The total cost to the government is often overlooked when making the decision to compete for FSD [full-scale development]. This probably occurs because one of the largest cost items of FSD competition is not a direct cost to the program. This indirect cost is the bid and proposal (B&P) cost… Defense industry speakers to the Defense Systems Management College have stated these proposals cost from 5 to 10 percent of the total program cost where the total program includes the FSD contract and all anticipated subsequent sole-source contracts (production, spares, etc.).
Bid costs as a percent of contract. Can be 8 percent for smaller contracts, 2 percent for large contracts.
… If three contractors compete, each spending 5 percent for proposal/ marketing, etc.; and if it is assumed that the government pays 80 percent of these expenses; and if it is assumed that the winner’s expenses are fully applicable to the program; then the government still loses 8 percent because of losers’ expenses. Even though this simple example ignores other costs to the government and ignores the possible future benefits from some of the losers’ efforts, it does show that competition may not offer real price advantages to the government. It also shows that the ultimate cost savings of competition is heavily dependent on the number of competitors and the effort each competitor spends to win the competition.
That was Robert Kruchten in a 1982 article, “Competition: Does It Lower the Cost to the Government?” I suppose it is lucky for government that most Small Business Innovation Research (SBIR) companies do not charge their bid and proposal costs back to the government. I previously used some back-of-the-envelop calculations to find that competing companies could collectively spend perhaps half of a SBIR award value on bid and proposal costs.
Traditional defense contractors, on the other hand, charge B&P costs back to the government as an allowable indirect expense. In one older case, a $40,000 study contract generated 39 proposals, each of which was estimated to cost between $2,000 and $10,000.
As the field gets necked down in design studies to just one winner for full-scale development stage, follow on contracts will be the big prize. This causes companies to say that “Proposals are our most important product,” and even buy-in on production.
I still believe competition is more effective than negotiation… but maybe the Competition in Contracting Act’s emphasis on “fairness” actually means it is fair to no one, not even the buyer. I think that so long as there are companies offering relevant alternatives elsewhere in the defense system, then a program office buyer should be able to have a lightweight negotiation to get to the vendor they want. This merit-based award idea is the foundation of commercial solutions openings.
This “negotiated contracts in a competitive environment” is made possible by partitioning programs into smaller contract tasks. But as you can see from the chart above, relative B&P costs fall as the contract value grows. That is not a state of nature, but the outcome of regulations and process. The effect is to incentivize much larger, winner-take-all, contracts to minimize the burden on contracting officials. Ironically, the increased size/duration of contracts also creates a huge amount of risk for both sides, increasing the need for defensibility. All this contributes to a death spiral where fewer companies are able to compete for a diminishing number of “must-win” contracts.
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