Army's fixed-priced solicitation could squeeze contractors

By Marjorie Censer
Monday, December 13, 2010

The Defense Department has been talking plenty about cracking down on contractors, calling for more affordable systems and contracts that require companies to stay within their budgets and on schedule.

Now, it's putting those words into action. The Army has released a solicitation for its new combat vehicle that takes the unusual step of implementing fixed-price contracts for the research phase of the program. The fixed-price contract structure means firms will have to foot the bill if they exceed their contract amount, a departure from past contracts that typically gave companies more leeway in spending.

Designed to replace 20- to 30-year-old vehicles, the Ground Combat Vehicle program has had several false starts. This time around, the Army says it's serious about getting an affordable piece of equipment that is ready in just seven years, lightning fast for a new military vehicle program.

Loren Thompson, a defense industry consultant at the Lexington Institute, said contractors see the program as an embodiment of what they feared would happen when the Defense Department announced it would require greater contractor efficiency.

"They're tearing their hair out," he said. "The structure of incentives is so unappealing, and yet the alternatives in terms of programs to bid on are so few and far between that they feel trapped."

No other Army programs to develop new combat vehicles are expected in the foreseeable future.

Col. Andrew DiMarco, the Army's program manager, said the solicitation is meant to focus industry on building an affordable vehicle within a tight time frame. Among the "must-haves" are the ability to carry nine soldiers and to provide sufficient protection from roadside bombs and weapons.

He acknowledged that the fixed-price contract structure is a departure from other Army acquisitions, but denied it would hurt contractors.

"I think that industry is going to have to take a little time to consider the ramifications of a fixed-price" contract, DiMarco said. "But I don't think that it's . . . beyond their capabilities."

The Army said in the solicitation it plans to pay a unit price of $9 million to $10.5 million for the finished product, a price tag that well exceeds that of many of its existing vehicles. DiMarco said including that price range in the solicitation will help contractors make sure they propose affordable designs.

Mark Signorelli, vice president and general manager of the program for BAE Systems, said recent acquisition reform legislation coupled with the Pentagon's focus on affordability has helped create a "perfect storm" that will challenge industry in the competition. BAE, which bases its U.S. operations in Arlington, is among several local contractors -- including Falls Church-based General Dynamics, Lockheed Martin of Bethesda and McLean-based Science Applications International Corp. -- that have said they plan to compete for the program.

"Every contractor that's considering a bid on this program will have to do it very carefully," Signorelli said.

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