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How Long is Long Enough to Incentivize Desired Product Support Outcomes?

We are often asked about the appropriate contract length for a Performance Based Logistics (PBL) Product Support Arrangement (PSA) with a commercial sector/industry Product Support Integrator (PSI…

How Long is Long Enough to Incentivize Desired Product Support Outcomes?

Bill Kobren

We are often asked about the appropriate contract length for a Performance Based Logistics (PBL) Product Support Arrangement (PSA) with a commercial sector/industry Product Support Integrator (PSI) and/or Product Support Provider (PSP). The easy answer would be, of course, to simply say, “it depends.” The more appropriate answer is it should be long enough to incentivize desired outcomes, short enough to facilitate desired competition, and appropriate enough to meet statutory, regulatory and policy requirements.

 

So what would I as a life cycle logistician, Product Support Manager (PSM), Program Manager (PM) or contracting officer need to know? I explored this subject back in early 2014 in a blog post entitled “Potentially Useful Contract Length References When Crafting PBL Product Support Arrangements” in which I outlined several potentially useful references, including:

 

·         10 United States Code (USC) §2304a. paragraph (f) reads as follows: “(f) Contract Period.-The head of an agency entering into a task or delivery order contract under this section may provide for the contract to cover any period up to five years and may extend the contract period for one or more successive periods pursuant to an option provided in the contract or a modification of the contract. The total contract period as extended may not exceed 10 years unless such head of an agency determines in writing that exceptional circumstances necessitate a longer contract period.”

 

·         Federal Acquisition Regulation (FAR) §17.204(e) reads as follows: "(e) Unless otherwise approved in accordance with agency procedures, the total of the basic and option periods shall not exceed 5 years in the case of services, and the total of the basic and option quantities shall not exceed the requirement for 5 years in the case of supplies. These limitations do not apply to information technology contracts. However, statutes applicable to various classes of contracts, for example, the Service Contract Act (see 22.1002-1), may place additional restrictions on the length of contracts.”

 

·         Defense Federal Acquisition Regulation Supplement (DFARS) 217.204(e)(i) states that “notwithstanding FAR 17.204(e), the ordering period of a task order or delivery order contract (including a contract for information technology) awarded by DoD pursuant to 10 U.S.C. 2304a— (A) May be for any period up to 5 years;  (B)  May be subsequently extended for one or more successive periods in accordance with an option provided in the contract or a modification of the contract; and (C)  Shall not exceed 10 years unless the head of the agency determines in writing that exceptional circumstances require a longer ordering period.”

 

·         Defense Procurement & Acquisition Policy (DPAP) 18 Feb 2009 policy memo "Review Criteria for Acquisition of Services" states "Service contract length should typically be 3-5 years with certain exceptions (e.g. performance-based logistics and energy-savings performance contracts).” (emphasis added)

 

·         USD(AT&L) 14 Sep 2010 policy memo " Better Buying Power: Guidance for Obtaining Greater Efficiency and Productivity in Defense Spending" states "Contract length should be appropriate for the activity performed. Knowledge-based services readily meet the three-year limit. Other services such as Performance Based Logistics (PBL)…as examples, may not.” (emphasis added)

 

·         As a side note, an interesting article entitled The Five-Year Limit on Government Contracts:  Reality or Mythprovides additional perspectives relating to several other FAR provisions including FAR § 16.505(c)(1), FAR § 17.104(a), FAR § 17.204(e), and FAR § 22.1002-1. This non-DoD article is among the nearly 300 references available for your perusal via links contained in PBL Community of Practice (PBL CoP) Articles & Reports Repository.

 

Several additional references not contained in the original blog post which you might be helpful include:

 

·         USD (AT&L) May 14, 2012 “Endorsement of Next-Generation Performance-Based Logistics Strategies” memorandum states “developing correctly structured, priced, and executed PBLs is often a more complex task than initiating a standard transactional arrangement. It requires a combined and focused effort by the Program Manager, the Product Support Manager, and the Contracting Community, among others. However, the ability to more affordably support the Warfighter at a greater level of readiness is worth the effort.

 

·         Acting ASD(L&MR) November 22, 2013 “Performance Based Logistics Comprehensive Guidance” memorandum states “Attributes of an effective PBL arrangement include …appropriate contract length, terms, and funding strategies that encourage delivery of the required outcome.” (emphasis added)

 

·         The May 2014 DoD PBL Guidebook: A Guide to Developing Performance-Based Arrangements states, “one of the ten foundational tenets of PBL (is to) provide sufficient contract length for the product support provider to recoup investments on improved product (e.g., Mean Time Between Failure (MTBF) and sustainment processes (e.g., manufacturing capabilities) (emphasis added). It goes on to state “PBLs contribute to minimizing operational risk by incentivizing the PSI and PSP to invest in improving their product and processes in support of Warfighter relevant outcomes. However, this requires an appropriate contract length aligned with the desired investment to provide the PSI or PSP an opportunity to realize a return on their investment. A provider would want the improved component to go through at least one repair cycle so they have an opportunity to recoup their investment. For example, a component with a shop visit interval of approximately three years would warrant a five-year base period to recoup the investment. The length of the contract will depend on the complexity of the product and the size of the investment. The PSM and Contracting Officer will need to work with their PSI and PSP counterparts to determine the contract length that is appropriate for their specific arrangement.” (emphasis added)

 

·         The Frequently Asked Questions (FAQ) section of the May 2014 DoD PBL Guidebook: A Guide to Developing Performance-Based Arrangements, specifically addresses the question “What is the appropriate PBL contract length?”, saying “the arrangement must be long enough for the provider to recover any investments made to improve their product and/or streamline their processes to meet the Government’s requirements (emphasis added). Complex subsystem OEMs (e.g., engine OEMs) want five- to seven-year contracts. This Period of Performance (PoP) gives them time to identify issues impacting reliability and cost in the first couple of years, design the fix in the third or fourth year, field the improved subsystem in the fourth and fifth years, and recover the investment in the sixth and seventh years. Less complex subsystems and components or arrangements that require less investment to improve can have shorter arrangements (three to five years). However, no OEM will make investments that cannot be recovered during the PoP. One or two year contracts do not incentivize the PSP to invest in performance improvements that drive down costs (emphasis added).

 

·         The January 7, 2015 DoD Instruction 5000.02, Enclosure 6, Para 2.a.(3) states, “the Program Manager, with the support of the Product Support Manager (PSM), will…employ effective performance-based logistics (PBL) planning, development, implementation, and management in developing a system’s product support arrangements (emphasis added). PBL is performance-based product support, where outcomes are acquired through performance-based arrangements that deliver warfighter requirements and incentivize product support providers to reduce costs through innovation.

 

Food for thought. What do you think? Is this helpful?