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Senator McCain Renews Focus on Ending Cost-Plus Contracts

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A longtime and well-known proponent of defense acquisition reform, Senator John McCain assumed the chairmanship of the U.S. Senate Armed Services Committee (“SASC”) on January 6.  Sen. McCain has been particularly outspoken concerning cost overruns on major systems procurement projects.  He has characterized the “cost-plus” contract structure as among the key causes of these overruns, and has described implementing a ban on “cost-plus” contracts as among his top three priorities for the 114th Congress (along with countering cyber-threats and addressing sequestration).

Sen. McCain’s antipathy toward cost-plus contracts is nothing new:  during the 2008 presidential campaign, he made waves in the contracting community by declaring during a debate with then-Senator Barack Obama that “particularly in defense spending, which is the largest part of our appropriations – we have to do away with cost-plus contracts.  We now have defense systems [in which] the costs are completely out of control. So we need to have fixed-cost contracts.”

Sen. McCain renewed his criticism of cost-plus contracts in a recent public appearance:  “I’m continuing to try to ban them [a]ll. . . If you don’t ban them, here’s what happens:   [contractors] come in with a lowball contract, so they can get the contract, and then . . . the costs mount.”  By way of analogy, the veteran lawmaker highlighted the faulty incentives he believes are created by such an arrangement:  “If you had a roof that leaked would you ask a guy to come and fix it with a cost-plus contract?!”

At the time of Sen. McCain’s 2008 high-profile criticism of cost-plus contracts, many experts in the contracting community expressed skepticism that an outright ban was desirable or even possible.  They posited, for example, that cost-plus contracts can be the best tool for the job in certain circumstances, such as high-risk research and development projects where the requirements (and thus the expected costs) are ill-defined.  A prominent contracting official even contended, as summed up by one think tank’s analysis of the issue, that “contractors would simply not bid on high-risk endeavors . . . if they were operated under fixed-priced contract structures.”

While the merits of cost-plus contracts remain a subject of vigorous debate, the Arizona senator’s SASC chairmanship and his party’s control of the Senate better position him to pursue this issue in 2015.  In addition, other key stakeholders appear favorably disposed toward defense acquisition reform.  Representative William “Mac” Thornberry, the new chairman of the U.S. House Armed Services Committee, has been studying the issue and collaborating with industry on recommendations.  Additionally, Ashton Carter, President Obama’s pending nominee to be the next Secretary of Defense, is a former chief acquisitions official at the Pentagon and a proponent of reform.

Acquisition reform figures to play a prominent role in Carter’s upcoming confirmation hearing, although the most likely forum for a specific proposal on cost-plus contracts is the FY2016 National Defense Authorization Act (“NDAA”).  One factor to watch as the NDAA process gets underway is whether Sen. McCain is able to build bipartisan support in Congress – and identify key allies across the aisle, and across the Hill – for the reform or elimination of cost-plus contracts.  Outgoing SASC Chairman Carl Levin, who co-authored a symposium-style report on defense acquisition reform with Sen. McCain in October 2014, has retired from Congress.  Also recently departed from the Hill is Representative Henry Waxman, whose proposal to require agencies to minimize cost-plus contracts passed the House in 2008.

It thus remains uncertain how Sen. McCain plans to realize his vision of ending cost-plus defense contracting.  However, given the emphasis that the new SASC chairman has consistently placed on the issue, cost-plus contracts will likely remain a prominent topic within the broader and seemingly dynamic context of acquisition reform in the 114th Congress.

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