Foe to monopolist power Matt Stoller provides some comments on acquisition policies in Nancy Pelosi, China, and the Slow Decline of the US Military. He zeros in on commercial items and price gouging as problem areas:
Policymakers in the Clinton administration also fostered contractor price gouging, especially on contracts where there was only one bidder, or ‘sole source’ contracts. A key way to do that was to eliminate contracting rules when buying things that were determined to be ‘commercial items.’ Originally meaning that contracting rules didn’t apply to things like pencils or off-the-shelf computers that are regularly sold to private citizens, Congress changed the meaning of ‘commercial items’ in the mid-1990s to mean anything, like military transports or sophisticated weapons system that are anything but commercial. Since the Pentagon is the biggest buyer in the world, this change had significant impacts on market structures across the board.
For example, the C-130 transport – which has never been sold to a private commercial party – is considered a ‘commercial item.’ And its price, which should come down as technology and manufacturing know-how improves, has skyrocketed, from one model selling at $37.5 million in 1994 to a slightly bigger version going for $200 million apiece today. Why is the price so much higher? Well, procurement officers can’t get cost data, because it’s a ‘commercial item.’ And so they lack bargaining leverage.
There’s a lot to unpack in just that. Before getting into commercial item issues, the data on the C-130J is simply wrong. Looking at the FY19 SAR report, the flyaway cost in constant 1996 dollars was $33M in FY94, and then $45M in FY96 (there might have been some nuance on the FY94 price, it was the first lot of the “J”). Fast forward to FY19, and the price is $52M per unit. From FY96 to FY19, that’s just 0.6% annual price growth over inflation. That’s lower than the aircraft manufacturing PPI.
Sure we could have expected learning, rate discounts, but C-130 is a pretty mature platform. And it’s hard to compare prices of FAR 12 commercial vs. FAR 15 sole source directly, because when USAF bought commercial it included a warranty and other items. So not apples to apples.
The other thing on the C-130J is whether government was more or less on an equal footing with respects to the facts. When USAF went commercial on C-130J, they had a lot of actual cost history upon which to base pricing. There were foreign sales too as a value check. Indeed, 63 countries have operated the C-130. Those countries are not in sole source situations, and so Lockheed has to price in a way that these countries find value.
FMS is actually a huge weakness of Matt’s example. He didn’t realize the $200M per unit price quote was for an FMS buy that included several years of logistical support, spares and repairs, prices paid to DoD to manage it, potential offsets, and other things.
Commercial Items
Matt is also not quite right that commercial items came to mean “anything” in the 1990s after FARA. It did dramatically open the aperture to items that evolved from commercial items, or been offered for sale commercially, or minor modifications to a commercial item. These commercial “of a type” items are pretty broad — I’ll give him that — and has been pulled back in some respects, such as a 5% limit on modification price relative to base commercial price.
For a potential fix, he points to Section 822 of the Senate’s FY2023 NDAA bill. It requires contractors demonstrate a commercial item on major weapon systems, subsystem, or spare by submitting a comparable commercial item sold to the public along with technical/performance characteristics (to enable a price analysis). However, DCMA will request this information anyway when making a commercial item determination, and often won’t go forward without it. I think this provision only impacts the few cases where a contractor outright refuses.
But let’s step back a second to Matt’s claim that measures like this will revitalize DoD industry, drive down prices, and increase delivery time of critical things like Javelins/Stingers.
Overall, commercial items are something like 10% of all contracts. Let’s pretend DoD can squeeze 50% savings out of those contracts by moving them onto a FAR 15 basis. Well, DoD has saved some $20 billion, which is great, but doesn’t move the needle strategically.
[Update: I am reminded by a reader that even if commercial items are just 10% of total prime contracts, there can be significant proportion of other contracts that have commercial subcontractors. While I don’t have data on commercial item subs, it must be higher than I suggest.]
Progress Payments
The other thing he pointed to was Section 827 of the Senate’s NDAA bill, which is a progress payment incentive pilot. Basically, it would reduce large traditional contractor progress payments to 50% as a base, and provide increases for good behaviors like passing business system reviews.
We can talk about what contractors do with this increased cash flow from progress payments. Maybe instead of investing in plant, equipment, R&D, etc., they put it back to shareholders in buy-backs and dividends. We can estimate the size of the impact. But that has nothing to do with prices paid by DoD or program outcomes. It is just a matter of financing the contractor. Does DoD do it, or does a private entity who will expect some interest?
Conclusion
We can debate these recommendations. They might be a good idea. But they touch the margins. There’s ‘no there there’ in terms of the big strategic issues impacting strategic competition with China. Yet this is the whole premise of the article, that “if the U.S. doesn’t get better at buying weapons, America will lose in a future conflict to China.”
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