By: Robert G. Bugge, August, 2014 © 2014 All Rights Reserved
The US government is the largest consumer of goods and services in the world. If you include state governments the combination represents 75% of the entire US market for goods and services. The application of AM within US Government contracting will have wide-ranging, disruptive effects on the business, economic and procurement models currently in use by US Government departments and agencies as well as the contractors that sell to and support them.
Procurement of all goods and services by the US Government is strictly governed by the Federal Acquisition Regulations (“FAR”) with each agency of the Government having its own supplemental set of regulations to deal with the unique aspects of their procurements e.g., Department of Defense Federal Acquisition Regulation Supplement (“DFARs”).
These regulations have extensive coverage regarding how procurements of goods and services are conducted and the content of the contracts awarded, including the ownership of intellectual property (“IP”) rights. In the context of Federal procurement, there are the IP rights of the contractors that sell their products to the Government and the IP rights of Government departments and agencies to the products that they have paid the contractor to develop with Federal funds. Essentially the paradigm has historically been that the contractor owns what it developed, or develops with its own funds and the Government owns the IP that is developed by the contractor with Federal funds. This paradigm has been in existence for decades and has resulted in evolved, well-oiled business, economic and procurement models that have been in use for just as long.
The IP ownership nuances between these ownership models are covered by numerous pages of regulations and are often the central point of negotiations between the contractor and the Government. The motivations are simple. The contractor wants to own all of the IP so that it can use it to develop new products and remain competitive. The Government likewise wants to own all of the IP not to compete with the contractor, but to ensure its source of supply to the product.
Even more important in this application are the business and economics models. As the largest purchaser of goods and services the Government can place large orders for products that dwarf the size of typical commercial orders. These attractive orders create economies of scale for the contractor and keep assembly lines open for long production runs. Moreover, in Federal procurement the Government frequently agrees in its contracts to options to purchase additional products and for the purchase of spares for those products thus ensuring a valuable, continuous supply of business for the contractor and the maintenance and support of a very long logistics chain for the Government to support its field operations. In the defense vernacular this is commonly referred to as the “tail to teeth ratio”.
AM has the potential to radically redefine the business, economic, procurement and logistical models in the Federal procurement space as it will clearly impact product development, product manufacturing and supply logistics. But what will this new paradigm look like and how will the procurement regulations need to change to address it? The answers to these questions could easily serve as the subject of several masters thesis, but just touching on them will hopefully serve as a catalyst to stir debate as the current process for regulatory change is slow and cumbersome and most certainly will not move as fast as AM adoption will in the Federal procurement space.
Business Model: Today contractors compete with one another for Government business. They assume an initial contract award for a specified quantity of an item and potential options for more products after the initial product run plus an ongoing quantity of spare products. Their pricing models depend on this ongoing procurement of their product and its associated spares. Their business models count on economies of scale with open production lines. So how will AM change their business models? There are a number of ways. As was noted, contractors compete for Government business. As such, AM offers the ability for them to rapidly prototype both in the pre-award procurement phase resulting in lower bid and proposal (“B&P”) costs as well as in the technical competitive area by offering a lower cost, technically superior product resulting from lower materials wastage and more complex geometries of the product that without AM were not previously possible. But, AM will also disrupt the previously well settled IP aspects of the procurement. With AM, Government departments and agencies (with their own AM printers) will now want to own all of the IP for the product so that they can make all of their own spares. They will no longer want to buy many of their spares from a contractor. By making some or most of their own spares they not only eliminate the contractor from the equation, but also many aspects of their own logistics systems that previously had to obtain, store and distribute the spares into the field. This will have an enormously disruptive effect on existing logistics, but it will be even more disruptive of the economic models used by contractors that compete for government contracts.
Economic Models: While AM may give early adopting contractors a competitive edge in Federal procurement it will also necessitate them changing how they view, and the economic models they use to remain competitive in Federal contracting. If the Government wants to own all (or most) of the IP (both the contractors existing IP and the Federally funded developed IP) so that it can use its own AM to make its own spares, then the contractor will need to change its pricing models because it can no longer count on the lucrative spares production that kept its production lines open. Certainly ownership of all (or more of) the IP will command a higher initial product price, but that higher price may be paid for by the Government by the massive savings it will achieve as a result of reduced logistics cost and infrastructure. With AM added to the equation, IP negotiations will be even more central to contract negotiations than they already are. Maybe contractors will license the Government to use AM to make its own spare parts (some of them or all of them) with the Government paying a royalty to the contractor each time that it does. How will the contractor establish its royalty pricing for its spares made by the Government using its own AM? Will such pricing cover the lost opportunity cost associated with long spare production runs and the early closing of production facilities? Will (or should) the Government be willing to pay that kind of AM premium?
Procurement Model: There is massive, existing infrastructure in place both regulatorily and physically that supports the existing non-AM based Federal procurement model. The impacts of AM will be felt by both the Government and the contractors throughout each phase of that procurement model from the bid and proposal competitive phase through post-award performance and post-performance lifecycle spares support phases. As noted at the outset, the Federal procurement system is governed by the FAR and the agency supplements. Every aspect of every procurement is controlled and scripted by those regulations. The FAR is in excess of 1,500 pages and the agency supplements are even longer. All of these regulations will need to be assessed for potential impact of AM. The Office of Federal Procurement Policy (“OFPP”) would likely spearhead this effort. As all proposed changes to these regulations by the OFPP are subject to public review and comment the process will be lengthy. Request for proposal document packages (usually containing technical, cost, contractual and management volumes) will also need to be revised to address AM, not only in terms of the contractor’s use of AM in the development and production phases, but they must also address the Government’s use of AM post-award. In addition to the IP and pricing issues that would need to be addressed, the issues of product liability associated with the Government making of its own spares outside the purview of the contractor as well as the Government’s right (if any) to use AM to reverse engineer, or repair an item that they have previously procured form a contractor would also need to be addressed. So too, will the Government need to re-assess its approach to logistics in light of the massive potential cost savings that it can realize by using AM to make its own spare parts. To achieve these savings not only will hundreds of procurement regulations need to change, but so too is the need for change to the Government’s entire regulatory approach and logistical infrastructure.
Governments around the world are investing large sums in AM and are actively assessing how AM can be employed by them and their contractors. How they do so and how fast they do so in the context of their procurement systems will likely determine whether they will gain the AM first mover advantage they seek over their international rivals. Game on!
About Robert Bugge
Rob is a corporate, in-house transactional attorney specializing in information technology, software licensing and government contract law. His career spans 27 years where he has held positions as Senior Legal Counsel for Racal Electronics Plc, Assistant General Counsel Price Waterhouse Washington D.C., Counsel to the Canadian Commercial Corporation, Senior Counsel at the Washington law firm of Dunnells, Duvall, Bennet & Porter and Vice President, General Counsel and Director of Contracts for RJO Enterprises. Rob retired in in 2011 from his position as Director of Legal Services Asia Pacific for Nuance Communications Australia based in Sydney, where he was responsible for multimillion dollar smart phone software licensing transactions across the Asia Pacific region for companies including Samsung, HTC, Nokia and Huawei.
Rob got his BA from the University of Florida in 1979 in Political Science with a specialization in military strategy, the Middle East and foreign arms sales where he studied under John Spanier who was the US lead negotiator of the SALT I Treaty and John Eisenhower for military strategy. Upon graduation he was employed by the Boeing Military Airplane Company as a Weapon Systems Analyst in their Military Airlift Division where he was responsible for Middle Eastern mission planning while his masters degree studies and thesis at Wichita State University focused on arms sales as an instrument of foreign policy.
Rob attend the Cumberland School of Law where he graduated with his JD in 1986. While in law school Rob was appointed by the American Bar Association as Law Student Division Representative to its Section on Government Contract Law. After law school and pending completion of the bar exam Rob took a position as a Senior Contracts Administrator in Honeywell’s Space and Strategic Avionics Division where he managed a number of space-based military weapon system development contracts.
Rob is admitted to practice in Washington, DC, Florida and New South Wales Australia. In 2003 Rob completed a 2 year 14,000 nautical mile TransPac sailing voyage aboard his 36’ sailing yacht Lone Eagle. He began his voyage from Washington DC a month after 911, transited the Panama Canal and visited more than 22 countries. Rob has dual US / Australian citizenship and lives with his wife in the little beach-side town of Yamba, New South Wales about 3 hours South of Brisbane.