FIXED-PRICE CONTRACTS IN THE R&D ENVIRONMENT

1. James Gill Space and Missiles System Center FIXED-PRICE CONTRACTS IN THE R&D ENVIRONMENT

2. Historical Perspective • Early 1980’s there was a move to have Fixed Price R&D contracts • Too many failed major programs • Too many cost overrun contracts • Hold Contractors accountable • Incentive Arrangements not working • Unrealistic estimates for new programs

3. Historical Perspective • Fixed-Price R&D Contracts became popular tool • Reagan Buildup meant big $ • Many Contractors interested in DoD business • FP Allowed Government to forecast budget needs • Held Contractor’s feet to the fire • Buy-in was big risk to Contractors • Normally in competitive environment • Production added as FPI or FFP option

4. Historical Perspective • End of Cold War (Peace Dividend) • Less business opportunities • Contractors could not “get well” with production buys • Downsizing of Industrial Base • Many problems in R&D programs (A-12, REACT) • Much litigation

5. Historical Perspective • Congress passed legislation • Required Secretarial approval for FP R&D contracts over $25M • DFARS 235.006. Contracting methods and contract type. • (b)(i) Do not award a fixed-price type contract for a development program effort unless— • (A) The level of program risk permits realistic pricing; • (B) The use of a fixed-price type contract permits an equitable and sensible allocation of program risk between the Government and the contractor; and

6. Historical Perspective • C) A written determination that the criteria of paragraphs (b)(i)(A) and (B) of this section have been met is executed— • (1) By the Under Secretary of Defense (Acquisition, Technology, and Logistics) (USD(AT&L)) for— • (i) Research and development for non-major systems, if the contract is over $25 million; • (ii) The lead ship of a class; or • (iii) The development of a major system (as defined in FAR 2.101) or subsystem thereof, if the contract is over $25 million; or

7. Historical Perspective • (2) By the contracting officer for any development not covered by paragraph (b)(i)(C)(1) of this section. • (ii) Obtain USD(AT&L) approval of the Government's prenegotiation position before negotiations begin, and obtain USD(AT&L) approval of the negotiated agreement with the contractor before the agreement is executed, for any action that is— • (A) An increase of more than $250 million in the price or ceiling price of a fixed-price type development contract, or a fixed-price type contract for the lead ship of a class;

8. Types of Contracts • Fixed Price contracts are used where: • Relatively low technical risk • Well defined requirements • Deliverable end product • Predictable price reasonableness • Normally used for commercial items and items ready for production

9. Types of Contracts • Cost type contracts • Poorly defined requirement • Cost accounting systems required • Risk assumed by Government • Not found in commercial sector • Best Effort

10. Why Fixed-Price Today? • Congress perspective • Too many failed major programs • Too many cost overrun contracts • Hold Contractors accountable • Incentive Arrangements not working • Unrealistic estimates for new programs

11. Hold contractors accountable • Cost-type contracts • Incentive arrangements • Award Fee • Incentive Fee • Performance Incentives (i.e. on orbit incentives, warranties etc.) • Past performance for new programs (CPARS) • Termination

12. Hold contractors accountable • Fixed-price contracts • Incentive arrangements • Award Fee • Cost incentive arrangements (FPIF, FPIS etc.) • Performance Incentives (i.e. Mission Success, on orbit incentives, warranties etc.) • Past performance for new programs (CPARS) • Performance-based payment • Withhold payment • Termination • For Convenience • For Default

13. Monitor Performance • Management & Oversight for the Acquisition of Services Process (MOASP) • Earned Value Management • CSCSC (Cost Schedule Control System Criteria) • Technical Interchange Meetings • Program Management Reviews (Internal & External) • Award Fee Review Board Sessions

14. 20 Years of Industry Consolidation Northrop Grumman General Dynamics Lockheed Martin Boeing Raytheon

15. Monitor Performance • Dissatisfaction with Program and Contract Performance within the DOD and Congress • Multiple Nunn-McCurdy Breaches • Frustration with perception of failure • FP R&D viewed as a last resort to control costs

16. WHY IS THERE COST GROWTH? • Overly Optimistic Proposals • Bad Government Estimating • Failure to replan Programs early • Program Managers not rewarded for failure • Technical challenges – State of the art • Requirements Creep • Congressional & DOD/Services Budget Turbulence – Funds Divergence • Bad Performance by Contractors

17. WHY IS THERE COST GROWTH? • Space Based InfraRed System (SBIRS) case study • Follow-on to DSP Program • Previous attempts included FEWS and ALARM programs – Too Costly >$10B • SBIRS Program estimated around $2.5B • Acquisition Reform • “Lightning Bolts” • Total System Performance Responsibility

18. WHY IS THERE COST GROWTH? • Space Based InfraRed System (SBIRS) case study • Cost type contract • Stepchild for Failure of Acquisition Reform • Young Commission Findings • Several Nunn-McCurdy breaches • Technically viable program – inadequately estimated and funded

19. WHAT CAN BE DONE TO MITIGATE COST GROWTH? • First and foremost – Reasonable Cost Estimation • Don’t let competition give an unreasonable expectation • Government Estimates must be credible • Budget to Government Estimates • Don’t let Congress drive cost reductions • Keep politics out of the acquisition business • More responsible oversight • No surprises • Make the hard choices as budget changes and technical issues surface

20. CONCLUSION • Conclusion: • Control Program Cost via Responsible Program Management • Need to identify unworkable/prohibitively expensive Programs as early as possible • Congressional Reform • Congressional withholds should not disrupt program viability • Clear Line of Accountability

21. CONCLUSION • Conclusion: • Can’t/Shouldn’t try to solve cost growth with FP R&D Contracting • Formula for Claims/litigation • Politics inevitable when dealing with major systems but politicians should be as accountable as the Contractors, the Services and the Government Program Offices

22. CONCLUSION • Conclusion: Didn’t work then – Won’t work now

23. Questions/Comments • Contact me at • www.james.gill@losangeles.af.mil