The federal government is putting undo pressure on contracting agencies and is undercutting innovation, said Linda Hudson, CEO for BAE Systems, at the opening of the National Contract Management Association World Congress a recent industry conference.
Hudson says the defense contracting industry is adjusting to federal budget cuts by streamlining business systems, cutting layers of management and reducing costs. Yet government agencies need to work with contracting agencies to negotiate fair and reasonable contracts.
However, in recent months, the Defense Department officials has said it is not a partner with industry due to differing objectives, Hudson said, which reflect an attitude that contractors are working against defense objectives, she said.
"We’re encountering a slew of new regulations, rulings and procedures governmentwide that were intended to save costs but are in fact increasing complexity, increasing reporting requirements, increasing costs for contractors and the department and that appear, taken as a whole, to reflect a deliberate effort to shift risk to and reduce profits for contractors," Hudson told hundreds of contractors and federal procurement workers at the opening of the National Contract Management Association World Congress.
One way the federal government is putting more pressure on contractors is by pulling away from more risky time-and-materials contracts and selecting more cost-reimbursement contracts. According to a new report from the Office of Federal Procurement Policy (OFPP), in 2009 the federal government awarded $31.31 billion in time-and-materials contracts, or 6 percent of the government’s $554.5 billion in spending.
In 2010, the federal government awarded $28.41 billion, or 5 percent of the $535.8 billion in federal spending. Yet cost-reimbursement contracts increased from $151 billion in 2009 to $162 billion in 2010, or 30 percent if government spending.
Hudson says federal contract officers are pressured to avoid cost-type contracts when they make "perfect sense" and favor fixed-price contracts "where contractors find the risk untenable."
"Industry simply can’t be expected to invest big over many years to develop new technologies for major products, then sell at margins inadequate to recover the investment or make a return for our investors,” Hudson said.
Dan Gordon, administrator from the OFPP, who authored the report on contract trends and spoke at the conference, said he has told federal agencies in the past to use fixed-price contracts "where appropriate." For example, he said it may be a good to use a cost-type contract at the start of a new project, but agencies should understand the project well enough to write a fixed-price contract in future years.