Understanding DoD

To get on contract with the DoD, it’s imperative that you understand the current DoD contracting culture, as well as DoD contracting strategies and terminology. 

Current DoD Contracting Culture | Contracting Cone | FAR-Based Contracts vs Statutory Agreements | Cost vs Fixed-Price | Colors of Money | Common Contract Strategies | Other Transaction Consortia | Pitch Day Tips

Current DoD Contracting Culture

Whether you are a first-timer or have worked with the DoD for years, DoD Contracting is like nothing else you’ll find in industry or academia. Nor will DoD Contracting look exactly like contracting with any other entity in the Federal Government, let alone state or local governments. Contracting even looks different between the Services so that the rules and formats for similar procurements with the Army and Air Force, for example, will be different enough to get you excluded for trying to use the format of one for the other.

For as much as you may not understand DoD Contracting initially, your counterparts probably don’t understand you. Even if your Government Program Manager understands your technology, the Government team is unlikely to truly understand the complexities of running a business or what you must do to stay afloat, let alone be the successful technical unicorn they hope you’ll be, plus at a rock bottom price and giving away your IP. It’s unlikely that many of your counterparts have ever worked in private industry, understand your IP concerns or profit motive, can fathom why you’re wary of having a full-time employee doing nothing but writing hit-or-miss proposals, or can tell the difference in how a beginner small business views DoD opportunities versus how a tough-as-nails major defense contractor views DoD opportunities. Part of the relationship you build with your DoD partners may depend on you educating your counterparts, especially those who are open to learning.

Of all Federal Government contracting systems, DoD Contracting is one of the hardest to comprehend and dominate because it is heavily bureaucratic; your counterparts live in a culture that doesn’t normally focus on fast or innovative; the jargon is complex; and the time lines may be longer than your company can sustain while you wait for a steady flow of contracts to pay your bills. That last factor—lengthy timelines—may be harder than regulatory compliance and culture factors because your business model may not have the luxury of waiting out the slow and lumbering acquisition bureaucracy.

Contracting Strategies and Terminology

For example, you may hear an innovation hub or a program manager refer to a “SBIR”–Small Business Innovation Research–as a solicitation, a contract, or a socio-economic program.  All three usages can be correct in the right context. The SBIR program is a Government program designed to encourage small businesses to participate in innovative Research and Development with the intent to commercialize. Although the solicitation may be referred to as a “SBIR,” or possibly as a “SBIR topic,” the actual request for proposals may be a Broad Agency Announcement (BAA) or–new!–a Commercial Solutions Opening (CSO).  The resultant contract or agreement is often called a “SBIR,” meaning that it’s awarded under the SBIR program.   The agreement may be a contract, a purchase order, an Other Transaction for Research, or an Other Transaction for Prototype.   The agreement could be written as a cost-type or a fixed-price-type arrangement.  A SBIR solicitation can be a BAA or CSO but not all BAAs or CSOs will be released under the SBIR program.   A SBIR could be awarded as an Other Transaction for Research or Prototype but not all Other Transactions will be awarded under the SBIR program.  

Understanding these differences takes time and you may need to ask for the context–is this a solicitation?  is this a contract?  The Contracting Cone allows you to delve into different types of contracts and solicitations with a click and read through the pros/cons, references, applications, restrictions, frequently asked questions, or scenarios.  

FAR-Based Contracts vs Statutory Agreements

The Contracting Cone is divided into “FAR based” and “Non-FAR.”  FAR, or Federal Acquisition Regulations, are the better-known authorities for DoD contracts and solicitations, with the specific FAR citation listed with the title in the blue FAR blocks of the Cone. When a Contracting Officer references a “FAR-based contract,” they mean a contract under one of these authorities, subject to a plethora of regulations and pre-written, often pre-determined clauses.  

“Non-FAR” points to statutory, rather than regulatory authorities.  These are listed in the green blocks of the Cone, along with the corresponding statute.  Non-FAR-based contracts, or statutory agreements such as Other Transactions, are less familiar but may be a better deal for a small business or startup because they don’t contain standard clauses and can be more freely structured. These agreements are generally simpler, more like business to business agreements, and less “bureaucratic” than contracts regulated by the FAR. They may have been around for decades but they have been relatively unknown and  seldom used until around 2016-2018 when the DoD became more aggressive in courting industry.

Cost vs Fixed Price Contracts/Agreements

Both FAR-based contracts and statutory-based agreements can be cost-type or fixed-priced-type.  Though there are variations of each, the ones you’ll most likely see on your early contracts with the DoD are Firm-Fixed-Price (FFP) and Cost-Plus-Fixed-Fee (CPFF). 

FFP is typical of commercial products, R&D studies where you’ve written your own statement of work, and any product or service that can be defined well enough that you can price it.  Under an FFP contract, the contractor assumes all the risk so if it costs you more than agreed to, you eat the loss.   If you manage your costs well and have funds left over at the end of the contract, that’s profit for you.

Profit is the term used for fixed-price contracts whereas fee is the correct word for cost type contracts.

CPFF contracts put the risks of underestimating the costs on the Government.  The DoD reimburses the allowable incurred costs and pays a fixed amount that is negotiated at the beginning of the contract. It may be negotiated as a percentage of the estimated costs but it is written into the contract as a precise amount, not a percentage. If you “overrun” the costs, your fee is the same, or fixed. You can be reimbursed for the overage of costs but you won’t receive additional fee unless the overage is a result of new work that has been added to the contract and was not anticipated in the original negotiation, such as an additional task that the DoD wants performed that you did not propose.  

When you overrun a contract, you don’t receive an additional fee and cannot apply the original percentage on which you based the fixed fee to the cost growth or it would be deemed a Cost-Plus-Percentage-Cost contract, which, unlike in industry, is illegal for DoD contracts.  Also, your contract will include a clause that requires you to notify the DoD in advance of spending all your funding, usually 60 days before you hit the 75% mark.  This allows the DoD to decide to (1) recognize and fund an overrun (assuming funding is available); (2) terminate the contract; or (3) de-scope the work to the amount of funds available. 

Two messy situations to avoid:

Situation 2

In the absence of funding–for whatever reason–the Government team should not encourage, beg, urge, cajole, plead, coax, demand, persuade, bully, threaten, direct, or any other synonym to convince you to work on your own dime.  

You will probably never have a Contracting Officer tempt you to continue to work in the absence of funds because the Anti-Deficiency Act (ADA) has been drilled into them since their first day in the career field.  However, other members of a DoD team probably have not been schooled as hard. Even knowing the ramifications, some team members will not stop a contractor from working on their own dime, and it does happen, particularly in emergency or urgent situations where the team member strongly feels the funds are imminent and it’s worth the risk.  Because “knowing and willful” violations of ADA are a class E felony punishable by a $5K fine, up to two years imprisonment, or both, these team members usually look the other way or even ask not to be told. ADA violations and ratifications can become messy for both you and the DoD team, with publicity and at least a minimum of reprimands none of you want.

If you negotiate a cost type contract, you will need an accounting system approved by the DoD.  A small percentage of the CPFF amount is held back until the contract close-out stage, which can take years to pass a final audit due to backlog.  One trick some Contracting Officers allow so that they can close out the contract and the contractor can get their final payment faster is to convert a CPFF contract to FFP near the end when the contractor is certain they will have no additional costs to report and is willing to forgo any increase in overhead rates that might have increased since the original negotiation.  

Statutory agreements such as Other Transactions can be of the cost or fixed price variety.

Contract type is determined by the Contracting Officer but if you follow the prescriptions in FAR Part 16, you may be able to convince the Contracting Officer to negotiate one you think is most appropriate to the risks. Even though FAR Part 16 doesn’t apply to Other Transactions, the language is still useful for supporting the type of Other Transaction that reflects the risk you are willing to take.

If you are new to working with the DoD, you’re most likely to be funded with RDT&E funding or O&M.  The trick with colors of money is to make sure that the color is used for the purpose Congress meant it to be used for.  This is fiscal law.  If you are contracted to deliver an R&D study under the SBIR program, you would expect that the funding–and the wording in your contract–to match the purpose and the RDT&E pot of money.  You would not expect to find Procurement funds for production on your SBIR Phase I contract.  If you are providing a regularly updated app for training and education of troops, then you would expect that your contract wording and funding both match the O&M pot of money, not an obscure fund cite for improving or building facilities. 

There are sub-differentiations of each color.  Each category is given a numerical code according to whether it’s Air Force, Army, Navy, Marines, or DoD-wide.  For example, RDT&E Air Force funding is called “3600” funding, sometimes called “two-year” funds because it can be obligated in the current and next fiscal year.

The correct color of money is the DoD’s responsibility, not yours, but it may affect exactly how a Statement of Work or Performance Work Statement is worded.  The Contracting Officer and DoD’s legal counsel will be attuned to the color of money because using funding for something other than what it was intended for can be an ADA violation, as mentioned above.

Common Contract Strategies

All of the above considerations–FAR-based vs statutory, cost vs fixed price, color of money, etc.–factor into the contract strategy.  If you’re new to the DoD, the following are the most likely strategies you’ll encounter:

Other Relevant Topics

The DoD has greatly increased use of Other Transactions in recent years as a flexible business arrangement for prototyping and early technology development. DoD organizations can issue direct OT awards, or they may leverage one of many Other Transaction Consortia have formed around technology or mission areas.

The Air Force, in particular, has begun leveraging Pitch Day events for businesses to pitch solutions to address Air Force needs and opportunities with contracts awarded during the event.