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Performance of the Defense Acquisition System: 2014 Annual Report

As most regular readers of this blog are already aware from this afternoon’s Defense Acquisition Workforce bulletin, the Undersecretary of Defense for Acquisition, Technology, and Logistics (USD(AT…

Performance of the Defense Acquisition System: 2014 Annual Report

Bill Kobren

As most regular readers of this blog are already aware from this afternoon’s Defense Acquisition Workforce bulletin, the Undersecretary of Defense for Acquisition, Technology, and Logistics (USD(AT&L)) today issued the “Performance of the Defense Acquisition System: 2014 Annual Report.” This is an important-read for all defense acquisition professionals, including, of course, life cycle logisticians, product support managers, and those involved with development and implementation of performance based logistics (PBL) product support arrangements (PSA).


According to the introduction, “by human nature, performance is incentive-driven. Organizations and individuals combine often competing incentives as they take actions and set priorities. In our second annual report on acquisition performance, we focus on incentives—particularly those from contract types and profits or fees—in addition to updating our prior analysis for which recent data might affect the statistical results. Most of the development and production on acquisition programs is conducted by industry under contract to the government. Therefore, we examine various incentive techniques to see how effective they are at driving cost, schedule, and technical performance. … Of particular note, this year’s report shows that the prevalent debate of cost-type versus fixed-price contracting is misguided. The real issue is how effective the incentives are for each contract type within each of those groupings. There are cost-type contracts that are very effective at controlling cost while others are not. Fixed-price contracts are effective at controlling cost—but some types do not share those savings with the government, yielding higher margins (sometimes spectacularly so) and higher prices for our taxpayers. …These findings do not, however, dictate “one size fits all” policies. Defense acquisition is complicated and varying. There are no simple “schoolhouse” solutions that should be mandated absent the particulars of each acquisition in question. These findings do, however, inform our individual program decisions and provide fresh insights into what generally works in what circumstances and why. This is critical to improving our performance: We must empower, encourage, and train our workforce to think—not dictate a cookbook that workforce members blindly follow.”


Among the report's conclusions, several have direct implications for DoD Performance Based Logistics (PBL) product support arrangements that leverage commercial sector product support integrators (PSI) and product support providers (PSP).  Specifically:


·         "Not all incentives work. Contractual incentives are effective if (1) we use them; (2) they are significant, stable, and predictable; and (3) they are tied directly to our objectives.

·         “Cost-plus versus fixed-price” is a red herring. The distinction between cost-plus and fixed-price contracts is not the divide on effectiveness. Rather, the emphasis should be on matching incentives to the situation at hand instead of expecting fixed-price contracting to be a magic bullet. Fixed-price contracts have lower costs because they are used in lower-risk situations, not because they control costs better. Moreover, prices on fixed-price contracts are only “fixed” if the contractual work content and deliverables remain fixed, which is often not the case. Our analysis showed that objectively determined incentives were the factors that controlled costs, not selecting cost-plus or fixed-price contract types.

·         CPIF and FPIF contracts perform well and share realized savings. These contract types control cost, price, and schedule as well as, or better than, other types—and with generally lower margins. We pay for the technical risks on our developmental systems—unlike the private sector, where companies pay for R&D on new products. This is partly due to the fact that we are, to some degree, the only customer for new military products (i.e., a monopsony-type market). Thus, it makes sense to use incentives that (1) link profit to performance, (2) control price, and (3) share in cost savings, especially in production when the risks are low. Specific incentive structures may not be appropriate in certain cases, so professional judgment is needed as always in matching contract type and incentives to the desired outcome.

·         FFP contracting requires knowledge of actual costs. FFP contracts provide vendors a strong incentive to control costs, especially in production, where they are most common. However, taxpayers do not share in those cost savings, unless the negotiated price took into account actual prior costs and margins, as well as the contractor’s anticipated ability to continue cost reduction. Thus, to use FFP contracts effectively, we must fully understand actual costs when negotiating subsequent production lots.

·         Competition is effective—when viable. Competed contracts perform better on cost, price, and schedule growth than new sole-sourced or one-bidder contracts in development. (i.e., a contractor’s knowledge that a competitor is not available may affect bidding and subsequent performance relative to that bid.) Thus, we must continue our efforts to seek competitive environments in creative ways. Unfortunately, direct competition on some MDAP contracts is often not viable—especially in production, where significant entry costs, technical data rights, or infrastructure may be barriers. In response, we are seeking ways in which competitive environments and open-system architectures will allow us to introduce competitive pressures."