Defense authorization targets industrial base

The Senate on Nov. 30 cleared another hurdle in the path to passing its version of the National Defense Authorization Act, capping the amount of time it will continue to debate the bill and indicating that passage of the legislation could come as early as this week. Now, some members of the defense industrial base are reacting to some of the bill’s language.

A number of existing provisions in the bill and amendments that have been added in the past 10 days of debate are targeting the business of the Defense Department, including extensive plans for acquisition reform such as the prevention of counterfeit parts in the DOD supply chain and rules for contractor pay.

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One amendment, proposed by Sens. Carl Levin (D-Mich.), the Senate Armed Services Committee chairman, and John McCain (R-Ariz.), the committee's ranking member, will require contractors to monitor their supply chain and be held responsible for counterfeit parts. The contractors also would have to pay for new parts to replace any fake items, as well as the reworking of the product to integrate the new parts.

That legislation comes on the heels of a recent Senate hearing investigating the use of counterfeit parts, many originating in China, in military weapons systems and other goods.

As part of the amendment, contractors would be required to buy parts whenever possible from a list of DOD-designated trusted suppliers, or from original manufacturers and their authorized dealers. DOD would also have a list of “untrusted suppliers.”

“The counterfeit electronics provision is probably the most impactful” for defense IT contractors, said Trey Hodgkins, senior vice president for national security and procurement policy at TechAmerica, an industry trade organization. “These are provisions that provide a level of attention that’s been lacking for years for an important issue.”

Still, Hodgkins said there are concerns with the counterfeit goods provisions, in particular, a need for better definitions of what’s counterfeit and identification of preferred suppliers. While the amendment enhances contractors’ liability to replace counterfeit parts in DOD systems, there’s no determination of what happens if contractors use the approved suppliers but still end up with counterfeit goods somehow, he said.

There’s also the risk that new measures could contribute to price increases – which could end up being borne by the taxpayer, he pointed out.

Hodgkins said there are a number of simple measures that could be enacted to improve supply-chain security, even without formal legislation. No matter which direction Congress chooses, he said, industry should be part of the discussion.

Other industry groups voiced concerns with limitations on the government and contractors in the current version of the authorization bill.

The Acquisition Reform Working Group (ARWG), a conglomeration of industry groups, said that the bill would throw out a statistical formula for determining how much the government will reimburse a defense contractor for compensating its top executives. An amendment would cap the reimbursement at the president’s salary.

Industry groups say it might make defense contractors less attractive to potential talented employees.

“Defense companies must compete for talent with commercial companies, and considering that the market drives such compensation, costs—with the exception of the top five executives—should be based upon the ‘reasonableness’ standard that has always existed,” ARWG wrote.

The payment has been a contentious issue in recent months, with the Obama administration proposing the cutback on what it’s willing to pay company executives. The administration didn’t increase the annual Executive Competition Benchmark, which is currently $694,000. The amount is based on salaries in the private sector.

Senators are interested in pushing DOD to use more fixed-price contracts to get the most of its money while holding companies accountable and keeping major defense acquisition programs on track. However, the ARWG said the limitation may hurt DOD instead.

The provisions “would likely result in greater use of fixed-price contracts in situations where their use is inappropriate and less beneficial to government in the long run,” according to the group.

Experts say since fixed-price contracts put the investment risk on the company, companies may tend to offer higher prices for work as their own protection.

Furthermore, “the amendment sends a message to DOD contracting officers that their use of cost-type contracts will be under additional scrutiny, even after a contracting officer has negotiated the obstacles that this amendment would establish,” ARWG said.

Finally, the group said senators should reconsider an amendment to require timely payments to small business subcontractors. The provision would require contractors pay the small businesses within 30 days after receiving a payment from the government. But companies make sure they have appropriate information before issue checks. 

“Today, contractors do not pay subcontractors, regardless of size, until the contractor receives an accurate invoice and evidence that the work was performed,” ARWG wrote.

The group also supports a number of amendments. It’s in favor of public-private competitions for government work. The competitions have been banned for several years. ARWG supports hiring authority for the cyber workforce and IT jobs in DOD and the creation of an independent commission to reform the federal acquisition rules.

Small business could also get a boost from the bill from an amendment reauthorizing eight years of funding for the Small Business Innovation Research and Small Business Technology Transfer programs.