Price Based Acquisitions

Price-based acquisition (PBA) is defined in dictionary.com as a way for the DoD to buy goods and services that does not rely primarily on a supplier providing cost data. It is a way of doing business that results in a firm-fixed price (or fixed price with performance incentives) contract and a fair and reasonable price without the government obtaining supplier cost data. Implementation would require changes to requirements generation and acquisition processes to allow the use of price-based acquisition for research and development without shifting risk to the contractor. PBA started to receive major attention in 1998 when the then Secretary of Defense, William Cohen, recommended that there be a study conducted. Prior to this time the DoD had been relying heavily on cost-based proposals for its contracting processes. Such an emphasis on cost-based acquisitions (CBA) led to unique accounting systems, extensive auditing which increased cycle times and a loss of focus on best value. (Will, 1999) In light of this, price-based acquisitions seemed like the clear and logical choice but along with making this type of change in the acquisitions world there came many benefits, challenges and valuable lessons learned.

According to the Acquisition Review Quarterly-1999, senior DoD and military acquisition officials persisted on advocating more frequent use of PBA during the late 1990s, in spite of the ongoing controversy to the compatibility with military unique systems and sub-systems. Due to the widespread skepticism when PBA first came on-line people were interested in learning about the claimed benefits and the way that those benefits would come about form the use of PBA. To address these concerns the government and industry officials identified three broad acquisition benefits that fell under PBA; reduced cost, shorter schedules and higher quality.

The ability to lower the cost of a product or service is just about always a benefit unless you are sacrificing quality for savings. This is true also for these types of acquisitions because during the study it was found that PBAs had the potential to reduce cost which at the time was the most emphasized benefit. PBA could reduce the amount of money that the government paid for goods through processes that could be categorized as reduced over-head, share in savings and enhanced military/civilian interaction. The reduced over-head included cost and price analysis, proposal evaluation, audits and contract management and oversight, just to name a few. The share in savings meant that there were incentives for contractors to reduce costs in order to increase profits. Increases civilian and military interaction meant greater competition because more civil/commercial contractors could become competitors. Along with the obvious benefits there were also theoretical benefits, which can be more important than the over-head savings and other benefits previously mentioned. Those that advocate cash-based acquisitions claim that the equipment, racking systems and other government related entities inhibit the participation of civilian firms in DoD competitions. According to the study completed by the government and industry professionals:

Civilian commercial firms (1) do not want to invest the money

necessary to install government-compliant accounting and

reporting systems (since government contracts would still

remain a small percentage of their over-all business) and (2)

do not want to reveal their costs and profits (which they

consider proprietary and competition sensitive) to the government.

CBA also operates under the notion that if you avoid reducing costs you maximize profits, contrary to the PBA advocate's idea that reducing costs brings in more profit. PBA enthusiasts claimed that contractors under PBA are far more likely to start production at a much lower unit production price in order to win the competition, and then work much harder to reduce production costs as procurement continues under pre-negotiated price. These advocates also claim that contractors under PBA would behave like firms in the civil commercial market at first, offering the DoD an initial production unit price that may be below the actual initial unit production costs, and then work hard to cut the production costs. In other words when using a commercial-style business strategy the contractor assumes that at some point the unit production costs will fall below the contractually negotiated price. This scenario is a benefit to the