Tag Archives: Military Commercial Items

Defense Industry Needs New Small Business Entrants During Crisis

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DEFENSE NEWSBy: Venture capital community leaders

How can the Pentagon best preserve its innovation base and develop the most competitive and advanced technologies? The answer is simple: Buy commercial. New and emerging defense startups — and our men and women in uniform — don’t need symbolic gestures.

What they need is concerted action to bring the latest and most advanced technologies — many of which are routinely used in industry — to dangerously antiquated defense weapons systems and internal IT infrastructure. This was true before COVID-19, it is true now and it will be true when the next crisis strikes.


“The COVID-19 health crisis is quickly leading to an economic meltdown, throwing millions of Americans out of work and forcing strategic reevaluations across industries. The defense industry is no exception. We are praying for a swift end to the crisis, but its effects will linger, shaping the Pentagon’s priorities, organizational structure, military operations, logistics, supply chains and interactions with the defense-industrial base for years to come.

In the past few weeks, we have had numerous conversations with government officials about our venture and growth equity investments in the defense sector. These discussions have centered on the eligibility rules of the CARES Act’s Paycheck Protection Program and the risk of foreign capital seeking entry into defense technology startups desperate for investment in these trying times.

All too often the government has responded to crises by circling wagons around incumbent firms — the large prime contractors, whose political connections afford them bailouts in the name of “ensuring ongoing competition.” This process is already underway. After announcing its hope for a $60 billion relief package for the aerospace manufacturing industry, Boeing successfully lobbied for $17 billion worth of loans for firms “critical to maintaining national security.”

The CARES Act also announced provisions to streamline the Defense Department’s contracting process, which sounds promising, except for the fact that these provisions apply only to contracts worth over $100 million. This discriminates against smaller, more nimble innovators and providers of cutting-edge technology.

This isn’t how things have always been. After complaints about large horse dealers monopolizing military contracts during the Civil War, the government allowed quartermasters to purchase horses and mules from any dealer on the open market. In World War II, Congress created the Smaller War Plants Corporation, which awarded tens of thousands of contracts to small, competitive firms. Today, through innovative use of Small Business Innovation Research money, other transactional authorities, rapid work programs and the like, the Pentagon is certainly signaling interest in emerging technologies.

But let us be clear: We are not advocating continuing to invest larger dollar amounts into never-ending, short-term pilots and prototypes. The key to sustaining the innovation base through this crisis and any future crises is transitioning the best of these companies and products into real production contracts serving the day-to-day needs of the mission. Host tough, but fair competitions for new innovations, and then rapidly scale the winners.

America’s technological supremacy has afforded our country nearly a century of military hegemony, but it is not a law of nature. Sovereign states and peer competitors like Russia and China will quickly outpace us if we take our prowess for granted. We need new entrants into the defense industry more than ever, but without government support through crises like this one, the talent and capital simply won’t be there.

As the Department of Defense readily acknowledges, its mission is fundamentally changing. Breakthroughs in technological fields like artificial intelligence, autonomous systems, robotics, resilient networks and cyberwarfare mean that future conflicts will look nothing like those we have seen before. The DoD of tomorrow needs a fresh wave of technical expertise to understand and respond to these new kinds of threats.

That is not to say that legacy defense contractors are not needed; their expertise in large air and sea vehicles is currently unparalleled. But the expertise to build these new technologies resides in pockets of talent that the big and bureaucratic incumbents, who made their names with 20th century technology, lost access to decades ago.

The DoD has publicly exalted the importance of innovative defense startups for years. That is partly why we are so excited to invest capital into the defense sector at this moment in history. Silicon Valley has a chance to live up to its oft-ridiculed but sincere ambition to make the world a better place by investing in American national security.

However, we as venture capitalists and growth equity investors also have a duty to our limited partners who have entrusted us to invest and grow their capital. If we see the same old story of the government claiming to support small businesses but prioritizing its old incumbents, those investment dollars will disappear.

Times of rapid and unprecedented change, as COVID-19 has precipitated, also provide opportunities. The DoD and Congress can reshape budget priorities to put their money where their mouths have been and support innovative defense technologies. Each dollar awarded to a successful venture capital and growth equity-backed defense startup through a competitively awarded contract attracts several more dollars in private investment, providing the DoD significantly more leverage that if that same dollar was spent on a subsidy or loan to a large legacy contractor. This leverage of private capital means that every contract a startup receives accelerates by up to 10 times their ability to build technology and hire talent to support the DoD’s mission.

The bottom line is this: There’s no reason to let a health crisis today become a national security crisis tomorrow. The DoD has an opportunity to not only sustain but grow its innovation base, and give contracts, not lip service, to innovators. We, the undersigned, hope they do.”

The contributors to this commentary are: Steve Blank of Stanford University; Katherine Boyle of General Catalyst; James Cham of Bloomberg Beta; Ross Fubini of XYZ Capital; Antonio Gracias of Valor Equity Partners, who sits on the boards of Tesla and SpaceX; Joe Lonsdale of 8VC, who also co-founded Palantir; Raj Shah of Shield Capital, who is a former director of the U.S. Defense Innovation Unit; Trae Stephens of, Founders Fund; JD Vance of Narya Capital; Albert Wenger of Union Square Ventures; Josh Wolfe of Lux Capital; Hamlet Yousef of IronGate Capital; and Dan Gwak of Point72.


GSA Begins Pilot OTA-like Streamlined Process



The General Services Administration announced its client support center for acquisitions will use a streamlined process, designed to attract startups, to procure innovative, commercial solutions.


“As part of a pilot, GSA’s FEDSIM innovation team will rely on the commercial solutions opening (CSO), a solicitation outside the Federal Acquisition Regulation, to acquire technologies and services in the production phase or adapted from existing products from “traditional and non-traditional government contractors.”

“The goal of this pilot program is to provide a streamlined approach for acquiring innovative commercial products and services,” GSA says.

CSO is a recently created tool with simplified contract terms, which Section 880 of the National Defense Authorization Act for fiscal 2017 authorized GSA to create the pilot. It’s similar to the Other Transaction Authority of defense agencies but differs in that it’s not legally binding, GSA says.

FEDSIM will post solicitations from client agencies for specific projects of technical areas of interest as they open.

New technologies, processes, methods, applications, and adaptations at the time a proposal is submitted will be considered.

The CSO process consists of submission of a written solution brief, an oral presentation if applicable, and a request for proposal.

Currently, FEDSIM is accepting briefs for three Defense DepartmentCSO solicitations: AFWERX Hub, Marine Maker and the Joint Artificial Intelligence Center Humanitarian Assistance and Disaster Relief DAMAGE.

The Defense Innovation Unit also uses CSOs to speed up vendor selection for innovative needs.”

The Pentagon Struggle to Determine Pricing for Commercial Items



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“Defense procurement chief Frank Kendall is caught between a rock and a hard place.

He faces pressures to ease contracting rules that discourage commercial tech firms from doing business with the Pentagon. At the same time, he must placate lawmakers’ and regulators’ concerns about contractor price gouging.

“We try to strike the right balance,” Kendall said.

“The issue of how to balance the Pentagon’s desire to attract innovative commercial suppliers against the need to exert proper oversight of contractors is a tough one.

Establishing the “commerciality” of a product will continue to be a source of friction between defense buyers and contractors.

The challenge for Kendall is to ensure the government is being charged fair market prices for commercial products without necessarily subjecting vendors to intrusive audits and costly red tape. “Commercial practices and purchasing are a continuing subject of discussion,” Kendall said Sept. 2 during a lunch meeting hosted by the Professional Services Council.

“The DoD inspector general expects me to ensure fair pricing,” he said. Defense contractors, meanwhile, for years have complained to Pentagon officials and members of Congress that they are being asked to provide sensitive internal company data to the government to substantiate prices they charge for products that are sold commercially and for which price data already exists. Among the most disputed items have been aircraft spare parts.

“I get pulled by the Hill in both directions,” said Kendall. “I get pulled internally in both directions.”

For standard commercial items that are widely sold in the open market, determining a fair price is easy, he said. For defense-unique technologies and weapons whose development is entirely funded by the government, the Pentagon requires “certified cost or pricing data.”

The problem is the gray area between those extremes, such as products developed with private funds that a vendor considers to be commercial, although there may be no competition for setting the price. Some companies contend the Pentagon consistently demands certified cost and pricing data for commercial items.

“I get pulled by the Hill in both directions,” said Kendall. “I get pulled internally in both directions.”

For standard commercial items that are widely sold in the open market, determining a fair price is easy, he said. For defense-unique technologies and weapons whose development is entirely funded by the government, the Pentagon requires “certified cost or pricing data.”

The problem is the gray area between those extremes, such as products developed with private funds that a vendor considers to be commercial, although there may be no competition for setting the price. Some companies contend the Pentagon consistently demands certified cost and pricing data for commercial items.

He has directed the Defense Contract Management Agency to study better ways to make “determinations of commerciality, to make the system more predictable and more expeditious,” Kendall said.

“Fair and reasonable price is what this is all about,” he added. “It’s always going to be contentious. We’re always going to have difficulties. We will occasionally make a mistake. … But we don’t want commercial suppliers driven away from the defense market.”

Kendall addressed the issue in the latest edition of the Defense Acquisition University Journal. “I’m afraid that we will never be perfect at this, given the vast number of items the DoD procures and our limited resources.”

In most defense acquisitions, he noted, “We need to proactively look for ways to embed or insert the most current commercial technologies. … It is clear that in many areas of technology the commercial market place is moving faster than the normal acquisition timeline for complex weapon systems.”

The Pentagon last month published a proposed rule to amend the Defense Federal Acquisition Regulation Supplement to provide guidance for evaluating the reasonableness of prices using data other than certified cost or pricing data. The proposed rule seeks to clarify the data an agency can use to establish reasonable prices in situations when there is no market competition.

Contracting experts and analysts have raised eyebrows following the publication of the rule Aug. 3 because it seems to add complexity to an already complicated discussion.

“The proposed rule falls short of its goal, instead increasing confusion in the determination of price reasonableness for commercial goods that have been ‘offered for sale’ but not sold,'” wrote Covington & Burling government contracting attorneys Jason N. Workmaster and Kevin T. Barnett. The rule has “open-ended data provisions that arguably permit the agency to request almost unlimited information to substantiate the reasonableness of prices,” they noted in a Law360 article. It is the “latest example of the government considering increasing the burdens and compliance obligations on its commercial contractors while expecting the results to be lower prices.”

Contractors have been invited to comment on the proposed rule by Oct. 2.

Workmaster observed that the Pentagon appears to take the position that market based pricing may not be an appropriate means of determining price reasonableness. “And it passes the buck to the contracting officer, empowering him or her to collect what the proposed rule refers to as ‘relevant sales data.’”

Industry analyst Byron Callan, managing director of Capital Alpha Partners, criticized the rule as a “step that runs counter to greater commercial outreach. That could be a disincentive for broader commercial enterprise engagement with DoD but also may bear on avionics and military engine spare parts pricing.” The regulation would “more rigorously and quantitatively define when DoD could rely on ‘market based’ pricing of commercial items,” Callan wrote in a research note. Market based pricing typically is presumed to exist when non-government buyers in a commercial marketplace account for a preponderance — 50 percent or more — of sales of a particular item.”