Pentagon seeks to avert low-ball bids on development contracts
By TONY CAPACCIO | Bloomberg | Published: January 3, 2017
The Pentagon is seeking ways to crack down on contractors that make low-ball bids for multibillion-dollar development projects in anticipation of collecting other Defense Department funds later.
Contractors oppose a proposed regulation saying that Pentagon contracts specialists could recalculate bids as higher than submitted. That would increase the risk that a company would lose the bidding to a competitor.
The question is whether some contractors rely too much in their bid calculations on estimates of future Pentagon reimbursement for their independent spending on research and development of unrelated projects. That's as opposed to a bid based more on a contract's technological risk and labor-cost projections, as well as the fruits of a bidder's own prior independent research and development expenses.
Counting on future reimbursements can give bidders "a significant competitive advantage" so "we just want to make sure that things are transparent," Claire Grady, the Defense Department's director of procurement policy, said in an interview.
The Pentagon actively encourages companies to spend their own funds on independent research and development that meets military needs, and repays some of the expenditures. The Pentagon reimbursed industry $3.8 billion in fiscal 2015 and $3.5 billion in 2014 for its share of these "IR&D" expenditures. The expenses are typically reimbursed as indirect costs spread across a company's entire business base.
Facing strong opposition -- led by the Council of Defense and Space Industry Associations, an umbrella group for contractors -- the Pentagon announced on Dec. 22 that it would extend the time for industry comments on the proposed regulation by a month, through Feb. 2. The extension increases the chances the proposal could be scrapped or revised by the incoming Trump administration.
While President-elect Donald Trump has vowed to slash the costs of major defense projects such as Lockheed Martin Corp.'s F-35 fighter, he's also promised to support U.S. businesses by cutting regulation.
With the extension, "we do not see the urgency of highlighting this issue" to Trump's transition defense team, Alan Chvotkin, executive vice president of the Professional Services Council, a member of the umbrella group, said in an e-mail. "We are confident that the department's new leadership will have ample opportunity to decide how it wants to proceed" with the proposal.
A final rule might be published between April and June, Pentagon spokesman Mark Wright said in an e-mail.
If the proposed regulation takes effect, it would be used to evaluate bids of upcoming high-profile development contests including the Marine Corps' Amphibious Combat Vehicle, the Air Force's Advanced Pilot Trainer, upgrades to the Army's Family of Medium Tactical Vehicles, and its Long-Range Precision Fires ground-attack project.
Nothing in the proposed regulation imposes new restrictions on what projects contractors choose to spend independent research on, and it doesn't prohibit bids based in part on the expectation of future reimbursements, even though the Pentagon might choose to recalculate the amount, Grady said.
But "if you're going to subsidize your current development effort by spreading those IR&D costs over your entire business base, we want to consider the cost to the government when we make that source selection," she said. "So we're looking at trying to make an adjustment to account for the extent your proposal was reduced by future IR&D" reimbursement.
Low-ball bids have been submitted in only a few contests that promised a long, profitable production phase after development, so it's not a systemic issue, Grady said. "It's when they're looking to secure that future production buy," she said.
The proposed regulation "creates a more level playing field and more transparent playing field," especially for companies new to defense contracting, she said. Adjusting bids to account for potential future Pentagon reimbursements could prevent "a situation where one company based on size alone could dominate and" create "an insurmountable competitive advantage," Grady said.
The Council of Defense and Space Industry Associations said in a Dec. 14 letter to Pentagon officials that the proposed regulation "represents a gigantic shift" in the policy overseeing independent research and development spending "and a break from procurement and oversight processes in place for many years. It thus deserves extensive and deliberate consideration before finalizing."
With assistance from Kevin Brancato