~Moshe Schwartz, President of Etherton & Associates, and Aaron Wasserman, Senior Director, U.S. Government Affairs, SAP, coauthors~
The comments in this article do not necessarily reflect the views of The Coalition for Government Procurement.
The ability to earn a fair and reasonable profit is important to the success of the industrial base and our national security. It is the promise of profit that motivates companies to invest, develop new capabilities, and compete in the marketplace. Profit is the down payment for the next generation of solutions to satisfy the requirements of tomorrow. The United States federal government does not fully utilize profit to incentivize its contractors to make investments in information technology modernization and cyber security resulting in lost opportunities.
Profit is normally determined by free-market competition and is not negotiated directly under most federally awarded contracts. When contacts are negotiated, federal policy is to “offer contractors opportunities for financial rewards sufficient to stimulate efficient contract performance, attract the best capabilities…, and maintain a viable industrial base.” Agencies use a structured approach, which for the Department of Defense (DoD) specifically allows contracting officers the ability to establish a profit position based on several factors including performance risk, facilities capital employed, and cost efficiency.
The existing method to calculate the DoD’s profit position on negotiated contracts requiring submission of certified cost or pricing data does not reflect today’s policy priorities. The last time the DoD’s profit methodology was updated to incentivize the adoption of innovative technology was in 2000. While beneficial, the creation of the Technology Incentive is restricted for the “development, production, or application of innovative new technologies” and is only available for use for “the most innovative contract efforts.”
A lot has changed since 2000. To succeed in driving innovation and maintaining military superiority over potential adversaries, the United States must approach profit in a way that reflects today’s realties, today’s priorities, and today’s economy. It must adopt a method to calculate profit that incentivizes contractor investments throughout the supply chain and adapts to the fluid nature of policy priorities. This would not be a radical divergence from previous practices. DoD’s methodology for establishing a profit position has evolved. Beginning in 1976, investments in facilities were prioritized under the facilities capital employed factor. In 2002, the cost efficiency factor was added to support the ever-present goal of reducing the cost of doing business.
We propose that the DoD must update its regulations to provide profit for the implementation of critical information technology investments and expanding cyber security information sharing. Specifically, remove one sentence that limits the technology incentive for “…only the most innovative contract efforts” and open it up for technology and cyber security investments across the board and throughout the supply chain. Supporting information technology modernization and cyber security in this way aligns with the current administration’s policies and Congress’ priorities as expressed in the FY22 National Defense Authorization Act.
There are many benefits to this proposed solution, which can be implemented without new authorizations or appropriations. Agencies and contracting officers can utilize their existing authority to make informed business decisions and reach a deal that incentivizes information technology and cyber investments (including CMMC) at a fair and reasonable price. Additionally, once codified, contracting officers and contractors would be able to quickly leverage the available dollars and implement existing commercial solutions to yield greater efficiency and security. Such an approach provides flexibility for each program and acquisition, not a specific information technology or cyber solution. All that would be needed to implement this approach is a minor update to regulations and some training for contracting professionals.
Profit seems like a four-letter word. But it is a powerful tool that DoD could use to its advantage to achieve information technology modernization and cyber security advancements.