Modular Contracting May Send the Wrong Signals

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Modular Contracting May Send the Wrong Signals

By James C. Fontana, Contributing Writer

While the dust may have settled on the most recent round of federal procurement reform, scrutiny is increasing on some of the reforms affecting the government's acquisition strategy regarding information technology.

A case in point is a key provision of the Federal Acquisition Reform Act of 1996, which strongly encourages agencies to "use modular contracting for an acquisition of a major system of information technology" instead of making large, single purchases of these systems.

According to the act, an executive agency's need for a system is satisfied with successive acquisitions of interoperable increments with modular contracting. The act does not mandate modular contracting in every procurement, but contains a strong preference for its use by stating that the agency should employ this method "to the maximum extent practicable." It also provides that each increment of an infotech acquisition should, also to the maximum extent practicable, be awarded within 180 days after the date the solicitation is issued, and that each such increment should be delivered within 18 months after issuance of the solicitation.

Proposed regulations implementing the act, to be incorporated into the Federal Acquisition Regulations, were issued Dec. 4, 1996. The proposed FAR establish guidelines for agency review of the benefits and risks inherent in making modular purchases, key among them the interoperability of the discrete modules.

The proposed rules permit wide discretion in deciding whether to use this contracting method after examining the type of infotech being acquired and the nature of the system being developed. In making that decision, however, agencies are not required to follow the criteria set out in the proposed FAR. This is unusual given that FAR provisions are typically designed as mandates in procurement procedures.

The proposed FAR also recognize that modular contracting may be accomplished by multiple purchases from a number of different contractors or the purchase of multiple modules from a single contractor. The government seeks the option of using the technique with a single contractor as a means to cut its losses by stopping or altering its acquisition of future modules where necessary to limit its liability in a particular procurement.

What's wrong with this new law? Nothing, if you think the government is an efficient integrator of technology products. Federal agencies have had a generally poor record as systems integrators, especially given the government's traditional yen for micromanaging these types of procurements. In addition, although the proposed FAR encourage agencies to examine the risk of noninteroperability of the modules in deciding whether to use this contracting method, the analysis is not a strict requirement. As a result, instead of streamlining the procurement process, modular contracting can be more expensive in the long run and cause unnecessary delays in the procurement process.

It is likely, however, that agencies will embrace modular contracting more than ever before, if only because of a perception among some agency procurement officials that its use will always mean higher efficiency in the procurement process. Also, from the standpoint of some agencies haunted by prior challenges to their award selections, modular contracting is a way to spread the procurement over a larger field of players, reducing the number of potential disappointed bidders and, in turn, reducing the risk of bid protests.

Modular contracting may create an advantage for small and emerging companies because it avoids the winner-takes-all strategy of individual infotech procurements that give large integrators a huge competitive advantage. With incremental purchases, more small businesses with little or no integration expertise can compete to capture a small slice of the infotech pie rather than getting no slice at all. On the other hand, larger companies with substantial integration capabilities will usually not embrace modular contracting.

In any event, it is advisable to closely examine an upcoming infotech procurement and determine whether modular contracting will result in the most efficient process. If not, then you should point out to the appropriate procurement officer that the act is not mandatory, and that the act's preference for modular contracting would not be useful in this particular procurement.

In addition, where modular contracting is used and the government assumes the entire integration effort, demonstrate in your proposal the company's capability in providing some integration support. Chances are the government may need the support after all. For example, including integration as an unpriced option, separate from pricing the product, technical support and training and maintenance (if any) may give the agency some piece of mind in the event its own integration efforts run awry.

James C. Fontana is counsel to Reed Smith Shaw & McClay in McLean, Va., and a member of the firm's Government Contracts and Export Compliance and Technology Law Groups. He was previously senior counsel to BDM International Inc.