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Defense Acquisition - The Game is Changing

Posted by Mike Anderson on Mon, May 12, 2014 @ 04:15 PM

With all the pressure on the Federal Budget the past couple of years, it is clear to see that the way of government spending is changing.  The implications of how it changes is very different from what we have seen before.  Or is it?  One of the clear changes is that spending is being cut.  Sequestration calls for cuts if congress cannot decide what to trim from the budget.  There have been several band-aids put on the FY2014 budget but the general consensus is that the budget will be trimmed significantly in coming fiscal years.  This may mean creative ways to trim expenses in certain departments, like the DoD, and will result in a more competitive environment for those bidding on the remaining work. 

One of the latest discussions of how to trim expenses from the budget focused on Weapons Maintenance Contracts.  Last week Undersecretary of Defense for Acquisition, Technology & Logistics, Frank Kendall, called for an investigation of commercial-like approaches to maintaining weapons equipment.  This is to be examined as a possible replacement to traditional type contracts for this expense.   This type of contracting is called "performance-based logistics" (PBL) and is more of a commercial type contract than a traditional cost based contract.  The impact is believed to be able to trim 10 to 20% from a $170 Million budget by going to this commercial type approach.  Deloitte LLP estimated that the Defense Department could save as much as $20 Billion a year by switching many of the current support contracts to PBL's.  Weapons maintenance is traditionally thought to be very costly and very inefficient in the first place so this is a logical place for the DoD to start to focus attention. 

The DoD used more PBL's in the 1990's but they fell out of favor over the last 10 years.  This is what I mean by defense acquisition is changing but it may simply be a return to something used in the past.  Part of the reason PBL's fell out of favor is that PBL's are not well understood within the government, thought to be complex and hard to administer.  The contracts must be constructed properly, and incentivise the contractor for good performance.  This may be a learning curve and take some time.  As this comes into play, many contract types will change and contractors must be prepared to change with this.  For instance, a contract might be written to reward a contractor with higher profits if something doesn't break as often.  Today, the contractor is given a fixed fee regardless of the performance of the weapons system.  In other words, there currently is no incentive for the contractor to do "above and beyond" type service.  This will require a different way of thinking (different profit levels, trust between the government and the contractor among other issues).  The government has been cost based for so long that this will be a paradigm shift to focus on the results (regardless of cost) for a reasonable price.  I think this is just the tip of the iceberg.  Contractors need to pay attention to the shift in policy that the government considers as this could cause slight adjustments in the way the contractor must propose to the government in order to be successful.  I guess this is just paying attention to your customer in order to deliver what they want. 

Topics: DoD, Defense Budget, Defense Acquisition, Federal Budget