I remember our discussion last year on this. It seems one of those specialized tools to be used by experienced people in precisely the right situation.

One of the things that bothered me in the other discussion was the sole source bit with concerns about cost control. A new contract for low rate production designated as sole source does seem a bit like raw meat before the tiger.

It seems that a valid mitigation technique might be the longer term partnering; some mutual trust, working relationship and track record; and solid negotiation toward some sort of FPI in the right hands.

The interesting part of the reference was the general discussion on partnering. While I despair on the subject of maintaining history and learning from it in general, there is much information. I would just like to see a more systematic collection, organization, and access to such information. I'm afraid the Admiral is right. It is less a need to learn than of not losing these lessons.

By Vern Edwards on Tuesday, January 25, 2000 - 09:43 am:

Although I don't like the FPI contract, you can use it to reach settlement in a tough sole source negotiation.

Suppose that two parties have reached their respective limits in trying to reach agreement on an FFP and cannot close the gap between them (e.g., the buyer is at $10,000,000 and the seller is as $11,800,000 and neither will move any further in the other's direction). They might be able to reach an FPI agreement by using their respective cost and profit positions to anchor the cost and profit end points of a graph, and then calculate the FPI share ratio for the incentive price revision clause on that basis (Share Ratio = Y1-Y2/X1-X2, where Y is profit and X is cost, Y1 and X1 are the buyer's profit and cost positions, and Y2 and X2 are the seller's profit and cost positions). They can then negotiate cost and profit targets at mutually agreeable points along the two ranges and use the contractor's position as the ceiling price. (The cost and profit targets are really for public consumption and don't matter much. Presumably, the incentive works along the entire range. Profit at the low end of the cost range should be high enough to really motivate the contractor to control costs.)

Presumably, the parties can agree in principle that profit should be lower at the seller's higher cost (lower risk) position and higher at the buyer's lower cost (higher risk) position.

I would prefer to use the FPI as a way to reach a compromise than to specify an FPI arrangement at the outset as a way to "incentivize" the contractor. The best way to motivate a contractor to control costs is to negotiate a firm-fixed-price. (The whole thrust of DoD's price-based acquisition movement is to move the government's attention from contractor costs to bottom line prices when feasible.)

There are many valid arguments against FPI contracts, but they can be useful in settling sole source negotiations for first-production contracts.

By Ramon on Tuesday, January 25, 2000 - 08:26 am:

In some recent web crawling in connection with the topic on Low Rate Production I again ran across an interesting site with the subject of partnering. It is a report with examples and POCs for a DoN group, the Industry-Government Partnering Working Group.

The Executive Summary (long) is at:
http://www.ifronline.com/Additions/Navy%20Guide/DoN.htm

I was interested in a quote from ADM Raborn under the FBM example; "The lessons of Polaris have certainly been lost on this country. It was a very successful effort of major proportions – But now people seem to be more content to "stooge" along following the many rules, feeling "protected" while more bureaucrats write more rules to prevent mistakes as if there can ever be a substitute for common sense."

As for that other discussion, despite widespread aversion to FPI it does seem to have its place in such sole source low production scenarios:

"Javelin is an ACAT-1C Program--Sole Source.
Contract Types: Fixed Price Incentive for Low Rate Initial Production (LRIP) II.
Firm Fixed Price for LRIP III & Multiyear I (3-year full rate production)."