This op-ed originally appeared in the Feb. 12, 2018 issue of SpaceNews magazine.
U.S. Defense Department leaders often point out that a healthy industrial base is needed to make sure the U.S. military is equipped with the best weapon systems in the world.
Small businesses are the backbone of the industrial base that supplies products and services to the military. So why do government contracting methods sometimes harm, rather than help, small businesses?
A case in point is professional services contracts. Thousands of small businesses provide financial management, program management, IT support and other skills and expertise not otherwise available within the government.
Small businesses run into trouble when they bid on firm fixed-price contracts for technical and professional services. Fixed-price agreements are normally used when the product or service is well defined and there is historical data to establish “fair and reasonable” prices. Prices for less skilled work like janitorial services, landscaping and staffing cafeterias are relatively simple to propose, and the budget is usually well defined, making them candidates for fixed-price arrangements.
Technical support services, on the other hand, are highly unpredictable by their nature, depending upon variables that are difficult, if not impossible, to anticipate.
Stuff happens, and when it does, the contractor is expected to fix the problem. Fixed-price contracts are exceedingly difficult to modify in a timely manner, and program managers need information and solutions quickly. Further, fixed-price contracts suppose a relatively well-defined requirement with no technical risk.
Historically, professional services contracts have been cost-type arrangements — where contractors are reimbursed for project costs — many with an award fee incentive arrangement. That started to change over the past decade. In 2006, the Government Accountability Office published a report entitled “DoD Pays Billions in Award and Incentive Fees without Regard to Acquisition Outcomes.” Other watchdog organizations criticized DoD for overpaying for services contracts. In response, the Pentagon introduced the so-called “Better Buying Power” procurement guidelines that called for greater use of firm fixed-price arrangements. Many organizations gained favor with senior DoD management by converting cost-plus contracts into fixed-price ones.
Congress further mandated cuts to support service contracts. So there was effectively a double whammy imposed upon support services contractors, many of which are small businesses that are dependent on this work for their very existence.
Companies moved to cut costs, in some cases asking employees to reduce their hourly rates, which might drive away the best talent and depress company morale. Or they reduced their profit margins, which were thin to begin with, in order to win the initial competition.
When companies cut pay, or hire newer and cheaper employees, they face the prospect of customer dissatisfaction, which will then be negatively reflected in performance assessment — further jeopardizing their chances for future business opportunities.
So why would the government initiate an approach that would result in bad outcomes? If the support contractor gives you less capable employees, then their value is diminished. If the company reduces its profit, it runs the risk of going out of business, thereby shrinking the available pool of industry competitors.
Surprisingly, the Small Business Administration has done little to address this problem. Congress also has turned a blind eye to these practices that hurt small businesses.
Another group that has been affected by this trends are sustainment contractors that provide repair and support services to fielded systems. Since it is difficult to predict when systems will break, DoD has a hard time projecting the demand for these contracts. Since the money that is used for these efforts has a one-year obligation limit, flexibility is key in this kind of contract.
Firm fixed-price contracts offer little flexibility to respond to changing demand in a timely manner. Sometimes the contractor will underestimate the level of effort required in a fiscal year and be forced to eat the overrun. Other times the work won’t show up as projected, and the contractor will realize a “windfall” profit. In reality, most organizations have a wish list of projects that they would like to do but for which they don’t expect to have the funds.
The difficulty in predicting how much work will be needed on an annual basis makes this type of contract inappropriate for sustainment work.
Unfortunately, the result of this overzealous application of firm fixed-price contract arrangements will be that more contractors will leave the defense business. This may ultimately result in the loss of important skills that the government needs.
One solution perhaps could be as simple as encouraging the use of good contract management by DoD leadership. Many of these contracts are managed at a lower level and do not attract senior leadership attention. This perpetuates poor judgment in the determination of appropriate contract types. It is unwise to risk losing the support of technical experts who contribute so much to the security of the United States.
James Gill is a graduate of the University of Southern California’s Defense & Strategic Studies Program, a former professor in the CSSB National Security Studies Program and is currently employed at Canyon Consulting. He previously worked at the U.S. Space and Missile Systems Center before retiring as the Technical Adviser to the Director of Contracting. He was also an adjunct professor for DAU.