Speed to Contract: Fuse Defense & Commercial Approaches to Benefit Warfighters

Can deliberate risk empower deliberate speed in the DoD contracting arena? A recent Speed to Contract, Speed to Market video podcast—with host Tim Templeton and guest Shay Assad—seeks to answer this critical question. Related topics include “Why do entrepreneurial companies deserve special handling by the government?” and “How can a paradigm of ‘cost trust’ help the US truly reward innovation from commercial businesses?” Mr. Assad, former DoD Director of Defense Pricing and CEO of Raytheon Co.’s Engineering and Construction Businesses, offers enlightened and innovative perspectives.?????

We’ve edited the below comments for brevity and clarity.??????

Look at acquisition through 3 different prisms

When you look at speed to contract, you must look at it through several prisms. One is what I call “traditional procurement”: the existing weapons systems and military items we're buying today in the context of traditional defense companies. The second, which has been extremely important for several years, is “How do we bring an innovative commercial environment into our defense work? How do we bring that to the table in a big way?” The third that we're dealing with is very traditional commercial companies. We're buying the same products that folks buy every day from these commercial vendors.?

It's three different perspectives. And you have to have different skill sets to deal with each of them.

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Don’t avoid risk by operating in all 3 with the same rule set

I think the most important thing in terms of speed to contract is—I used to call it “deliberate speed,” and that infers that you can, in fact, take risks. Taking risks is not something we should avoid if it's deliberately thought out, right? It's not just, “I'm gonna decide to take risks because it would just make things go faster.” It's, “ I had a plan. I executed that plan, and I, yes, took some risks. Here’s why I took those risks. And here's the benefit the taxpayers and warfighters received for my risk.” I think if you can operate in that environment, you can be very successful.?

Our problem is that we're trying to deal with all three of those environments—traditional procurement, commercial innovation, and traditional commercial— with the same rule set.

Traditional defense companies run differently than commercial?

The DoD is kidding itself if it thinks it will be able to get innovative commercial technologies —brought to bear by significant commercial companies—and try to apply the same rules to them as the defense industry. The defense industry benefits from several policies that some would say are subsidies, which commercial companies can’t take advantage of.? They can't take advantage because they're not in that environment. The risk posture of a commercial company is completely different than the risk posture of a defense company. Many people think there's a significant difference between commercial companies' accounting practices and defense contractors' accounting practices. But the reality is many accounting practices are very, very similar. It's just the manner in which those companies decide to proceed with business. In the case of the defense industry, the traditional defense contractor wants a contract and funding in hand, and then they'll build to whatever that contract tells 'em to build. In a commercial environment, they're building to a forecasted, risk-based revenue projection. And that's a totally different animal than what the defense companies deal with. But if we're under the assumption that commercial companies don't understand what things cost, that's a fool's paradise. They collect their costs maybe a little bit differently, but in many ways, it's the same on the commercial side, which is strictly, “I'm going to buy a commercial item that everybody else buys.”

That's the simplest thing for us to deal with. We've got pricing information that says, “This is what a variety of different buyers pay for that item.” And in general, the department's position has always been, “We're going to pay what a variety of customers pay for any particular item.” If it's competition, that’s totally different—this is where I see the speed coming in.?

But let's talk about the traditional environment first. ?

Create systems that make it easy for companies to meet requirements? ?

Many companies don't understand the data requirements they're obligated to meet. They often say things like, “I had to submit volumes of data; it was seven feet high.” The reality is that how they choose to estimate or provide the data for a particular proposal is really up to them. But the underlying fact base is really pretty simple. Most times, companies think, “I gave them all the information that was associated with preparing my proposal.” But that's not what the requirement is.? The requirement is “Just give me the factual data that a prudent buyer and seller would consider that could significantly affect price.”? And I think they fall down a little bit here.?

If we can create systems that make it easy for companies to say, “Okay, I'm going to meet that fact-based requirement, and here's how I'm submitting.” And if a system and a process get put in place that they understand, and the government says, “Yes, that'll do the trick from a fact-based point of view,” then they can go off and develop their proposal. What are they thinking? “I've got it that this is the fact base, but I chose to develop my proposal on this basis, and here are the reasons why that's fair game.” If substantiated correctly, this approach is fair game. ?

Develop commercial systems, as companies do for themselves

What I'm suggesting is that we shouldn't force companies to translate their data into some format that the government will accept. But there are certain fundamental elements of cost—material cost. This is an indirect cost, right? This is overhead. This is G&A, direct engineering labor, or whatever it might be. And I think we need to have “commercial” systems. Companies like ProPricer and others can provide systems and simply say, “All right, I got it. I'm going to be able to extract that information from my accounting records and present it to you.”? And I think what we're really looking for, at least in terms of what I think is important, is, at the end of the day, can you demonstrate? And this is really when I say “traditional systems.” These involve supplied products that are either the same or similar year over year. ?

Produce an estimating model with an actual cost foundation

A company should be able to say, “This was what we proposed, this was the expected result—which is what we negotiated—and here's the actual result, and is there a correlation between the two?” Where should the government eventually go?? Establish a high degree of correlation. Say to the companies, not the government: “This is your product. Demonstrate to me that you can develop an estimating model that has the disclosure of factual, actual cost as its foundation.” That says, “If you use my model, and you make these materials, and you put these actual inputs in, we're going to go down a learning curve. We've got so much indirect or so much variable and fixed cost; here's how it's going to impact us, and here's the number.” And at the end of the day, I think companies ought to be able to say, “If you use my model, here’s what we negotiate for the fiscal year.”

Primes & subs should present a model that creates data correlation

“Because if you use my model, here's the outcome, and here's what the model said it was going to be.” If you can create that high degree of correlation, which would require both the prime and its subs to correlate—don't let the subs off the hook. Now, you’ve got to be reasonable about the level of subcontracted data you go down to, but the big dogs have to play just like everybody else. Everyone has to be in the same kennel. If we can create that, I recommend creating contracting instruments that enable us to not only contract for the current year but use that very same data and just contract out for the next year or two. But not so far out that it places an unreasonable risk on the company or causes the company to want to put in some reserve that will cover that risk.

An approach where both parties assume a degree of risk

It would be great for the government to be able to say, “Let's stay in a range where both of us can assume a degree of risk. We both can participate; we can reasonably expect an outcome.” Yes. If we can create that kind of approach, we can lose a lot of time from the process.

But there's another part of this process, and it's somewhat the tail wagging the dog. That's the requirements side, right? When I was in the Department, it was not unusual for a requirement to take three years to generate and come through the system. We have to be able to work faster, and that's another degree of risk that we have to be able to take. ?

Handle non-traditionals differently. They’ve invested capital ?

We may not get this exactly right, but you know, I never met a flag officer or a general officer who wasn't willing to take some risk if they could get a capability to the field much quicker. And so, we need to accelerate the requirements process, and then we need to streamline and accelerate how we actually get the contract. Once we've got a requirement, how we get the contract, the next prism is what I'll call the “non-traditionals.” We've got to deal with them totally differently because most of what they have created was done on a risk basis. There was no government requirement that existed. They created it; they paid for it. In many cases, it was a capital investment made by entrepreneurs and folks of that nature who realized this was really risk-based but then said, “By the way, I want to get a return when I'm taking that kind of risk.”

Defense companies take no risk. The government makes the entire investment

So we can't treat those companies in the same way we treat traditional defense companies, who are fully reimbursed. They don't invest any of their own money. The government makes the entire investment. Risk, here,? is basically non-existent. Then you go into a non-traditional world, and it’s the opposite. They're funding everything—not just their capital equipment, but their technology and trying to put it together, then whatever testing must be done.

The government doesn’t have the skill set to deal with non-traditionals

The most important thing about speed to contract is: How quickly can you determine that you are paying a fair price, which will require dealing with non-traditional firms? It’s going to require a level of sophistication that we typically do not have in the Department. And the traditional defense company doesn't have it either. So, let's get that out on the table. They don't have those skill sets. So, you're dealing in an environment where there still has to be a degree of transparency. But then there have to be other factors that are taken into account.

For example, existing profit policies are cost-based and don't incentivize companies to reduce their costs. ?

Speed, improvement, innovation, price, & cost-benefit

In traditional defense work involving non-traditionals, we need to talk about the speed of capability, the magnitude of improvement, innovation brought to the table, and ultimately price benefit and cost-benefit. “What are we gaining as a warfighting entity in doing business with this particular company? And what's a reasonable amount of money to pay for that kind of capability?” What that means is you're going to have to take it out of the traditional transaction—involving the contracting officer and contract administrator or contract manager from the other company—into a much broader evaluation. ?

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