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MV2009

End of Life Procurements

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I am hoping to get some input as to how individuals are handling the procurement of end of life parts and see if there is a better way.  Currently, we have been negotiating each end of life buy individually. For purposes of discussion, please assume the following factors:

1) A Diminishing Manufacturing Sources and Material Shortages Program is not in place.

2) The procurement of the end of life parts are required to support repairs of fielded systems

On these low dollar value procurements, it can be difficult to assess the price being fair and reasonable without data from the firm. Routinely, the proposed price is not aligning to the historical data I have readily available. Additionally, they are not willing to provide the support or they will not provide the information in a timely fashion before the part goes end of life thus forcing a potential re-design situation.  

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Not sure how to answer this question. Can the original poster (MV2009) please restate and provide details?

 

1. Who are the "individuals" MV2009 is asking for input? Government or prime contractors or whom?

2. Why would MV2009 think that each end-of-life buy would NOT be individually negotiated?

3. What "firm" should provide the data MV2009 is seeking? The OEM or the contractor?

4. Who is "they" who are not willing to provide necessary support or information?

5. What "information" -- if provided timely -- would help prevent a redesign?

 

This is an important topic, and it's an industry-wide problem, and it affects both contractor and government. It's worth discussing and digging into. But the question is such that I can't even begin to fashion an answer.

H2H

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H2H,

Thank you for the response. My apologies for not providing sufficient details in my initial post and not responding in a more timely fashion.

#1 - I`m interested in both industry and Government comments on this issue.

#2 - FAR 15.402(a) requires supplies be purchased at fair and reasonable prices. I was not sure if anyone had any creative ideas to handle these issues as they are appearing frequently and causing issues negotiating fair and reasonable prices and could cause serious program impact if not order (i.e. redesign). I have seen where repairs were handled on a cost-reimbursement contract line item where each repair was not negotiated individually.  I was not sure if someone was employing a similar method for these types of buys.

#3 - I was referring to the data provided from the contractor. Some times I can find the OEM pricing via a Google search but it is unclear whether that price is accurate or dated and if the distributor pricing on a 3rd party website is a good price. The prime contractor may get better pricing than the quoted price on a 3rd party website.   This appears to be especially true after a quick review of the contractor's purchase order history of the part. The purchase order history is routinely lower than the proposed end of life pricing.

#4 - The contractor typically provides a very short suspense.  Since it is FFP and below the threshold, they will not provide certified cost or pricing data and they will not provide any additional information. This is problematic as it puts the the burden on the buyer because of the short timeline and the fact that failure to award may result in the part no longer being available, which may require a redesign of the system.

#5 - The information I would like to see is the quote and the actuals from historical end of life buys to include the labor to procure and sell-off the procurement. 

Getting a short suspense and not obtaining the data necessary to support a position make these low dollar value procurements extremely difficult to determine a fair and reasonable price.  Personally, I think these buys should be done a cost basis if the quoted pricing is dramatically different than the PO history in order to meet the end of life procurement timeline and the contractor is not providing sufficient information to support its position. The FAR is clear that contract type is a matter of negotiation.  I understand that these buys are predominately done on a FFP basis but it is hard to assess the quoted FFP price to be fair and reasonable without additional data from the contractor. This is especially true when PO history shows a price that is different from the FFP price proposed.

I appreciate any feedback.

 

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DMS and tech obsolescence is a huge, industry-wide, problem and getting worse. One of the root causes (among others) is the preference for COTS and similar items. The commercial marketplace moves light-years faster than the DOD lifecycle. As a result, parts are discontinued and need to be replaced. This necessitates (1) end of life buys in order to secure an adequate part supply to support existing production needs (assuming you know what the "true" needs are), (2) identification of alternate sourcing, and (3) redesign to incorporate the new supplier's part into the product. If you're lucky, there is no change to form, fit, or function. But sometimes you don't get lucky and now you have a major redesign in the middle of production.

Savvy customers fund DMS activities as a separate CLIN on the production contract. They have a contractual requirement for early notification (and the other side of the coin is prompt action by the customer). As noted above, some changes are minor and others are significant. Some customers have joint Change Control Boards (CCBs) that permit timely action and others wait for an Engineering Change Proposal (and associated cost proposal) to be submitted before taking action. If the customer doesn't take prompt action, the contractor may be due an REA for delay/disruption, especially if the lack of action impacts the production line.

Thus it's a complicated topic and the cost of the end of life buy is but one aspect of the activity. You note "labor to procure and sell-off the procurement" but you missed the real cost, which is engineering labor for DMS monitoring, program labor for identification of second sources (if necessary) and for determining the right quantity of parts to procure, and the huge costs associated with redesign if necessary. You are, if you'll permit me, focusing on the tip of the iceberg but missing the rest it.

I would assume that the government has the right to review the contractor's determination that the end of life pricing is fair and reasonable. However (as I hope I've illustrated with this long-winded post) what is fair and reasonable under the circumstances might not just be the price paid. First, the supplier might have the contractor over a barrel--it will charge whatever it wants because the part is going obsolete and it just doesn't care anymore or the quantity being procured is minimal when compared to the supplier's other product lines. Second, the cost of a production line stoppage is horrendous and I'm pretty sure most contractors would pay whatever was being asked in order to avoid that situation.

I'm getting tired of typing now. Hope this helps.

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H2H,

I agree and understand DMS is a much larger issue and this is just a small portion of it. I excluded monitoring DMS (i.e. determining the quantity, monitoring its BOM) because it is currently being done on a cost line item funded as a separate contract action on a term basis. I agree that the cost of re-engineering a system or sub-system far outweighs the cost of doing an end of life buy. Both parties understand this and the contractor likely uses this information in its pricing strategy for the end of life buy. That puts the Government at a disadvantage in negotiations and makes these smaller buys extremely time-consuming. This is especially true when the PO history shows a lower price paid than the historical quotes and the end of life quote is higher than both of those data points.

I agree with you that the push to COTS and the time it takes for a system to reach production and sustainment means that  this problem will continue to get worse.

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Related to this topic, is it normal for fixed price contracts to include language that would allow the contractor to receive an equitable adjustment to the contract price or targets if a redesign is required?  To me, this language shifts the risk from the contractor to the Government and the Government has no way to mitigate this risk unless it takes on a role of overseeing the contractor's suppliers (which is something I am not advocating for). For procurements that will occur immediately after award,  I have some concern that the contractor does not know whether it can build the system on a fixed price basis at time of award.   I can understand the potential need for this language if the parties are agreeing to options or being able to order future systems under an IDIQ.  Industry has a valid point that the if the Government has the unilateral option to require the contractor to perform, the Government may reject the ECP and require the contractor to perform in accordance with the contract, which greatly increases risk to the contractor (if a redesign is required).  From my perspective, if the out-years are the concern, wouldn't it make more sense to make any future order/modification bilateral to allow the parties a chance to determined if they it can do the build or not prior to the execution of the contract action vs. adding this language on contract? 

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MV2009,

If the government rejects the contractor's ECP and that rejection negatively impacts performance, wouldn't the contractor have a potentially valid claim for delay & disruption or something similar?

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3 hours ago, Vern Edwards said:

It depends on why the contractor submitted the ECP.

Vern, this thread has been about Diminishing Manufacturing Sources and technological obsolescence. MV2009 was inquiring about the necessity for a redesign, which can happen if a purchased part has been discontinued by the supplier and there is no equivalent part available in the marketplace. The redesign and associated cost impact are submitted via ECP and must typically be approved by the customer. In that context MV2009 was noting the contractor's "valid point" that a rejected ECP and a requirement to perform anyway puts the contractor in a tough -- nearly impossible -- spot. That was the context of my question back to MV2009.

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H2H,

Let's assume it is a FFP contract type and the contractor agreed to deliver the product. During the build, the contractor says it can no longer deliver because one of the parts it intended to use in the build for the system went end of life and can no longer purchased it. In this instance, are you saying the contractor is no longer contractually obligated to deliver the product it agreed to provide? 

While that may put the CTR in a tough spot in terms of meeting the requirement, the contractor agreed to the contractual relationship and should have done everything to reduce or eliminate that risk during the build process. This risk should be borne by the contractor under any fixed-price arrangement is my argument. For contracts where the Government can place orders in the future on a unilateral basis, I said I could understand the need for language pertaining to those uncertainties but was advocating that the unilateral option may not be the best idea and it should be a bilateral agreement so parties understand the risk prior to starting the effort.

Is there something that I am missing that requires the Government to accept an ECP?  If a redesign is required it is likely the whole system would need to be retested, not sure I would want to continue any performance of a production build if the system would need to undergo test which may result in secondary impacts.  If I am buying a system, I would want to know up front whether the redesign is required prior to entering the contract. If that cannot be known, clearly, some of the risk has now shifted to the Government and if the Government were to agree to a special clause then the Government's profit position would need to reflect that.

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I know what the thread is about.

Failure to accept a contractor's proposal for an ECP that no clause requires the government to accept is not, in and of itself, a basis for a claim arising under or relating to the contract. However, the contractor may have an excuse for nonperformance if the government's refusal to accept the ECP leaves performance impossible or commercially impracticable.

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Vern, to pull on this statement little: "However, the contractor may have an excuse for nonperformance if the government's refusal to accept the ECP leaves performance impossible or commercially impracticable."

Isn't there ways that the contractor can eliminate or reduce this risk before it becomes impracticable? I know it is common practice in the auto industry for the major  auto manufacturers  to set up agreements to ensure their suppliers do not go end of life immediately. If a contractor is not doing that, doesnt the contractor have some of the blame in not reducing this risk? Industry is needed and handing them a large financial loss is not a good strategy, regardless who is at fault. I am having heartburn accepting a clause that precisely says if a redesign is needed it will impact the build of systems and will change the terms of agreement to include profit and cost upwards. Contractors should know when they sign the contract whether it can complete the current build or not, especially under any fixed price contract type regardless of when it decides to procure the material (i.e. just in time or at time of award) during the build process.  The fact that large defense contractors aren't doing what the auto industry (which also deals with end of life issues) is doing is somewhat concerning to me.

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If the contractor did not check, and if the item was not available prior to formation of the contract, then the contractor might be precluded from invoking a defense based on impossibility or impracticability.

Now I am at the limit of what I know about this topic and I don't have time to do any research, so here's what I suggest: Go find a copy of Administration of Government Contracts 4th and read the discussion of impossibility and commercial impracticability. I'm signing off. Good luck.

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