Navy Wants More Competition To Reduce Cost

Photo: US Navy

Dec 1, 2011 By Amy Butler Aviationweek.com

NEW YORK – The Navy is hoping to shift 10-15% of its sole-source work into a competitive environment in the coming years as part of a push to more smartly buy and manage weapon system development and production in a tightly constrained budget environment.

The service is pursuing several ways to inject more competition into its contracting.

Some high-dollar programs are managed by sole-source integrators, limiting the chances to introduce competition. For new programs, competition is a clear choice, says Vice Adm. Mark Skinner, the military deputy to the Navy’s acquisition chief.

However, in cases where a competition at the prime level is not possible or where the service is locked into a long-term deal with a single prime, program managers are encouraged to “break out” capabilities from the prime and manage them directly under the Navy’s own purview. Thus, “We don’t pay the pass-through cost,” says Skinner, who spoke Nov. 30 at the Credit Suisse/Aviation Week 2011 Aerospace & Defense Conference here. “If a company is actively managing the supply chain, we are OK with that,” says Shay Assad, director of defense pricing and acquisition policy, who also spoke at the conference. The Pentagon’s issue is with contractors who are adding cost to contracts for easily procured times that don’t require close management.

One example is a contract on which the Navy separately took management control over a reduction gear for a particular weapon system, saving money through direct management.

Additionally, the Navy is keen to buy more data rights to weapon systems upfront to avoid being locked into a single original equipment manufacturer to support that system through its life. This would also allow for competitions throughout the life of a program, Skinner says. An example would be to compete the design, development and low-rate production but later recompete for that program’s full-rate production. Today, the shift from design to build is often linear and managed by a single contractor unless an egregious misstep takes place.

While competition is one method to better manage programs, the Navy is also looking at other ways to trim cost. As with its sister services, the Navy is conducting “should-cost” reviews of each program as it is subjected to milestone reviews. A recent study managed by the Center for Strategic and International Studies found that despite the Pentagon’s propensity to fund programs at a 50/50 confidence level, roughly 80% of them overran their cost targets since 1972.

The should-cost exercises are aimed to inform program managers about what areas of a program can be reduced in price. However, there is no leverage or teeth behind a should-cost study; program managers and contractors are still technically judged based on performance to a specific contract in a specific budget.

In reality, though, “you need to be ahead of schedule and under cost in this environment,” Skinner says. “If you are not you are in trouble.”

Skinner says, he has begun to see a shift in contractor overhead cost structures in the last four months owing in part to realizations coming out of should-cost work.