There are four key changes in Dr. Carter’s “Affordability” Guidance. First, is establishing unit-cost “Affordability” as important as Technical Capability, at the beginning of major Weapons Programs, particularly Army’s Ground Combat Vehicle; USAF’s Long Range Strike; Navy’s Missile Submarine SSBN(X); and Navy’s Presidential Helicopter “VXX”. This will be followed by shedding of unaffordable requirements at time of “winner-take-all” down-select for Engineering Manufacturing Development Phase.

Second, is the compromise selection of Fixed-Price-Incentive-Fee Contracts, adopting a “50/50 Shareline”, which means that contractor Fee will be directly tied to actual Cost, plus ensuring that contractors share equally in both profitable Cost Underruns, as well as any Cost Overruns. (Also establishing 120% Ceiling for conversion of CPIF into FPIF.) Traditionally, Fixed-Price-Incentive-Fee contracts have had a “70/30 Shareline”, with contractors only being responsible for 30% of any Cost Overrun, and only being incentivized with 30% Profit of any Cost Underrun.

Third, is the commitment to more frequent recompetitions of Professional Services contracts, generally after three years. As a general rule, Professional Services’ contracts are currently 5-years in maximum duration, which means a service contractor effectively recompetes for 20% of his or her Portfolio each year. Presumably, this increase in Professional Services re-competitions to every three years, which will place additional competitive pressure on Service Contractors, who will now have to replace 33% of their portfolio each year.

Fourth, is the restriction against continued use of Time & Materials contracts, where the contractor’s Fee is automatically built into the hourly rate, without regard to actual performance. DoD is also restricting use of traditional Cost-Plus-Award-Fee contracts, which value Technical performance without regard to Schedule or total Cost. These will primarily impact Professional Services contractors, and force them to adopt milestone or performance payments tied to specific Cost avoidance.
 

Collectively, these actions are likely to further accelerate both Hardware Contractors’ reduction of both Overhead and G&A Costs, while likely triggering strategic consolidation within Professional Services Contractors to sustain Operating mass & Customer diversity.