In a February 2019 report finding that a defense contractor, TransDigm Group, Inc. (TransDigm), overcharged DoD for spare parts under sole-source contracts, the [Inspector General] IG characterized the government’s inability to obtain such data as a systemic problem. The IG stated that although using certified or uncertified cost data “is the most reliable way” to determine whether a price is fair and reasonable, contracting officers are often unable to obtain cost or pricing data when they request it from contractors. The IG cited several reasons.
First, according to the IG, federal and DoD acquisition policies “lack consequences for contractors that refuse to provide uncertified cost data.” The IG appeared to criticize the TINA exception for commercial item contracts and contracts whose value falls below the Simplified Acquisition Threshold. The IG also opined that “new legislation is making it easier for contractors to avoid providing cost data to contracting officers.” The IG cited the increase in the TINA threshold as an example.
That was a nice article from Alexander Canizares, “Cost or Pricing Data Requirements: Emerging Developments and Risk Areas.” HT: Michelle Currier.
The IG recommended changing statutes and regulations to ensure cost or pricing data is provided for sole-source contracts. IG also recommended a creating a team of functional experts — a pricing cadre — to assess parts and contractors.
As Canizares reports, the Pentagon caved into the IG. ASD(Acquisition) Kevin Fahey testified he agreed with “all” of the IG’s recommendations. Defense Pricing and Contracting (DPC) Mr. Kim Herrington announced the formation of a pricing cadre. However, the Pentagon isn’t just doubling-down on traditional methods:
DoD has indicated that it is investigating potential “reverse engineering possibilities” for more than 1,000 spare parts to create “competitive alternatives” and drive prices down.
That’s an interesting approach, especially with the increasing in-house capabilities to do additive manufacturing. Not sure how intellectual property works into reverse engineering into a requirement for competition.
I tend to take the view that the issue with cost or pricing data isn’t only that increases administrative burden, but that it deters commercial firms from doing business with the government at all.
The IG fears a rise in contractor profits and increasing sole source contracting. That’s not an economically rational set of fears. Increased profits — so long as there are not extensive barriers to entry — should incentive firms to enter the market and drive prices back down to zero economic profit (the point where firms are indifferent between investing and divesting). That drives competition up and lowers sole-sourcing. Most of all, it ties profits to performance. High profits should indicate returns to innovation and value creation. Steady 10-15 percent profit should not be given to routine capital allocations and increasing base costs due to poor management. Overall, demanding cost or pricing data may contribute to cost disease problems, even if it keeps profit-on-sales in check.
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