Senior Defense official knocks legislative contracting provision

John Young, the Pentagon's director of defense research and engineering, joined the aerospace industry Thursday in opposing Senate-passed legislation that would require fixed-price contracts for most military research and development projects.

The proposal, championed by Senate Armed Services Airland Subcommittee Chairman John McCain, R-Ariz, was one of several measures in the fiscal 2007 defense authorization bill seeking to control the soaring cost of defense programs.

"It's possible the proposal could have some merit in controlling cost, but I think it's more likely it will have the opposite effect," Young told a Defense Writers Group breakfast. Young noted that President Bush opposes the provision because it would interfere with efforts "to bring programs forward to greater technology maturity."

The former Navy acquisition executive said he has been pushing to obtain higher technology maturity, or readiness, at earlier stages in program developments and to get more realistic requirements.

"But even if you do that well, there is risk in a program. And my experience, particularly on the acquisition side but also as overseer of development programs, is if you force industry to a fixed price development program ... they will price in that risk. So you will see prices, I think, across the board go up significantly because companies will not want to take the risk that they will lose money," Young said.

McCain and his supporters have argued that contractors should bear more of the financial risk of developing new military technology and ease the burden on taxpayers. The amendment, supporters say, is relatively modest and would merely shift the preferred contract mechanism from a cost-plus agreement to fixed-price contract.

"Most of these arguments in opposition to, or critical of, Sen. McCain's amendment ... start off by misunderstanding or mischaracterizing what the amendment does," said a Senate aide supportive of the language. The amendment, the aide added, ensures that "serious thought be given to how risk should be allocated in a given program that is headed into production."

But Young countered that there will be cases when defense contractors underestimate the cost and will lose money even if they add in costs to cover the risk. That would not have to happen too often before the contractors added in all possible risk, leading to times when they over-estimate and make money, he said.

That is why, after many years of experience, the Defense Department uses so-called cost-plus contracts for developmental programs and "the government assumes some of the risk," Young said. His comments echoed the warnings last week from Aerospace Industry Association President John Douglass, also a former Navy acquisition executive, that the McCain provision was unworkable.

Industry analysts have also pointed out that profit margins from fixed-price contracts tend to be smaller than cost-plus agreements. The McCain amendment will be one of many points of contention in ongoing House-Senate conference negotiations on the defense authorization bill.