New DoD Acquisition Rules May Boost Price of Services

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WASHINGTON — The Pentagon’s new rules for acquiring tens of billions of dollars worth of services each year are intended to lower the department’s costs through more competition and tougher bargaining. But many experts say the changes could increase the burdens on procurement staffs, drive contractors to merge, and even raise procurement costs in some cases, experts say.

The new rules, unveiled Sept. 14 by U.S. Undersecretary of Defense for Acquisition Ashton Carter, will require more frequent competition for services work — every three years in most cases, instead of the current five years. That, along with a move to shift more cost risk onto contractors’ shoulders, should lead to less pricey contracts for services, Carter has argued.

But some industry officials say there could be unintended cost increases as a result, depending on how the rules get implemented. That is because it costs money to conduct contract competitions and to shift work from one contractor to another. And there is almost certain to be more competitions and more work transferring hands under the new rules.

Carter also wants more service contracts going to small businesses, increased reliance on firm-fixed-price contracts under certain conditions, and better research into market conditions to get a clear idea of appropriate contract pricing.

“By focusing on creating efficiencies in the way we approach the buying of services, we will reap huge dividends, totaling in the billions of dollars,” Pentagon spokeswoman Cheryl Irwin said in an e-mail.

But those changes also could lead to higher costs as well. That’s because small businesses, due to their size, may not be as efficient in delivering services as larger businesses. And moving to firm-fixed-price contracts could prompt many companies to bid higher prices than currently in order to compensate for additional cost risk they would be assuming under such contracts.

Finally, Pentagon acquisition staff likely will need to spend more time on each procurement to take the extra steps being asked of them: more market research, more coordination with program managers to define requirements and more frequent competitions. That extra work is almost certain to mean higher administrative costs associated with each procurement, many experts say.

From fiscal 2001 to fiscal 2009, Department of Defense (DoD) spending on contract services roughly doubled to more than $200 billion, according to numbers compiled by the Government Accountability Office. That growth continued last year even as defense spending on products fell for the first time in the decade.

But government efficiencies usually translate to a contractor’s dwindling profits. Some analysts are already predicting that more frequent competitions and greater use of firm-fixed-price contracts will likely mean thinner profit margins for contractors, and that expectation could accelerate consolidation within the services industry.

Last month, Defense Secretary Robert Gates called for 10 percent reductions in annual support contract spending for the next three years.

On top of that potential revenue falloff, Carter’s push for more fixed­price contracts could slice into profit margins, analysts said. “The service sector is going to shrink; that’s nearly inevitable,” said Loren Thompson, defense analyst with the Lexington Institute. Given the uncertainty about future government buying behavior, Thompson said, “the logical thing for service companies to do is to consolidate.”

Carter’s guidelines also will require a more sophisticated acquisition work force “that is probably more capable than what exists today,” Thompson added.

That point was echoed by Joshua Schwartz, a contract law professor at the George Washington University here.

“It’s penny-wise and pound-foolish to stint on that commitment to build up the acquisition work force,” he said. “You’ve got to think of it as an investment.”

Last year, Gates announced plans to hire 20,000 acquisition professionals by fiscal 2015. It’s now almost one-third of the way to that goal, Irwin said.