I’m not a big fan of just linking to proposed and/or final rule changes, nor am I a big fan of simply recapping what they say. My thought is: You all can do that. You can read the rule and grasp what’s going on. Thus, I don’t normally just tell you what’s happening because you can all do that for yourselves.

Instead, I want to express a point of view about the regulatory change. I want to tell you what’s happening and then opine on why it matters—or should matter—to you. That’s the goal of this blog (even if it sometimes gets me into trouble.) I want to tell you what’s going on and why you should care.

With that being said, let’s discuss some recent regulatory rule changes.

1. Effective 01 October 2019, the DFARS was changed via final rule to limit the use of Lowest-Price, Technically Acceptable (LPTA) source selection procedures. Going forward, the LPTA process can only be used when—

(i) Minimum requirements can be described clearly and comprehensively and expressed in terms of performance objectives, measures, and standards that will be used to determine the acceptability of offers;

(ii) No, or minimal, value will be realized from a proposal that exceeds the minimum technical or performance requirements;

(iii) The proposed technical approaches will require no, or minimal, subjective judgment by the source selection authority as to the desirability of one offeror's proposal versus a competing proposal;

(iv) The source selection authority has a high degree of confidence that reviewing the technical proposals of all offerors would not result in the identification of characteristics that could provide value or benefit;

(v) No, or minimal, additional innovation or future technological Start Printed Page 50789advantage will be realized by using a different source selection process;

(vi) Goods to be procured are predominantly expendable in nature, are nontechnical, or have a short life expectancy or short shelf life (See PGI 215.101-2-70(a)(1)(vi) for assistance with evaluating whether a requirement satisfies this limitation) ….

And the LPTA process must be avoided “to the extent practicable” in the following circumstances:

(i) Information technology services, cybersecurity services, systems engineering and technical assistance services, advanced electronic testing, or other knowledge-based professional services;

(ii) Items designated by the requiring activity as personal protective equipment (except see paragraph (b)(1) of this section); or

(iii) Services designated by the requiring activity as knowledge-based training or logistics services in contingency operations or other operations outside the United States, including in Afghanistan or Iraq.

And the LPTA process is “prohibited” in the following circumstances:

… items designated by the requiring activity as personal protective equipment or an aviation critical safety item, when the requiring activity advises the contracting officer that the level of quality or failure of the equipment or item could result in combat casualties. See 252.209-7010 for the definition and identification of critical safety items.

… to acquire engineering and manufacturing development for a major defense acquisition program for which budgetary authority is requested beginning in fiscal year 2019.

All of the above changes were driven by legislation—i.e., language found in the FY2017 and FY2018 National Defense Authorization Acts (NDAAs).

What was Congress thinking?

Well, we think Congress was reacting to the recent trend by the DOD in awarding major defense procurements to companies who are willing to “invest” in them by offering prices below estimated costs. See, for example, this article discussing Boeing’s ability to “invest” (in the words of its executives) “to create long-term valuable products and services franchises.” In that same article, we discussed news reports stating that Marilyn Hewson (Lockheed Martin’s CEO) had said that her company didn’t have the same cash resources as Boeing had, and that it could not compete if the competition is based on the size of the contractor investment. More explicitly, Lockheed Martin’s CFO was quoted as saying “Those [losses] were disappointing for a lot of reasons. But the fact they really decided, all three, on an LPTA (lowest price technically acceptable) basis, didn’t help the situation.”

Thus, we reckon that Congress heard those complaints (whether from reading them in the press, or via testimony at hearings, or via whispers of lobbyists into the right ears) and decided to tell DOD to knock it off.

And how is Boeing’s strategy working out for the company?

• It’s winning orders for new aircraft.

• It’s got continuing technical problems.

• Deployment may be delayed.

So: a mixed bag. In the long run, Boeing’s strategy likely makes sense for the company and its shareholders (of which I am one). However, in the short-term Boeing has had to take literally billions of dollars in financial reserves to cover its cost growth on the program. As we have pointed out before, if the DOD’s penchant for awarding to the low-bidder were to continue, then only the very largest of contractors will end up with any future awards. Thus, we are pleased to see Congressional action in this area.

Speaking of Congressional action, as the result of a 2017 NDAA requirement, the FAR definition of commercial item was recently revised via final rule. The revised definition adds the following situation to the definition at FAR 2.101:

A nondevelopmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments or to multiple foreign governments.

That should be helpful to a few folks out there.

There have been a number of proposed rules published recently. In the interest of brevity we won’t list them all. But one was “interesting” and we think worth bringing to your attention. See link here.

The proposed rule, if implemented as drafted, would provide notification to contractors doing business in Afghanistan that there are exemptions from liability for Afghanistan taxes, customs, duties, fees or similar charges. The rule does not add any new requirements for contractors; however, it is providing unified guidance for contractors performing in Afghanistan. The DFARS already has such language, but now it’s being proposed for inclusion in the FAR.

Regulatory changes continue to happen. For a long time, the rule-making process seemed paralyzed, but now it seems to be getting back on track.

Recently I had an opportunity to attend an industry briefing, given by a senior DOD acquisition policy official. (I need to be vague here because the briefing was on a “non-attribution” basis, meaning that no direct quotes are permitted.) In that briefing, the senior official cited to the 2018 U.S. National Defense Strategy.

The National Defense Strategy (NDS) is the successor to the Quadrennial Defense Review. As such, it is produced very four years. It provides broad guidance to the Pentagon in areas such as military planning, military strategy, force posturing, force constructs, force modernization, etc. The Pentagon takes that guidance and, through the Joint Chiefs of Staff, creates the National Military Strategy (NMS), which provides detailed guidance for theater campaign planning, modernization, force posturing, and force structure. The NMS is classified; while most of the NDS is not.

Thus, when this senior DOD acquisition policy official cited to the latest NDS, he was citing to the highest level of U.S. military strategic planning. It was interesting to see an acquisition official cite to military guidance, but it made sense—because the military objectives are intertwined with acquisition objectives.

The 2018 NDS includes eleven strategic objectives. We’re going to list just two of them, because they seem relevant to the topic. They are:

• Continuously delivering performance with affordability and speed as we change Departmental mindset, culture, and management systems

• Establishing an unmatched twenty-first century National Security Innovation Base that effectively supports Department operations and sustains security and solvency

The first bullet point listed above is an old topic, much repeated. We first noted it way back in 2009, when we reported to readers that the Defense Science Board had told SECDEF that the DOD acquisition process was too bureaucratic to meet the needs of the warfighters. In the intervening decade, not much has changed, though some Section 809 Panel recommendations, if adopted, might move the needle a bit.

The second bullet point is also interesting from a nomenclature perspective. Historically, the defense industrial base has been referred to as just that—“the defense industrial base.” In fact, the official Pentagon component that works in that space is the “Industrial Policy Office.” So to see the description change to “National Security Innovation Base” is interesting and speaks to what the Pentagon is hoping to get.

Importantly, the NDS devoted a significant amount of verbiage to acquisition reform. (Only it wasn’t called that.) The NDS stated—

The current bureaucratic approach, centered on exacting thoroughness and minimizing risk above all else, is proving to be increasingly unresponsive. We must transition to a culture of performance where results and accountability matter. … Current processes are not responsive to need; the Department is over-optimized for exceptional performance at the expense of providing timely decisions, policies, and capabilities to the warfighter. Our response will be to prioritize speed of delivery, continuous adaptation, and frequent modular upgrades. We must not accept cumbersome approval chains, wasteful applications of resources in uncompetitive space, or overly risk-averse thinking that impedes change. Delivering performance means we will shed outdated management practices and structures while integrating insights from business innovation. …

Better management begins with effective financial stewardship. … We will continue to leverage the scale of our operations to drive greater efficiency in procurement of materiel and services while pursuing opportunities to consolidate and streamline contracts in areas such as logistics, information technology, and support services. We will also continue efforts to reduce management overhead and the size of headquarters staff. We will reduce or eliminate duplicative organizations and systems for managing human resources, finance, health services, travel, and supplies.

Naturally, the above objectives are much more easily said than done. Still, most of us would agree they are important objectives that, if met, could make the defense acquisition environment a more efficient (and easier!) marketspace in which to operate.

But as history consistently has shown us, the Pentagon is not comfortable shining a light into its back-office workings. (See this blog article for one example.) As soon as Congress (or the Secretary of Defense) challenges the Pentagon to reduce bureaucracy (and/or costs), the next step is to focus on contractors. That diversion ignores the fact that contractor costs (largely) come out of a different color of money, and it ignores the fact that those who focus on contractors instead of the Pentagon’s “Fourth Estate” are missing the point of the exercise. Still, it’s the traditional approach when faced with a challenge to shrink Pentagon bureaucracy and to streamline business processes.

In what we are sure is an effort completely unrelated to the NDS objectives discussed above, that same senior Pentagon acquisition official noted that it is past time to perform another study of contractor financing and profit. The reported goal is to complete that study by the end of GFY 2020.

Many readers are largely ignorant of the give-and-take between Pentagon leadership, Congress, and the largest defense contractors. That give-and-take involves influencing annual National Defense Authorization Acts (NDAAs), establishing acquisition policy goals, and addressing proposed changes to acquisition regulations. It’s an ongoing process, involving lobbyists, staffers, Pentagon stakeholders, and industry associations (just to name a few). The give-and-take process is happening right now, and it will continue into the foreseeable future.

We trust you’ve enjoyed a glimpse into that process.