After sitting in countless meetings over the last few weeks with government executives brainstorming about cost-cutting possibilities, I have listened to many options. Repeatedly, executives appear to be falling into a trap of believing that future platform cost savings will be solely the result of lower cost gadgets from industry.
However, I have yet to hear someone suggest cost cutting linked to the government business processes that drive up industry costs. A more efficient approach to the contracting process alone will save labor costs and auditing overhead, and, in effect, result in cheaper goods and services.
To put the government-industry business ecosystem in perspective, let me compare two recent events.
Our company negotiated a multi-year, multimillion-dollar contract with a Fortune 50 client. The entire process, from proposal submission to award, took less than two weeks. We negotiated a similar contract with the government for almost identical services; however, despite our best efforts and lots of pleading with the government-contracting officer, it lasted almost 12 months!
Government contracts require audits and a detailed review of accounting systems and labor rates regardless of the competitiveness of the labor price. Fortunately, our company is experienced and has an approved accounting system or it could have cost tens of thousands to support the process.
Amazingly, industry does not have a clear interpretation of the Federal Acquisition Regulations (FAR) procedures. As a result, every new auditor provides their own interpretation on how to account for costs. This in turn costs industry money that is subsequently passed along to the government customer.
The protracted contracting and auditing procedures increase overhead costs for any government contractor. In the above example, our commercial client reviewed comparable market rates and quickly concluded that our rates were well below the competition, and our services were appropriately priced. Rarely will you observe such a logical and efficient approach for an award within the Department of Defense.
This commercial client employs twelve procurement specialists to manage over 2800 vendor contracts in a multibillion-dollar organization. I don’t know how many government contracting and procurement specialists would be required to support an organization that large, but I’m guessing that the number is larger than twelve. The government must take a hard look at institutional changes in order to get serious about cutting costs.
Inefficiencies in the contracting process are forcing more contracts to push funding through pre-negotiated Indefinite Order and Indefinite Quantity (IDIQ) contracts that often have only a small number of competitors. Until the government redefines their business processes and interpretation of the FAR, they will continue to pay 15 to 25 percent premiums for goods and services to prime contractors who do nothing more than pass along money to smaller contractors.
Companies like ours can strive to only do business with prime contractors who legitimately add value. However, the defense sector is littered with contractors that function as storefronts through which goods and services can flow because that is easy and convenient.
The cost of labor to support the government contracting processes inevitably generates the skyrocketing cost of goods and services. As an Air Force acquisition officer in the mid-1990s, I remember being shocked at a labor rate near $100 per hour for a senior engineer. Fifteen years later, the same engineer most likely costs in excess of $250 per hour. Lowering the labor rates and, subsequently, the price of gadgets, requires government support. Regulations cover almost every aspect of company operations. Consequently, the government is indirectly responsible for the price of goods and services sold.
For example, the time to obtain high-level security clearance for employees is so long (anywhere from 12 to 24 months), that it has resulted in an escalation of salaries for employees holding high-level security clearances. We certainly need to be mindful of security threats, but I suggest there is room for improvements that do not affect security. Shortening the time to adjudicate a security clearance would increase the pool of available workers, which ultimately would result in lower labor costs. This simple lesson in supply and demand could save the DoD billions over the next five years.
We consider our company fortunate to have proficient and skilled government customers who genuinely care about their work and make every attempt to be responsible stewards of taxpayer money. To meet the future budget challenges, these government employees and contractors need strong leadership that possess a true desire to reform.
Undoubtedly mistakes will be made along the way; however if the government wishes to operate with the efficiency of the private sector, DoD executives must critically evaluate the government business process and the regulations that govern them. That, in my opinion, may be the most effective way industry can cut costs deep enough to meet the future fiscal challenges.
Brian Ippolito is president and CEO of Orbis Technologies, Inc.