Military Acquisitions: DOD Is Taking Steps to Address Challenges Faced by Certain Companies
Published: 2017-07-20T00:00:00

Fast Facts:
The Department of Defense has a history of investing in innovative technologies, allowing the United States to maintain superiority on the battlefield and beyond. Now that commercial science and tech firms—"non-traditional companies"—are on the leading edge of innovation, DOD relies on them for new products and ideas.
The trouble is many non-traditional companies find the cost of doing business with DOD to be expensive, slow, and cumbersome. In this report, we look at what some of their key challenges are and how DOD is addressing them.

Highlights:
section_title: Why GAO Did This Study
paragraphs: Private industry investments in research and development have significantly outpaced DOD's own spending in this area over the past three decades. Recognizing that this situation is likely to continue, Congress has passed legislation aimed at enabling DOD to leverage technologies made by companies that do not typically do business with it, referred to in this report as non-traditional companies.
A Senate report included a provision for GAO to review DOD efforts to attract non-traditional companies that could potentially develop their commercial products for DOD's use. This report describes (1) key challenges identified by non-traditional companies when trying to do business with DOD and (2) actions DOD is taking to address them.
To perform this work, GAO conducted interviews with 12 non-traditional companies. Companies were selected based on size, the amount of business they had with DOD, and the type of technology they produce. GAO discussed the nature of the challenges identified with the companies. In addition, GAO obtained information from DOD on steps it is taking to mitigate identified challenges through document reviews and interviews with military service and Office of the Secretary of Defense officials.
section_title: What GAO Found
paragraphs: According to representatives from 12 innovative companies that do not typically do business with the Department of Defense (DOD), there are several challenges that deter them from selling their products and services to DOD or further developing their products and services for military use. These challenges can be grouped into the six areas shown in the table below.
According to these company representatives, collectively these challenges have created an environment where companies choose to either not pursue DOD business or believe that their resources could be better spent pursuing commercial business where the cost to compete is lower and selection decisions are made faster. For example, 1 of the 12 companies GAO spoke with conducted a cost comparison study and found that it took 25 full time employees, 12 months and millions of dollars to prepare a proposal for a DOD contract. In contrast, the study found that the company used 3 part time employees, 2 months, and only thousands of dollars to prepare a commercial contract for a similar product.
DOD is taking steps to implement some of the requirements that Congress mandated in recent legislation to address some of these challenges, as well as implementing other innovative solutions. For example, as required by Congress, DOD established an advisory panel to identify opportunities to streamline the acquisition process, including recommending regulations that should be eliminated. The panel, which consists of 18 current and former DOD executives, expects to issue a final report in 2018. Each of the military services also has efforts underway to shorten their contracting process. In addition, DOD established an innovation unit in April 2015 to reach out to companies that do not typically do business with the department and facilitate business agreements within a desired period of 60 days using the process below.
Because many of the steps and initiatives that DOD is undertaking are in the early stages of implementation, it is too early at this time to determine whether they will address all of the challenges identified by companies that normally do not do business with the department.
section_title: What GAO Recommends
paragraphs: Although GAO is not making recommendations, DOD reviewed a draft of this report and had no comments.

section_title: Letter
paragraphs: The Department of Defense (DOD) has had a long history of pioneering  innovative technology that has enabled the United States to achieve  technological superiority on the battlefield and spurred the development  of new commercial products. According to DOD and National Science  Foundation research and development data, in 1987, DOD accounted for  about 40 percent of all research and development spending in the United  States. However, the focus and pace of research and development  changed dramatically over the decades. By 2013, DOD accounted for  less than 20 percent of the spending. Innovation is now being driven by  the commercial sector. The commercial sector increased its research and  development spending almost 200 percent from 1987 to 2013.  Companies are developing sophisticated data analytics software  packages, advanced cybersecurity capabilities, and autonomous vehicles  that could be used by DOD.
In 2014, DOD’s Office of Acquisition, Technology and Logistics’ Better  Buying Power initiative recognized that in order for the U.S. military to  maintain its standing against adversaries in all areas of warfare, including  ground, air, sea, and cyber, it needed to start leveraging commercial  technologies created by companies that do not typically sell or develop  products for DOD’s use. (We refer to these companies as non-traditional  companies in this report.) DOD, however, has experienced problems  attracting these companies to do business with them.
The Senate Armed Services Committee’s report accompanying their  proposed version of the Fiscal Year 2016 National Defense Authorization  Act included a provision for GAO to study the problems DOD has had in  attracting non-traditional companies. This report describes (1) key  challenges identified by non-traditional companies when trying to do  business with DOD and (2) actions DOD is taking to address them.
To identify the challenges that non-traditional companies face when trying  to do business with DOD, we interviewed company representatives and  collected corroborating documentation when possible from 12 non- traditional companies. We selected these companies based on several  factors, including company size, the extent to which the company  conducted business with DOD, and the development of technologies that  are relevant to our national security needs, such as data analytics,  cybersecurity, and autonomous vehicles. For reporting purposes, we  grouped the challenges that were identified into six broad categories. We  include several examples of challenges based on the companies’ points  of view in this report. The statements expressed to GAO by participants  represent the perspective of their own companies and cannot be  generalized. We also reviewed DOD studies and budget data, and had  discussions with representatives from three traditional companies and  knowledgeable DOD acquisition and contracting officials to obtain  additional information on the potential challenges non-traditional  companies face. The traditional companies provided quantitative  information about the challenges and also identified other potential  challenges that non-traditional companies could face based on their own  experiences. We provided company representatives with an opportunity  to review a summary of the challenges section of this report and  incorporated their comments as appropriate.
To identify DOD’s efforts to address challenges identified by commercial  companies, we determined the status of DOD efforts to implement  various provisions included in the fiscal years 2016 and 2017 National  Defense Authorization Acts. We analyzed data from several new  initiatives aimed at improving DOD’s outreach to non-traditional  companies and reducing the time for contract awards. We supplemented  the data collected with information from a series of interviews with DOD  acquisition professionals across the three military departments and the  Office of the Secretary of Defense. See appendix I for more details on our  scope and methodology.
We conducted this performance audit from June 2015 to July 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: DOD acquires many different products developed by commercial  companies to enable the warfighter to protect our country. For the  purposes of this report, we describe the three types of products that DOD  acquires as the following:  1.  Products that are commercially available, such as computers and  software. DOD acquires these products from a variety of suppliers.  2.  Commercial products that are further developed by companies  for DOD use based on those currently available in the  marketplace, such as adding avionics equipment to an unmanned  aerial vehicle. These products are the focus of this report because  they are often produced by companies that do not work regularly with  DOD (non-traditional companies).  3.  Products developed exclusively for military use (military-unique),  such as tanks, fighter jets, and submarines with military capabilities  that do not have a commercial application. Since 2011, we found that  when DOD acquires these products, it typically does so with  companies such as The Boeing Company, Lockheed Martin  Corporation, Northrop Grumman Corporation, Raytheon Company,  General Dynamics Corporation, the General Electric Company, BAE  Systems PLC, and Rockwell Collins, Inc. We consider these  companies traditional companies because they have consistently  worked with DOD to develop military-unique products.
Before DOD acquires a product, it conducts market research to determine  which of the three product types is most suitable for its particular need.  DOD contracting officers then follow the Federal Acquisition Regulation  (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS)  to procure the product. As shown in figure 1, the degree to which the  product is commercially available and the risks associated with  developing or producing the product influence the type of contract used  and the contract’s terms and conditions.
DOD may use commercial item acquisition procedures under FAR Part  12 to procure commercially available products and negotiated contract  procedures under FAR Part 15 for military-unique products. Negotiated  contracts for military-unique products generally contain more government- specific terms and conditions than commercial item acquisitions, in part  because of the risk DOD takes to fund the development of these  products. There can be a great deal of variation in the contract type for  commercial products that are further developed for DOD’s use, as well as  the number of contract terms and conditions that would apply. If DOD  determines that products are commercial items as part of its commercial  item determination process, it must acquire the product using FAR Part  12 procedures instead of FAR Part 15 procedures. Alternatively, DOD  might find the desired product is not a commercial item, but nonetheless  requires a relatively low risk development effort. In that case, DOD can  negotiate a fixed-price-incentive contract under FAR Part 15.
Congress also provides Other Transaction Authority (OTA) that allows  DOD to enter into agreements with companies to complete research and  development and prototype projects. OTAs are flexible agreements that  typically include very few required terms and conditions and instead allow  the parties to negotiate terms and conditions specific to the project. This  flexibility can help agencies attract and partner with entities that have not  done business with federal agencies due to concerns about standard  government requirements. However, OTAs are not procurement  contracts. DOD would still follow the FAR or another express authority to  procure products successfully developed through an OTA.
DOD has long played a large role in influencing innovation in the United  States through its research and development investments. Among other  things, DOD funds basic research performed by universities, as well as  applied research and development performed by companies. Several  studies and agency documents highlight how DOD’s funding has led to  technological advances that enable the development of military products  as well as commercial products. For example, the Defense Advanced  Research Projects Agency supported the development of a  communications network in the 1970s to facilitate information sharing.  This network is considered the foundation of the modern internet. In the  1950s, the Air Force and the Defense Advanced Research Projects  Agency funded research on speech recognition and artificial intelligence  that enabled the development of the Cognitive Assistant that Learns and  Organizes. In the 1990s and 2000s, commercial companies started  leveraging this research to develop commercial technologies like Siri, the  iPhone assistant. The Army has funded research that led to the  development of powerful, lightweight lithium batteries, which are used in a  variety of military products, such as night vision equipment. Today,  lithium batteries are widely used in consumer electronics products and  electric vehicles.
Based on DOD and National Science Foundation research and  development data, DOD’s influence on the type of technologies  developed by U.S. companies began to diminish as companies  significantly increased the amount they invest in research and  development. As shown in figure 2 below, DOD spent about $69 billion on  research and development in 1987, while U.S. companies spent about  $114 billion. In 2013, DOD spent about $75 billion, while companies spent  about $341 billion. Between 1987 and 2013, companies’ investments  skyrocketed by approximately 200 percent. This growth was fueled, in  part, by significant investments in the information, pharmaceuticals, and  computer and electronics sectors.
In its 2016 Annual Industrial Capabilities Report to Congress, DOD  acknowledged that the department benefits when there is an influx of new  companies with new technologies competing for business opportunities.  The report further stated that DOD must take advantage of the rapid  evolution of emerging commercial technologies that, when integrated with  military systems and novel concepts of operations, could be a source of  battlefield advantage. In order to take greater advantage of newly  developed technologies coming out of the commercial sector, the report  acknowledged that the department should leverage innovation created by  non-traditional companies.
However, available industry data, as well as DOD studies, indicate that it  may be difficult for the department to attract non-traditional companies to  sell or further develop their products for DOD’s own use. As shown in  table 1, one reason for this is that DOD is not a significant customer for  top innovative companies.
In 2016, for example, Apple earned $216 billion in sales, of which about  $70,000 came from contracts directly with DOD. Amazon earned $136  billion in sales, with about $275,000 coming from contracts directly with  DOD. Google and Facebook did not earn any revenue through direct  sales to DOD.
section_title: DOD’s Acquisition Environment Creates Unique Challenges for Non-traditional Companies
paragraphs: According to company representatives that we spoke to, DOD’s  acquisition environment presents unique challenges to non-traditional  companies that they otherwise do not experience in the private industry.  The acquisition environment is driven by laws that provide transparency  and fairness, regulations that promote specific socio-economic goals, and  DOD’s approach for implementing those laws and regulations. For the  most part, the selected 12 companies we spoke with expressed  frustration with the complexity of DOD’s acquisition process; the time,  cost, and risk associated with competing for and executing a contract;  and interacting with DOD’s contracting workforce. Table 2 highlights six  key areas of DOD’s acquisition environment that create challenges for  non-traditional companies, according to these companies.
Together, these challenges create an environment wherein the selected  non-traditional companies told us that their resources might be better  spent pursuing commercial business where the cost to compete is lower  and selection decisions are faster. Two of the 12 non-traditional  companies in our review are currently not pursuing business with DOD as  a result of these challenges.
subsections: section_title: Complexity of DOD’s Acquisition Process
paragraphs: The non-traditional companies we spoke with identified several  challenges related to the complexity of DOD’s acquisition process that  made it difficult for them to do business with the department. One  particular challenge is the difficulty companies had in identifying the right  avenue to develop on-going or longer-term business arrangements with  DOD. Several non-traditional company officials said that DOD acquisition  program managers wanted to obtain their product but could not do so  because DOD did not have a validated requirement for it. As a result,  these non-traditional companies had to find alternative paths to sell their  products to DOD. Some companies spent several years demonstrating  their products to other organizations within DOD before establishing a  viable business arrangement with one of these organizations. In some  cases, multiple DOD decision-makers throughout the department  weighed in, some of whom had no purchasing authority. This slowed  down the process even more. Company officials said that in the  commercial market they are used to communicating directly with people  who have the authority to (1) discuss their needs, (2) gauge whether the  company’s product could satisfy those needs, and (3) award a contract  within months.
Non-traditional companies we spoke to also raised concerns about the  lengthy process for obtaining security clearances. Some company  officials told us that DOD required their company representatives to  obtain security clearances prior to DOD discussions on technology needs.  Company officials also noted that the process for attaining personnel  security clearances, which is shared between DOD and the Office of  Personnel Management, can take over a year to complete. One company  even said it took 5 years to obtain a facility clearance from DOD.
Software companies identified the time and cost associated with obtaining  multiple software certifications, which they said are required by DOD prior  to competing for business, as an additional challenge they face when  entering the defense market. This includes providing documentation to  obtain the Federal Risk and Authorization Management Program  (FedRAMP) certification, which is managed by the General Services  Administration, and the FedRAMP Plus certification, which is managed by  the Defense Information Systems Agency. These certifications provide a  government-wide and DOD-specific standardized approach for cloud  products and services, respectively. Officials from one large non- traditional software company said it has spent at least $40 million so far to  obtain FedRAMP certifications for 50 products and it has taken on  average 18 months to obtain the certifications. The company has also  been working for almost 2 years to obtain DOD’s FedRAMP Plus  certification for these products. A company official stated that DOD  continues to add more requirements that sometimes conflict with the  FedRAMP requirements or, at a minimum, add additional controls and  create ambiguity. The official also said that, “as a company that provides  services to numerous customers, it is unmanageable to comply with  different rules and requirements for different agencies.”
An official from one small non-traditional company we spoke to stated that  they have invested over $100,000 and well over a year in pursuing  FedRAMP certification even though there is no guarantee that they will  win a contract. In addition, he estimated that once certified, monthly costs  to maintain the certification would range from $10,000 to $20,000. The  official also described the certification process as “a series of checklists  that do not necessarily make products safer or more secure.” However,  he said that they must obtain these software certifications because the  federal government will not talk to companies without them. For example,  the company has had to answer and provide data or documentation for a  standard list of nearly 100 questions that the General Services  Administration developed for companies to obtain FedRAMP certification.
section_title: Unstable Budget Environment
paragraphs: Some of the small non-traditional companies we spoke to expressed  frustrations with DOD’s funding process, including the effect budgetary  delays from continuing resolutions and sequestration have had on DOD’s  ability to award contracts. One official said that doing business with any  company or organization that has an unstable budget environment  creates additional risk and could cause them to go out of business or lose  investors. Their experiences with DOD, in some cases, drove them away  from the defense market and back to pursuing business with more  financially stable entities.
It takes 2 years for major acquisition programs to receive funding through  DOD’s budget process, which dates back to the 1960s. Adding to the  challenges of this process, as shown in figure 3, DOD has started each  fiscal year since 2010 operating under a continuing resolution. In general,  continuing resolutions prohibit new activities and projects for which  appropriations, funds, or other authority was not available in the previous  fiscal year.
As an example of the impact this environment can have on DOD’s ability  to contract with a non-traditional company, after demonstrating its product  for nearly 4 years, one company that produces augmented reality  products was provided funding to support additional engineering and  development activities by the Army. However, the Army program  subsequently lost funding due to sequestration. As a result of these  difficulties experienced in the past, the company is no longer actively  pursuing business in the defense market, according to a company  representative.
section_title: Lengthy Contracting Timelines
paragraphs: Non-traditional companies that we spoke to stated that DOD’s contracting  timelines are significantly longer than what they experience with the  commercial market, and there is a potential for a bid protest when  competing for DOD work that could further delay contract award. One  official said that their investors would prefer that they pursue business in  the commercial market where contracts are awarded more quickly.
DOD’s contracting process can be very lengthy, depending on the dollar  value of the contract. For example, in January 2017, the Army  Contracting Command established standard contracting timelines that  ranged from 55 days (about 2 months) for contracts valued less than  $25,000 to 700 days (about 24 months) for contracts valued over $1  billion. In general, the timelines, as shown in table 3 below, increase as  the dollar value of the contracts increase and competitively awarded  contracts generally take longer to award than non-competitive contracts.
Data collected by the Air Force show that in fiscal year 2016 it took an  average of nearly 13 months from the time a request for proposal was  issued until an award decision was made for 52 sole source contracts  valued between $50 million and $500 million. Figure 4 shows the  activities that contributed to this timeframe.
The Air Force study found that companies spent on average nearly 5  months putting together their initial proposal and another 1.5 months  revising the proposal based on DOD feedback that the proposal did not  meet certain DFARS requirements. For example, a contractor may have  received subcontractor proposals and included them in its proposal.  However, the contractor may not have completed the required  commerciality and price reasonableness analysis of the subcontractor  proposals, which should have been reflected in the initial proposal to the  Air Force. According to an Air Force official, there was a significant  amount of back and forth between the Air Force and companies to make  sure proposals adequately responded to the requirements in a  solicitation. Once an adequate proposal was received, the Air Force,  Defense Contract Management Agency, and Defense Contract Audit  Agency then reviewed and evaluated the technical and financial aspects  of proposals over the next 4 months. The Air Force spent the final months  negotiating with companies and awarding a contract.
Non-traditional company officials that we spoke to said they are  accustomed to contracting timeframes that are much shorter, ranging  from a few weeks up to about 6 months when working with commercial  companies. In addition, they said that the time and resources they invest  in developing a proposal for commercial companies is significantly less  than for a DOD proposal. For example, one of the 12 companies GAO  spoke to conducted a cost comparison study and found that it took 25 full  time employees, 12 months and millions of dollars to prepare a proposal  for a DOD contract. In contrast, the study found that the company used 3  part time employees, 2 months, and only thousands of dollars to prepare  a commercial contract for a similar product. A company official explained  that a lot of time and resources were spent developing detailed schedules  that outline the engineering resources over the life of a project so that  DOD could evaluate whether the company had the appropriate resources  to complete the work. The official said the company had no plans to  monitor how it performs against the detailed schedules and only prepared  them for the purpose of submitting a DOD proposal. He said that they  were not required to provide this type of detailed information for  commercial proposals.
Concerns raised by the non-traditional companies we spoke to regarding  the length of time it could take to win a DOD contract were also identified  by three traditional companies we spoke to. One of the companies shared  a study that it conducted in 2016 that showed that it took on average over  12 months from the time the Air Force issued a request for proposal until  a contract was awarded for 60 proposals the company submitted that  were valued between $50 million and $500 million. Company officials also  provided data that showed one of its large business units had  experienced contract cycle times as long as 3 to 4 years from the time  DOD released a request for proposal until an award decision was made.
The Director of Defense Pricing noted that DOD’s contacting process  typically takes longer than the commercial industry process because DOD  has to be transparent in its dealings, ensure competition wherever  possible, and protect the interests of the taxpayers.
section_title: Government-Specific Contract Terms and Conditions
paragraphs: Most of the 12 non-traditional companies that we spoke to said they had  commercial products that the department was clearly interested in  obtaining. However, after discussions with DOD, they chose to not  develop these products for DOD’s use because it might trigger a large  number of contract terms and conditions that would be expensive to  implement. Like other federal agencies, DOD includes standard terms  and conditions in its contracts that are unique to the government that  some companies we spoke to believe would add significant cost or add  little value to the transaction. For example, based on the FAR, companies  are required to establish a government-unique cost accounting system  when it awards certain cost-type contracts to disclose actual cost  accounting practices and to follow disclosed and established cost  accounting practices consistently. DOD and other federal entities also  require companies to comply with socio-economic obligations, such as  those for equal employment opportunity, small business set asides, labor  standards for government contractors, and a drug-free workplace. They  could also require companies to use American-made materials in their  products, provide whistle-blower protections, safeguard their information  systems, and comply with cyber regulations related to cyber incident  reporting.
One non-traditional company conducted a study that determined it would  take at least 15-18 months and cost millions to establish a government- unique cost accounting system. According to a company official,  accepting DOD cost-type contracts with this requirement would mean that  their engineers would have to log hours specific to the projects they are  working on at any given time. The official explained that this additional  step would not only add to their workloads, but create inefficiencies that  might inhibit communication and undermine innovation, which he said, “is  the very ethos of this company.” As a result, the official stated that the  company has decided not to compete for DOD cost-type contracts that  require a government-unique cost accounting system. The company  official also said that the company’s contracts and agreements with DOD  and another government agency have included anywhere from 27 to 69  terms and conditions. While this is significantly fewer than the roughly 200  terms and conditions the company official estimated would have been  included in a cost-type contract, it is much more than the 12 that are  typically included in contracts with commercial companies. Company  officials pointed out that each additional clause adds costs and burden to  the company, and are concerned that they could incur tremendous liability  if the prescribed clauses are not strictly followed.
Traditional companies we spoke to confirmed the difficulties, as well as  the costs with implementing government-unique contract clauses. For  example, one traditional company we spoke to stated that they must  expend resources to track changes to the FAR in order to stay in  compliance with government contracting regulations. Company officials  said that they review an average of 100 new regulatory actions for  applicability each month. Further, they typically direct all clauses to  individual suppliers because it is difficult for the prime contractor to  determine which ones would apply. We found, for example, that  legislation regarding whistle-blower protections has changed several  times since 2009 and that different rules apply depending on which  federal agency awarded the contract, whether the agency was  participating in a whistle-blower pilot program, or whether contracts were  funded by the American Recovery and Reinvestment Act. This example  demonstrates how companies with multiple contracts may have to comply  with different whistle-blower protection simultaneously. In addition, the  implementation of the regulations themselves is costly. For example,  while officials from this same company acknowledged the need for cyber  security, they estimated that new DOD cyber security regulations would  cost the company an estimated $100 million to comply. They stated that  these types of requirements contribute to the 12 to 14 percent price  differential between their commercial and DOD products.
Officials from another traditional company that we spoke to said there are  also costs associated with ensuring that its suppliers comply with these  clauses, and these costs contribute to the company’s lower rate of return  on its defense business (7 to 10 percent profit) versus its commercial  business (15 to 18 percent profit). These officials also stated that one of  its suppliers turned down a $20 million performance-based logistics  contract because it could no longer effectively manage the large amount  of federal requirements included in contract clauses.
The traditional companies we spoke with stated that in most cases they  separate their commercial and defense business units to ensure that  overhead costs that support their DOD business do not extend to their  commercial business and make their products less competitive in the  commercial space. For instance, officials from one traditional company  stated that it has taken great care to keep a primarily commercial  business unit separate and apart from its primarily DOD business unit,  including supply chain, sourcing, engineering, sales, and related support  functions.
The Director of Defense Pricing indicated that DOD has heard similar  concerns about the cost of compliance raised by traditional companies  and said that the department has been trying to substantiate data with the  companies for several years, in order to determine what actions may be  necessary to address these concerns.
section_title: Intellectual Property Rights Concerns
paragraphs: Non-traditional companies we spoke to raised concerns about the  possibility of losing their intellectual property rights when further  developing their products for DOD’s use. According to an Air Force  handbook related to the acquisition of technical data and software, DOD  seeks access to technical data and computer software rights to enhance  competition and sustain each system and its subsystems over their life  cycle. Examples of technical data include product specifications,  engineering drawings, and operating or maintenance manuals. Examples  of computer software include source code, algorithms, and associated  software design documentation. According to DOD acquisition policy,  DOD ordinarily only acquires the technical data, computer software, and  the associated data rights essential to meeting its needs. For example, in  the case of noncommercial items:  If the contractor developed an item or computer software exclusively  with government funds, the contractor retains the copyright over the  technical data pertaining to the item or the computer software, but the  government acquires “unlimited rights” to use the data or software  without restriction.
If the contractor developed an item or computer software with mixed  funding, then the government normally acquires “government purpose  rights.”
If the contractor developed the item or computer software completely  at private expense, then DOD usually acquires only “limited rights” (for  data) or “restricted rights” (for software).
Both non-traditional and traditional companies we included in this review  consider intellectual property, including technical data and software rights,  to be essential to a company’s survival. As one official we spoke with  explained, intellectual property is the “life-blood” of their company. It is  what distinguishes a company in the marketplace and is an integral part  of the value placed on a company. Companies try to protect their  intellectual property so that others do not copy it and for that reason many  of the companies we spoke to believe it is too risky to further develop  their commercial products for DOD’s needs. Based on our review of  documents, we found that in one recent court case, the Court of Federal  Claims awarded a company expectation damages for lost profits after the  government “repeatedly breached the Cooperative Research and  Development Agreement by releasing the plaintiff’s proprietary  information to unauthorized recipients, including its competitors.”
Non-traditional companies we spoke to prefer to sell their commercial  products to DOD so there is no negotiation between them and DOD as to  the rights DOD will take in technical data or software. Even then,  problems still occur. For example, an official from a non-traditional  software company said his staff spends a great deal of time educating  contracting officers on DOD’s software rights under the company’s  software license agreement. He said that DOD acquisition officials are  “stuck in research and development mode” and believe DOD should have  greater software rights even though DOD did not contribute any money to  the development of the software. Another non-traditional company official  said that DOD shared a demonstration copy of his company’s software  with the prime contractor who then tried to integrate the software into its  own system. Although the prime contractor was unsuccessful in this  endeavor, the official said that the prime contractor was competing  against the company for DOD’s business. This official said the company  is no longer doing business with DOD.
Traditional companies we spoke to confirmed the non-traditional  companies’ concerns. One official at a traditional company said that DOD  is putting increased pressure on companies to grant unlimited technical  data and software rights or government purpose rights rather than limited  or restricted rights. For example, in a 2013 Army request for proposals,  the program was pushing for an open systems architecture approach and  companies were told that one evaluation criterion would be the extent of  data rights (more rights) that they were willing to grant DOD. This was  problematic for the company because the intellectual property used to  build the components was developed at private expense.
Officials from another traditional company said that a prime contractor it  was working with expected the company to offer unlimited rights to its  software to increase their chances of winning a contract. In this example,  the agency’s request for proposals allowed offerors to propose their own  technical solutions, but it also provided that, as part of the technical  evaluation, offerors would be assessed a weakness where data rights  assertions did not allow the agency to procure, maintain, and modify the  hardware and software in a competitive environment. The company  understood that to be competitive for award with this evaluation scheme,  it had to provide at least government purpose rights to its software and  technical data, as well as provide the source code for its software,  regardless of whether they were commercial or had been developed at  private expense. According to company officials, they were willing to  negotiate with the prime contractor to some extent in order to help them  win the contract, but it was not going to offer government purpose or  unlimited rights in commercial data or software that it developed at private  expense, or turn over software source code. The prime contractor told the  company that its unwillingness to turn over the information was hurting its  proposal. In the end, the prime contractor was not selected for this  contract.
section_title: Inexperienced DOD Contracting Workforce
paragraphs: Non-traditional companies that we spoke to generally described DOD’s  contracting workforce as inexperienced, especially when procuring  software services, such as access to the cloud, and performing market  research to determine the types of products that could meet DOD’s needs  and to make commercial item and price reasonableness determinations.  Non-traditional and traditional companies that we spoke to provided  several examples of their interactions with DOD’s contracting workforce.  For example, officials from two non-traditional software companies said  that DOD contracting officers they interacted with were inexperienced in  how to buy cloud services. One company official said that contracting  officers tried to use a firm-fixed-price contract to buy cloud services. While  it may make sense to use a fixed-price type contract for acquiring  hardware, such as laptops and printers, the official said that it is much  more difficult to use a fixed-price contract for cloud services. Commercial  cloud service providers price their services based on the amount of  services a customer uses every month, which could vary based on  changing needs  In addition, in response to a DOD request for information, officials from a  non-traditional company that provides data integration and analytics  products stated that DOD issued a request for proposals to develop a  military-unique solution for a requirement that could be met with existing  commercial products. Based on our review of documents, we found that  the company eventually protested DOD’s procurement on these grounds  and the U.S. Court of Federal Claims agreed with the company. The court  issued a permanent injunction ordering the DOD component to satisfy the  requirements of 10 U.S.C. § 2377, which requires DOD to determine  whether commercial items exist that can satisfy its needs, in whole or in  part. Company officials attributed DOD’s initial decision to seek a military- unique solution, in part, to an inexperienced and risk-averse workforce.
Traditional companies also pointed out other areas of market research  where the contracting workforce is inexperienced and therefore could  result in contributing to additional lengthy processes that non-traditional  companies could face. All three traditional defense companies we met  with stated that DOD contracting officials were requesting significantly  more documentation than in the past to make determinations of  commerciality and price reasonableness, partly because some  contracting officials are inexperienced in these processes. One company,  for example, spent an average of 220 hours (28 days) in 2008 to  complete commercial item determination documentation for components  on one military system, while in 2014 the average number of hours  increased to 1,105 hours (138 days) for the same system. The companies  also stated that, at times, DOD contracting officers are not following the  FAR for establishing price reasonableness by first performing market  research, such as comparing offers to published market prices or  conducting an independent government cost estimate before asking the  company for additional cost data. Some company officials stated that they  have spent considerable time and money tracking down the information  DOD has requested. Some company officials said DOD’s desire to obtain  data related to the costs the company incurred to develop the product  rather than the market price customers are paying for the product has  also had an impact on companies’ suppliers, with some of them refusing  to provide this information to DOD and others refusing to do business with  DOD anymore.
In a prior report related to market research, in which we examined 28  contracts, we found that the market research conducted by selected  federal agencies, including DOD, varied.  The agencies tended to  conduct more robust market research for 12 higher dollar contracts than  the 16 lower dollar contracts we reviewed. We recommended that DOD  clearly document the basic elements of market research that was  conducted.
Overall, DOD and military service senior acquisition officials were aware  of these concerns and in the case of market research, are interacting with  commercial companies to identify ways DOD can improve its capabilities.  One senior contracting official noted that very few people outside the  companies that provide cloud, analytics, and certain types of software  understand these products. Several acquisition and contracting officials  said that many of the concerns raised by companies may be due, in part,  to the large number of new contracting officers it has hired since 2008.  Statistics collected by DOD’s Human Capital Initiatives Office show that  the department increased the size of the contracting workforce by almost  5,000 positions over the past 8 years, from 25,680 personnel at the end  of fiscal year 2008 to 30,669 at the end of fiscal year 2016, a 19 percent  increase. As shown in figure 5, the influx of new personnel has helped  DOD address concerns about having a disproportionate number of staff  that were ready to retire compared to new staff that were being hired and  trained to take their place. However, with the influx of new staff comes a  degree of inexperience.
DOD has established curriculum and experience requirements for  contracting officers to achieve in order to advance in their career. For new  staff, this includes classes on contract planning, execution, management,  and pricing. Following a proficiency assessment in 2010, however,  contracting leaders thought it was necessary for the Defense Acquisition  University to add a 4-week research-intensive fundamentals course that  provides new hires practical experience using the FAR and DFARS.  Contracting leaders emphasized that it is not only important for  contracting officers to master the what , but the how in  being able to use critical thinking and sound judgment when applying  knowledge.
section_title: DOD Is Taking Some Actions to Address the Challenges Faced by Non-Traditional Companies
paragraphs: Congress and DOD recognize that changes to laws, regulations, and  DOD’s implementation practices are needed to address the challenges  cited by companies and are taking steps to address them. The fiscal  years 2016 and 2017 National Defense Authorization Acts, for example,  contain several provisions aimed at eliminating some contract terms and  conditions that are burdensome to non-traditional companies. DOD is in  the process of implementing some of the provisions. DOD has also taken  actions to attract non-traditional companies by establishing industry  outreach offices in high-tech areas across the country and piloting new,  streamlined ways of doing business with these companies within a  desired completion period of 60 days. Between April 2015 and March  2017, the offices facilitated 25 arrangements using OTAs between  companies and DOD organizations worth $48.4 million. The military  services are also examining ways to reduce the time it takes to award  contracts. Because these initiatives are just getting underway, it is too  soon to determine whether they will address the challenges faced by non- traditional companies.
subsections: section_title: DOD Is Implementing Recent Congressional Requirements to Address Some Challenges
paragraphs: The Fiscal Year 2016 and 2017 National Defense Authorization Acts  include provisions for DOD to address aspects of its acquisition  environment that create challenges for companies. These include  addressing some of the complexities associated with DOD’s acquisition  processes; eliminating or reducing the burden of some contract terms and  conditions; clarifying intellectual property rights policies; and addressing  contracting workforce concerns. Table 4 highlights some of the new  requirements.
DOD has started to implement some of these legislative provisions. For  example, in June 2016, the Defense Contract Management Agency  established a Commercial Item Group to assist DOD contracting officers  with complex determinations. The group, which had about 53 personnel in  January 2017, also provides training on assessing whether a product  qualifies as a commercial item and offers assistance to DOD contracting  officers for conducting market research and analyzing the  reasonableness of a contractor’s prices. According to Defense Contract  Management Agency statistics, from October 1, 2016, to January 6, 2017,  the Commercial Item Group was averaging 7 days to deliver a  recommendation of commerciality. Of the items they reviewed, the group  recommended 93 percent to be commercial. DOD is also working with  several large commercial companies to enter into advanced agreements  that DOD officials believe will significantly reduce the time associated with  determining the commerciality of an item and the fair and reasonable  price of such items.
In addition, DOD established an 18 person advisory panel of current and  former DOD executives, referred to as the 809 Panel, to identify  opportunities to streamline the acquisition process. The National Defense  Authorization Act identified two duties for the panel. First, the panel is  expected to review the acquisition regulations applicable to DOD with a  view toward streamlining and improving the efficiency and effectiveness  of the defense acquisition process and maintaining the defense  technology advantage. Second, the panel is expected to make any  recommendation for the amendment or repeal of regulations it considers  necessary to:
Establish and administer appropriate buyer and seller relationships in  the procurement system.
Improve the functioning of the acquisition system.
Ensure the continuing financial and ethical integrity of defense  procurement programs.
Protect the best interests of DOD.
Eliminate any regulations that are unnecessary for the purposes  described.
According to the panel’s May 2017 interim report, the panel has  established nine working groups that are focused on a variety of topics,  including barriers to entry in the DOD market, cost accounting standards,  budget issues, commercial buying practices, and streamlining  regulations. The panel’s Executive Director stated that interim reports  with recommended legislative changes will be issued by each working  group as it completes its work. The panel will then issue a final report in  2018.
section_title: DOD Has Also Initiated an Effort to Attract Non- Traditional Companies
paragraphs: DOD has established offices in high-tech areas of the country to build  relationships and identify promising technologies developed by  commercial technology providers or non-traditional companies and to  help facilitate business agreements between these companies and DOD  organizations. Known as Defense Innovation Unit Experimental (DIUx),  the new outreach effort is part of DOD’s Defense Innovation Initiative that  is focused on pursuing innovative ways to sustain and advance emerging  technology capabilities. The initial DIUx office was announced in April  2015 and was opened in Silicon Valley in August 2015. For the first year,  the office had no funding or authority to award contracts according to the  director of DIUx at that time. Instead, office staff met with these  companies to learn about their products and then helped facilitate  meetings between the companies and interested DOD organizations. The  former director stated that commercial companies they worked with  became frustrated that DIUx could not help them overcome challenges  with identifying and obtaining DOD business.
In May 2016, the former Secretary of Defense appointed new leadership  for DIUx and allocated funding and delegated contract award authority to  the organization. DOD is now referring to the new effort as DIUx 2.0. The  revamped office reports directly to the Office of the Secretary of Defense  and was provided $20 million in research, development, test and  evaluation funding. The office is using OTAs to enter into agreements  with industry for prototyping projects. The office solicits proposals through  an online Commercial Solutions Opening, which is similar to a broad  agency announcement and then, with the assistance of contracting  experts from the Army Contracting Command-New Jersey, is awarding  OTAs to prototype commercial technology. The statutory authority behind  the Commercial Solutions Offering Process, which is illustrated in figure 6  below, allows DIUx to mirror the contracting practices that commercial  companies normally use—intended to enable DIUx to design projects,  and negotiate payment milestones, terms and conditions, and intellectual  property rights for a desired completion period of within 60 days.
According to the DIUx Commercial Solutions Opening How-To Guide, the  process begins with DIUx posting technology areas of interest on its  website. Interested companies submit a short briefing online describing  the proposed technology and information about the company. DIUx  evaluates the briefs and if DIUx is interested in learning more, it may  invite companies to pitch their products in person and then submit a full  proposal. After a merit-based evaluation, DIUx officials select proposals  to pursue and negotiate the terms and conditions of proposed projects,  and, through the Army Contracting Command-New Jersey, awards OTAs.  DIUx generally uses a combination of price analysis methods, such as a  company price list or previous government or commercial contract prices  to determine whether a price is acceptable.
Due to the volume of companies submitting proposals, DIUx has decided  to prioritize its selections to the following five research and development  areas: artificial intelligence and machine learning, autonomy, human  systems, information technology, and space. As of March 31, 2017, DIUx  has awarded 25 agreements for a total value of $48.4 million. According  to a DIUx official, prior to the fiscal year 2017 continuing resolution, DIUx  awarded agreements in an average of 59 days. Due to funding  constraints during the continuing resolution, DIUx’s average increased to  121 days. DIUx is now working to reduce that average back to 60  days. The director stated that DIUx’s most recent agreement, which  started while under the continuing resolution, was awarded in 75 days.  Projects funded include high-speed unmanned aircraft, network security  detection, automated text analysis, and communication devices. For  example, DIUx partnered with the Air National Guard to award an  agreement with a non-traditional company to adapt a wireless, hands and  ears-free, commercially available device as a communicator for  warfighters. The Air National Guard was looking for a solution to replace  existing communication tools, which add weight to a warfighter’s load,  occupy their hands, and restrict visibility.
section_title: Military Services Are Taking Steps to Reduce Contracting Cycle Times
paragraphs: The military services have also initiated efforts to streamline or  standardize their contracting processes, one of the major challenges  identified by non-traditional companies. For example, the Naval Sea  Systems Command conducts analyses of its award cycles times and has  undertaken initiatives to streamline them. In addition, the Air Force has  focused its efforts on reducing the time it takes to award sole source  contracts for sole source acquisitions valued between $50 million and  $500 million. Between fiscal year 2014 and 2016, it reduced the time  needed to award a contract from 16.1 months to 12.8 months, or by 20  percent.
According to an Air Force official, the Air Force initiated several efforts to  improve the contract cycle times, including (1) early coordination between  companies and Air Force contracting officials, the Defense Contract  Management Agency, and Defense Contract Audit Agency to help  companies improve their proposals and reduce the amount of re-writing;  and (2) an emphasis on training engineers who help evaluate the  technical details of proposals. Previously, the Air Force found that the  engineers had technical knowledge about technologies or products, but  were not as knowledgeable or familiar with how to document their  evaluations to aid contracting officers during the contract negotiation  process. Air Force officials stated that the Air Force’s goal is to further  reduce the contracting timeframe to less than 11 months in fiscal year  2017 by ensuring all contracting offices are following best practices and  collecting additional lessons learned.
In October 2016, the Assistant Secretary of the Army for Acquisition,  Logistics and Technology issued a memorandum directing improvements  to the Army’s contracting processes by eliminating redundant layers of  management and oversight, improving accountability and transparency,  and improving the contracting workforce and workload. For example, the  memorandum stated that there are over 350 documents that potentially  need to be included in a contract file, many of which are redundant. This  inefficiency results in time spent on non-value-added activities instead of  negotiating good business deals and conducting adequate post-award  administration. The memorandum also states that more robust source  selection guidance, sharing of best practices, and enhanced training may  help drive more streamlined practices, reduced timelines, and better  outcomes.
The Army Contracting Command expects contracting officers and  contract specialists to track their ability to meet various acquisition  milestones and to communicate closely and often with their customers  when establishing and adjusting milestones. According to an Army  Contracting Command official, Army leadership plans to identify trends  and areas of opportunity where contracting activities can be streamlined.  One effort already directed by the Assistant Secretary of the Army for  Acquisition, Logistics and Technology is to improve the customer’s ability  to prepare a complete contract request package because inadequate or  missing contract request documents significantly impact the contracting  process, causing rework and delays in contract award timelines.
In June 2017, we issued a report that examined the Army’s contracting  operations and found that top Army leaders focus their contracting  reviews on efforts to obligate funds before they expire, competition rates,  and small business participation. Leaders have not consistently  evaluated the efficiency and effectiveness of the Army’s contracting  operations. While Army leaders, including successive Assistant  Secretaries of the Army for Acquisition, Logistics, and Technology, have  acknowledged a need for improvements in contracting since 2012 and  have taken positive intermittent steps to do so, the leaders did not sustain  the efforts or—alternatively—provide a rationale for not doing so. Among  other things, we recommended that the Secretary of the Army establish  and implement metrics to evaluate the timeliness of contract awards and  to document the rationale for key decisions. DOD concurred with the  recommendations.
section_title: Agency Comments
paragraphs: We are not making recommendations in this report. We sent a draft of this  report to DOD for advance review and comment.  In response, DOD  informed us that it had no comments on the report.
We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense, the Secretaries of the Air Force,  Army, and Navy; the 15 companies we selected to prepare this report;  and other interested parties. In addition, this report will be available at no  charge on the GAO website at http://www.gao.gov.
If you or your staff has any questions concerning this report, please  contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made major contributions to  this report are listed in appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report describes (1) key challenges identified by non-traditional  companies when trying to do business with Department of Defense  (DOD) and (2) actions DOD is taking to address them. For the purposes  of this report, we define non-traditional companies as those that do not  typically sell or develop products for DOD.
We analyzed DOD and industry research and development spending  from 1987 to 2013 to describe changes in spending over time. We  obtained data on DOD research and development outlays from the White  House Office of Management and Budget Summary of Outlays for the  Conduct of Research and Development: 1949-2017. We obtained  information on industry research and development spending from the  National Science Foundation Survey of Industrial Research and  Development and the National Science Foundation and U.S. Census  Bureau Business Research and Development and Innovation Survey. To  adjust for inflation, we converted then year dollars to 2017 dollars using  the research and development deflator in the National Defense Budget  Estimates for 2017 (Green Book). Private sector investment could include  funding from DOD.
To identify the challenges that non-traditional companies face when trying  to do business with DOD, we first conducted a literature review. Our  literature review included previous reports from GAO, think tanks such as  the Brookings Institute and RAND Corporation, and the Defense Business  Board, as well as testimonies delivered at congressional hearings. We  then reviewed the documentation to identify challenges and to help inform  interview questions posed to company representatives from 12 non- traditional companies to learn about their experiences in pursuing DOD  business.
We selected these 12 companies based on several factors, including the  extent to which the company had conducted business with DOD,  company size, and the types of technologies they have developed.  Specifically, we selected companies that had few or no contracts with  DOD from fiscal year 2010 through 2016 based on the number of  contracts awarded to the company from the Federal Procurement Data  System-Next Generation system. We selected large companies that are  on the Fortune 500 list and smaller companies that are not on that list to  ensure that we considered various perspectives of the challenges faced.  We also considered whether companies were developing products in key  technology areas identified in the Defense Innovation Initiative, including  data analytics, cybersecurity, autonomous vehicles, and space launch  vehicles. We used industry reports and information from company web  sites to identify companies developing relevant technologies. To aid in our  company selection, we conducted interviews with technology and industry  experts at various think tanks and venture capital firms, along with DOD  officials. We also reviewed industry lists of top small innovative  companies, such as Fortune’s “These Big Data Companies are Ones to  Watch,” Fast Company’s “The World’s Top 10 Most Innovative  Companies in Robotics.” As a result of our research and these  discussions, we selected 12 innovative companies to include in our  review. Five companies asked to remain anonymous. The other  companies include:
Cylance, Inc., a cybersecurity company
DreamHammer Products LLC, a drone management platform
MotionDSP, Inc., a video software company
Liquid Robotics, Inc., an autonomous vehicle company
Amazon Web Services, Inc., a data analytics company
Microsoft Corp., a data analytics company
Palantir Technologies, a data analytics company  With each of the companies, we interviewed senior representatives that  were knowledgeable about their business in defense and commercial  markets. We asked company officials to discuss the similarities and  differences in selling their products to DOD and commercial customers.  Companies provided specific examples of contracts or experiences they  have had with DOD and commercial companies to illustrate similarities,  differences, and challenges. Where possible, companies provided  relevant documentation to support their examples. We analyzed the  interview responses and supporting documentation and identified over 20  challenges. We then grouped these into six overarching challenges that  nearly all of the non-traditional companies said they faced when trying to  doing business with DOD.
The statements expressed by participants represent the perspective of  these companies and cannot be generalized because we used a non- probability method to select companies for the sample. We also obtained  information on challenges mentioned by reviewing DOD studies, as well  as through discussions with senior representatives from three traditional  companies (The Boeing Company, Honeywell International, Inc., and  another company that asked not to be identified). The traditional  companies provided quantitative information about the challenges and  also identified potential challenges that non-traditional companies could  face based on their own experiences. We provided company  representatives an opportunity to review a summary of the challenges  section of this report and incorporated their comments, as appropriate.
In addition, we spoke to knowledgeable acquisition and contracting  officials within the Office of the Secretary of Defense and the military  services. Among others, DOD officials included two senior acquisition  executives, the Director of Defense Procurement and Acquisition Policy,  the Director of Defense Pricing, acquisition officials from nine program  executive offices, contracting officials from six program executive offices,  and officials from the Office of Small Business Programs, the Strategic  Capabilities Office, the Defense Contract Management Agency Cost and  Pricing Center, and the Defense Innovation Unit Experimental (DIUx).
To determine DOD efforts to address the challenges described by non- traditional companies, we first examined the National Defense  Authorization Acts for Fiscal Years 2016 and 2017 and identified several  provisions that may address the six overarching challenges identified by  non-traditional companies. We obtained status documentation or updates  from various DOD organizations related to its efforts to implement the  provisions. Second, we collected and reviewed documentation on new  DOD-wide efforts aimed at addressing specific challenges, including  DIUx. This organization is DOD’s primary effort to identify promising  technologies developed by non-traditional companies and then to help  facilitate business deals between those companies and DOD  organizations. Third, we met with senior DOD personnel and acquisition  professionals from across the three military service departments and the  Office of the Secretary of Defense to identify military-specific initiatives  focused on addressing some of the cited challenges and collected  pertinent documentation on these efforts.
We conducted this performance audit from June 2015 to July 2017 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Cheryl Andrew (Assistant  Director), Sameena Ismailjee (Analyst in Charge), Emily Bond, Kurt  Gurka, Joe Hackett, Jeff Hartnett, Alexandra Stone, Michelle Vaughn,  Nate Vaught, and Robin Wilson made key contributions to this report.