The art of the deal in government contracts is much more complex than in the private sector because public policies and principles attach to the use of public funds.
President Donald Trump has made his federal procurement debut, announcing on January 30, 2017 that Lockheed Martin had agreed to cut $600 million from its next production lot of F-35 Joint Strike Fighter planes. The Washington Post quickly confirmed that the $600 million cost-savings deal was not, in fact, a product of Mr. Trump’s negotiations, but rather the result of cost reductions already planned by the Obama administration’s Department of Defense (DOD).
Nevertheless, President Trump claimed that, after “no movement,” he personally had been able “to get $600 million approximately off those planes.” Subsequently, on February 3, 2017, there was another announcement that Lockheed was increasing the savings to $728 million on the contract for 90 F-35 jets.
Trump’s announcement capped weeks of discussions that were triggered by a pair of tweets late last year. And, as with many of his other political forays, Trump’s latest Lockheed announcement raises more questions than it answers. In fact, the foremost question on many contractors’ minds in the wake of an extraordinary series of negotiations is “Can he do that?”
On December 12, 2016, at 5:26 a.m., and again on December 22, then-President-elect Trump issued the following tweets — seemingly out of the blue — targeting the costs of Lockheed Martin’s fifth-generation F-35 fighter jet program:
As his announcement of the $728 million price cut shows, President Trump hardly forgot about Lockheed in the days and weeks since the December tweets. He also gave notice shortly before his inauguration — at his first and only press conference as president-elect — that Lockheed was still very much in his sights:
I’m very much involved with the generals and admirals on the airplane, the F-35, you’ve been reading about it. And it’s way, way behind schedule and many, many billions of dollars behind budget. I don’t like that.
And the admirals have been fantastic. The generals have been fantastic. I’ve really gotten to know them well.
And we’re going to do some big things on the F-35 program and perhaps the F-18 program. And we’re going to get those costs way down, and we’re going to get the plane to be even better and we’re going to have some competition.
And it’s going to be a beautiful thing.
Lockheed’s stock immediately plunged by 1.6 percentage points.
This followed the nearly 2 percent hit that Lockheed’s shares took in the wake of the tweet in which Trump announced that he was inviting Boeing to compete its F-18 against the F-35. And investors watched as the value of Lockheed’s shares climbed back up by nearly a percentage point on January 13, after Lockheed’s CEO announced a productive meeting with Trump.
These are classic hardball negotiation tactics to be sure — with one of the country’s largest and most powerful corporations rising and falling by the tone and tenor of its public relationship with the president-elect. But how do these tactics fit into the densely regulated field of government contracts?
Here, we address the slew of questions these tweets raise across the landscape of federal procurement.
Wading Into the Federal Acquisition Regulation
President Trump, no doubt an experienced negotiator in the private sector, has now asserted himself in a field where negotiations and deals are subject to a regulation so dense that the bound spines of its printed copies, with sheets so thin as to almost be translucent, stretch more than 50 centimeters wide. The Federal Acquisition Regulation (FAR) reaches nearly all aspects of contracting with the federal government — and the Department of Defense’s agency supplement almost doubles the amount of material to which defense contracts are subject.
Where should Trump’s tweets be placed within the regulation? While there are numerous implications, we focus here on three key issues: delegation of authority, market research requirements and competition requirements.
A Contracting Officer’s Authority, Delegated From the Top
As firms familiar with government contracting know well, Contracting Officers (COs) are the only government personnel who have the authority to bind the government into contracts. That authority, however, is a delegated authority.1 A Department of Defense CO’s authority is delegated down from the Secretary of Defense, whose authority, in turn, is delegated down from the president. In theory, then, a president could serve as Contracting Officer in Chief, negotiating and signing contracts on behalf of the United States.
A president-elect, though, has not yet taken the oath of office and does not have any authority to delegate or to exercise. A president-elect may not conduct contract negotiations on behalf of the United States, no matter how enticing the deal.
Twitter Tactics: Permissible Market Research?
As many a CO is fond of reminding agency counsel, the FAR tells agencies that, when a particular acquisition strategy is not specifically prohibited, agencies may pursue it if it is in the government’s best interests. It is an exhortation to creativity, embraced with enthusiasm by many strategic thinkers on the government side.
Does this extend to tweets? A CO may certainly reach out to specific firms to invite their participation in an upcoming competition. But this is generally done in the context of acquisition planning — setting the stage for competitions and contracts to come — not contract administration, with a contract already in place and costly work already well underway.
It is also generally done as just one of a series of market research conversations meant to test the market capability for meeting a government need, as well as to drum up interest within the industry. COs are encouraged for ethical reasons not to simply target one favorite — or to give the appearance that one firm is a favorite — but to reach out to a handful of sources that might reasonably be able to compete. If the president-elect had tweeted along these lines, we might have expected to see tweets to other major defense contractors as well.
But there are real disadvantages to a public conversation. Generally, we speculate about questions of this nature — sometimes with more confidence than others — in an attempt to discern what effects certain actions may have triggered. And yet this is a situation in which one can measure those effects in real numbers: $1.2 billion. That is the amount that Lockheed lost the day after the Boeing tweet. Lockheed, as a company, immediately became nearly 2 percent less valuable in the wake of then-President-elect Trump’s “statement.”
If this becomes a pattern of presidential practice, Lockheed may find itself with company. And as this one incident ripens into a method, its effect on stock prices could leave American companies vulnerable to foreign competitors, undermining domestic economic activity and creating an additional barrier to success for American firms.
Ensuring Full and Open Competition Under the Law
If one principle is foremost in federal procurement, that principle is the fundamental importance of full and open competition. The Competition in Contracting Act requires it as a matter of law and as a baseline in government procurement: The bar is set high for COs who intend to skip competition in favor of one firm the government has singled out for award. The FAR requires layers of internal justifications and approvals, and agency regulations and internal rules often require even more.
Fairness — and the appearance of fairness — in competing for business with the sovereign is the foundation on which our ethical procurement system rests. This means that no CO — president or otherwise — can cut through a field of close competitors and single out one as the lucky firm that gets to compete.
But there is a flaw in the Lockheed deal on a much simpler level — a flaw in basic negotiation strategy, and one that has nothing to do with the intricacies of the FAR or federal procurement law. Although it may seem as though inviting a competitor to jump in and offer an alternative path forward will lead to price competition, cutting to the chase with Boeing and freezing out the rest of the defense contracting pack right at the threshold actually has the effect of decreasing the field of competition, and decreasing the opportunity for price competition. When a CO shrinks the field of competition, the taxpayer loses.
It bears noting, in all of this, that the F-35 contract was in fact competed from the outset.
President Trump’s Other Strategic Considerations
Despite the foregoing limitations, Lockheed CEO Marillyn Hewson made a statement following her January 13 meeting with then-President-elect Trump that Lockheed was “close to a deal” to cut costs of the F-35 and that Lockheed anticipated adding 1,800 jobs. It is unclear to what extent the $600 million cost reduction relates to an earlier unilateral price decrease imposed by the DOD for the latest Low Rate Initial Production (LRIP) contract. The cost reduction and any new jobs could also be attributable to Lockheed’s eagerness to establish good graces with the new administration, particularly considering previous administrations’ track records for terminating large programs that were perceived to be over budget (e.g., President Obama’s cancellation of Lockheed’s Marine One program in 2009).
The next question is how President Trump may approach future negotiations with Lockheed. If, for instance, President Trump were to attempt to leverage (i.e., threaten) Lockheed’s ability to retain existing contracts and compete for future federal work in an effort to pressure a price reduction, he would again find that the regulatory framework for federal contracting deviates from the commercial world and that this hardball commercial approach may produce unwanted results.
What if President Trump were to simply threaten to terminate the F-35 contract? The FAR does grant the government discretion to terminate an existing contract without cause when it is in the government’s interest. The termination regulations, however, have well-defined principles on reimbursing contractors for work they have already performed on the terminated contracts, likely resulting in a significant payout to Lockheed — and without the receipt of a single fighter jet in exchange for the money. Assuming that there is still a demand for the aircraft, the DOD would then have to re-compete the procurement, and, absent a debarment as discussed below, Lockheed would be able to compete for the new contract, potentially putting Lockheed back where it started and turning the termination into an unnecessary and expensive publicity stunt.
Of course, despite the rhetoric and hardball negotiation tactics, future contracts, including re-competed work, will still be subject to the FAR’s strict competition rules, which would make it difficult to penalize or exclude Lockheed in a manner consistent with Trump’s tweeted disfavor. Specifically, FAR Part 15 contains detailed requirements on any solicitation issued by the government and procedures for the government’s source-selection process. Absent several narrow exceptions, the government would be required to open the new contract for competition. Moreover, the government would be required to spell out in the solicitation the terms by which it would evaluate competitors, and any deviations from those terms would open the government to lengthy and costly litigation — and, potentially, the need to start all over again from scratch.
Finally, and most unlikely, the government could have pursued or threatened a debarment, which would have effectively prohibited Lockheed from being awarded any new contracts for a specified period of time. This is essentially a death knell for any company that is heavily reliant on federal contracting, and therefore there is limited precedent for a complete debarment of a company of Lockheed’s size and stature. In light of the severity of a debarment, contractors have extensive due process rights to protect against the potential for abusive or harassing treatment.
The art of the deal in government contracts is much more complex than in the private sector because public policies and principles attach to the use of public funds. No one, least of all the U.S. taxpayer, would argue seriously for inflated prices on federal contracts. But because COs have the authority to use public funds, they also carry the responsibility to use them prudently, and according to the laws and regulations that govern federal contracting.
1 COs derive their authority from a delegation of authority from the Head of Contracting Activity. This delegation is referred to as a “certificate of appointment” or “warrant.” The warrant will specify any limitations on the scope of the authority (namely the monetary threshold), and COs may bind the government only to the extent of the authority delegated to them.