As defense acquisition costs have soared over the past decade, efforts at reforming the acquisition system have focused intensely on creating more opportunities for competition as a means to reduce costs and incentivize better contractor performance. While competition can, in some cases, reduce costs and improve contractor performance, it is not a cure-all for the problems that plague defense acquisitions. This paper presents a quantitative approach, using game theory to model the effects of competition on contractor pricing. It demonstrates that the way in which a competition is structured can be a determining factor in whether competitive pressure is sufficient to balance the additional development costs of multiple contractors and higher unit costs from splitting the award. Specifically, the way contractors are incentivized to bid (or not bid) depends on the number of rounds of competition, the number of units awarded in each round, and the split in award between the winner and loser for each round. The analysis reveals that in some instances the structure of the competition can actually incentivize contractors to bid higher and drive up costs.

The way a competition is structured can be a determining factor in whether competitive pressure is sufficient to balance the additional development costs of multiple contractors and the higher unit costs from splitting the award in defense acquisitions. In some instances, the structure of the competition can actually incentivize contractors to bid higher and drive up costs.

“Competition is a major source of productivity in the defense industry, as it is in commercial industry.”

–Former Secretary of Defense Robert Gates

“Real competition is the single most powerful tool available to the Department to drive productivity.”

–Former Under Secretary of Defense Ashton Carter

In a free market-oriented society, competition is often advanced as a sound way to achieve cost savings. As defense acquisition costs have continued to soar over the past decade, efforts to reform the acquisition system have focused intensely on creating more opportunities for competition, both to reduce costs and to incentivize better contractor performance. The Weapon Systems Acquisition Reform Act of 2009, for example, requires the Department of Defense to use acquisition strategies that “ensure competition, or the option of competition, at both the prime contract level and the subcontract level.” The law goes on to specifically identify competitive prototyping and dual-sourcing as measures to ensure competition. While competition, in some cases, can reduce costs, promote innovation, and improve contractor performance, it is not a “cure-all” for the problems that plague defense acquisitions. Rather, the cure of competition can sometimes be worse than the disease.

The purpose of this paper is to develop an analytic framework for evaluating when competition can reduce acquisition costs and how best to structure a competition to drive down acquisition costs. This analysis focuses specifically on the use of dual-sourcing as a means of ensuring competition in the acquisition of major weapon systems. It uses a competitive pricing model that accounts for how companies will be incentivized to bid under different conditions. The analysis is limited to the acquisition costs of a program from development through procurement and does not evaluate the use of competition to encourage innovation or to reduce operational risk. > read full report

This analysis was presented at the Limits on Competition in Defense Acquisition Symposium hosted by the Defense Acquisition University on September 18-19, 2012 > view slides