The Senate Armed Services Committee’s (SASC) fiscal year 2017 defense authorization bill takes aim at the Pentagon’s status quo regarding contracting, which committee aides said on Monday has led to a risk-adverse culture that negatively incentivizes the government and defense companies.
Both the House and Senate armed services committees’ acquisition reform proposals center around the idea of spurring innovation, said SASC aides, who viewed the efforts as complementary.
However, unlike the House Armed Services Committee’s (HASC) proposal, which focused on modular open systems and speeding up the pace that cutting-edge tech moves into the hands of operators, SASC members believe they can stimulate a more forward-thinking Pentagon by changing the way it structures and awards contracts.
The bill, helmed by Chairman John McCain (R-Ariz.), passed out of committee Thursday in a 23-3 vote.
Cost Vs. Fixed Price Contracts
One of the biggest pushes in the bill is to move the department away from cost-type contracts, which are often employed when a program involves higher levels of developmental risk, to fixed-price contracts where a contractor is responsible for paying for any expenses that exceed the award value.
Fixed price contracts, committee aides argued, could provide a means for the department to achieve better management and increase innovation. Companies would be incentivized to perform well in the hopes of maximizing its award, knowing that cost overruns could eat into profits.
The bill establishes a four-year pilot program that imposes a financial penalty on cost contracts starting in fiscal 2018, an aide said. Companies would be subject to a 1 percent penalty for all cost-type research, development, test and evaluation (RDT&E) contracts, while procurement contracts would incur a 2 percent fee. That money would roll into a new fund that disburses fixed-price contracts for advanced prototypes.
“By the end of four years, the expectation is that the culture should be changed in that particular timeframe,” the aide said.
Cost-type contracts can still be issued by the department, but will need to be sanctioned by a senior level official for all awards up more than $50 million in fiscal 2017. By 2020, any cost contract over $5 million will require such approval.
Should cost-type contracts continue to be the department’s method of choice, “I think what you’ll see–particularly from this committee– is a greater scrutiny of the difference between independent cost estimates and actual contract awards,” the aide said.
Fixed price contrast tend to be awarded at a similar level as the independent cost estimate. In cost contracts, the contractor is incentivized to underbid, knowing the government will cover cost overruns later, he said. “That process has been with us for decades and it has really negative impacts.”
Bid Protests
A rising number of Wall Street financial experts have been directing defense contractors to submit bid protests, which is contributing to a more risk-adverse contracting environment as companies increasingly view protests as in their shareholders’ best interests, a committee aide said.
“If that becomes the standard, if Wall Street analysts start driving this type of behavior…that’s a real problem that we have to start looking at,” the aide said.
The committee decided to take a number of preliminary steps to disincentivize vendors from making an undue protest. For instance, if a company with over $100 million in revenues brings a protest to the Government Accountability Office and subsequently loses, that company would pay GAO’s fees. That fee isn’t necessarily “huge,” but is a penalty that could help dissuade companies from lodging a protest that ultimately could add to schedule delays, the aide said.
SASC included an additional penalty mechanism starting in fiscal 2018 for incumbent companies who file a protest after losing a contract that it previously held. Sometimes, those protests result in “bridge contracts” that keep the incumbent making money during the protest period. The committee’s language stipulates that if an incumbent vendor files a protest and a bridge contract is awarded, the company must surrender all profits on that contract until the GAO certifies it has won the protest. If it loses, it will permanently forfeit that money, which could be given to the GAO, Defense Department or even the winning vendor at the department’s discretion.
The bill also would mandate taking independent delivery, indefinite quantity contracts out of the bid protest system and instead create an ombudsman to review the fairness of those competitions.
Finally, the committee requires two studies exploring what types of contractors file bid protests and the incentives are associated with bid protests. “That’s an area where we’d like to drive down, getting more fidelity and better data, and continue to track that type of data,” the aide said, adding those findings could drive future committee actions.
Foreign Military Sales
In the area of foreign military sales (FMS), SASC instated a requirement for FMS contracts to be issued on a firm, fixed price basis only, therefore simplifying the process the aide said. “We’re spending a lot of time and effort and contracting personnel doing essentially cost-type contracts.”
The committee put a restriction on undefinitized contracting actions (UCA), mandating that all UCAs be definitized within 100 days. Sometimes, FMS contracts remain undefinitized for years at a time, meaning that the contract value is not settled even as work begins.
It also created a working capital fund for the purchase of precision guided-munitions on behalf of U.S. allies.
The committee tackled a number of other acquisition issues, including:
- Lowest Price, Technically Acceptable Contracts: Such contracts have become popular in recent years because they provide an easy, “protest-proof” way to adjudicate a contract, but may not always provide the best solution. SASC included a number of restrictions in the bill to try to limit the use of these contracts, and will likely do more in the future, an aide said.
- Developmental and Operational Test: The legislative now puts developmental testing—including the Deputy Assistant Secretary of Defense for Developmental Test & Evaluation and Director of the Department of Defense Test Resource Management Center—under the umbrella of the Pentagon’s office of the director for operational test and evaluation, who will report directly to the defense secretary. The rationale, an aide said, is to more closely link developmental and operational testing, allowing the test community to focus on the early stages of a program and giving developmental testers more independence from the services.
- Commercial Items and Nontraditional Contractors: The bill continues last year’s practice of streamlining regulations pertaining to commercial items, therefore easing the barrier for nontraditional defense contractors to sale their wares to the department. This year, the committee included a provisions that deems services provided by nontraditional contractors as a commercial item.