Original Date: 08/07/1995
Revision Date: 01/18/2007
Best Practice : Modified Requirements Contracts
Lockheed Martin Tactical Aircraft Systems (LMTAS) addressed several pricing concerns with a goal to maintain aircraft unit price as production levels decline. Pricing concerns include uncertainty about future quantities and production rates, low rates and quantities that prohibit competition, and year-to-year instead of multiyear contracts. These problems make it difficult to maintain prices in a declining market. Existing options also offer excellent pricing at nominal-to-high delivery rates but result in premium prices at today's lower rates. These are the issues LMTAS set out to address.
LMTAS turned to its suppliers for help, and the suppliers responded by recommending Modified Requirements Contracting. This contract vehicle is defined in the Federal Acquisition Regulations 17-104.4, but primarily covers low cost commercial products. LMTAS decided to apply this to its more costly defense products.
The following rules have been established with the supplier for Modified Requirements Contracting.
There is a maximum five-year contract life. The supplier will purchase material in economic lot sizes.
LMTAS will provide a “best estimated quantity” and delivery schedule.
Prices will be predicated on an average monthly delivery rate calculation for six-month increments.
Prices will be obtained through arms length negotiations.
Pricing data is certified up-front and remains unchanged throughout the contract.
This relationship would be maintained with the supplier as long as he delivered on time, applied Statistical Process Control (SPC) to produce a quality product, and demonstrated improvements in pricing.
A benefit of this approach for the supplier is the guarantee of business without future competition. The supplier becomes a partner to LMTAS and is provided up-front all known quantities and schedules. Suppliers prefer a five- year outlook instead of year-to-year. Modified Requirements Contracting also reduces the need for the supplier to have a sales staff for LMTAS and eliminates future estimating within the terms of the contract.
The advantages for LMTAS include establishing a long-term relationship with the supplier and becoming partners in meeting Department of Defense needs. It allows LMTAS to provide quick responses to request for quotes because prices are already established with its suppliers. Request for quotes do not have to be prepared, sent out for quote, and reviewed when they were received. LMTAS has built flexibility into the contracts to adjust to changing market demands. Pre-established limits on quantities and schedules are negotiated into the contract.
By utilizing Modified Requirements Contracting, LMTAS was able to save 6% on its existing MY III contract. It resulted in 22% savings over the options features of its MY III contract. If additional quantities of aircraft are ordered, savings will also be generated on those aircraft.
LMTAS Suppliers have embraced Modified Requirements Contracting, and some have initiated it with their own suppliers. Through persistence and dedication to aggressively perform in a declining defense market, LMTAS has been able to reduce the cost of delivered products even as production rates are drastically declining. This effort is in line with present-day Acquisition Reform Initiatives.
For more information see the
Point of Contact for this survey.