Defense Acquisition and the Government Contractor

The Federal Government released their 2013 report on the Defense Acquisition System.  This 126 page report looks at the performance of the purchasing system in the Government's largest arm and points out many of the reasons we have such budget problems that ultimately cause issues such as Sequestration.  In a recent issue of National Defense magazine, NDIA president Lawrence Farrell Jr.'s article indicated that now may be a perfect opportunity for the DoD to clean up their purchasing habits.  With all the pressure on the Federal budget, especially on the military component, this should be a perfect time to make changes that would result in better acquisition, saving billions of dollars in the process. 

One of the items that Mr. Farrell points out is the rampant cost overruns that average around 70% on defense acquisition programs.  The 2013 Defense Acquisition System Report elaborates further on that.  The report shows that the "average" cost growth on DoD contracts is in fact around 70%.  It also points out that this is reduced from around 90% in the early 90's.  While the government may think this is progress, any business owner would tell you that such slow reaction to a major purchasing problem over a 20+ year span would spell doom for the business.  Clearly there is a very systemic problem.  The report shows a number of "gross" program over-runs over the last 25 years including the Crusader development contract with over 1,200% cost growth!  The report further identifies that the largest number of breaches to the Nunn-McCurdy legislation (cost growth over original the original baseline) reach 77% on helicopter programs and 100% on Chemical Weapons Demilitarization programs.  All other programs seem to average around 30% in Nunn-McCurdy breaches.  Clearly, there is almost an expectation that cost overruns will occur and the government will pay for them.  The report further tries to identify the "why" of these cost overruns.  Initially the report claims 56% of the cost overruns are due to poor management performance.  The report further looks at causes on development contracts and identifies 4 major contributors to cost growth:

  1. Major work added later
  2. Poor cost estimate
  3. Premature Start
  4. Poor contract management

When looking at these development contracts, cost reimbursable contracts appeared to have a higher frequency of occurrence than fixed price development contracts.  The data also shows the same bias for schedule growth.  When the data was analyzed for early production contracts, however, the opposite was observed.  Fixed price contracts for early production seemed to have a higher frequency for cost growth and schedule growth than cost reimbursable contracts.  Overall, the report could not identify much overall difference in performance for fixed price vs. cost reimbursable contracts. 

So, in conclusion, I think Mr. Farrell is correct that now is the time for some significant reform.  If the government doesn't try something substantial, there will be no major changes.  Will there be more fixed price development contracts?  That could be a logical conclusion for the Defense Acquisition system to implement.  By the same token, there could be more cost reimbursable early production contracts?  Mr. Farrell suggests that we need better management of government contracts which could mean more training.  I think the smart government contractor would follow the same path - more training in contract and program management.  It seems hard to imagine the government reducing the amount of bureaucracy and red-tape to try to control projects so government contractors should not expect too much relief in that area (even though may are suggesting that reduced regulations are the way to reduce budget costs). 

My advice to government contractors is to get your compliance in order - this is a competitive advantage that you need in a tight market. 



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