Magazine article National Defense

Industry Struggles with Ever Changing Acquisition Rules

Magazine article National Defense

Industry Struggles with Ever Changing Acquisition Rules

Article excerpt

Recent studies show that the percentage of overall research and development spending sponsored by the government has dropped sharply over the last 50 years.

Whereas government funding accounted for 67 percent of R&D in 1964, it accounted for 23 percent in 2015, a 44 percent reduction. For the government, this is not a salutary development. Increasingly, the "state of the art" is being defined by the commercial marketplace, without government participation and often without its access to the resulting technological advances.

One need only recall the intense media furor over the government's inability, for months, to obtain access to the shooters' encrypted cell phone data following the December 2015 San Bernardino terrorist attack to appreciate the consequences when the developers of advanced commercial technology eschew the federal marketplace.

The government has attempted for years to reverse this trend. In fact, the Federal Acquisition and Streamlining Act of 1994, popularly known as "FASA," had, as one of its primary purposes, the attraction of commercial entities into the federal marketplace. The trend, however, continues.

One of the principal reasons for this, and one that receives little attention, is that while policymakers "talk a good game" in terms of easing the regulatory burdens on non-traditional government contractors, they often fall woefully short on delivery. Succinctly stated, commercial contractors find it difficult to trust promises of legislative and regulatory reform when these promises can be undermined, as they have so often been in the past, by subsequent legislative and/or regulatory developments, or by implementation at the field level that ignores the purpose of the statute or regulation.

Perhaps the most obvious example of the government's willingness to impair a statutory mandate designed to benefit non-traditional government contractors can be found in the nullification of FASA's exemption for commercial item contracts from the requirement to provide cost or pricing data. For years, companies that had developed and priced their commercial items using a commercial market model were reluctant to provide cost or pricing data as a condition of contracting with the government.

The reasons for this reluctance are no1 difficult to divine. First, if the product is being successfully sold in the commercial marketplace, then the price, by definition, is reasonable because it reflects what a prudent buyer is willing to pay and what a prudent seller is willing to accept in an arm's length transaction.

Second, the government audits product prices based on current information--for example current material costs, current labor and indirect rates--relating to a particular contracting action. But that is not how commercial companies customarily price their products, relying instead on a long-term assessment of the projected market, the likely quantities that may be sold over a period of time, the pace of product obsolescence and the investment necessary to bring the product to market.

Products so priced yield less profit on the front-end of the product's life, but increasingly handsome profits on the back-end. If the government buys the item on the back-end of the product's life, an audit of "current" cost or pricing data will demonstrate what the contractor knew all along, which is that it's recouping in later sales the investment sunk in the front-end development of the product and not recovered in sales made prior to the break-even point in the product cycle. An auditor will characterize this late life profit margin as "gouging."

Unsurprisingly, FASA's exemption for commercial items came as welcome relief, both to established contractors and new players alike. The statute expressly stated that submission of cost or pricing data shall not be required.

Alas, that exemption was short-lived. By 1996, FASA's commercial item exemption was effectively gutted when the prohibition on "submission of cost or pricing data" was changed in the National Defense Authorization Act to a prohibition on submission of "certified" cost or pricing data. …

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