Industry urges caution with Navy’s preferred supplier program

Industry groups are expressing concern about a proposed Navy program that would reward contractors that best control costs, meet schedules, provide quality services and reduce energy consumption.

In May, the Navy announced it would establish a preferred supplier pilot program that would rate the service's top 25 contractors based on "exemplary performance at their corporate level in the areas of cost, schedule, performance, quality and business relations."

Companies designated as preferred suppliers would receive benefits such as more favorable progress payments, tailored reporting requirements and special award fee pools, but the conferred status would not be a factor in source selection, according to a May 24 Federal Register notice.

But, the Council of Defense and Space Industry Associations, made up of eight trade groups that represent thousands of contractors, argues the initiative is vague and poorly defined.

In comments issued to the Navy late last week, the council suggested that while it supports the program's general concept, the proposal fails to clearly explain the criteria for entrance into the program or how it would accommodate new market entrants or small businesses with only a handful of contracts.

"It is right for the Navy to incentivize exemplary performance with the promise of preferred status," said Alan Chvotkin, executive vice president and counsel for the Professional Services Council, a contractor trade association that is part of CODSIA. "However, any such program must also balance that preference with the innovations new entrants and small businesses may offer."

Chvotkin noted the Navy's initial guidance fails to answer several key questions. For example, while the preferred status will be conferred only at the corporate level -- rather than on individual affiliates or subdivisions -- it does not address joint ventures or business combinations. It also is unclear whether the Navy will evaluate only active contracts or if the program will encompass previous awards dating back several years.

In addition, the guidance fails to specify whether contracts with other Defense services will be considered, the groups said.

In a statement, the Navy said it had "received numerous comments during the open comment period, and we are analyzing input now. The Navy has not yet finalized how the Preferred Supplier Program pilot will be structured, but expects to do so after careful review of public and industry input."

Preferred supplier programs are popular in the private sector and have been useful in incentivizing performance, according to the May Federal Register guidance. The Navy currently negotiates business arrangements on a contract-by-contract basis and "as a result of this decentralized and individual approach, loses an extremely important opportunity," the notice said.

During the initial rollout, the Navy plans to use a five-star rating system based on Contractor Performance Assessment Reporting System data, although other sources of public information will be considered, the notice said. The Navy will consider a company's technical competence, its ability to meet schedule and price, the responsiveness of management, oversight of key personnel, and the use of small business.

The program also will assess a contractor's energy efficiency, but the council fears that such criteria could be an impediment for small businesses.

"What will be the impact on a small business that may not be in a financial position to implement specific energy efficiency or other PSP program components?," the group asked in its comments. "Will the Navy have the resources to provide timely evaluation and responses to the influx of applications from potentially hundreds of primarily small and mid-tier businesses that will want to be designated a PSP? A gap in any of these areas will undercut the necessary legal and business foundations for a Navy PSP."

The council urged the Navy to take a cautious approach in implementing the program. But, the Defense Department might have other ideas. In a June 28 departmentwide memorandum, Ashton B. Carter, undersecretary of Defense for acquisition, technology and logistics, suggested that as part of his industry efficiency initiative the Pentagon could "emulate the Navy's pilot program to provide special benefits to consistently excellent industrial performers."

Chvotkin said expanding a yet-untested program would be a mistake. "Adopting this model across DoD before it is even tested in the Navy would be premature and could hurt the ability of firms to compete in the Defense marketplace," he said.