Why Shelby’s latest crusade is self-defeating
by Sam Dinkin
|If a commercial contract is awarded on a fixed-price basis for standardized goods and services, both supplier and the contracting officer at NASA have an incentive to minimize the paperwork associated with the award.|
Cost-plus contracting is inherently expensive. If a contract is awarded on the basis of cost, plus a fixed profit level, the supplier has an incentive to maximize costs. Various epicycles can be put in place to attempt to reign in this effect, such as requiring providing detailed documentation. As noted by the Space Access Society, these methods are not very effective at keeping costs in check—and are themselves a source of additional cost. Both the supplier and the contracting officer have an incentive for this documentation to be extremely detailed. The supplier is reimbursed for the cost of detailed documentation. The contracting officer is pilloried if it is subsequently revealed that costs were unjustified, especially when overruns ensue.
In contrast, if a commercial contract is awarded on a fixed-price basis for standardized goods and services, both supplier and the contracting officer at NASA have an incentive to minimize the paperwork associated with the award. The supplier obviously wants to minimize the cost of compliance due to the fixed revenue that must cover the cost. The contracting officer also has no incentive to force a rise in the cost of compliance because the fixed bid will include the cost of compliance and, given that the price is fixed, any risk associated with the certified price being wrong is borne by the supplier. Therefore, there are no overruns. NASA would only pay for goods and services it receives so it would not bear any monetary cost if the supplier fails to deliver.
Indeed, the FAR inherently takes this into account. Sen. Shelby is attempting to implement the FAR piecemeal, but the regulation generally requires only minimal documentation for components acquired commercially. If a part is available commercially and is either too insignificant a component of cost, is priced competitively by multiple suppliers, or has a long history of stable prices, then the FAR does not require certified cost and pricing data. (There are a set of exceptions to the requirement for certified cost and pricing data requirements in 15.403-1(b).)
The following example illustrates the way to take the cost and details out of certified cost accounting. The Space Access Society posed a hypothetical situation: “Imagine the response you'd get, handing [FAR Table 15.2IIA which requires detailed cost accounting of each part] to a car dealer while you’re haggling over price”. The dealer would hand the wag an invoice that shows one part, “the car”, the factory price and the dealer’s markup.
The way these dynamics might be operationalized for NASA is that a company bidding for a new commercial crew contract (The Commercial Crew Company), might have a single subcontractor (The Commercial Spaceship Company) and if necessary a third company that is a sub-subcontractor (The Commercial Spaceship Component Company) and NASA might receive a certification of a single number—the complete cost of the contract.
The preceding dynamics are, of course, an exaggeration. The contracting officer will seek adequate detail to assure that Sen. Shelby does not pillory NASA. Nevertheless, once this minimum level of detail is obtained, there is no further incentive for complexity.
|Sen. Shelby’s proposal is, in effect, pushing on a string.|
The projection that requiring certified cost and pricing will raise costs 50 to 200% versus commercial costs is based on a data set that is populated likely exclusively by cost-plus contracts. The actual cost increase that would ensue if Sen. Shelby’s language is adopted can be much lower than expected given that the incentives of both parties are to minimize complexity in a fixed-price contract.
Sen. Shelby’s proposal is, in effect, pushing on a string. Requiring detailed accounting without also giving either the contracting officer or the supplier an incentive to make the accounting more detailed will defeat itself. This may, in turn, cause him to seek that contracts only be cost-plus, but that is a battle for the future.