In a memo dated March 6 and released publicly Friday, Hegseth directs all DOD components to use the Pentagon’s Software Acquisition Pathway, as well as other authorities created to leverage commercial capabilities — all in an effort to speed up the process for fielding software-heavy systems.

“The Department of Defense has been slow to recognize that software-defined warfare is not a future construct, but the reality we find ourselves operating in today,” Hegseth said in the memo, which is addressed to all senior Pentagon leaders, combatant commanders and field activity directors. “When it comes to software acquisition, we are overdue in pivoting to a performance-based outcome and, as such, it is the warfighter who pays the price.”

Senior defense officials told reporters Friday the memo is the first of what will likely be a series of steps from Hegseth, who has said on several occasions he wants to change the way the military buys and builds both software and hardware. The officials requested anonymity to speak freely about the secretary’s guidance.

The Defense Department created the Software Acquisition Pathway in 2020 as the recommended approach for buying software. The pathway offers a tailored acquisition mechanism, recognizing that software can’t, and shouldn’t, be procured under the same process as an aircraft or ship.

DOD program offices adopted the approach fairly broadly, and today 82 programs representing each of the military services are using the pathway to buy a range of capabilities — from command-and-control systems to cyber. The problem, according to one official, is that the pathway hasn’t been combined with other authorities designed to attract and take advantage of commercial capabilities.

Those authorities include an approach championed by the Defense Innovation Unit called a Commercial Solutions Opening, a type of solicitation that allows startups and non-traditional defense companies to sell products and services to DOD. DIU also leverages a contracting tool called Other Transaction awards, which isn’t subject to the same regulations as a standard contract and allows the government to award contracts on faster timelines.

As part of Hegseth’s memo requiring use of the Software Acquisition Pathway, he calls for acquisition organizations to make Commercial Solutions Openings and Other Transaction contracting approaches “the default” for buying capabilities.

“Department components are prohibited from implementing further guidance on this point that would set out restrictive measures, guidelines, frameworks, directives or policies other than required by statute,” he said.

The under secretary of acquisition and sustainment, as well as DIU — because of its experience with these tools — will craft an implementation plan over the next month.

DIU expects to see an uptick in the number of program offices wanting to work with the organization to procure software using these methods, one official said. As part of the implementation plan, the department will identify what resources DIU will need to support the increased workload and help train acquisition officials on how to use these authorities.

“The combination of DIU innovation with acquisition modernization is creating a streamlined mechanic to both deliver capability fast and simultaneously open up the industry base to a broader audience,” one official said.

Airmen and guardians will soon be able to take advantage of the Hypori Halo Workspace Anywhere program that grants access to government apps, email, NIPRNet, sensitive data, and CAC-enabled websites via personal devices, including a phone or tablet, whether they’re in the office or not.

A spokesperson for Hypori did not give an exact date for enrollment, but told C4ISRNET it’s still on track to begin this summer.

“The Air Force and Space Force are actually already using our platform,” said Jared Shepard, CEO and president of Hypori, at the TechNet Cyber conference presented by the Armed Forces Communications & Electronics Association International late last month in Baltimore. “Now, they’re going to scale.”

Capitalizing on the need for integrated communications and the pandemic-fueled remote work environment, the Army, including its Reserve and Guard components, already began transitioning service members toward Halo, which as of June 11 became the only way Army.mil users can access Army 365 services from a personal device. Shepard said at the conference that 50,000 Army enrollees are using the service since that BYOD effort began as a pilot in 2022. Hypori was also awarded a contract by the National Geospatial-Intelligence Agency on June 6 to give a third of its workforce remote access to secure networks.

“[BYOD] is a top priority for us, and it is a game changer because when our soldiers and airmen are not at the armory, they have to be connected in a secure way,” said Kenneth McNeill, chief information officer of the National Guard Bureau, in a statement February.

Reservists and part-time members of the services especially have limited access to base networks, so giving them the flexibility to complete work from wherever they are will be a boon to the organization, leaders have said.

“In our dynamic environment, the Department of the Air Force is committed to providing user-friendly enterprise solutions which empower the force to work securely in a wide range of operational contexts,” said Air Force Chief Information Officer Venice Goodwine in a statement in March.

The technology also eliminates the need to carry two devices while ensuring their government and personal data are kept separate to minimize liability. The idea of “no data at rest” means there is no risk of compromise if the enrolled devices are stolen or lost, and it ensures that personal information stored on that device is not accessible by the government.

The technology, which also vets users, is also compliant with White House orders that ban TikTok on government devices due to concerns that the social media platform’s Chinese-based parent company, ByteDance, would get access to sensitive data.

“Industry has a responsibility that if it’s doing work for the Department of Defense, that it protects that data,” Shepard said.

While pending budgetary and political outcomes are still many months from resolution, carefully planned and justified digital transformation offers a safe harbor for investment decisions being made today. By finding opportunities to improve government efficiency and productivity while reducing costs, agencies can both gain needed advancements and mitigate risks from current unknowns. The key is readiness to make constructive moves quickly to be well-positioned for momentum and success on Oct. 1.

Starting off strong in FY25

Agency IT leaders may be giving some serious thought as to what to do in the first 100 days of the new budget year. One area ripe with potential is removing systems duplication across agencies with adjacent purposes. Consider one real example: a department within Agency A identifies and certifies individual claimants as legitimate victims of a particular type of crime. Department personnel had traditionally used spreadsheets to collect, track and analyze claimant data to decision benefits entitlement. Automating data collection and tracking allowed on-demand access for the entire program team, but also enabled a dozen other Agency A components to more easily coordinate with Agency B, an integral part of the justice system. Agency A’s productivity skyrocketed, with twice as many victims served in the year after implementation vs. the year before, without increasing budget or staffing; time to victim certification was reduced by half. Their IT investment also eliminated the need for a duplicate system at Agency B, which was now willing to accept Agency A’s certification decision – a win-win for everyone.

Digital transformation can also make a significant improvement in mission outcomes where poor or inconsistent system quality is leading to customer dissatisfaction. The biggest impacts will be found when new technology enables customer self-service, reducing time to benefit and concurrently reducing government employees’ burden of performing lower-value work like filling in forms. Effective planning will also help replace cumbersome, expensive aging technologies to make room for more cost-effective options and processes. Routine, manually-intensive activities could be made significantly better and faster using advanced technologies like artificial intelligence. The resulting talent enablement will empower staff to prioritize activities that are more important, and also likely more fulfilling, supporting workforce retention.

An additional option is to focus on known appropriations priorities (such as infrastructure, the Chips Act or supply chain sustainability, in the recent past). Understanding where the government will be willing to spend can help direct the alignment of an IT organization’s own investment strategy.

Maximizing year-end ‘bonus’ dollars

Agencies that may find themselves with the luxury of obligated but unused FY24 funds can apply that money toward sound end-of-year digital modernization investments that will deliver a big impact. Again, look for where automation can address system duplication or independently recognized poor quality or poor customer satisfaction. This is also a good opportunity to modernize a system that has been either unreliable, compromised, or otherwise proven to have significant shortfalls.

The key is to pursue technology opportunities that will produce a measurable business return. That requires innovative thinking for IT-minded people who often consider new technology only as a means to reducing operations and maintenance (O&M) costs – i.e., moving to the cloud for cheaper data storage or using low code software to reduce development costs. While any savings is helpful, these kinds of reductions have minimal impact, since IT O&M typically represents only a small part of an organization’s total budget.

Instead, approaching IT investment as a means to benefit business productivity (i.e., repurposing labor to higher-value needs or increasing customer transaction capacity with the same number of staff) can produce dramatically higher returns. And, because budgeted O&M expenses will have already been met, any extra end-of-year funds can be applied toward development, modernization and enhancement (DM&E) initiatives that might otherwise not get done, amplifying the payback of this ‘bonus’ money.

If IT leaders need some guidance on this journey, the discipline of Technology Business Management offers a valuable framework and tools that provide a consistent way to measure technology investments so that they can be translated to business value.

Solving a perennial problem

While government fiscal cycles will always impose some annual uncertainty, one thing is certain – the ongoing requirement for digital transformation is sure to continue as long as technology evolves. By focusing investments on business outcomes, agency IT leaders can not only appropriately justify their budgets but also advance their agencies’ mission fulfillment – no matter which direction the political winds may blow.

Jeff Myers is Senior Director of Government Contracts at REI Systems.

The dismissals came at the request of the government — not the defense — citing prosecutorial errors.

Retired U.S. Navy officers Donald Hornbeck, Robert Gorsuch and Jose Luis Sanchez, and U.S. Marine Corps Col. Enrico DeGuzman had all admitted to accepting bribes from defense contractor Leonard Francis, nicknamed “Fat Leonard.”

The enigmatic figure — who was six feet, 3 inches tall and weighed 350 pounds at one time — is at the center of the Navy’s most extensive corruption cases in recent history.

The three pleaded guilty to a misdemeanor charge of disclosing information on Tuesday. The judge also dismissed the entire case against U.S. Navy officer Stephen Shedd. Their defense lawyers could not be immediately reached for comment.

It marked the latest setback to the government’s yearslong efforts in going after dozens of military officials tied to Francis, who pleaded guilty to offering more than $500,000 in cash bribes, along with other gifts and wild sex parties in Southeast Asia, to Navy officials, defense contractors and others. The scheme allowed him to bilk the maritime service out of at least $35 million by getting commanders to redirect ships to ports he controlled and overcharging for services, according to the prosecution.

Francis owned and operated Singapore-based Glenn Defense Marine Asia Ltd., which supplied food, water and fuel to U.S. Navy vessels. He was arrested in 2013 in a sting operation in San Diego.

Prosecutors said in legal filings outlining their request for Tuesday’s dismissals that the action does not mean the defendants did not commit the charged crimes but because information was withheld from the defense and other mistakes were made, they wanted to ensure justice was served fairly.

In 2022, Judge Janis Sammartino had ruled the former lead federal prosecutor committed “flagrant misconduct” by withholding information from defense lawyers. In September, the felony convictions of four former Navy officers were also vacated. The four men pleaded guilty to a misdemeanor and agreed to pay a $100 fine each.

The dismissals come weeks before Francis is due back in court to set a date for his sentencing.

Francis returned to the U.S. late last year after a daring escape from his house arrest in San Diego in 2022. He fled to South America weeks before he was scheduled to be sentenced last year, and was later captured in Venezuela, which extradited him to the U.S. as part of a prisoner exchange.

The escape was also seen by some as a misstep by the prosecution for allowing him to not be held behind bars.

The AbilityOne program is the largest source of employment for people who are blind or have other disabilities. From M16 magazines to baking mix, it supplies $4 billion in products and services to the government each year and employs more than 40,000 workers through partnering non-profit agencies.

The program’s overarching regulatory framework has been largely preserved since it was established in the 1930s, but calls to modernize the program have been voiced for years in order to grow it. As an answer, a new rule finalized in March allows price to be an evaluation factor in contract selection. Because of the program’s unique structure, price is something the program has been able to deemphasize in awards, unlike the rest of the $600 billion contracting sphere.

“The rule is designed to increase transparency, incentivize performance, and ensure that the program remains a trusted source of supply and services for federal agencies, thereby creating and maintaining jobs for people who are blind or have significant disabilities,” said AbilityOne Commission Chairperson Jeffrey Koses in a statement.

Before the rule, a federal agency would bring a contract opportunity to central nonprofit agencies. Then, they would respond with their bids based on past performance and technical capabilities; price was not a factor at that point. Then the central nonprofits would designate a supplier, and the nonprofit and the government would negotiate a fair price that the AbilityOne Commission then confirms.

Now, for new and existing defense contracts over $50 million and civilian contracts over $10 million, competition inclusive of price can be requested. Competition can only be requested by a senior official or, in the services, a flag or general officer. And again, the commission has final authority.

“The rule is written in a way such that factors and subfactors, including technical capability, past performance, training, and placements, are part of the trade-offs that are weighed along with the proposed price,” a commission spokesman told Federal Times. “This was to ensure that the price does not have a disproportionate role in the overall competitive process.”

However, introducing price to the bid selection process is a huge departure from going procedure, nonprofits said in interviews with Federal Times.

“One of the benefits of this program is, once a contract is on the procurement list, you’re not recompeting,” said Dwight Davis, president of Global Connections to Employment. “You’re just repricing it every five years. There’s a whole difference when you’re talking about running a competition.”

Impasse-related competitions are limited to service requirements exceeding $1 million in total value, which the commission estimates would represent a fraction of all contracts.

And though some nonprofits raised concerns about the commission lacking the resources and funding to take on any potential surges in impasse requests, a spokesman for the commission said officials don’t expect the them to increase given agencies still have to exhaust all existing remedies before competition is considered.

Further guidance is forthcoming on implementation of the final rule, the spokesman added, but nonprofit business owners said until they see the regulation fully baked, they are unsure how exactly price will be weighed.

The rule also acknowledges that the award process will consider nonprofits’ investments in training and development of their workforces, though the rule declined to adopt the term “social impact” in its language.

Though these efforts are incentivized in the competitive process, they’re still an unallowable cost.

“When you want people to succeed, you have to have the tools available for them to succeed,” said Jewelyn Cosgrove, vice president of government and public relations, at Melwood, another AbilityOne nonprofit. “But in a price-centric in a world where price has heavier weight, we are going to have to look really closely to ‘how?’ And how far do we go in terms of workforce development?”

Though Cosgrove and Davis said the final rule sought to be responsive to concerns raised by the nonprofit community, implementation guidance will be crucial to ensuring minimum disruption to the AbilityOne workforce, which includes more than 2,500 veterans.

“This is a program that is unique in the contracting space,” said Cosgrove. “And it is unique in the disability space. The next two, three years … is going to tell us far more than what we know today.”

Unfortunately, the steady movement toward government-imposed cybersecurity regulations and enforcement actions poses a dilemma for many companies. Do they allocate resources to secure their environment or to ensure compliance with a multitude of government mandates and reporting rules?

The number of cybersecurity regulations imposed on industry is so voluminous that a core pillar of the Biden administration’s National Cybersecurity Strategy is to harmonize regulations. Yet government agencies continue to issue conflicting mandates that will divert resources from security to compliance.

One such example is the Federal Acquisition Regulations rule on Cyber Threat and Incident Reporting and Information Sharing, proposed by the U.S. Department of Defense, the General Services Administration, and NSA, which is estimated to impact upwards of 94,000 companies that contract with the federal government. This proposed rule alone is conservatively estimated to impose compliance costs of $1.52 billion annually on companies that service the federal government. The benefits, however, are less easy to quantify.

Advocates of mandatory reporting claim that it is necessary so that the government can have a better understanding of cyber threats, which will help them share information on how to defend against the threats.

Even if we accept this claim — that despite the collective resources of the NSA, Cyber Command, the CIA, the FBI, the U.S. Department of Homeland Security, and a nearly endless number of federal agencies, the government still does not have a sufficient understanding of the threat landscape — the proposed regulations will not achieve the purported goal. Instead, the government will be provided with a tsunami of information with seemingly no filter.

For example, the proposed FAR rule would require companies with government contracts, and their suppliers, to report on every anomaly observed on their network — which the proposed rule calls an incident that “may have occurred”— within eight hours (yes, eight hours) of it being noticed.

Companies investigate potential security incidents every day. Therefore the Cybersecurity and Infrastructure Security Agency could receive hundreds, potentially thousands, of reports each day on incidents that “may” have occurred. CISA will be quickly overrun with unverified and inaccurate information on security incidents that either didn’t occur or have no impact. The task of sorting through a mammoth amount of data will make it more difficult to provide actionable threat intelligence back to industry.

As such, at a minimum, the FAR regulations should limit mandatory incident reporting to consequential incidents such as those that impact government data or a contractor’s ability to perform its mission.

Other government agencies also are imposing regulations that likely will have a detrimental impact on security. The most high-profile of these is the SEC’s Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure rule, which creates another set of governance and reporting requirements for publicly traded companies. Under the SEC rules, publicly traded companies would have to publicly announce when they experience a cyber incident that has a “material impact.”

Under these regulations, companies must publicly disclose incidents and certain details even if doing so puts them or other companies at greater risk. For example, if a company is still remediating an attack, it faces the prospect of being attacked again by other actors who know that the company is already busy responding to the initial incident. Public information about a successful attack will undoubtedly be scrutinized and used by attackers.

Companies are anxiously awaiting the next round of regulation, due in March, when CISA issues its initial proposed regulations to implement CIRCIA. This law was passed in 2022 and requires companies to report incidents to CISA within 72 hours. Key areas of focus will be which companies will be required to report incidents and what type of incidents they will need to report.

These examples reflect only a sample of the regulations and mandates from just the federal government. States are developing their own set of cybersecurity requirements. This will make both security and compliance more difficult and costly.

Our nation faces a complex range of cyber threats. Nation-states are using their cyber armies to attack America’s critical infrastructure and government. They are actively stealing intellectual property and, according to the FBI, are lurking on networks waiting to pounce when the time is right. Unfortunately, the government’s response to this is to create a complex regulatory, compliance, and reporting environment that is both duplicative and contradictory.

It may not be realistic to begin the immediate rolling back of regulations and mandates. However, it is essential that the government collectively pause on issuing new cybersecurity regulations and mandates to focus on the much-needed regulatory harmonization.

Scott C. Algeier is Executive Director at IT-ISAC, a not for profit organization of companies dedicated to enhancing cybersecurity by sharing threat information.

A bold vision requires bold action, and the most effective way for the U.S. government to take the lead in realizing the change it and its partners seek in the digital world is to get its own house in order. To do so, it must prioritize ensuring that its marketplace reflects the values it promotes by addressing the risks that persist from its IT monoculture.

The federal government is the largest consumer of goods and services in the world, spending roughly $600 billion each year—including more than $100 billion on IT and cyber investments. A large majority of these investments are directed toward Microsoft. Relying so heavily on a single IT provider not only increases the target profile of that provider, but also limits the ability of the government to defend itself against future cyberattacks. As Sen. Eric Schmitt, R-Mo.,recently stated, “only meaningfully employing one vendor” creates a single point of failure that adversaries can exploit.”

These concerns have been echoed across government agencies, including the U.S. Departments of Veterans Affairs and Defense. Current and former officials tied the VA’s move to go “all-in” on a single vendor to the accidental disclosure of 1,500 U.S. veterans’ personal data. Similarly, former DoD senior officials questioned the department’s decision to replace its long-running cybersecurity program with off-the-shelf tools from the same vendor providing the DoD’s software and cloud services, calling the move an “unacceptable level of risk” for the department.

In December, with the passage of the 2024 National Defense Authorization Act came lawmakers’ agreement to a key insert to the act by Sen. Schmitt (section 1553) compelling the Department of Defense (DoD) to assess the cybersecurity capabilities of the technologies it uses so as to ensure competition and interoperability—the concern being that both competition and interoperability are hindered by the DoD’s overreliance on legacy vendors. Cybersecurity experts know that an impartial analysis will likely find the DoD’s overreliance on a single vendor is severely limiting competition and interoperability, and is as a result a threat to U.S. national security.

The DoD represents the largest portion of the U.S. government marketplace, but the need to diversify IT and cybersecurity vendors extends across the government and aligns with the Biden Administration’s National Cybersecurity Strategy. The strategy is rooted in two central themes: rebalancing the responsibility to defend cyberspace and realigning incentives to favor long-term investments. As part of this, the U.S. government and major technology providers are called on to protect data, assure the reliability of critical systems, and make cyberspace more resilient and defensible over the long term.

The best place to start is in its own marketplace—where the U.S. government has the most control. For the government to best protect its systems and invest in a secure digital ecosystem, it must foster greater competition and diversify the vendors it relies on to provide and secure its digital ecosystem. Doing so would drive the values the administration seeks to realize in the broader digital world and enhance our national security posture. Additionally, such a move in the largest marketplace in the world would be a major incentive to drive change and almost certainly reduce the need for extensive regulation to enforce an open, free, interoperable market.

Until the U.S. government’s marketplace exemplifies its vision for the broader digital world, it can’t expect to lead others in realizing such a vision—at home or abroad. The U.S. government should prioritize leading by example and ensure its IT marketplace fosters competition, privacy, and security, and ultimately by selecting a more diverse set of cybersecurity and IT vendors. In this way, the U.S. government will lead by example, not exception, in bringing about the global internet and technology ecosystem that it envisions at home and abroad.

Cory Simpson is the founder and CEO of Gray Space Strategies, Inc., a professional services and strategic advisory firm based in Washington, D.C., and serves as CEO of the Institute for Critical Infrastructure and as a Senior Advisor to the Cyberspace Solarium Commission.

A Fairbanks man who defrauded the U.S. Government for a Ford Explorer, cash and other kickbacks agreed to a plea deal on Monday.

Kevin Mahler pleaded guilty for his part in a conspiracy to inflate project costs and take illegal payments on contracts for commercial flooring services at a U.S. Army facility in Fairbanks, Alaska. Over five years, he received more than $100,000 in kickbacks from the owner of a commercial flooring company, according to documents filed by federal prosecutors.

Mahler and flooring company owner Benjamin McCulloch inflated the costs of flooring subcontracts administered by Fort Wainwright. Then McCulloch paid roughly half the proceeds to Mahler. Between 2016 and 2021, Mahler received cash, a 1997 Ford Explorer, Apple watches, TVs, workout equipment, cash and an all-terrain vehicle from McCulloch. Mahler did not report this income to the Internal Revenue Service. McCulloch already pleaded guilty to his role in the crimes.

“Taking advantage of U.S. taxpayers by defrauding U.S. Army facilities is a crime and will not be tolerated,” said Deputy Assistant Attorney General Manish Kumar of the Justice Department’s Antitrust Division in a news release. “The Justice Department’s Procurement Collusion Strike Force will hold accountable individuals who conspire to illegally profit — through kickbacks or otherwise — at the expense of the public.”

Multiple agencies, including the Antitrust Division’s San Francisco office, the U.S. attorney’s office for Alaska, the FBI Anchorage field office, and the IRS Criminal Investigation’s Seattle office, are investigating the case.

Mahler could be sentenced to up to 10 years in prison and a fine of $250,000.

WASHINGTON — America’s defense industry needs “generational” change to keep pace with competitors like Russia and China.

This is the Pentagon’s assessment in its first-ever National Defense Industrial Strategy, arriving at a moment of extreme demand. The U.S. is supporting partners threatened abroad — including Ukraine, Israel and Taiwan — forcing careful management of American aid and readiness.

“This strategy is about balancing the tension points,” said Halimah Najieb-Locke, the Pentagon’s acting deputy for industrial base policy, in a briefing with reporters.

The document is a self-described “call to action,” with almost 50 pages of recommendations to build a “fully capable 21st century” defense sector. It features the Pentagon’s most up to date thinking on the health of its suppliers, stretched thin after Russia’s invasion of Ukraine and the disruptive COVID-19 pandemic. America still builds the best weapons in the world, the strategy says, but that alone isn’t enough in a more competitive world.

The U.S. “must have the capacity to produce those capabilities at speed and scale to maximize our advantage,” it says.

That advantage may be narrowing in part because of America’s main competitor. In the last 30 years, the document says, China “became the global industrial powerhouse in many key areas — from shipbuilding to critical minerals to microelectronics.” China’s capacity, the document says, in some cases surpasses that of America and its allies in Asia and Europe.

Still, Cynthia Cook, a defense industry expert at the Center for Strategic and International Studies think tank, says China’s advances are only part of what’s motivating this work.

“I would not say that that’s the entire purpose … behind the strategy,” she said.

Instead, Cook said, the document is meant to be the summit of more than six years of Pentagon work. Former President Donald Trump ordered the Defense Department to review its industrial base early in his term, leading to a report issued in 2018. Since then, more reviews have followed, including one on supplier competitiveness.

“All of these factors together make it fairly clear that it’s time for a rethink of how the department manages industry,” said Cook. “Without a strategy, it’s going to be one-offs here and there.”

The document is split into four sections, focusing on supply chains, workforce, Pentagon acquisition and the American economy overall. There are more than two dozen recommendations, which include diversifying the Defense Department’s suppliers, training more workers for industry-related careers, increasing commercial acquisitions and sharing more technology with U.S. partners.

Neither the problems nor the remedies listed are new. They aren’t meant to be, said Cook. The value of the strategy, she said, is its ability to coordinate industrial base work across the Pentagon, including in the services.

“Part of this strategy is really marshaling a lot of what we’ve already been doing within the department,” said Assistant Secretary of Defense for Industrial Base Policy Laura D. Taylor-Kale, also speaking at the briefing.

Specifically, she referenced a map of the supply chains for 110 different weapons systems the Pentagon has been developing since November. This map, added Najieb-Locke, will help find links further down the supply chain that are particularly brittle — whether due to approaching obsolescence or being a single point of failure.

Speaking at the Reagan National Defense Forum in December, Undersecretary of Defense for Acquisition and Sustainment Bill LaPlante said the document is also meant to be a broader signal to industry.

Najieb-Locke elaborated on that point Thursday. On one end, the strategy is meant to signal longer-term commitment to its current suppliers by putting the department’s goals in writing. On the other, it affirms that the Pentagon needs to work more with non-traditional companies, particularly those in the innovation space.

“We’re answering the industry’s call for consistent demand signal by organizing ourselves and targeting our efforts,” she said.

Despite that, some former defense officials and analysts who spoke with Defense News were skeptical of the strategy’s value. Heidi Peters, a defense industry expert at the RAND Corporation think tank, questioned why there needed to be a new strategy when the Pentagon already publishes so much literature on industry.

David Berteau, president of the Professional Services Council, which represents government contractors, said the strategy was a good “first step,” but he wants to see more attention paid to sustaining systems rather than just buying them.

Even more, Berteau said he was focused on how the strategy would be implemented, something he said is “more important than the strategy itself.”

While reshaping the defense industry may take a generation, the document said, it has shorter-term goals for the next three to five years. The Pentagon expects to publish an unclassified implementation plan in February — and a classified one later in March, said the officials briefing Thursday.

The classified plan will focus on many of the existing authorities the Pentagon has, such as the Defense Production Act, which Taylor-Kale said are “underutilized.”

The implementation plan will feature a list of priorities and metrics to gauge the strategy’s success, said Najieb-Locke. One of those priorities in the next five years is to create a faster and more stable supply of “long lead items,” which slow production, she said. To do so, she added, the department will have to better track its lower-tier suppliers, who sometimes don’t even know their work is supporting the Pentagon.

That need makes it more important for the Defense Department to continue speaking with partners across the government and in industry, Taylor-Kale said.

“We’re not going to come out of our our offices, so to speak, talk to people in and then go back in and shut the door,” she said. “We’re continuing the conversation.”

Indeed, when Boeing first won the deal to build what’s now known as the KC-46, the defense contractor said it would use a “low-risk approach,” basing its design on the existing Boeing 767 commercial airplane. The contract was firm-fixed-price, meaning Boeing was on the hook if costs ran higher than expected.

Nearly 13 years later, Boeing has absorbed $7 billion in cost overruns, far more than the contract value of $4.9 billion. For years, the tanker, designed to refuel aircraft in flight, has been plagued by delays, production errors and a faulty vision system that required a complete redesign.

While Boeing has paid the financial price, the company and the Air Force have spent years trying to make the program work. The initial contract award called for the combat-ready tankers to arrive in August 2017; the first arrived in January 2019.

In the years that followed, the KC-46 program was beset by further delays, including production line problems that regularly stalled deliveries and an underperforming vision system. That system is years behind schedule and expected to come in October 2025.

Boeing’s experience with the KC-46 and other programs in recent years has turned into a “cautionary tale” on the risks of entering into fixed-price development contracts, said Steven Grundman, a former Pentagon industrial base chief who now works as a senior fellow at the Atlantic Council think tank.

The KC-46 story “makes both sides of the market — the Pentagon and the contractors — sharpen their pencils,” Grundman said. “The Pentagon will be more cautious about programs that it thinks [lend themselves to] an efficient and effective fixed-price contract type. And contractors will be more discerning about the readiness of their engineering chops and the ability of their balance sheets to absorb risk.”

While analysts don’t expect the Pentagon to entirely shy away from fixed-price contracts, they said the military and businesses will think long and hard about which future deals make sense for such a contract structure — and when another path might better serve a program.

Air Force Secretary Frank Kendall, who was the Pentagon’s deputy acquisition chief when the original tanker contract was awarded, has said the service didn’t look closely enough at some design elements and wasn’t skeptical enough of the rosy picture Boeing painted.

And he has acknowledged a cost-plus contract, meaning one that covers a company’s expenses as well as some profit, might have been a better choice — for both sides.

“In a fixed-price, you’ve got to let the contractor kind of do what it wants because he’s taking the risk associated with the cost,” Kendall said.

L3Harris Technologies’ chief executive told investors in an April earnings call that concerns over the risk of fixed-price contracts prompted the company to pass on two opportunities it otherwise found “exciting.”

“It’s very hard to commit to a fixed-price development program when you don’t know the spec,” Chris Kubasik said. “We all look back at all the write-offs and losses, and more times than not they’re tied to that. So we will not be playing that game.”

‘No quarter’ for fixed-price mistakes

Under firm-fixed-price contracts of the kind Boeing received to build the KC-46, the contractor agrees to deliver a product or service for a hard-and-fast price, and shoulders the cost of any overruns or changes that weren’t originally agreed upon with the government.

But while the contractor bears the brunt of the risk under a fixed-price deal, it can also pay off considerably if the company plays its cards right. While other forms of contracts limit profit margins to between 5% and 12%, under a fixed-price contract, companies can keep any leftover money. If they come in under cost, they reap all the benefits.

Bryan Clark, the director of the Center for Defense Concepts and Technology at the Hudson Institute think tank, said there will always be a place in the Pentagon for fixed-price contracts.

“The idea of fixed-price contracts is still very popular within the [Department of Defense] because contracting officers like it; it’s a good way to show that you’re holding the line” against cost overruns, Clark said.

Some contracting experts said fixed-price deals can make sense for straightforward projects, but more complicated development programs are not necessarily an ideal fit.

Defense industry analyst Loren Thompson said if a company can’t turn a profit on a program — or worse, starts bleeding cash as it spirals — the company might start looking for places to cut corners to save. That, he explained, can lead to moves detrimental to the program over the long run — and perhaps years of delays and headaches for the client, even if they’re not financially on the hook.

“If you’re not breaking even on a program, then you start thinking: What don’t I have to do that was in my original plan?” Thompson said. “And it can lead to trouble.”

(Thompson previously consulted for Lockheed Martin, though he no longer does so. Lockheed and Boeing contribute to the Lexington Institute think tank, where Thompson is chief operating officer.)

Boeing’s KC-46 experience shows companies can’t expect the Pentagon to bail them out if things start to go sideways on a fixed-price contract, Grundman told Defense News. During the Cold War, he said, the Pentagon was more willing to help when such a contract started to balloon out of control and endanger a company. But those days are gone, he noted, ever since the wave of industry consolidations led to mega-firms with multibillion-dollar revenues.

“The Pentagon is going to give no quarter to companies that make mistakes in how they bid on these things,” Grundman said. “These [primes] are big boy companies, [with] big balance sheets that the Pentagon can ask to bear more risk.”

In recent years, Boeing has made more than one big bet on a fixed-price program. In 2018, the company won deals for the T-7A Red Hawk trainer, MQ-25A Stingray tanker drone and VC-25B Air Force One programs, all fixed-price efforts that have contributed to billions of dollars in charges for Boeing.

“Boeing wanted to win the work, so they went for these fixed-price [research and development] contracts and lowballed it, and now they’re suffering,” Clark said.

Lockheed Martin lost three major contracts to Boeing in 2018, including the T-7 and MQ-25. Lockheed’s chief executive at the time, Marillyn Hewson, told investors that if the company had matched Boeing’s price, then Lockheed would have lost more than $5 billion.

The Trump administration’s hardball renegotiating of the VC-25B contract with Boeing — which CEO Dave Calhoun has publicly lamented — also ratcheted up the company’s risk.

“There was a lot of risk in that [Air Force One project] because it’s not easy to convert a plane that already exists to perform a different function,” Clark said. “The government squeezed them pretty hard to give them a fixed price, and [Boeing] had to lowball it, and now they’re having to take those losses.”

Boeing, still smarting from the contracting licks it took — and, for now, will continue taking — is going to great lengths to show its investors it learned lessons.

“Rest assured, we haven’t signed any fixed-price development contracts, nor [do we] intend to,” Boeing’s chief financial officer, Brian West, said in the company’s October earnings call.

And on Dec. 4, a Boeing spokesperson confirmed the company is no longer competing to provide the Air Force with a successor to the E-4B Nightwatch, a so-called doomsday plane meant to serve as a survivable command, control and communications center during nuclear war.

“We are approaching all new contract opportunities with added discipline to ensure we can meet our commitments and support the long-term health of our business,” the spokesperson told Defense News.

Reuters reported the service’s insistence on using a fixed-price structure for the contract, which Boeing has sworn off, was an insurmountable disagreement.

Boeing declined to confirm whether a fixed-price dispute was a factor, and the Air Force declined to comment on the ongoing competition.

Clark said Boeing’s experience has prompted firms to be more wary of fixed-price contracts and more reluctant to accept those kinds of deals during the higher-risk research and development phase.

“There’s definitely been a new openness on the part of DoD contracting officers to accept cost-plus [contracts] on the R&D side,” he said. Companies now say they “want R&D to be a cost-plus endeavor, where we’re getting covered in terms of our overruns. Because the government always asks for something pretty ambitious, therefore, it makes sense that the government helps to pay for or cover the risk associated with those ambitious goals.”

No ‘vanilla Wedgetail’

For its B-21 Raider bomber, the Air Force has applied both a cost-plus and fixed-price approach. The service used a cost-plus approach for the 2015 contract it awarded Northrop to develop the Raider, and the soon-expected low-rate initial production contract will use a fixed-price structure.

That cost-plus structure raised eyebrows at the time, particularly from the late Sen. John McCain, R-Ariz., who worried it would lead to cost overruns and schedule slips. But after the Raider’s on-time and on-budget rollout in December 2022, former Air Force Secretary Deborah Lee James said it was clear the cost-plus structure and the way the Air Force had managed Northrop Grumman’s incentives worked.

Clark also praised the Air Force’s contracting approach.

“That’s obviously partly a function of Northrop Grumman’s superior execution, but it’s also a function of the contracting in a way that’s sustainable for the company,” he said.

But Thompson, the defense analyst, said rockier roads could lie ahead for Northrop in the production phase. Several times last year, the contractor’s chief executive, Kathy Warden, cautioned investors it’s unlikely the B-21 will initially turn a profit, and that Northrop could lose up to $1.2 billion on the low-rate initial production contract.

In January 2023, Warden attributed the rising cost estimates for the low-rate initial production contract to “unprecedented” inflation, supply chain disruptions and labor issues. However, she expressed confidence the B-21 would keep driving future growth for Northrop.

But Thompson said inflation isn’t the entire story here, as Northrop had bid aggressively to win the coveted and highly advanced bomber contract.

Northrop “actually underbid an aggressive proposal from Boeing and Lockheed,” Thompson said. Now “they’re concerned about how little money they may make on production. The way they presented this publicly is, ‘Oh, we forgot to put an inflation clause in the contract.’ And maybe that’s close to it, but when you have a very challenging concept for a future program and you bid fixed price, it’s a crapshoot.”

The Air Force’s $1.2 billion deal in March for Boeing to start rapid prototyping of the E-7A battle management aircraft took a different approach. That deal uses the cost-plus structure, the Air Force said.

In a statement to Defense News, the Air Force said it chose that approach to balance the risk between the service and Boeing, and because of modifications the American version of the E-7 will require.

The Air Force’s E-7 will be based on the configuration Boeing is already making for the United Kingdom, the service said, but its design will be tweaked to meet the United States’ standards for satellite communication, military GPS, and cybersecurity and program protection requirements.

The Air Force’s use of a cost-plus contract for E-7s, which will replace its aging and retiring E-3 Sentry fleet, makes sense because of the modifications, Clark and Thompson said. Australia also flies the E-7, which it dubbed Wedgetail, but its version too differs in several ways from the American one.

“This is not going to be a vanilla Wedgetail,” Thompson said. “Wedgetail has been flying a long time, and it’s a sole source for Boeing. From the Air Force’s point of view, those two facts make … going fixed price sound more reasonable. But I think that underestimates how much uncertainty there is in the integration and future evolution of the airframe.”

If the Air Force conducts rigorous oversight on the E-7′s prototyping, Thompson said, the cost-plus structure could give Boeing the flexibility it needs to meet the cost requirements while netting a decent return. And in return, he said, the Air Force could get a better product out of Boeing.

“Wedgetail presents an opportunity to rigorously balance the concerns of the customer with those of the contractor,” Thompson said. “As long as that [government oversight] happens, giving the contractors a little more flexibility can pay big dividends.”

Boeing had a stronger hand with which to negotiate, Clark said, since there wasn’t another ideal candidate to replace the older airborne warning and control system aircraft. Boeing was “in a good position and felt like they didn’t need to underbid everyone else,” he added.

But Thompson said the Air Force’s move to a cost-plus structure for the E-7 may be a sign of lessons learned about the risks that can come with fixed-price contracts.

“Kendall understands acquisition better than anybody else in the [Pentagon’s] E ring,” Thompson said, referring to the building’s outer ring of hallways where many of the military’s most senior leaders have their offices. “And I think he has relearned an old lesson: You get what you pay for. You can either pay for it up front or you can pay for it down the road, but at the end, you get what you pay for.”