“High Road Contracting” Will Be A Dead End For DoD

The Department of Defense (DoD) is growing more desperate by the day to avail itself of the skills and technological advances of commercial companies. As the Pentagon leadership readily acknowledges, the locus of technological innovation has shifted from government sponsored activities to those initiated by the private sector. In addition, commercial companies have the demonstrated ability to adapt and innovate rapidly, reduce costs as necessary, run efficient, agile and global supply chains and employ resources efficiently that far exceeds anything allowed by the current defense acquisition system.  This is particularly the case for IT and software, two areas where government simply cannot compete with the private sector in terms of speed, agility and creativity. When it comes to cyber security, the Pentagon cannot even recruit the right talent.

The problem is that federal regulations and defense acquisition policies and practices make the Pentagon an unattractive customer for many commercial firms, particularly those at the cutting edge of new technologies. This might surprise some given that the DoD budget is over $550 billion annually and that the department spends some $400 billion of that on goods and services. But the government, generally, and DoD, in particular, limits the profits companies can make regardless of the quality of the goods or services provided, can cancel the contract at any time for its own convenience, requires a unique accounting system, demands detailed cost and pricing data that commercial firms often do not even collect and threatens to take privately-developed intellectual property (IP).

Unfortunately, the Federal Government cannot seem to get out of its own way even when it comes to its efforts to encourage commercial companies to do more government contracting. Ashton Carter, the Secretary of Defense, recently made a pilgrimage to Silicon Valley where he made the case for a closer partnership between DoD and commercial IT companies. Deputy Secretary of Defense Robert Work announced a Defense Innovation Initiative. The Under Secretary of Defense for AT&L, Frank Kendall, published a new version of the Better Buying Power acquisition guidance that directed the removal of unnecessary and overly-burdensome regulations. Mr. Kendall has been working closely with the House Armed Services Committee in that body’s efforts at acquisition reform.

At the same time, the White House and DoD have been pursuing policies that make it less likely that commercial companies will want to do business with the government. AT&L has been trying to limit protections for commercially-developed IP in cases in which the government is now the primary purchaser. It also has proposed new oversight and approval procedures for corporate Independent Research and Development (IR&D), which government pays for as part of the cost of government contracts. The new procedures would make the government, not the company, the arbiter of what was appropriate R&D. The new rules would apply to research activities where company and government-provided IR&D funds were comingled.

The latest success by this administration in deincentivizing commercial companies to pursue government contracts is the new executive order on fair pay and safe workplaces. This is just the latest example of what I referred to in an earlier blog as “High Road Contracting.” For any contract over $500,000 – which is most of them – contracting officers must now determine whether the company in question has conformed to a host of pay, work place safety and labor laws. If there are any violations, regardless of their nature, scale or merit, the company could lose the contract without an appeal mechanism.

Never mind that several departments already monitor companies on these subjects and can fine or indict violators. Now DoD and all other contracting officers get to do it too and not just once but every six months. This executive order adds another layer of regulations, bureaucracy, paperwork and oversight to an already cumbersome, slow and overburdened acquisition system. It means more unproductive activities for both government employees and the companies, a cost which will come at the expense of the actual work for which the contract is being awarded. It will result in fewer jobs except for the teams of “labor compliance advisors” who will roam from contracting officer to contracting officer. As Stan Soloway, the President of the Professional Services Council argued:

“ . . . the order wildly over-reaches, lacks basic concepts of fairness and due process, is of questionable legal standing, and will be incredibly expensive for both the government and industry, while also being wholly unnecessary.”

It makes perfect sense for DoD to try to entice commercial companies that make much higher profits than allowed by the government, sell anywhere in the world, invest their R&D dollars however they like, write and execute contracts in days rather than months or years and try and minimize excess overhead and back office costs with an acquisition system and new executive orders that are the antithesis of every one of these conditions. The negative consequences are likely to be particularly great for those innovative start-up IT businesses, the ones DoD particularly wants to partner with, but that don’t provide the pay and benefits required for government contracting. For DoD, new policies on commercial IP, IR&D and pay and labor practices are a High Road to nowhere.