I was pleased to have Phil Jasper, Mission Systems President at Collins Aerospace, join me on the Acquisition Talk podcast to discuss commercial item acquisition. In the early 1990s, there was a recognition that DoD needed to streamline its business processes in order to attract commercial companies. The Federal Acquisition Streamlining Act of 1994 led to FAR Part 12 procedures, which exempted items determined to be commercial from various regulations such as certified cost or pricing data, cost accounting standards, and business system administration. The past several NDAAs strengthened the preference and opportunities for commercial, including the creation of the DCMA commercial items group (FY13 Sec. 831), treatment of nontraditional contractors as commercial (FY16 Sec. 857), and reduced contract clauses and flowdowns (FY17 Sec. 874).
Phil argues that commercial procedures have important benefits to DoD. First, it allows companies to bring their internal R&D for commercial customers to bear, including open systems architectures. A common avionics system, for example, was tailored for UH-60 and CH-47 helicopters saving the government over $160 million. Moreover it was delivered in just 13 months compared to a normal defense cycle time of three years or more. Similar examples in the aircraft world are found in fuel systems, heads up displays, fire protection systems, and landing gears. These commercial items have lasting benefits in terms of continued private investment that generate capability enhancements throughout the lifecycle. This helps offload obsolescence management from the government and allows military systems to be upgraded on much faster cycle times.
Currently, DoD systems fall years behind the current state and need to leap-frog to the next generation before falling behind and doing it again. Embracing commercial items can break that cycle. “If you look at Moore’s law,” Phil says, “and the pace at which memory and processors double in capacity every 18 months, for example, and then you look at the life cycle of defense articles, airplanes flying 30, 40, maybe even longer years. Think of how technology evolves over that time. You really have to look at the value that’s provided from the company, assuming that redesigning obsolescence as part of a commercial business model versus me [government] having to pay each and every time one of those processors gets upgraded. And now I’ve got to go pay the reintegration costs and the recertification costs.”
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There are still challenges to DoD use of commercial item procedures. Phil found that the number of flowdown clauses for commercial contracts was just 13 in the early 1990s, growing to more than 60 today. These flowdowns have a major impact on the commercial supply chain, with Collins having lost subcontractors due to the regulatory requirements. This is particularly true because government is a low volume buyer, making it hard to close that business case. Commercial items also have to be recertified regularly which adds time and cost. Intellectual property and reasonable pricing determinations are also sticking points that can bog contracting down.
Despite these challenges, Phil is hopeful about continued progress in commercial item adoption. “Frankly, at the end of the day, that’s what this is all about — industry and government are aligned in common purpose and that is to get the best technology to the warfighters as fast as possible at the most affordable price and best value for the taxpayer.” Amen to that.
“Of A Type”
One of the challenges for commercial items is this concept of commercial “of a type.” Some people say that a commercial item is only one that has the same specifications and is sold in similar quantities as on the commercial market. Those items needing modifications for military use therefore should require the contractor to providing cost or pricing data to make sure government gets a good deal.
Phil contends that customization is often required of for even their commercial customers. “The core technology is the same but the specific application needs slight tailoring in order to make it fit. But that tailoring applies to no matter what aircraft we’re putting a landing gear on.” He continues:
[For] people who are saying that commercial items are being too broadly interpreted, or maybe in their view abused a little bit, I’d encourage them to go read the language in the federal acquisition regulations around FAR part 12 and go look at the congressional intent as they we’re putting these requirements in the national defense authorization act around commercial acquisition. They intend the definition to be very broad because there’s recognition throughout Congress, throughout the Department of Defense, that it’s very hard to take an exact commercial item and apply it to go without modification to go solve a challenging military operational problem.
One of the things I wondered about is why so many commercial items are sole sourced in DoD. These purchases are exempt from certified cost or pricing data, but not “other than” cost or pricing data (which is basically the same thing but without the certification and legal ramifications that come from it). Shouldn’t commercial items be subject to competition more often if they were in fact commercial? Here’s Phil:
Look at the major transport jets of Boeing and Airbus. When you secure a position on those platforms, you’re part of the build of that particular aircraft. And so in essence, it becomes a sole source environment.
He argues that the commercial process is more about the value being generated for the end customer rather than production costs due to continuing investments and relationships. There are lots of tools to determine fair value. But that doesn’t change the underlying commerciality of the item. The commercial item determination is a separate process from price reasonableness.
Private Investment
I asked about the logical conclusion of an embrace of commercial item acquisition. If companies are self-funding more R&D, then shouldn’t government increase Procurement and O&M appropriations to cover the cost of private investment? Wouldn’t that also mean government has to pay more than 10-15 percent profit to cover the investment?
I think that’s correct there and I think we’re seeing that play out in industry today. If you look at, for example, the joint all-domain command and control, the JADC2, environment right now that’s out there, each one of the services has demonstration and experimentation events where they’re saying to industry, bring us your technology and demonstrate to us how you can go solve some of these specific problems… And if you can demonstrate that, then we can start talking about how we go acquire that particular technology. In order to get the technology up to the TRL level 5 or 6 that it needs to demonstrate, that’s investment that we make as a corporation.
Headwinds
I was concerned to hear some of the regulatory compliance issues that exist even within commercial item acquisition. It is well known that DoD prime vendor base has been shrinking pretty consistently since World War II. In the last ten years, prime vendors dropped from 80,000 to 50,000 and new entrants shrank even faster from 15,000 to 4,000. It would be interesting to see the statistics at the subcontractor levels which are often hard to come by. But even back in 1955, North American Aviation itself dealt with 10,000 suppliers. Here’s Phil discussing the situation faced by his supplier base on military contracts:
The overhead that comes with acquisition and doing business with the military market keeps commercial technologies and commercial companies from doing business with the department of defense. They simply can’t afford to invest in the resources needed in order to go do that. Unfortunately, that’s an environment that exists not just within FAR part 15 acquisitions, but also FAR part 12 acquisitions.
As I look at the supply base, and if you look at a flow downs to do business with the government you have to have six business systems that are required in order to have truth and negotiation or TINA compliance. Those are cost estimating systems, earned value management system, material management systems, accounting systems, purchasing systems, and property management systems. Small companies, commercial companies, they look at the cost of putting those systems in. They weigh that against the incremental volume that they’ll get through being a defense supplier, and that equation doesn’t always work out for them.
Phil can cite cases where even his company was forced to no-bid certain contracts because the defense customer required non-commercial procedures that would have triggered implementation of business systems. Ultimately, however, there is not as much a problem with commercial “of a type” itself in law and regulation. The acquisition community must embrace the concept more fully and balance good faith with due diligence.
Thanks Phil Jasper!
I’d like to thank Phil Jasper for joining me on the Acquisition Talk podcast. Be sure to read his article, Commercial classifications in DoD programs are a win-win for government and taxpayers. He also has a great briefing and DAU talk on the subject. You can also find a nice interview with Phil here, and a short video on integrated products here.
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