As we wrap up out highlights from the Government Contracting Pricing Summit, here’s a couple good parts from an address made by David Cade, Vice President at the Boeing Company.
Mr. Berteau highlighted to Senator [Tim] Kaine a discussion he had with an unknown contracting officer. Berteau suggested using a different part of the FAR for greater flexibility instead of FAR 15. The contracting officer replied “I am more comfortable with the one that tells me everything I need to do and I do not have to make any decisions on my own.” Clearly, someone did not trust themselves to move faster.
… There’s a fear factor among contracting officers and I understand it. I can’t go wrong or be criticized if I’ve got binders of data. I may not understand it all. I may not look at it all. But I’ve got it. If I’m ever questioned by auditors I can say, “Look at what I’ve done. I’ve collected all this information.”
FAR 15, of course, is the procedures used for negotiated contracts for government, and industry often prefers the use of commercial item procedures found in FAR 12. Mr. Cade gets into a discussion of how a contracting officer would feel comfortable buying an IPad at the market price without getting into Apple’s cost structure. Certainly, however, an IPad’s price is much more than the materials and Chinese labor that go into it, but there’s “trust” that market forces make the IPad’s price reasonable.
He then brings that to defense systems like the KC-46. “It’s a freighter,” Cade says, similar to what DHL or UPS buys. Even though there are unique components or upgrades, Cade is trying to say that there are methods of price analysis that can be done without getting into cost structures. Just have an open discussion on, “how did you internally decide to price?”
Cade explains this is important because having all the business systems to track everything for a cost build up is expensive. He gives an example of having to buy and track common bolts under a FAR 15 contract with all the clauses it contains, rather than bulk buying in inventory and using average costs for all contracts. Commercial business units don’t have the same infrastructure to track all of that.
Yet, if a contracting officer agrees to a price, and the DoD IG or DCAA comes back later and finds that not enough information was provided to understand the cost of each bolt, screw, and component, then the contracting officer faces a personal risk.
Still, it’s hard to imagine Boeing would say — “here’s the price of a commercial freighter so that’s what we’ll sell you a KC-46 for.” There would be a lot of additional costs. How are those justified? How does the contracting official know that Boeing isn’t loading the KC-46 proposal cost with overruns from the commercial 787 development? That is a challenge. But so is the challenge of knowing whether a product could have been built for a much lower cost, those are the “unseen” costs of compliance.
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