DoD’s Demand For Cost And Pricing Data On Commercial Items Could Kill The Golden Goose

Caught between the escalating price for its major acquisition programs and shrinking budgets, perhaps the Department of Defense (DoD) could be forgiven for going overboard in its efforts to control costs. Unfortunately, many of the Pentagon’s initiatives in this area are ill-considered and likely to have the opposite of their intended effect.

Many major military platforms and systems contain parts, assemblies and subsystems that are essential commercial items. For example, the Pratt & Whitney F117-PW-100 jet engine which powers all the U.S. Air Force’s C-17 transport aircraft is a derivative of the PW2000 commercial engine found on the Boeing 757. Commercial vendors are often more agile than their defense counterparts thereby providing DoD access to advanced technologies at a faster rate than would be achievable through the defense acquisition system. Over the years, the Pentagon has expanded its use of commercial parts in military platforms precisely in order to gain the cost savings resulting from privately sponsored research and development, large scale production and common supply chains.

DoD has a contracting system unlike anything in the commercial world. It is focused largely on preventing fraud and abuse by requiring excruciating levels of detail on cost and price. The government not only requires details no commercial purchaser would even think to request but it demands that the information be provided in a unique format. Asking for the additional data makes sense when the government is the sole purchaser or the acquisition is of unique items where there is no other market. But producing certified cost and pricing data is not a free good. The accounting systems necessary to comply with these requirements are expensive and labor-intensive. Commercial companies generally rely on accounting processes and formats consistent with something termed Generally Accepted Accounting Procedures, or GAAP.

In order to benefit from the lower prices and better technologies associated with the acquisition of commercial items, DoD has traditionally avoided imposing on the commercial vendors its unique cost accounting requirements. Current acquisition rules prohibit the government from demanding more cost or pricing data than required to determine price reasonableness or from requiring that the commercial vendor use the unique government formats and definitions.

All this may soon change. At DoD’s behest, the Senate Armed Services Committee included in its version of the Fiscal Year 2013 National Defense Authorization Act a provision, Section 841, which permits DoD to demand the same kind of detailed cost and pricing data from companies selling commercial products and services that go into major military platforms as it does from defense contractors producing specialized military items. Section 841 also allows DoD to demand detailed cost and pricing data for all services in support of a component, subsystem or system, including commercial services like repair or maintenance, upgrades and for IT systems, cloud or cyber services.

As has been the case with so many attempts by the federal government, in general, and DoD, in particular, to control costs and root out abuse in the acquisition system by increasing regulation, oversight and reporting requirements, this one too is likely to backfire. It is virtually certain to increase wasteful spending by requiring commercial item suppliers to create and staff a parallel accounting and contracting system. For smaller commercial vendors, the cost of two accounting systems would be prohibitive. Ironically, when vendors provide more detailed data, the government has to hire more contracting officers and spend more time reviewing and verifying the information.

More important, Section 841 is certain to reduce DoD’s access to commercial items in cases where the government is not the sole source of demand. In many cases, the government gets a price break precisely because it takes advantage of the large commercial markets available for the same parts and services and the less onerous reporting requirements for commercial items. But vendors with large commercial markets also have the option of refusing to sell to the government. There are many items the government buys in the commercial market that it could not afford to develop or produce just to meet its own demands. Many smaller commercial vendors simply could to afford to comply with the new reporting requirements and would avoid selling into the defense market. The next result of DoD’s effort to control costs would be higher prices for commercial items and reduced access to advanced technologies.