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DoD’s commercial buying challenges

Updated: Oct 13, 2022

One of the many questions that will face the Biden administration this year is how to improve defense acquisition. A central challenge has been the inability of the Department of Defense to attract non-traditional suppliers, who often make most of their revenue in the commercial sector. These are the firms that are producing the most cutting-edge technologies today – those that will ensure the United States maintains technological advantage over any future peer competitor. DoD is having difficulty attracting these companies because its acquisition system is guided by outdated laws and regulations, many of which were first crafted before the modern technology age—before the first moon landing.

As a first step toward attracting the most innovative U.S. commercial firms, the military should take a hard look at, and overhaul these laws and regulations to better align the rapid technology innovations and evolutions of today.

Take for example the Truth in Negotiations Act (TINA). This law, first established in 1962, was first crafted in the industrial age of the 1960s, when manufacturing was king and the economics in industry were different than they are today. TINA requires firms who are negotiating sole source government contracts over a certain dollar threshold to submit certified cost and pricing data to the Pentagon that is truthful, accurate, and complete. This is to ensure the government receives a good deal for any sizable purchase.

The time has come for TINA to be modernized because it undermines innovation and competition by decoupling profit motive from production. If a company’s costs are the basis for negotiating contract price, companies have no incentive to become more efficient and lower production costs. In fact, they have an incentive to be cost inefficient. And the profit margins on many TINA contracts pale in comparison to what commercial firms can earn in the private sector. DoD would benefit in the long run by incentivizing companies to work with government, encouraging companies to invest in innovation, and promoting efficiency.

TINA is also widely criticized because it requires commercial firms to spend a substantial amount of time and money to provide this information, increasing the cost of doing business with the government and in some cases increasing the cost to the DoD.

The good news is there are alternative methods of furnishing similar information to the government that is much less costly, but still provides the government insight into fair and reasonable pricing. One of these methods is reviewing General Services Administration (GSA) rates, which are accessible by government cost personnel. These rates, when compared to a commercial firm’s, can offer valuable particulars about a contractor’s prices. Another method is to complete an Independent Government Cost Estimate (IGCE). This estimate details what the government expects to pay for services on a specific effort. If a contractor’s proposal is substantially higher than the estimate, then there is a disconnect from the contractor’s pricing, or the government estimate could be skewed.

Another effective alternative to steer away from the requisite TINA, although not always possible, is to seek and promote competition. Competition, on its own, pits vendors against one another and forces them to be creative in their proposals to the government, as opposed to the sole source method which is often more convenient. Because sole source is quicker, more convenient and easier to achieve, government organizations regularly choose to continue working with the same contractor, rather than opening the program to competition. Competition leads to commercial firms driving down costs while presenting viable technical expertise in hopes of being the best value to the government, as opposed to sole-source contracts which can lead to vendor lock and even cost increases. There are times when the lowest priced and technically acceptable vendor will win, and there are others when the best technical proposal succeeds, regardless of funding. So, to set themselves up for victory, it would behoove commercial firms to present feasible technical solutions and to keep costs low.

Moreover, if the DoD wishes to ensure that commercial firms deliver a service on time and at the proposed price, it can be more creative in the use of performance incentive fees. Such incentives are generally suited to incentivize contractors to meet specific objectives. If the firm meets the objectives, then they will receive the monetary incentive as promised in the contract. If they fail, then the incentive is not realized. And if the contract is based on a cost share ratio, contractors can wind up receiving less than the full incentive value should they overrun or underrun on the price by a certain amount. According to a study conducted by the Government Accountability Office, which included a sample of 1999-2003 contracts, award and incentive fee contracts only accounted for 4.6% of contract actions over $25,000.

In today’s fast moving, interconnected, and rapidly evolving economy, innovative contractors, and even traditional manufacturers, spend valuable time and money developing their products with the expectation that they will be reap financial rewards commensurate with the value of their innovation and investment. This risk-reward calculus is the fuel that powers innovation and economic strength.

The sooner acquisition regulations are amended to better reflect how the modern economy functions and what drives industry, the sooner the DoD will attract more innovative companies, increase competition, and leverage industry to ensure that our military maintains the capabilities and technological edge it needs to protect US interests around the world.

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