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Competition in contracting must be tailored to need

Mar. 3, 2013 - 01:12PM   |  
By DANIEL GOURÉ   |   Comments

The Obama administration came to office determined to improve the defense acquisition process. Beginning in 2010, with its Better Buying Power initiative, the Pentagon undertook an effort to improve the acquisition system’s efficiency and reduce the cost of defense goods and services.

A central feature of BBP was the promotion of increased competition among private-sector providers to improve outcomes and lower prices. BBP required greater use of firm fixed price instead of traditional cost-plus contracts.

Unfortunately, some program managers started issuing FFP contracts regardless of the type of work involved. The drive to increase competition also led to an explosion of so-called lowest price technically acceptable contracts and a tendency toward shorter contract performance periods with more frequent recompetes.

Now, the Defense Department’s love affair with competition appears to be waning. While DoD still acclaims the virtues of competition, the recently announced revision to BBP, dubbed 2.0, makes it clear that a more nuanced definition of best value is required in competitive contracting and that quality and past performance must be considered.

What is the real story on competition as a driver for improved performance and lower cost? When it is good, it can be very, very good. But when it is bad, it is awful. There are cases where DoD’s decision to promote competition seems to have worked, reducing unit costs and improving performance. Many involved standing up a second source to produce an already mature system (AIM 7 and 9, TOW, Hellfire and Tomahawk missiles).

One of the most effective forms of government-promoted competition is the General Services Administration’s system of schedules. Special Operations Command has used these long-term, governmentwide contracts with multiple commercial firms to access vendors for its Survival, Support and Equipment Systems.

Indefinite-delivery, indefinite-quantity contracts with multiple winners, such as the Defense Logistics Agency’s Tailored Logistics Support Program and the Navy’s SeaPort-Enhanced, can ensure competition based on both quality and cost at the task order level.

But there are other cases where the rigid pursuit of competition has led to higher costs and poor outcomes. Studies by the Rand Corp. and the Center for Strategic and Budgetary Assessments have concluded there are many instances, such as when nonrecurring investments are large, in which competition can boost acquisition costs.

For example, most studies concluded that competing production of engines for the new F-35 Joint Strike Fighter would require up to $4 billion in additional nonrecurring costs for a second source and, because the two engines would be different, additional billions in life cycle expenditures. The Pentagon decided these costs would outweigh projected savings from splitting the engine buy between two providers.

There is a clear difference between what I would call natural competition, when companies have enough information, skill and capacity to make credible, sustainable bids and are allowed the time to recoup costs, and forced competition, which is artificially constructed based on policy desiderata.

For major defense system procurement, only a few companies can meet the standards for a natural competition. Even in the commercial world, natural competition tends to take place at the component and subsystem levels.

Forced competitions can be defined as those where qualified alternate sources do not exist or when periods of performance on contracts are reduced to less than an economically sensible period. When IDIQ contracts require winners to compete for every task order, including those they are not qualified to perform, this, too, is a forced competition. The results generally are higher costs to government and the private sector.

Forced competitions ignore the value of incumbency with respect to past performance, acquired knowledge, learning curve and trust between the parties.

DoD needs to be cautious in its drive to increase competitive contracting in a continuing resolution and sequestration environment. The acquisition system needs to promote natural competition but eschew forced competition.

Daniel Gouré is vice president of The Lexington Institute, Arlington, Va.

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