The US Department of Defense is getting back in tune with the price/value meaning of the "affordability" principle.
The Party Is Over - Gates Unveils New Buying Rules
What Defense Secretary Robert Gates unveiled today is basically a compilation of standard common-sense procurement practices. Some of these policies have been in existence for decades and, had they been followed properly during the past 10 years, probably would have already saved far more than $100 billion.
Systems will be designed based on affordability rather than “desire or appetite,” Gates said.
Another tenet in the new contracting blueprint is that program cost estimates will have to be calculated based on what a systems “should” cost, not necessarily what it “will” cost. That may sound perplexing, but it makes sense considering the usual practice at the Pentagon to boost the estimated costs of a system because it was originally underpriced, or because mismanagement led to cost increases.
Efficiencies also will be sought through the use of multiyear contracts that will let companies benefit from economies of scale and lower prices from suppliers. Another way to generate savings will be through increased competition, said Gates.
For industry, the most worrisome item in the plan is changes in the way contractors are compensated. A system of almost guaranteed “award fees” will be replaced by a regime that rewards performance and efficiency, according to Gates.
An explosion in contract spending since 9/11 has created a bloated system where productivity is a foreign concept and every problem is fixed by throwing more money at it, Gates said at a news conference.
Under the new guidelines, weapons programs woud be held to strict “affordability targets.” A program manager will set such goals at the beginning of the project and the target cannot be revised upward without approval from the Pentagon’s acquisition executive. This will “prevent us from embarking on contracts that are not affordable,” said Gates.
Ashton B. Carter, undersecretary of defense for acquisition, technology and logistics, said spending on service contracts sprang out of control after 9/11 without proper oversight. Organizations received loads of money to hire contractors and did not have the expertise for how to manage these projects. As a result, hundreds of billions of dollars have been handled by “amateurs” who needed work done and were not particularly concerned about efficiency or return-on-investment, Carter noted. “We need to help them with guidance, templates, market research” so they can acquire the same services but at less cost.
Simply because something is fairly priced doesn't make it a reasonable expense. Pricing must be both fair and reasonable: in Mr. Gates' words, "affordable".
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