The Commercial Operations and

Support Savings Initiative

Challenges and Solutions for Success

D E C E M B E R 2 0 0 1

 Office of the

 Under Secretary of Defense

 For Acquisition, Technology

 and Logistics

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Table of Contents

INTRODUCTION.............................................................................................................. 1

BACKGROUND................................................................................................................................................... 1

USE OF STAGE I FUNDS................................................................................................................................. 2

RESULTS............................................................................................................................................................... 2

COSSI SURVEYS ................................................................................................................................................ 3

ISSUE 1: THE COSSI COMMUNICATION CHALLENGE......................................... 3

Coordination and Cooperation During Stage I................................................................................................. 3

Early Identification of Team Responsibilities.................................................................................................. 4

Communication during Agreement Negotiation.............................................................................................. 5

Personnel Turnover............................................................................................................................................... 5

Conclusion.............................................................................................................................................................. 6

ISSUE 2: THE COSSI PROGRAM TRANSITION CHALLENGE............................... 6

Background............................................................................................................................................................ 6

A perspective from the business world.............................................................................................................. 7

ISSUE 3: THE ACQUISITION TRANSITION CHALLENGE ..................................... 8

Background............................................................................................................................................................ 8

Budget for Stage II................................................................................................................................................ 8

Justification for no Further Competition........................................................................................................... 9

Pricing ................................................................................................................................................................... 10

SUMMARY....................................................................................................................... 11
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INTRODUCTION

The goals of the Commercial Operational and Support Savings Initiative (COSSI)

are to improve readiness and reduce operations and support (O&S) costs by

inserting existing commercial items or technology into military legacy systems.

COSSI emphasizes the rapid development of prototypes and fielding of

production items based on current commercial technology. The program also

implements the goals of the current Administration and the Secretary of Defense

to:

♦ expand the use of commercial practices and products that will facilitate the

modernization of our military forces,

♦ improve the acquisition process, and

♦ make near-term investments to acquire modern capabilities based upon U.S.

scientific and industrial preeminence.

This handbook will enhance the ability of Contracting Officers, COSSI Program

Managers (PMs), and program personnel (users) to optimize COSSI benefits.

The handbook will do this by clarifying pre- and post-award procedures,

summarizing lessons learned from existing programs, and offering practical

management reference tools for both the civilian contractor and military customer

participants who are transitioning COSSI programs from prototype development

to production.

Nothing in this handbook should be construed as directive in nature. All

processes described are examples. Those processes actually used should be

tailored to each specific application.

BACKGROUND

Many Department of Defense (DoD) systems require maintenance long beyond

the useful life initially anticipated. Extending the service life of military systems

increases the costs of ownership (i.e., O&S costs). For the purposes of COSSI,

O&S costs are the costs of owning and operating a military system, including the

costs of personnel, consumables, goods and services, and sustaining the

support and investment associated with the peacetime operation of a weapon

system.1 One way to reduce O&S costs is to take advantage of the commercial

sector’s technological innovations by inserting commercial technology into fielded

weapon systems (see Figure 1).

 

1 Office of the Secretary of Defense Cost Analysis Improvement Group, Operating and Support

Cost-Estimating Guide. Washington, D.C., May 1992.
2

Prototype {

Non Recurring

Engineering (NRE)

adapts core technology

for fielded system

Commercial “core” technology

Fielded Military System

Qualification testing

ensures the technology

meets performance

requirements

Figure 1

COSSI funding leverages technology developments made by commercial firms,

reducing research and development (R&D) costs for the DoD.

COSSI involves a two-stage process. In Stage I, COSSI funds are used to

perform the non-recurring engineering (NRE), testing, and qualification that are

typically needed to adapt a commercial item/technology for use in a military

system. Selected contractors develop, fabricate, and deliver a prototype “kit” to a

military customer for installation into a fielded DoD system. Each prototype kit

consists of a commercial item, or a combination of commercial items, that has

been adapted, qualification-tested, and readied for insertion. Stage I generally

lasts two to three years. Stage II involves the purchase of production quantities of

the prototype kits.

USE OF STAGE I FUNDS

The purpose of Stage I is to develop and test a prototype. Accordingly,

Stage I funds may not be used for training purposes. Stage I funds may be

used to acquire technical data when needed to support sustainment or a

follow-on procurement.

RESULTS

Since COSSI funding began in Fiscal Year (FY) 1997, 77 projects have been

funded through the program. COSSI has contributed an investment of $234

million, and contractor spending has contributed another $143 million. The
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projected O&S cost savings for 30 projects from FY 1997 and 1999 that have

transitioned or will transition into Stage II are over $5 billion. These results do not

even take into account the excellent progress being made in the FY 2000

programs.

Although the foundations of COSSI are at the forefront of Defense reform and

have proven to be successful formulas for success, issues remain in the

interpretation, transition, and implementation of the program. In order to clarify

the challenges that have arisen in the management of COSSI, the COSSI

Program Office has surveyed program participants to identify solutions and

suggestions for future guidance.

COSSI SURVEYS

Over the life of the program, the COSSI Program Office has conducted several

surveys to assess participants’ experiences. The survey results can be grouped

into three primary areas:

1. COSSI communications,

2. COSSI program transition, and

3. Acquisition transition.

The sections below address lessons learned in each area.

ISSUE 1: THE COSSI COMMUNICATION CHALLENGE

Coordination and Cooperation During Stage I

In Stage I, the contractor is required to adapt a commercial item/technology for

use in a designated military system. Activities performed include the

development of a prototype that offers interface, environmental, and/or

performance improvements. The contractor also may need to perform NRE on

the target system to prepare it for the prototype kit. Stage I must include any

required qualification testing to demonstrate that the kit will not degrade systemlevel performance and will produce the expected O&S savings. In each of these

activities, thorough communication between the contractor, the Government

technical monitor, and the military customer is paramount to ensure the efficient

execution of the program.

Contractors and Government personnel have reported a lack of adequate

communications during Stage I. This occurs when:

♦ statements of work or statements of objective are not clear in portraying the

parties’ intents,

♦ the contractor loses sight of the end user’s needs,
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♦ the commercial technology requires greater development than originally

planned,

♦ the Government PM requires excessive performance improvements to the core

commercial technology,

♦ the Government integrated process team (IPT) adds testing requirements (i.e.,

“requirements creep”),and/or

♦ the Government PM did not adequately define needed testing before award.

Lessons Learned

One resource some PMs have used to gain perspective is industry technology

“road maps.” Industry firms, industry associations, and Government agencies are

successfully using road-mapping techniques. The term road-mapping is broadly

applied to the use of a structured scientific planning process to graphically

represent complex, dynamic R&D processes for achieving important strategic

goals. Road-mapping is mutually beneficial to the PM and the industry contractor.

Road-mapping predicts the complexities of the planned technological

development, thereby helping to identify any major business risks and

opportunities for the contractor. By carefully reviewing road-map documents, a

PM can gain an understanding of the broader context of the overall technology

and how a specific COSSI program fits within it.

If used properly, the formation of an IPT, with representation from the science

and technology, program, and logistics communities, as well as the customer,

can be very successful in reducing communication problems. The IPT should

review military design characteristics and values and identify ambiguities.

However, IPTs can cause more harm than good if not managed properly. In one

project, a contractor reported that aggressive IPT reviews of performance

improvements caused extensive additional costs to both the Government and

contractor, and did not significantly improve the product. Successful IPTs realize

that the Government output is advice, not direction. The contractor reported that

in the future it would improve program management oversight to maintain

rigorous system engineering in order to control requirements creep. The

Government needs to define its requirements on a performance basis and allow

the contractor the flexibility of determining how to best meet or exceed those

requirements.

Other communication tools that have assisted PMs include “kick-off meetings”

held during the pre-performance agreement period. In addition to holding kick-off

meetings, PMs should plan for subsequent program reviews to allow candid

exchange among industry and user team members to resolve technical and

program challenges. Successful COSSI programs have involved strong

collaboration among program participants.

Early Identification of Team Responsibilities

Occasionally, the contracting firm may develop size or turnover problems that

affect its ability to deliver the product according to the terms of the original
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contract. For example, one contractor on a COSSI program lacked a needed

technical expert but failed to notify other participants until after the agreement

was signed and the performance period had begun. After some discussion, the

Government agreed to provide this service outside the original terms of the

contract.

Lessons Learned

Realistic identification of team responsibilities—including those of the contractor

and the Government agency providing technical assistance—should occur as

early as possible in the COSSI process. In evaluating the offerors’ proposals, the

evaluation must consider the offeror’s ability to perform the prospective Stage I

successfully. An offeror’s proposal should include the costs that might be

incurred by the Government, such as the costs of utilizing Government testing

facilities or lab personnel on a reimbursement basis. Changes after award can be

costly and time-consuming.

Communication during Agreement Negotiation

Confusion caused by a lack of communication among the Government team

members responsible for negotiation of the individual projects can cause delays.

It is important that the acquisition team including technical and project specialists

participant fully in the formative phases of the agreement. Failure to agree on

the government position was reported as a cause in the delay of negotiations and

award. This lack of communications can cause delays and jeopardize project

funding.

Lessons Learned

A draft contract vehicle should be prepared as early as possible. Negotiations of

all aspects of the agreement (e.g., technical, programmatic, and business)

should include all applicable parties, such as the PM, contracts, budget/finance,

logistics, test, and legal personnel; as well as the potential user). Although a

criticism of COSSI is that negotiating the agreements takes too long, the time

spent on this communication will greatly increase the likelihood of project

success. Solicitations in the past have required the use of a prototype “other

transaction” (OT) business agreement. However, section 803 of the FY 2001

National Defense Authorization Act (P.L. 106-398) imposed conditions on the use

of this OT authority that impact whether an OT may be used for a COSSI award.

These conditions must be considered when developing the acquisition strategy

and the solicitation.

Personnel Turnover

Personnel turnover can cause problems such as a lack of military customer

support for the kits developed in Stage I and a lack of awareness among those

responsible for Stage II procurement. Time constraints and the transfer of

responsibility can result in a tendency to overlook the details of a COSSI

business deal. Although COSSI programs have not directly failed because of this
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lack of communication, program opportunities for reductions in life-cycle costs

may be delayed or lost in the future.

Lessons Learned

A well-defined and detailed turnover strategy should be developed to ensure

everyone understands the COSSI program goals and objectives, including

potential savings in O&S costs. The savings benefits to the Government should

be featured prominently to ensure consistency in the future management of the

program. One such strategy is to employ a special marking of

Government/contractor files to quickly identify COSSI files as unique.

Conclusion

Effective communication among all participants in a COSSI program is crucial for

the program to be successful. Kick-off meetings, regular program reviews, and

the formation of an IPT can promote thorough and accountable communication. It

is also important to examine the product’s “road map” and identify team

responsibilities early on. The contract instrument should be developed with all

appropriate parties as early as possible. In addition, plans for transition from

Stage I to Stage II should be developed, and those responsible for contracting for

Stage II procurement should be made aware of the COSSI program goals and

objectives.

ISSUE 2: THE COSSI PROGRAM TRANSITION CHALLENGE

Background

Transition must be a principal program goal. With regard to a COSSI project,

transition involves the successful insertion of purchased production kits into

military equipment. This insertion of the Stage I production kits into the host

system is the only outcome that provides the desired benefits of the COSSI

program. In order to keep up with the dramatic increase in the pace of technology

change, the DoD must focus on smart, efficient approaches to refresh existing

systems with new technology. It is therefore crucial that the Department take the

lead in exercising new acquisition techniques. Innovative approaches such as

COSSI provide powerful tools, but their effectiveness is apparent only with

completed transition examples.

COSSI transition processes can be difficult and complex because of the diverse

actions and numerous parameters involved. If projects are to be successful,

transition actions must be considered throughout the acquisition process. These

actions begin with the decision to pursue a product with the selection of a COSSI

project and conclude only when the product is successfully inserted into the

weapon system. Finally, one component of the transition complexity is the

number of people and organizations that are involved in both the development of

technology and the budgeting of resources and purchase of the technology.
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In cases where COSSI projects have failed to transition into Stage II, the main

reasons have been:

♦ the commercial technology could not be suitably modified to meet the

intended military need, and/or

♦ the funds to acquire the prototype kits in quantities necessary to achieve lifecycle costs savings were not available.

Lessons Learned

Guidance on successful transitions is difficult to find and often contradictory. The

suggestions below offer some considerations and lessons learned from COSSI

programs.

A perspective from the business world2

“The management of R&D ... must be purposeful rather than hopeful or ‘handsoff’ and must always be connected with the firm’s overall business strategy.”

The Government IPT should:

♦ Understand military needs. The selection of a COSSI project is the starting

point for planning the transition to production in Stage II. Indeed, planning for

Stage II funds should begin immediately. The military customer must be kept

informed about the progress of the project, and military needs associated with

the technology should be clearly understood. Commitments from the users

must be real.

♦ Establish performance metrics. It is important for the team to begin to

identify the price (for the Government), and performance characteristics that

must be met if Stage II is to be realized.

♦ Develop a transition plan. The IPT should develop a plan to establish:

— Appropriate data, including a form, fit, function, and interface

specification;

— The path to military transition (e.g., who will test and buy the

product);

— The type of contractual vehicle that will be used for Stage II; and

— Transition milestones.

During Stage I, it is important to revisit and further define the transition plan as

needed. Circumstances that will demand such revision and/or further definition

include changes in the base technology, unanticipated failures or successes in

development, changes in customer needs, and changes in the delivery schedule.

To keep such changes under control, it is particularly important to:

 

2 Rousell, Phillip A., Kamal N. Saad, and Tamara J. Erickson, Third Generation R&D: Managing

the Link to Corporate Strategy. Arthur D. Little, Inc., 1991.
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♦ Assess progress against performance metrics. A continuous assessment

should be made against performance metrics. Project progress reports should

be issued, and lessons learned from mistakes and successes should be

employed to improve the project and processes. Performance metrics should

be updated as necessary.

♦ Maintain customer awareness. The military customer should be kept in close

contact throughout the project. This may be accomplished through project

progress reports, assessment reports, and invitations to project reviews and

demonstrations

ISSUE 3: THE ACQUISITION TRANSITION CHALLENGE

Background

At the end of Stage I, the military customer determines whether the kits meet the

requirements for Stage II and if the item will proceed into production. Successful

transition requires early budgeting for Stage II and a contractual instrument to

procure the kits in quantities necessary to achieve life-cycle cost savings

The Stage II PMs should be mindful of the target price quoted in the initial project

proposal. Before proceeding to Stage II, they should compare the target price

and proposed Stage II procurement price. Any significant difference will require

further evaluation regarding the decision to proceed to production, to include

whether sole source award is justified, determining if the increased price is fair

and reasonable, and an economic analysis to ensure the project still will produce

the O&S savings anticipated in the initial proposal.

The transition from Stage I to Stage II has not been without its problems. Some

Program Offices have failed to budget for production in time to avoid a break

between completion of the Stage I kits and the Stage II production. Some

Program Offices introduced competition for production without understanding the

business arrangement anticipated in the COSSI solicitation. Finally, there have

been questions regarding the need for cost or pricing information to determine if

the prices for the Stage I kits or Stage II production units are fair and reasonable.

These areas are addressed below.

Budget for Stage II

More than two years of prior planning in the budget cycle is required in order to

have the funds in place to proceed to Stage II and reprogramming large amounts

within appropriations already approved requires congressional authority.

Therefore, budgeting for Stage II needs to occur before Stage I is completed. In

some cases, a lack of planning for Stage II funding has prevented projects from

transitioning to production.

Lessons Learned

The appropriate funds for Stage II procurements must be budgeted and allocated

for the acquisition of production quantities of the Stage I kits. To aid in the
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occurrence of an effective acquisition transition, production quantities should be

acquired in Stage II immediately after the completion of Stage I.

Justification for no Further Competition

COSSI solicitations prior to FY 2002 solicited proposals from industry. The

overall strategy was to competitively obtain Stage I proposals that included target

prices for Stage II production and forecasted O&S savings for the project.

Projects were selected that offered the best O&S savings. These solicitations

encouraged, and in some cases required, some level of contractor cost-share.

The solicitations also set forth the government’s intention, if it decides to buy

production, to do it without recompetition and to accomplish price analysis vice

requiring detailed cost or pricing data. Follow-on sole source awards were

envisioned to facilitate rapid fielding necessary to achieve forecasted O&S

savings and to uphold the business arrangement set forth in the solicitation. A

new competition is time consuming and disestablishes the ongoing business

arrangement. The Stage I contractor may have invested scarce resources to

achieve transformation of commercial items or technology into the COSSI kits. In

addition, a large break in time between fabricating the kits for Stage I and

producing them in quantities for Stage II could have negative technical and

business impacts on the program.

Notwithstanding the intention set forth in prior COSSI solicitations to continue into

Stage II without further competition, the government recognized that a sole

source contract would need to be justified and reserved the right not to purchase

kits for any reason to include a production price that exceeds the target price

offered during the Stage I competition. This need to justify a Stage II production

sole source award has been problematic for some program offices.

Lessons Learned

One acceptable approach used by most Contracting Officers is to create

individual justification and approval (J&A) for each project, using the exception in

FAR 6.302-1: “Only one responsible source and no other supplies or services will

satisfy agency requirements.” The Phase I NRE involved in modifying a

commercial product or technology for DoD purposes is likely to place the

incumbent contractor in a sole source position given its unique expertise with the

item and the government’s need for expeditious production insertion to achieve

the O&S savings. Also, the overall business arrangement resulting from the

COSSI solicitation should be considered in justifying the sole source award. For

instance, was the contractor encouraged or required to cost-share in anticipation

that the government would continue with the incumbent contractor? Did the

contractor honor the target prices proposed during the COSSI competition in its

production proposal? The conditions of the Stage I business arrangement and

the prices offered for Stage II production are factors that the government team

must consider to determine if circumstances support sole-source award for

production.
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One Contracting Officer reported that calling the kit “highly specialized

equipment”, which is one acceptable justification for a sole source determination,

forced the Government team to require a non-commercial pricing approach, that

is, it required cost or pricing data. Categorizing an item as highly specialized

equipment for sole source justification does not necessarily preclude it from

being a commercial item. If the kit qualifies as a commercial item then cost or

pricing data is not required.

Though sole source award may appear to be justified, it could be challenged.

For instance, on one COSSI project, industry representatives told the DoD that

they could fulfill the Government’s needs at a lower price when the Department

advertised its intent to award non-competitively. The result was a FAR Part 12

commercial item competition that determined the existence of only one

responsive and responsible offeror: the Stage I contractor. The qualification tests

for the competition proved to be the key technical discriminator.

Execution of a Determination and Finding (D&F) pursuant to the FAR 6.302-7

exception is another approach used by the Secretary of the Navy for its COSSI

actions in FY 1997. The exception states “full and open competition need not be

provided for when the agency head determines that it is not in the public interest

in the particular acquisition concerned.” This exception can be used only when

no other exception is appropriate, it requires agency head approval and requires

written notice be provided to Congress 30 days prior to award. Several Navy

Contracting Officers reported that this approach worked well.

These examples demonstrate that smooth transitions are possible. All Stage II

production quantities decisions require lead-time to receive approval. The

lessons learned by previous COSSI participants dictate that it is imperative to

start early—approximately four to six months before the completion of Stage I.

Lack of advanced planning, particularly for funding, has caused failures in

transitions.

Pricing

Buying based on price, without requiring cost or pricing data at Stage I and Stage

II, is a key factor in attracting non-traditional Defense contractors and the

commercial technology to solve a military need. Under the FAR, Contracting

Officers are encouraged to use every means available to ascertain that a price is

fair and reasonable before requesting cost or pricing data. If the Stage I price

and Stage II target prices are offered in a competitive environment, there should

be no reason to require cost or pricing data provided the contractor’s proposed

price for Stage II production does not exceed the target prices offered during the

original competition. If prices are not obtained competitively or if the competitive

prices are not honored, then the Contracting Officer should attempt to determine

fair and reasonable pricing by relying upon information other than cost or pricing

data.
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Lessons Learned

Contracting Officers have successfully awarded Stage I agreements and Stage II

production contracts without requiring cost or pricing data based on the prices

that were offered in a competitive environment and honored for Stage II

production. To minimize any confusion regarding the competitive nature of the

target prices for Stage II production, it is suggested that a provision be included

in competitively awarded agreements or contracts for Stage I projects that sets

forth the Stage II target prices, quantities for the Stage II production units, and

any additional terms and conditions (e.g., maintenance or sustainment

considerations) that were offered during the original competition. This will

document the business arrangement established as a result of competition and

facilitate smooth transition to Stage II without the need for cost or pricing data

when these conditions are honored for production.

Contracting Officers also have justified award without cost or pricing data by

relying upon the exception applicable to commercial items when the Stage II

production item qualifies as a commercial item.

In some cases, Contracting Officers have required cost and pricing data. This

should only be requested if pricing is not competitive or if the contractor does not

honor competitively established target prices and it is not possible to determine

fair and reasonable pricing by any other means.

COSSI project managers need to consider the above issues and the importance

of appropriately documenting the strategy and understandings regarding both

Stages of the COSSI project.

SUMMARY

The Government teams that have been most successful with COSSI programs

have developed effective forms of communications in program and transition

planning, execution, and transition, and revisited them on a regular basis.

Their results, achieved through their successful projects, will have a lasting

impact on the Department of Defense because of the reduction of operation and

support costs for years to come.