I am looking for a good example of a "Shared Savings Clause" to insert Via SPI block Mod or single mod depending on the circumstance. On the Apache Long Bow the shared savings clause used in conjunction with a "Obsolescence/Technology clause has incentiveized both the Program Office and the contractor to work toward a common goal of more product for the dollar. The Army AR office has indorsed this approach. I would like to take this approach with our Navy and Airforce contracts.
Thanks. Gordon Elley, Acquisition Reform
Director, Air Combat Systems Northrop Grumman Corporation, El Segundo CA

By Ramon on Tuesday, January 25, 2000 - 08:30 am:

I've just cited a web reference with some possible interest to this discussion under "Industry-Government Partnering." It is fairly long, but has added value in giving some active points of contact.

By Vern Edwards on Monday, January 24, 2000 - 07:59 pm:

Here's what I would do: I would ask the contractor to propose two ways: FFP and FPIF. I'd ask him to explain his cost reasoning for each proposal. I'd analyze the deals then see what I could get him to sign up to at the table. I'd use FPIF as a compromise if I couldn't get the firm-fixed-price I wanted. But I'd go for FFP first.

The key to choosing between FFP and FPIF is whether you and your contractor can reach an agreement on a firm-fixed-price. If you can, then production costs are the contractor's problem and you don't have to worry about them anymore. If you can't, then maybe you can agree on a cost range and then develop a cost sharing arrangement.

If you can't agree on a single number, then perhaps you can agree on a range between the best case cost and the worst case cost. If so, then you can negotiate profit numbers for each end of the range. Based on those numbers you can calculate a share ratio. All you have to do then is agree on a spot on the cost range for your target cost.

This is a negotiation problem, not an acquisition planning problem. Think of FPIF as a negotiation solution if you can't agree on a firm-fixed-price. Don't think of it as an incentive; think of it as a compromise.

I don't know much about your item. It sounds like an active sensor (or set of sensors) hooked up to a data processing box and a human interface. Perhaps it's a newer version of an older system. Perhaps the system is a new thing, but the pieces are based on older designs. You may have enough cost data to reach agreement on a reasonable unit price.

Have fun with this. I used to do these sole source negotiations all the time. They were great fun. A lot more fun than source selections.
I envy you.

By Brian Fisher on Monday, January 24, 2000 - 07:26 pm:

First, don't expect significant AR savings on a small-lot contract. The nonrecuring costs, limited learning improvements, lower-tier vendor prices for small purchase quantities, and other problems facing small-lot contracts, will limit the potential for substantial savings. Also, given the end-use of the technology (mine hunting), I also would not expect any immediate spin-offs that would enable a contractor to recoup the costs elsewhere, so expect to pay more.

That being said, have you considered fully the issues of GFP, GFM, and any other avenue through which NAVSEA can lower the contractor's production costs?

Also, have you reviewed the Capital Programming Guide in OMB Circular A-11, Part 3 Supplement? This Guide provides several potential cost-saving approaches that you might wish to consider if you have not already done so.

Finally, have you spoken to OFPP to obtain their input? (FYI: One of the OFPP staffers is a recent "acquisition" from NAVSEA and might be able to push the right buttons for you.) Try (202) 395-4761. You might even try calling OMB's National Security Division, Force Structure and Investment Branch, at (202) 395-3884, to discuss funding alternatives and approaches. Rob Goldberg (the Branch Chief) and his staff have received many accolades for their assistance to DoD agencies in implementing creative approaches when funding is tight. (VERY HELPFUL).

An FFP contract MIGHT sufficiently motivate and compensate -- without the FPI mess -- a contractor for its risk of entering into a small-lot production contract. You state that your potential sole-source awardee "has successfully competed through an open competition and several 'down-selects' in the development phase." It sounds like you and the contractor have reached a general understanding of the program's technical and other basic requirements. If your cognizant technical staffs have identified both the known and the known-unknown risks, and if you can appropriately allocate those risks -- as well establishing a process by which to allocate potential unknown-unknown risks between the parties, then a well-written FFP contract might allow the contractor sufficient "trade space" within the program's general concept to produce a system that meets your technical requirements while meeting or beating the contractor's cost requirements.

However, additional facts may indicate that your program might or might not have advanced to a point where the design or the technology is mature enough to justify (at least in my overly cautious mind) shifting essentially all of the risk to the contractor via an FFP arrangement. I believe that if you follow the simple steps outlined in the Capital Programming Guide, you will have at least considered some of the more basic issues not addressed in your posting here.

Good luck,

Brian

By A.M. Shaw on Monday, January 24, 2000 - 12:33 pm:

It seems as though FPIF is the textbook answer to my question but it also seems as though no one really thinks that's a very good solution. Does anyone have suggestions for alternatives?

The Contractor in question has successfully competed through an open competition and several "down-selects" in the development phase and will be awarded a sole source contract for the 6-12 production units.

By Ramon on Saturday, January 22, 2000 - 01:49 am:

Going from my previous general observation to the problem at hand it seems you are in a situation at least similar to the LRIP phase. You have a prototype and need to work on production processes as well as possibly knock some rough edges off the prototype with potential minor design changes.

One of the things you want to do here is have the contractor work on production innovation to lower cost and, if possible, improve the product. One old lesson relearned from the auto industry was to involve production in design modifications that do not adversely impact performance, but enhance production. If I recall, the Ford Taurus was once touted as such a case. Such work can also enhance maintainability.

If I recall correctly places like DSMC have done research and collected some metrics on LRIP scenarios. I believe GAO has also done some negative reporting on some misuses. Anyway, some of the data collected on LRIP and best manufacturing practices might be a place to look.

I'm grasping at some reading years ago, but I believe there were some metrics on expected production efficiencies for given types of things over given numbers of units. I believe some incentives made either follow on production or sharing arrangements contingent on whether actual efficiency met the expected curve, but it has been a long time since I dug into that interesting corner. You might check with DSMC to see if they have any recent LRIP metrics that might apply to your situation.

By Vern Edwards on Friday, January 21, 2000 - 08:40 pm:

Hi Larry:

No, I haven't changed my mind. I don't like the formula incentive contracts. I don't think they work. I think it's too hard to develop a sound incentive structure and I think they make contract administration more complicated than it needs to be.

But A. M. Shaw asked what kinds of incentives he/she could use, and I gave him/her the standard line on incentive contracts.

I guess I'm getting mellow. Lately, I've just tried to answer the question.

Vern

By Larry Edwards on Friday, January 21, 2000 - 06:06 pm:

Vern: On 22 Aug 98 in this forum, you said:

“One last piece of personal advice -- Whatever you do, don't use a fixed-price-incentive (FPI) contract unless somebody holds a gun to your head and demands that you do. If they point a gun at you and demand that you use an FPI contract with successive targets, tell them to go ahead and shoot you. “  This is one of my favorite quotes since I share this sentiment. Have you changed your mind or did you mean it to apply only to this 1998 instance?

By Vern Edwards on Friday, January 21, 2000 - 05:34 pm:

Well, it's hard to answer your question without more information about your program, but here are a couple of thoughts.

The ultimate incentive to control production costs would be a competitively-awarded firm-fixed-price contract. But I don't know if you have competition or whether you feel that the use of an FFP contract is practicable.

If you don't have competition and you don't think you can otherwise establish a fair and reasonable firm-fixed-price, then a fixed-price incentive (firm) contract (FPIF) would seem to be the most appropriate choice. DOD often uses FPIF contracts for initial production of non-commercial items.

I wouldn't think you would need to use any type of cost-reimbursement contract for a production requirement.

By A.M. Shaw on Friday, January 21, 2000 - 03:38 pm:

Vern-
What kind of contract I'm going to use is the essence of what I'm asking for suggestions on. We have a couple of ideas and want to see what other kinds of vehicles are out there that we may not have thought of. This is something we're trying to "think outside the box" on.

The item in question is a "mine hunting" system for a submarine. The prototype is being funded and developed on a separate contract and I think production will be continuous.

By Ramon on Friday, January 21, 2000 - 02:19 pm:

This is somewhat an aside and in no way intended to be sarcastic, but I do sometimes wonder about all this talk of motivation and incentive as if it were some sort of magic.

I do recognize incentives and motivation have a place, but I wonder if the key is not avoiding disincentives and careful selection of an already motivated contractor.

First, I doubt there is any way to motivate a mule to win the Derby anymore than you'd motivate a racehorse to effectively pack heavy loads into Grand Canyon. Motivation is best captured in selection of the right contractor with a record of performance. A good performer is more likely to do well even in a new venture or without clever incentive programs.

One way to turn a performer into a laggard is to plague them with disincentives. I'm afraid some government contracting organizations and agencies are pretty effective in that respect.

I have to wonder if half the time were spent on really eliminating disincentives (Most good contractors know "rotten bait" when they see it.) and then on effective selection as on various incentive and motivation schemes we would not do better.

By Vern Edwards on Friday, January 21, 2000 - 12:32 pm:

The choice of incentive depends in large measure on the contract type. What type of contract are you planning to use?

Also, what type of item? Is this a prototype? An item that has been previously produced? Will production be continuous or on-order? Is the item largely hand-produced, like a spacecraft, or is production highly automated?

Etc.

By A.M. Shaw on Friday, January 21, 2000 - 12:03 pm:

Anybody have any suggestions about how to incentivize a Contractor to keep production costs low on a production contract which requires low production quantities? (Throughout the life of the contract only 6-12 systems will be produced) I'm looking for examples of how similar situations have been handled, including the application of Acquisition Reform.