WT Business Beat

By Nick Wakeman

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Nick Wakeman

Dear DARPA: 'Profit' is not a dirty word

I’ve spent an entire career writing about the government and there are still many things I don't know or understand.

At the top of that list is the government’s concern with the profits of its contractors. Government officials will talk about the need for a healthy and profitable private sector, along with how the private sector needs to be incentivized to bring innovation into the market.

That makes sense to me and I agree with that.

But the government seems to not want companies to make too much profit and that is where the logic starts to fall apart for me. That’s how I felt when I read through a recent DARPA solicitation.

The Defense Advanced Research Projects Agency has released a solicitation for a Small Business Innovation Research contract to fund the development of a tool so the government can quickly determine if a bid has a proper level of profit.

They’ve even come up with a fancy name for the research project -- R&D Automated Profit Incentive Determination, or RAPID.

DARPA will fund phase one research contracts worth $225,000 over six month. They don’t give a potential value of any award for phases two or three.

As I read the overview, I stumbled over the objective DARPA lays out. They want an “explainable and structured approach to determining a profit or fee... that better motivates performance for DOD research and development requirements while speeding up negotiation timeliness.”

OK so they want to get quicker. I understand that, but things started to fall apart for me as I got deeper into the description of what DARPA wants and why.

“DOD must negotiate profit that is not only “fair and reasonable” for the taxpayer but also stimulates “efficient contract performance, [and] attract[s] the best capabilities of qualified large and small businesses,” the notice states.

This apparently is in the Federal Acquisition Regulations but I’m stuck on that phrase “DOD must negotiate profit.” Why?

Why not focus on a tool that can quickly tell you if you are getting a fair price, regardless of profit. Then focus on competition so you are getting the best prices.

I’ll acknowledge that DARPA, because they fund R&D efforts, is different from other government agencies. The notice talks about other motivators besides profit for non-traditional companies pursuing research work. Things like cash flow, dual-use considerations, data rights and the like.

Negotiate those things. Who cares if your vendor is making 5 percent profit or 55 percent profit? Are you getting a fair price? Are you saving money? Are you getting results? Those are the important questions.

In fairness to DARPA, the notice does talk about the need to move away from the legacy approach of negotiating profits. But the best way is to move away from negotiated profits in the first place.

DARPA says it wants to learn about these other motivation factors such as cash flow and dual use. That’s great. But it seems that they want to learn about those factors as a way to then negotiate what the profit should be or how to use profit as a motivator.

I’m lost. There is no need to negotiate profit. Let the market do that. DARPA and the rest of the government needs to embrace that concept.

Posted by Nick Wakeman on Mar 17, 2021 at 1:34 PM

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