On May 31, 2011 the Defense Department announced that Shay Assad, Director of Defense Procurement and Acquisition Policy (DPAP) had been assigned to a new position, that of Director, Defense Pricing. Both positions report to the Under Secretary of Defense (Acquisition, Technology, and Logistics), so this is a lateral move. Reportedly, Mr. Assad will be replaced by Richard Ginman, one of his deputies.

Seems innocuous, doesn’t it? Not really. We’re going to dig a bit deeper to show you how this transition not only ties into many of the important issues on which we have routinely reported, but that it also establishes the future for DOD acquisition policy.

Mr. Assad has been either the subject of, or a key participant in, many blog articles on this site. A quick search returned 21 articles in which he has been mentioned. He’s been a key figure in our ongoing saga of Defense contractor oversight.

As DPAP Director, he established acquisition and cost policy for the Pentagon. For example, we reported that his Class Deviation implemented the Franken Amendment. Perhaps more importantly to regular readers, he emerged in late 2009 as the mediator in the public flame wars between the DCMA, DCAA, DOD IG, and Commission on Wartime Contracting (CWC). In another “for example,” in this article we reported that Mr. Assad had Chaired the DOD’s Taskforce on Wartime Contracting (TFWC), and that he had concluded that every concern raised by the CWC was already being addressed.

Mr. Assad had established himself as a key leader in the Pentagon’s contractor management. He had been involved in the highest profile issues facing DOD’s acquisition workforce. Recently, reports linked Mr. Assad to the travails of the F-25 JSF program. Reuters reported that—

Carter's deputy, Shay Assad, came to Fort Worth last week to review Lockheed's costs amid growing frustration that only about 15 percent of the plane's cost is linked to ‘touch labor,’ work on the plane actually done in the plant, with the rest linked to Lockheed's overhead.

We touched on these frustrations in our story on customer reactions to program cost/schedule increases. We quoted a report that stated—

Committee chairman Carl Levin said new estimates of ‘life-cycle’ F-35 costs, including development, operation and maintenance, now top $1 trillion. The committee has been a strong supporter of the program, but he asked Carter to present alternatives as a ‘backup’ option within a week. … Senator John McCain of Arizona, the panel's top Republican, described the F-35 program as ‘incredibly troubled’ and a ‘train wreck.’ He suggested the Pentagon think of alternatives to the F-35 program if its costs cannot be brought down. Carter, the undersecretary of defense for acquisition, responded that there were no good alternatives to the F-35, a multirole aircraft due to replace various aircraft in the military fleets of both the United States and its partners.

Mr. Assad’s lateral move to his new position—a position apparently created for him—portends something new in the Pentagon’s approach to establishing contract prices. The new approach was discussed in an interview of Mr. Assad, published online in Federal Computer Week. Mr. Assad said—

One of the things that we are looking at is creating within the DCMA a pricing center of excellence. It would include a market research branch. If people are looking for a particular service, these folks would be able to provide them guidance as to how to go about doing that market research.

Matthew Weigelt, author of the FCW story, summed up Assad’s new responsibilities thusly—

Ashton Carter, undersecretary of Defense for acquisition, technology and logistics, has sought to improve efficiency through the Better Buying Power initiative and other activities that drive down costs, such as increasing competition for contracts.

DOD has also focused on managing program costs. Senior officials are trying to control spending and comparing what an acquisition should cost and what it will cost in the end.

David Berteau, director of the Center for Strategic and International Studies' Defense-Industrial Initiatives Group, said Assad's new position will help reverse 15 years or more of a decline in managing defense contracts and controlling prices. Such a position is long overdue and will have lasting value for DOD.

‘It is central to the success of Carter's initiatives,’ he said. ‘But more importantly, it will have benefits across all $360 billion of DOD contract dollars.’

Aviation Week reported a Reuters story with an emphasis on weapon system cost control. It reported—

The Pentagon is stepping up efforts to get the best prices possible for up to $400 billion in weapons and services it buys each year, but officials insist they are not trying to slash contractors’ profits.

‘This isn’t a war on contractor profitability. This really is trying to figure out how do we pay less for the goods and services that we buy,’ Shay Assad, a top aide to the Pentagon’s chief weapons buyer, told Reuters after a news conference to discuss an organizational change that left him with the new title ‘director, defense pricing.’

‘The reality is we need to step up our game across the board, and so that’s what we’re doing,’ Assad told reporters. He said unlike profit margins, overhead costs would be fair game. ‘That’s cost. How do we get that out?’ …

Assad said his job was not to tighten the screws on contractors, but to help equip the service’s acquisition experts to achieve the best possible deal for taxpayers.

He said he would review all sole source acquisition deals valued at over $1 billion, and some others worth more than $500 million. He would also be involved with pricing for competitive deals, but another official would oversee those negotiations.

Over the next 18 to 24 months, for instance, the Pentagon is revamping its Defense Contracts Management Agency and building a database that will help contract officials compare their programs with those of other services.

DefenseNews reported the story with emphasis on Assad’s role in negotiating contract costs. It said—

There will be a new negotiator at the table as the Pentagon and Lockheed Martin hammer out a pricing deal for the latest batch of F-35 Joint Strike Fighters. Shay Assad, the newly named director of defense pricing, will help the U.S. Defense Department buy weapons at a lower cost than official budget estimates. The creation of the new position is part of the Pentagon's quest to drive down the cost of weapons at a time when defense budgets are constricting. In his new role, Assad will help program managers hit these should-cost targets, which will be set at levels less than official budget estimates.

In addition, he will spend more time improving the contracting and pricing work forces in ‘improving their skills on what it is we pay on the goods and services we buy.’

One of the major elements of this is to transform the Defense Contract Management Agency (DCMA), Assad said. DCMA has hired 300 pricing analysts who will assist contract officers during negotiations for weapons, sustainment, services and other contracts. It will take 18 to 24 months to bring this work force up to speed, Assad said.

Officials are also creating an online system that will ‘enable our contracting officers to get insight into the financial aspects of the companies that we deal with in a real-time way,’ he said. The system, which already includes rate data, is being tested. Currently, it could take contracting officers months or even a year to compile this type of data. Soon it will all be organized under one roof and should take minutes to retrieve. …

Assad will be ‘intimately involved’ supporting the acquisition of the F-35, the Pentagon's most expensive program. DoD converted the program to a fixed-price construct last year and has entered new negotiations for the fifth batch of production aircraft. The F-35 negotiations will likely not wrap up until this fall, Assad said.

We noted above that Mr. Assad’s transfer shows how the DOD intends to manage its contractors. Let’s list some of the strategies mentioned in the various stories above.

1. Allegedly, 85 percent of the F-35’s unit cost is “overhead”. That’s nonsense, of course, but it plays well. Assad’s intent is to drive down such “overhead” costs by focusing on what those various tasks “should cost” as opposed to what the contractor tells DOD it is actually costing.

2. Assad is going to focus on enhancing DCMA’s existing skillset in analyzing contractor proposals and their proposed prices, and in negotiating program prices. Reports mentioned that DCMA’s pricing analysts would be key to achieving those goals.

3. Another aspect of the transformation is to develop insight into contractors’ actual costs. To that end, a database has been created to permit rapid comparisons between contractors.

A couple of final thoughts on the foregoing:

• Omitted from any reports that we saw was mention of the role of Mr. Charlie Williams, Jr. (Director, DCMA) in the agency transformation. We can’t help but wonder whether Mr. Williams sees Mr. Assad’s new role as being one of additional, badly needed, support—or whether he sees Mr. Assad as stepping on his toes like an elephant at a sock hop.

• Omitted from any reports that we saw was mention of the role of DCAA in assuring fair and reasonable contract prices. Mr. Assad, who has been an effective mediator between DCMA and DCAA (and other stakeholders), is going to focus on DCMA and nobody has anything to say about DCAA. What’s that about? And while we’re on this topic, what about that DCMA/DCAA dispute resolution process that Mr. Assad was instrumental in crafting and in executing? What’s going to happen to that process without Mr. Assad?

• About that magic database. Surely the database cannot be intended for use in comparing contractor indirect rates. Nobody can compare contractors’ indirect cost rates because very few contractors have identical cost accounting practices. Some contractors have a lot of direct costs and others have a lot of overhead pools and special cost allocations. What matters is the bottom-line price and not how much is “overhead”. So there must be another purpose to that database….

Leveraging on the points above, let’s speculate wildly for your amusement.

Suppose—and we’re just speaking hypothetically here—just suppose DCMA wanted to stop relying on DCAA. Suppose DCMA was fed up with audit reports that arrived too late, and contained too little reliable information to permit effective contract negotiations. Suppose DCMA was tired with DCAA’s misplaced emphasis on compliance with GAGAS and maintenance of auditor independence. Suppose DCMA wanted to negotiate with contractors on issues ranging from forward pricing indirect cost rates to contractor proposals, and it wanted to conduct those negotiations on its own timetable, and be responsible for its own outcomes. What might DCMA do in that hypothetical situation?

It seems to us that DCMA might develop its own price analysis center of excellence. One that focused on analyzing contractor costs. One that was staffed with dedicated analysts who had been rigorously trained in cost and price analysis techniques—analysts who could match DCAA auditors in proposal analysis expertise. In that scenario, DCMA could conduct its own proposal analyses and negotiate with contractors without the need for a detailed DCAA audit.

And if DCMA wanted to move away from reliance on DCAA to negotiate contractor indirect cost rates—especially forward pricing rates—then DCMA might develop a database of historical contractor indirect cost rates. Such a database might be used for linear regression and other similar statistical analyses, so as to project future contractor indirect cost rates without relying on a detailed audit of contractor budgets. DCMA could negotiate from a position of strength based on its statistical analyses, and would no longer need to wait for a DCAA audit report.

As we’ve asserted before, our belief is that DCMA has given up on DCAA and is frantically trying to develop its own expertise so that Contracting Officers no longer need to rely on audit reports in order to sit down at the negotiating table.

From this viewpoint, Mr. Assad’s new role makes perfect sense: his new job is to get DCMA to “man-up” so that DCAA’s current role in contract pricing can safely be de-emphasized. From this viewpoint, Mr. Assad’s seemingly innocuous transfer portends a significant change for DOD contractor management, one that does not bode well for DCAA.

Watch DOD’s new pricing center of excellence carefully. Watch DCMA’s interaction with DCAA. Look for changes in the current roles and relationships. Those changes might be signs that we’re on the right track.

Hypothetically speaking.

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