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Sen. McCain, You Have A Point: Kendall Reassures On Draft Regulation

Posted by Sydney J. Freedberg Jr. on

Frank Kendall

Frank Kendall

NATIONAL PRESS CLUB: Yesterday, Sen. John McCain erupted over a proposed Pentagon regulation that would, the senator said, hamstring efforts to buy commercial items without excessive bureaucracy. This morning, the Pentagon’s procurement chief, Frank Kendall, replied to the Senate Armed Services chairman’s concerns. Kendall’s answer in a nutshell:

  1. It’s just a draft rule which we’re still refining.
  2. Critics are misinterpreting a key provision.
  3. But if people are misreading it, we probably need to rewrite it so they don’t.

“First of all, it’s a draft rule, it’s out for comment. So Sen. McCain gave us a comment, we took that seriously,” Kendall said, with a barely audible chuckle, when I raised the issue at the ComDef conference here this morning.

What’s more, Kendall continued, the senator has a point: “The rule as it’s written is very general. I would like it frankly to be more specific, and I’m working with my contracting people on how to do that.”

The particular provision that’s problematic, Kendall said, is one that defines a “commercial item.” While high-profile weapons programs develop uniquely military products – missiles, armored vehicles, warships – where there are few competitors and only one customer, the Defense Department spends billions on widely available items from spark plugs to software, where a fair price is set by many buyers and sellers in the free market. You don’t need the same kind of elaborate oversight and cost accounting on literal nuts and bolts as you do on a stealth fighter.

But it’s not always obvious what counts as a commercial item. What about cutting edge cybersecurity software, for example, developed by a Silicon Valley firm but for the military’s needs? If a military aircraft uses landing gear that’s similar to a commercial plane’s but not identical, Kendall said as an example, is that a commercial item? What if the vendor charges you twice as much for the military version: Do you just accept that as a fair market price, or do you require the contractor to prove it’s fair according to arduous accounting rules?

“We’ve been working for sometime now to make this process quicker and more predictable,” Kendall said, “so when somebody goes out and buys something from a catalogue or from a vendor… they can make a fairly quick determination of whether it’s a commercial item or not.” The Defense Contract Management Agency (DCMA) is even standing up a help desk of technical experts that other agencies can call for help.

But here we come to the sticking point. To simplify the determination whether something is a commercial item or not, the draft regulation says that if more than 50 percent of an item’s sales are to commercial customers (rather than the government), it counts as commercial.

The rule is meant to make it easier to declare an item commercial, Kendall said: If more than 50 percent of sales are commercial, the item’s commercial too, end of story. If less than 50 percent of sales are commercial, however, the item might still qualify as commercial on some other grounds. Said Kendall, “that’s not a hard rule that says you have to have more than 50 percent [commercial sales] to be considered commercial.”

The problem is that the rule as written (apparently) doesn’t make that clear. So risk-averse procurement officials might interpret it narrowly, not as one way among many to qualify as commercial, but as the only way. Under this reading, if less than 50 percent of sales are commercial, the item isn’t commercial. If a product is brand-new — consider cutting-edge cybersecurity again, or SpaceX’s rockets — then it has no sales and automatically fails this test. This is the opposite of the intended meaning, but it wouldn’t be the first time the bureaucracy has perverted the intentions of its leaders.

“There’s been a reaction that said, people will apply this rigorously, they’ll apply it as an iron line between commercial and non-commercial. That is not the intent,” Kendall said, “[but] I think this is a fair criticism.”

“We are open to input on this,” Kendall said. “We struggle frankly to get the right balance. I don’t think anybody should be overly concerned about this rule yet. It’s not a final rule.”

What Kendall didn’t say: All the Pentagon’s rulemaking may be moot before it’s finalized, because the House and Senate are currently in conference on the annual defense policy bill, which contains extensive programs to reform the acquisition system.

What do you think?