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Breakout Session # 606 JAMES H. GILL TECHNICAL ADVISOR, CONTRACTING SPACE & MISSILE SYSTEMS CENTER Date: 24 APR PowerPoint Presentation
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Breakout Session # 606 JAMES H. GILL TECHNICAL ADVISOR, CONTRACTING SPACE & MISSILE SYSTEMS CENTER Date: 24 APR - PowerPoint PPT Presentation


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FIXED-PRICE CONTRACTS IN THE R&D ENVIRONMENT. Breakout Session # 606 JAMES H. GILL TECHNICAL ADVISOR, CONTRACTING SPACE & MISSILE SYSTEMS CENTER Date: 24 APR Time: 1520-1620. Historical Perspective . Early 1980’s there was a move to have Fixed Price R&D contracts

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slide1

FIXED-PRICE CONTRACTS IN THE R&D ENVIRONMENT.

Breakout Session # 606

JAMES H. GILL

TECHNICAL ADVISOR, CONTRACTING

SPACE & MISSILE SYSTEMS CENTER

Date: 24 APR

Time: 1520-1620

historical perspective
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
historical perspective3
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
historical perspective4
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
historical perspective5
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
historical perspective6
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
historical perspective7
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;
types of contracts
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
types of contracts9
Types of Contracts
  • Cost type contracts
    • Poorly defined requirement
    • Cost accounting systems required
    • Risk assumed by Government
    • Not found in commercial sector
    • Best Effort
why fixed price today
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
hold contractors accountable
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
hold contractors accountable12
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
monitor performance
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
slide14

20 Years of Industry Consolidation

Northrop

Grumman

General

Dynamics

Lockheed Martin

Boeing

Raytheon

monitor performance15
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
why is there cost growth
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
why is there cost growth17
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
why is there cost growth18
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
what can be done to mitigate cost growth
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
conclusion
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
conclusion21
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
conclusion22
CONCLUSION
  • Conclusion:

Didn’t work then – Won’t work now

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