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Multiyear procurement should be in acquisition reform talks

Sep. 11, 2010 - 06:00AM   |  
By JOHN YOUNG   |   Comments

Discussion of the need for acquisition reform often fails to address fundamental steps necessary to improve Defense Department cost control. Some of these steps involve reform by organizations that are outside the formal acquisition team. One such step is to significantly expand the use of multiyear procurement contracts.

Currently, DoD must request legislation on a program-by-program basis and obtain congressional approval to enter into a multiyear procurement (MYP) contract. Supporters say this requirement preserves Congress' annual power over DoD's budget and ensures long-term spending flexibility.

Congress has made MYP even harder by insisting on savings of 10 percent or more on such contracts. The result of these policies is fewer MYP contracts and wasted tax dollars.

DoD budget processes tacitly support elements of this logic, seeking to retain the maximum flexibility to trim programs in the annual drill to make the department's top-line number.

As the Navy acquisition executive, I found myself signing a justification and analysis to support the procurement of T-45 aircraft. The document allowed the Navy to complete the purchase of T-45s by buying eight airplanes in the next budget year and five aircraft the following budget year. At these annual rates, T-45 aircraft cost about $30 million per copy. In some years, the Navy bought T-45 aircraft at rates as high as 15 per year, allowing the Navy to pay only $20 million per trainer.

I was not happy to sign this paper to charge the taxpayer more money solely because the system lacked the discipline to buy efficiently. I asked the Navy team to review the history of this program. The Navy purchased the original requirement of 223 T-45 aircraft. However, allowing the Navy, DoD and Congress to vary procurement quantities cost the taxpayer $632 million more than necessary over the life of this program.

One of challenges to the execution of defense acquisition programs is the annual DoD budget process. Program managers have virtually no control over the budget they are asked to execute. The final DoD processes that "hit the top-line number" frequently reduce a program manager's requested budget.

Congress then replays this process through four committees. So, after about 18 months and dozens of reviews, a program manager is handed a budget that is very different from his original, executable request forcing renegotiation of contracts, replanning and cost increases.

It would dramatically improve defense acquisition if more programs were executed under stable, multiyear funding, limiting the annual budget process churn that consumes precious program management time.

DoD is already buying most weapons at low or minimum annual procurement rates. Some DoD programs may not be able to save 10 percent, but any savings on needed weapons is beneficial to the taxpayer and the war fighter. Indeed, a MYP contract may be essential simply to control cost on these weapons built at low rates, which limit industry's buying power but still require all the overhead necessary to build at higher rates.

DoD should also be allowed to use MYP contracts early in programs. The department pays outrageous premiums for weapons that will be bought solely because of the refusal to buy systems in the early stages through multiyear processes.

An early multiyear contract, approved by Congress, for Virginia-class submarines was critical in allowing this program to execute with cost control through a congressionally mandated dual-source procurement strategy constrained to one submarine per year to limit procurement in advance of testing.

However, there is still much to be done on overhead costs and non-value-added work associated with acquisition programs. These programs endure substantial overhead due to technical authorities, reporting requirements and audits.

MYP contracts provide needed stability to allow companies to negotiate longer-term agreements with suppliers, invest in their production processes and consider capital equipment purchases. Without the clarity of MYP contracts, costs increase as industry limits spending on production process improvements. The stability provided by MYP contracts is even more important to the industrial base as the budget begins to flatten.

John Young is a senior fellow and member of the Board of Regents at the Potomac Institute for Policy Studies and a former undersecretary of defense for acquisition, technology and logistics.

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