Pentagon Reviews Contractor Profit Guidelines for Weapons

The Pentagon is reviewing guidelines used to negotiate profits for contractors under an initiative to improve weapons-buying practices.

The review is intended to “align profitability more tightly” with efforts to make defense programs more affordable, according to a memo released today by Frank Kendall, the undersecretary for acquisition.

The Pentagon has been increasing the use of fixed-price contracts that require companies to shoulder a greater share of cost overruns. The review of profit guidelines is included in the final version of the Department of Defense’s “Better Buying Power 2.0” initiative headed by Kendall.

“This is the one thing that industry will probably focus on more than anything else,” Kendall told reporters today. “We are taking a look at whether” the current factors in the guidelines “are the best way to do it.”

“I do not think that is going to produce a fundamental change,” Kendall said.

Kendall’s memo said “profit is the key lever in motivating contractors to perform in alignment with DoD goals.” The industry “must be profitable or there will not be an industrial base, but the profits DoD provides should be consistent with the risks industry takes and the return needed to attract the required capital.”

While current profit levels “in the aggregate are reasonable and sustainable” they “are not tied tightly enough to successful performance in meeting DoD goals,” he said.

Incentives Review

Incentives under review “also provide opportunities for companies to realize profits above” the levels defined “based on their performance,” according Kendall.

Kendall told the Pentagon’s director of defense pricing to report by July 1 on the status of revised profit guidelines and of a new “Incentive Training Guide” for contracting specialists.

Calling for innovative methods for controlling costs, Kendall said, “Our workforce should be encouraged by leaders to think and not automatically default to a perceived ‘school solution’ just because it is expected to be approved more easily.”

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