March 16, 2023

ICYMI: At Hearing, Warren Questions Navy Acquisition Nominee on Reining in Unnecessary Spending

Washington D.C. – In case you missed it, at a hearing of the Senate Armed Services Committee, U.S. Senator Elizabeth Warren (D-Mass.) questioned Nickolas H. Guertin, nominee to be Assistant Secretary of the Navy for Research, Development, and Acquisition about how the Department of Defense (DoD) could reform progress payments to prevent price gouging and get programs on schedule.

In response to Senator Warren’s questions, Mr. Geurtin committed to evaluating a reform proposal that would condition or lower progress payment rates to contractors – a proposal that was defeated by the defense industry during the Trump administration.

In June Senator Warren and Representative John Garamendi (D-Calif.) introduced the Stop Price Gouging the Military Act to strengthen acquisition laws to help prevent price gouging by DoD contractors. The bill included a progress payment pilot modeled on the Trump administration proposal. Mr. Guertin agreed with Senator Warren that DoD has to look at changing the way they do business, saying “I'm all about getting the best possible deal for the American people. No question. And I'm also very interested in innovative business models that get us to that end, and that sounds like a great opportunity.”

Transcript: To consider the nominations of Keohane and Guertin
U.S. Senate Committee on Armed Services
Wednesday, March 15, 2023

Senator Elizabeth Warren: Thank you, Mr. Chairman. Mr. Guertin, you've been nominated to manage the Navy's acquisition programs, in other words, how the Navy buys things to build and to maintain the fleet. So let's start with something easy.

When the military makes a purchase, should it pay whatever the company demands? Or should we be using taxpayer money only to buy things where a price is justified by costs, and we receive a quality product on time?

Nickolas H. Guertin, Assistant Secretary of the Navy for Research, Development, and Acquisition Nominee: Senator, the nature of the contracts for the things that we use to, to buy this military equipment absolutely should be rigorously applied, we should make sure we're paying for the things we get. There's a variety of different contract types, and they all have their ways of managing cost to make sure the work is equitable and fair.

Senator Warren: Right. But, but I just want to be sure that we're saying the same thing. That what we're looking for, before we agree to pay for anything, is that the price is justified by cost and that we have a right to expect on time performance. Basically right?

Mr. Guertin: Basically right. But Senator, let's make sure we're not talking about, you know, different kinds of animals that are still fixed price contracting, in which case, I'd completely agree with you, then when we are there, there's more technical risks where the outcome is more uncertain, then that may be a better place to put cost-plus contracting where the cost might not necessarily–

Senator Warren: Okay, but that’s still justified by costs, they're just different ways to calculate it. That's all I'm getting at. Because one of the tools that DoD uses to get things made faster is what's called progress payments. And that's where I want to ask more. So rather than pay for a project, when it is fully complete, a company that's getting a progress payment gets advanced funding before they've finished building a ship or a plane, so that they can cover the large capital investments that they need to make in order to do the job. I understand that.

One of the ways that DoD responded to the pandemic was to hike the rate of advance payments to contractors so they got even more up front. Now, let's be blunt, there was no data to suggest that that was necessary. But I understand that DoD was trying to help workers and the defense industrial base withstand an unprecedented emergency, I get that. But DoD is conducting a study now to determine how to reform progress payments, now that the pandemic has eased. So do you agree that if the study shows that increased payments did not help DoD, that we should reevaluate using this method?

Mr. Guertin: Senator, as you might imagine my current role, it's all about the data, we want to analyze using data and make sound decisions based on actual information. And so first of all, I think you're really onto something. I bet there's, there's a pony in there somewhere. But I think we should make sure we have the data that backs it up.

Senator Warren: Okay, as long as we will act on those data, the data show the progress payments are not really helping us here. You know, I don't say this very often. But I think the Trump administration had a really smart idea for how to make progress payments work even better. They were sick of programs being behind schedule and over cost, so they proposed tying the size of the progress payment to program performance, and then sharing cost and, and pricing data.

Companies that deliver on time and provide all the data would get their money up front. The industry hated President Trump's reform proposal, and they managed to defeat it. But I think it's worth reviving. So let me ask would you support conditioning or lowering the progress payment rate if it means that ships and airplanes will be cheaper and are more likely to arrive on time?

Mr. Guertin: Senator, first and foremost, I'm all about getting the best possible deal for the American people. No question. And I'm also very interested in innovative business models that get us to that end, and that sounds like a great opportunity. I would love to explore it.

Senator Warren: All right, you know, look, failing to conduct proper oversight to control costs hurts our national security and it hurts our ability to build the force we need to support our national defense strategy. We need to ensure that our acquisition policies are getting a good deal for the military, and not just lining the pockets of giant contractors. Let's work together on it. Thank you.

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