This blog is really for the contracting people out there that buy hardware. The government is always looking to reduce cost when buying hardware systems. If there is a production contract for anything these days, most prime vendors purchase many components from sub-contractors. In my experience I have seen the Government make the decision to “save money” by contracting for certain components direct and provide those as Government Furnished Material (GFM) to the prime. Some of you may have to make that choice someday so let’s look at the pros and cons.
As we all know the markup/pass-through cost that primes put on components can be high. Given the accounting systems that most major companies use, every dollar that enters the company comes out at the other end 2-3 dollars higher when you add on all the overheads and other factors. So, if you have a large dollar item there is the potential to “save” money by eliminating the additional cost that a prime adds to all material that he purchases from sub-contractors. To me that is the only pro in this scenario. This view is based on actual experience.
Government contracting folks, let be honest. What we don’t need is another RFP to put together, another proposal to evaluate, and another contract to administer. So, it is a “cost” to the government to add additional work into an already overworked and understaffed process. The government has to evaluate the sub-contractors even when the RFP went to the prime. The RFP issuance and having to conduct separate negotiations can be time consuming. Many times, I have had discussions with customers who point out that they took a class on the contracting process and it should only take x number of days. My answer to that was always the same. I don’t work on one thing and one thing only and your requirement is entering the queue with all the other requirements your program has tasked the contract office to acquire. But that isn’t the only con.
When you contract for components and provide them as GFM, the Government now becomes a supplier to that prime. The government has shifted risk away from the prime and taken it on itself. Now if there are delivery issues, the government is on the hook to manage and mitigate those impacts to the prime. If the prime was managing this supplier and there were delays, the government could seek consideration from the prime for the delay. Now the government may have to provide “consideration” to the prime because its supplier is late. It is a real shift in risk in taking that route. (Note: that risk shift can be used to lower profit with the prime. Use it!!)
Let me give you an example. I was the CO for a weapon that had two major sub-components purchased directly from the original sub-contractor that initially had been sub-contracted for by the prime. So, every production lot required three separate RFPs and negotiations. Murphy’s law kicked in eventually and both suppliers had problems producing items and meeting schedule. Complex systems usually have these issues as we all know. But the government now was impacting the prime’s delivery schedule. If the prime was still managing that supplier, it would have fallen on the prime to fix the problem – now it was the government’s responsibility. It got solved but there were cost impacts that had to be resolved, so how much was “saved” was to my mind questionable when you add in all the time and effort expended by the government in managing those two suppliers
I was with the government during the $500 hammer days and the great push to buy as many parts as possible direct from suppliers and not pay primes big markups. I think the litmus test to make that decision is (1) how stable is the design of the product; (2) is the sub-contractor experienced in dealing directly with the government; (3) does the government have sufficient support both on the technical and contract side to support another contract; and (4) most importantly, will there be real savings to the cost of the end item if the government takes on that risk?