One of the biggest failures of FAR 12 [commercial] contracting has been DoD’s unwillingness to proactively use these commercial of a type procedures because of its inability or cultural aversion to pricing value. This has led to the absurd situation of DoD again spending billions of dollars a year to try and reinvent commercial capabilities with defense unique contractors sometimes at 10 times the cost (but at fixed profit rates)…
Using the canard that ‘commercial of a type’ solutions lead to “excess profits”, the DoD IG [Inspector General] has placed itself as the gatekeeper to police any deviance from collecting cost and pricing information rather then developing a workable alternative value or non-TINA price based criteria… The failure of the commercial of a type model has made OTAs more important, as this may now be the only way to get non-traditional companies to work on DoD unique solutions.
… now the contracting mafia is starting to load up OTAs with their own set of government-unique contracting clauses taken directly from the FAR. While not OTAs, nowhere is this trend better illustrated than in the Air Force’s so-called 1-page Small Business Innovation Research (SBIR) contracts that are plagued by 80 pages of specific FAR contract clauses incorporated by reference. Venture capital backers of small companies winning SBIR contracts are only now realizing what they are signing up to.
If you haven’t already read it, that was the excellent Bill Greenwalt writing at Breaking Defense, “25 Years Later… and it’s Still Computer Chaos.” Commercial of a type are those items which are not exactly the same as a commercial item, but have similar requirements. Military vs. civilian aircraft parts are an old example.
Modern software is the same. Commercial software is tailored for various consumer or enterprise needs which create specific applications. Commercial in this context doesn’t mean another unit of the exact same item. Theoretically the commercial space — with the rise of software, data, and other intangibles — is becoming more like ‘commercial of a type’s — more customized — and yet buyers are not reacting by demanding cost data. Instead they rely on a series of overlapping and competing offers to determine whether they are in fact receiving value.
Knowing how much was expended by a supplier tells the buyer nothing about value per se.
Greenwalt argues that government risk aversion moved against the intent of simplified commercial of a type procurement from the 1990s. We now have demands for TINA cost and pricing data to support even minor orders that may have only slight differences from commercial products. A defense pricing corps in on the horizon.
He rightly worries that the same fate may befall the use of Other Transactions Authorities, and that’s something to watch out for. Indeed, if OTAs are not used extensively enough, it could prove their own downfall. The rise of OTAs and commercial practices aims to invite competition, discover the merit-worthy firms and filter out the non-performers.
Failures should be expected, and the system should not punish merit-worthy firms with indiscriminate punitive regulations (which may just be requiring FAR clauses). Such a reaction has the effect of simply destroying the competitive filtering process which keeps the industry vibrant. Perhaps commercial practices are not politically tolerable for long enough to demonstrate results.
While I agree with much of what you say here (especially about profit policy), let me come at the question from a slightly different direction.
The government buys two kinds of things: things where they should already know what is a fair price, and things where they don’t. For the latter, they require extra data to justify the price, in order to avoid ripping off the taxpayers.
Commercial items, freely available on the open market, clearly fall in the first category. First-of-a-kind custom items that don’t yet exist clearly fall in the second category. In between, there is a fuzzy middle ground where there is potential for mischief.
The intent of expanding the definition of commercial items to include “of a type” was to recognize that some items not currently available on the open market _could_ be available at very similar prices to the ones that are now sold. If DoD wants F-150 pickup trucks but with a multifunction tailgate like the new RAM trucks, there’s no reason to require price justification, even though that product doesn’t yet exist.
The problem arises when the “of a type” loophole is used to apply commercial pricing rules to designs that are not just minor variations on commercial products. (I seem to recall an attempt to label the KC-X, which eventually became the KC-48, as an “of a type” commercial aircraft…) This is a gross abuse of the privilege, and leads to unproductive backlash when OSD and the Congress realize they’ve been conned.
As for software… I think we need to start recognizing that anything beyond pure shrink-wrap software is a service, not a product. Service contracting rules should apply.