MODULAR CONTRACTING
FOREWORD
This Acquisition White Paper on modular contracting is one in a series of short papers that focus on key issues and hot topics in the acquisition and management of information technology (IT).
Regarding modular contracting, with the enactment of the Information Technology Management Reform Act of 1996 (ITMRA), Federal agencies have been given independent authority to contract for IT resources using a simplified acquisition process. Modular contracting is an important tool recommended by ITMRA to help Federal agencies streamline and improve their acquisition processes, especially for the procurement of their major IT systems.
Modular contracting is an acquisition strategy in which an information system is acquired in successive, interoperable, increments or modules. Recognized as a cutting edge approach, modular contracting has the potential to greatly improve the chances of success in large Federal information technology development programs. By using an incremental strategy that divides acquisitions into modules, agencies can decrease program risk, obtain quicker results, and realize a more rapid return on investment. The modular contracting approach really gives managers a new tool for achieving incremental successes, and provides a better way to take advantage of rapidly evolving technologies.
This Acquisition White Paper is the first guidance about modular contracting. Federal agencies are requested to provide any comments and suggestions to the following address:
U.S. General Services Administration
Strategic IT Analysis Division
1800 F Street, NW., Room 2009
Washington, DC 20405Additional information about Federal IT acquisition and other acquisition white papers are available on the IT Policy OnRamp located on the internet at: http://www.itpolicy.gsa.gov.
EXECUTIVE SUMMARY
To help improve Federal agencies' acquisition and management of major information technology (IT) systems, Congress passed, and the President signed, the Information Technology Management Reform Act (ITMRA, P.L. 104-106, February, 1996) (also known as the Clinger/Cohen Act). Section 5202 of this law directs Federal Agencies to use modular contracting, to the maximum extent practicable, for the acquisition of major IT systems. Following ITMRA, the President issued Executive Order No. 13011, which instructs agencies to apply modular contracting "where appropriate" and "to the maximum extent practicable."
Modular contracting provides for the delivery, implementation, and testing of a workable system or solution in discrete increments, or modules. Modular contracting is one of many approaches that may be used by Federal agencies to acquire major IT systems. It may be achieved by a single procurement, or multiple procurements, but is intended to ensure that the government is not obligated to purchase more than one module at a time. Modular contracting is intended to balance the government's need for fast access to rapidly changing technology and incentivized contractor performance, with stability in program management, contract performance and risk management.
Analysis of relevant laws, regulations, and studies, etc., indicate that modular contracting provides a significant opportunity to help remedy many systemic IRM and acquisition problem areas. Its beneficial application, however, introduces a number of management and "culture" challenges requiring increased attention to areas such as Agency architecture and standards, system integration, modular interoperability, program management and configuration control, and innovative contracting techniques. Federal agencies that can effectively meet and manage these challenges will be able to incrementally address complex IT objectives thereby significantly increasing the likelihood of achieving their program objectives.
It should be noted that one of great enablers of modular contracting is the ready availability of task order, multi-agency, and Government-wide Agency Contracts (GWAC's). With these tools, program managers have access to many major IT service and product providers through these contracts. In some cases, task orders can be in place within 60 days of the initial request. This allows program managers to quickly and easily compete modular tasks.
Modular contracting is one acquisition approach recommended by ITMRA to transition agencies from the traditional process-oriented procurement strategy to a results-based acquisition process. A significant benefit offered by modular contracting is its potential to refocus acquisition management attention and strategies to a more responsive and realistic "systems development acquisition model."
PAGE FOREWORD i EXECUTIVE SUMMARY ii TABLE OF CONTENTS iii LIST OF EXHIBITS v LIST OF ACRONYMS vi 1. INTRODUCTION 1-1 1.1 Background 1-1 1.2 Scope 1-1 1.3 Audience 1-2 1.4 Definitions 1-2 2. LEGISLATIVE AND BACKGROUND MATERIAL 2-1 2.1 Historical Perspective 2-1 2.2 Federal Policy and Guidance 2-1 2.2.1 Legislative 2-2 2.2.2 Policy 2-4 2.2.3 Regulatory 2-4 2.2.4 Budgetary 2-4 3. TRADITIONAL SYSTEM DEVELOPMENT APPROACH 3-1 3.1 Today’s “Traditional” Model 3-1 3.2 The “Modular Contract” Model 3-2 4. MODULAR CONTRACTING ISSUES AND RISKS 4-1 4.1 Preference for Modular Contracting 4-1 4.2 Module Concepts 4-2 4.3 Procurement Techniques 4-4 4.3.1 IDIQ Contracts 4-4 4.3.2 Single Contract with Options 4-5 4.3.3 Successive Competitive Contracts 4-5 4.4 Risk and Information Technology Management 4-6 4.4.1 Integration Risk 4-6 4.4.2 Modular Interoperability Risk 4-7 4.4.3 System Requirements and Configuration Control Risk 4-7 4.4.4 Contracting Technique Risk 4-7 5. MODULAR CONTRACTING IMPLEMENTATION CONSIDERATIONS 5-1 5.1 Business Planning 5-1 5.2 Alignment with Agency IT Architecture 5-1 5.3 Program Planning 5-1 5.4 System Design and Modular Construction 5-2 5.5 Program Management Techniques 5-2 5.6 Managing Uncertainty and Risk 5-3 6. APPLICATION OF MODULAR CONTRACTING PRINCIPLES TO THE “MAXIMUM EXTENT PRACTICABLE” 6-1 7. CONCLUSIONS 7-1
TABLE OF CONTENTS LIST OF ACRONYMS
AWP Acquisition White Paper
COTS Commercial Off the Shelf
CPFF Cost Plus Fixed Fee
EO Executive Order
FAR Federal Acquisition Regulation
FASA Federal Acquisition Streamlining Act (P.L. 103-355).
FFP Firm Fixed Price
FSS Federal Supply Schedule
FY Fiscal Year
GPRA Government Performance and Results Act (P.L. 103-62).
GSA General Services Administration
GWAC Government-wide Acquisition Contract
IDIQ Indefinite Delivery/Indefinite Quantity
IRM Information Resource Management
IT Information Technology
ITMRA Information Technology Management Reform Act (P.L. 104-106). Also known as the "Clinger/Cohen Act."
OMB Office of Management and Budget
PL Public Law
RFP Request for Proposal
1. INTRODUCTION
1.1 Background
Modular contracting is one of several methodologies currently available to the Federal Government for acquiring Information Technology (IT). Modular contracting is an outcome of the Government's efforts to streamline IT acquisition processes and procedures. This major shift in procuring IT has been precipitated through passage of legislation aimed at facilitating the acquisition of IT. The Information Technology Management Reform Act (ITMRA, Public Law [P.L.] 104-106, February, 1996) directly addresses acquisition of IT. A key element in the Government's reformation is the use of modular contracting to obtain IT. ITMRA, Section 5202 states that Agencies are required to use modular contracting for acquisition of a major system of information technology, to the maximum extent practicable.
Modular contracting is most effectively accomplished when an "Agency's need for a system is satisfied in successive acquisitions of interoperable increments. Each increment complies with common or commercially accepted standards applicable to IT so that the increments are compatible with other increments of IT comprising the system". In its simplest terms, modular contracting is acquisition of a major system of IT in successive increments or interoperable modules.
The decision to use modular contracting should be based on the specific circumstances for each system. For those acquisitions where its application is appropriate, modular contracting offers an opportunity to break away from and reduce the risk inherent in the traditional "grand design" mode of system acquisition. History has shown that the grand design approach has often resulted in systems that were extremely expensive and years behind schedule, provided less than the desired capabilities, and were often outdated by the time they were fielded. As an alternative to grand design, ITMRA suggests that major IT system acquisitions be divided into several smaller acquisition increments, or modules, that:
Are easier to manage individually than would be one comprehensive acquisition;
Address complex IT objectives incrementally to enhance the likelihood of achieving workable solutions for attainment of those objectives;
Provide for delivery, implementation, and testing of workable systems or solutions in discrete increments, each of which comprises a system or solution that is not dependent on any subsequent increment in order to perform its principle functions;
Provide an opportunity for subsequent increments of the acquisition to take full advantage of any evolution in technology or needs that occur during conduct of the earlier increments.
1.2 Scope
This Acquisition White Paper (AWP) provides information, guidance, and recommendations for applying modular contracting to major IT system development and program management. This AWP does not presume to provide detailed instruction at the level necessary to conduct an acquisition via modular contracting, but is intended to provide guidance that will enable Agency IT personnel to develop an acquisition project tailored to their specific requirements and circumstances.
The General Services Administration (GSA) published this AWP to solicit feedback on the issue of modular contracting. This document and the feedback obtained will be used to expand areas of interest, and provide examples, case studies, and best practices for a Government-wide acquisition guide on modular contracting.
Comments on this document should be addressed to General Services Administration, Strategic Information Technology Analysis Division, 18th & F Streets, N.W., Washington, D.C. 20405. Points of contact for this document are David Middledorf, (202) 501-1551, and John Clark, (202) 501-4362.
1.3 Audience
This AWP was developed to meet the needs of Federal IT program and project managers and the technical and contracting staffs.
1.4 Definitions
The information presented in this AWP is based on the following definitions:
Module: A module is an economically and programmatically separable segment that has a substantial programmatic use, even if no additional segments are acquired.
Modular Contracting: Modular contracting is accomplished when an "Agency's need for a system is satisfied in successive acquisitions of interoperable increments. Each increment complies with common or commercially accepted standards applicable to IT so that the increments are compatible with other increments of IT comprising the system".
Major System: Major systems, as defined by the Federal Acquisition Regulation (FAR) 2.101 are:
Civilian Agency systems with total expenditures of more than $750,000 (based on Fiscal Year (FY) 1980 constant dollars),
Department of Defense systems with total expenditures for research, development, test, and evaluation estimated to be more than $115,000,000 (based on FY 1990 constant dollars) or an "eventual total expenditure for the acquisition" in excess of $540,000,000 (FY 1990 constant dollars), or
Any system designated a "major system" by the head of the Agency responsible for the system.
2. LEGISLATIVE AND BACKGROUND MATERIAL
2.1 Historical Perspective
In 1994, the Federal Information Technology Acquisition Improvement Team reported to Vice President Gore as part of the National Performance Review that the:
"Current methods and practices for requirement definition and source selection directly contribute to an inefficient process, especially for software development and integration. Although Agencies in some cases spend 2 years making program assumptions, defining requirements and developing cost estimates and program performance periods, they typically require offerors to complete their analysis of the requirements and prepare their responses in 60 days, during which communication is strictly controlled. This process tends to produce proposals characterized by overly optimistic assumptions, which on contract award, becomes the program baseline........ Agencies should experiment with difference acquisition and source selection strategies focusing on finding the best offeror rather than committing to a solution.'
The Team recognized the need for alternative acquisition strategies that would be more responsive to the specific system requirements. Modular contracting is one of several strategies that provide Federal Agencies alternative methods of acquiring IT.
The current preference for modular contracting is one result of a considerable "history" of high profile, and often unsuccessful projects. The reason cited for these acquisitions being seriously off-track varied but usually included: cost overruns, failure to define and control requirements adequately, ineffective program management, failure to perform, late delivery or under-played programs, lack of clear performance objectives, and others.
These situations prompted acquisition and management reforms(from prescribing "fixes" to perceived flaws in the acquisition process (e.g., the Federal Acquisition Streamlining Act of 1994 [FASA], ITMRA), to cuts in program funding, to increased capital planning and management reporting of cost , schedule and performance goals. Additional examples of the increased attention in IT acquisition include Office of Management and Budget's (OMB) Presidential Priority System and Presidential Technology Teams.
2.2 Federal Policy and Guidance
During the past several years, Congress has passed numerous initiatives intent on re-inventing the way the Federal Government conducts its business. These initiatives have streamlined the Federal acquisition processes and procedures, specifically bringing the acquisition of IT more in line with the realities of obtaining technology. As an evolving public policy objective, guidance to date on modular contracting has been limited. Information that isavailable falls into four general categories: legislative, policy, regulatory, and budgetary. The information contained in the following sections focuses on guidance that directly affects modular contracting.
2.2.1 Legislative
The three key pieces of legislation that precipitates modular contracting are the Government Performance and Results Act (GPRA) (P.L. 103-62), FASA, and ITMRA. The GPRA requires each Agency develop a comprehensive hierarchy of planning documentation outlining goals and measures. The FASA applies the GPRA criteria to acquisition programs, while the ITMRA further delineates the law, focusing on IT acquisition. Exhibit 2-1 summarizes the key issues of the three separate, yet interrelated statutes.
GPRA. The GPRA, passed in 1993, legislates that Federal Agencies are to be more responsive and accountable to the public/customers relative to achieving program results. The GPRA requires that Agencies develop comprehensive strategic, business, and performance plans documenting the organizational objectives, goals, strategies, and measures for determining results.
FASA. FASA applies the principles from the GPRA to all Federal acquisitions. For example, OMB's FASA implementation instructions for acquisitions (including IT):
Require that cost, schedule, and performance goals and measures be established for each "acquisition program," (those exceeding $20 million over the system life cycle);
Place program success accountability in an "acquisition program manager";
Require Agencies to measure and "achieve, on average, 90 percent of the cost and schedule goals established for major and non-major acquisition programs ... without reducing the performance or capabilities of the items being acquired";
Take action and report steps taken on non-compliant acquisition programs, to include termination (those with cost overruns, schedule noncompliance, inadequate performance).
ITMRA ITMRA applies the acquisition parameters outlined in the FASA to IT. ITMRA requires Agencies to use modular contracting for acquisitions of major IT systems to the "maximum extent practicable". In addition, ITMRA suggests time limits for award and delivery of IT systems:
A contract for an increment of an IT acquisition should, to the maximum extent practicable, be awarded within 180 days after the date on which the solicitation is issued and, if the contract for that increment cannot be awarded within such period, the increment should be considered for cancellation; and
The IT provided for in a contractor acquisition of IT should be delivered within 18 months after the date on which the solicitation resulting in award of the contract was issued.
One particularly noteworthy strategic aspect of these statute's requirements is the association made by Congress between modular contracting and Agency goals and mission. ITMRA effectively ties modular contracting to the law's requirements for development of performance and results-based measures for IT used by, or to be acquired for, the executive Agency.
Exhibit 2-1. Legislative Issues
AGENCY MISSION/
BUSINESS GOALS
GPRA (P.L. 103-62)
Strategic Agency 5-year plan (w/mission: define outcome-oriented goals/objectives; how they relate to strategic plan; describe program evaluation methods)
Annual performance plan (planned goals versus actual results)
Demonstrate measured results linked to programs
Results to be used in budget decisions
AGENCY PROGRAMS
FASA (P.L. 103-355)
Requires cost, schedule, performance goals & measures for each acquisition program
Sets single program manager accountability
Requires measure compliance at least 90% on average for major and non-major acquisitions
Requires pro-active remedial action on non-compliant projects, including termination
Create/develop acquisition positions
AGENCY IT PROGRAMS
ITMRA (P.L. 104-106) (Clinger/Cohen Act)
IT and Information Resource Management (IRM) Specific
Oversight shifted from GSA to OMB
Chief Information Officers must manage IRM investment to support mission/program results (derived from GPRA and FASA); develop IRM resources; manage IT risks; reform processes before acquiring IT
Improved budget-linked capital planning. Budget linked to mission achievement
Align IRM investments to support Agency strategic and annual performance plans
Integrate budget, financial, program management
Performance based management and acquisition methods
Modular acquisition for system development
2.2.2 Policy
Executive Order (EO) #13011, Federal Information Technology, issued July 17, 1996, implements ITMRA and requires significant improvement in information system acquisition management through compliance with the Paperwork Reduction Act, ITMRA, and GPRA. Section 2(e) of the Order requires that: "where appropriate, ... [Agencies are to] structure major information system investments into manageable projects as narrow in scope and brief duration as practicable ... to reduce risk, promote flexibility and interoperability, increase accountability, and better correlate mission need with current technology and market conditions."
2.2.3 Regulatory
The FAR does not currently address modular contracting. In November 1996, the FAR IT committee developed draft coverage to implement modular contracting into the FAR. The committee determined the need for "discretionary material" not usually contained in the FAR. It was later determined the discretionary material would be more appropriately included in a separate acquisition guide. The proposed rule was released March 27, 1997. The rule adopts the provisions of the ITMRA and briefly addresses several related areas: risk, compatibility, performance, and selection of contract type. It is anticipated that FAR coverage will become final in the near future.
OMB Circular A-109, Major Systems Acquisition, provides guidance on managing major systems through an integrated systematic approach. The goals contained in A-109 are similar to the ITMRA goals.
2.2.4 Budgetary
Modular contracting parallels the "decision criteria" established in OMB Memorandum 97-02, Funding Information Systems Investments. These criteria, also referred to as "Raines' Rules," represent the conditions under which OMB will recommend new or continued funding for IT. The modular contracting parallel is that investments in major IT systems should be implemented in phased, successive chunks as narrow in scope and brief in duration as practicable, each of which solves a specific part of an overall mission problem and delivers a measurable net benefit independent of future chunks.
Additionally, OMB Circular A-11, Planning, Budgeting, and Acquisition of Fixed Assets, (part 3) was recently revised to include specific guidance on budgeting following a modular approach.
3. TRADITIONAL SYSTEM DEVELOPMENT APPROACH
Recent studies and "reform" initiatives recognize that Federal systems development and modernization acquisitions are usually of unprecedented size and complexity. However, while larger and more complex, these programs rarely required "state-of-the-art" technological breakthroughs to be successful. While technical elements can be a major success obstacle ( root cause findings in modernization and development acquisition studies focused instead on how agencies handle and manage uncertainty.
Analysis of relevant laws, regulations, studies, etc. indicate that modular contracting has the significant potential to help remedy many systemic IRM and acquisition problem areas.
A significant benefit of modular contracting is its potential to refocus acquisition management attention and strategies from a standard "procurement model" to a more responsive, manageable, and realistic "systems development acquisition model."
To appreciate the impact potential of modular contracting, it is important to see it relative to the current process. Today's standard system development procurement (or "reality") model follows the same procurement concepts as those used in other fixed price supply and service (low-risk) procurements. While the standard procurement model is suitable for numerous types of Federal acquisitions, the approach adds a degree of difficulty to large-scale IT systems development and modernization acquisition environments. The standard model does not allow for the inherent and higher magnitude complexities and risks involved in large scale development efforts. The difficulties in applying the traditional process can be attributed to the fact the model required that agencies "solve" the operational problem during the pre-award source selection.
3.1 Today's "Traditional" Model
The traditional procurement model can provide satisfactory results and meet all desired program objectives for some IT acquisitions. However, in many cases applying the traditional approach to major system development acquisitions imposes significant obstacles and unnecessary demands on agency officials and program managers. This is due to the fact that the traditional "procurement model" demands specificity in planning, funding, and acquisition, and a predictive precision that is extremely difficult to achieve, particularly in today's rapidly changing working and technical environments. This model goes on to consider any deviation from the early planning and estimates as failures or mistakes, warranting some form of penalty and additional oversight. Forcing this rigidity into the systems development acquisition process — intending to minimize risks and mistakes — can actually exacerbate same.
Modular contracting provides an opportunity to adapt the current
procurement model to the realities of the IT environment.
3.2 The "Modular Contract" Model
Modular contracting is an alternative process that provides agencies the opportunity to incrementally acquire a system. This alternative provides for the delivery, implementation, and testing of a workable system or solution in discrete increments, or modules. The distinct modules can be acquired via a single procurement, or by multiple procurements, but the intent is to ensure the government is not obligated to purchase more than one module at a time.
Under the modular approach, the agency incrementally awards and manages the program rather than requiring contractors to price and manage the entire effort at one time. This approach allows the agencies to make more informed decisions based on factual information rather than on projections and estimates. For example, under the traditional approach, offerors are required to price the system's code and test effort for work to be accomplished years after contract award. Using modular contracting coupled with task orders, pricing of the code and test for a single module can be accomplished after the final design review. As a result, the pricing and schedules will be more realistic than when done under the traditional acquisition model of pricing the entire system or solution at the solicitation/proposal stage.
The Agency retains flexibility and can constantly revisit cost, technical, and schedule assumptions, even combining modules, if the facts so warrant. At its simplest level, as opposed to a standard development contract, the hardware and systems software under a modular approach would not be acquired until the module's timing and size requirements were determined.
4. MODULAR CONTRACTING ISSUES AND RISKS
4.1 Preference for Modular Contracting
As stated in the Clinger/Cohen Act, agencies should, to the maximum extent practicable, use modular contracting to acquire major IT systems. In order to determine if modular contracting is practicable, agencies must decide if the acquisition can be separated into logical segments. The concepts of a module may vary significantly depending on the type of IT being acquired and the nature of the program being developed.
In determining if a system is a candidate for modular contracting, the program office should initially develop a high-level system design. This effort should be the first step in determining the acquisition and development methodology. It is extremely unlikely that logical breakout points can be determined without first having a system design.
The program office conducting the system definition effort would be tasked to explore, in conjunction with Agency personnel, the Agency's operations, needs, constraints, legacy systems, documentation quality, etc., along with rigorous market surveys, assessments of technology, and trend analyses. In many cases, the Agency may wish to acquire the services of a systems integrator to assist in this effort. If the system is a candidate for modular contracting, this design would also include an agency developed optimum module breakout structure and phasing of subsequent modules. The system design provides a better understanding of the current environment and agency needs, a more realistic system design deliverable, and, in turn, will enable more informed and reduced-risk decisions, strategies, and contracting actions downstream.
While ITMRA did place a statutory preference for the use of modular contracting (maximum extent practicable), the legislation does not mandate that agencies use modular contracting. There are times when application of modular contracting techniques, even with its advantages, is inappropriate for the system being developed. For example, there are circumstances where it is in the Government's best interest to acquire the system from a single contractor following the traditional development approach. In these cases, the integration risk of not having a single contractor developing the system may outweigh the benefits of modular contracting. Factors that could warrant such a determination would be:
High development and/or integration risk
Lack of in-house resources or desire to contract out the integration and configuration management functions
Monolithic system with no logical breakout of modules
In these cases, it is recommended that the agency document the decision and proceed with the appropriate acquisition strategy. Section 6 discusses the applicability of modular contracting principles to acquisitions that do not meet the definitions and time constraints contained in the legislation.
4.2 Module Concepts
What constitutes a module varies depending on the nature of the program and the type of system being developed. Every major IT system is comprised of a mix of hardware, software, software development, commercial-off-the-shelf (COTS) software, integration, support services, transition, conversion, training, and related services. The ITMRA law envisions that every system has "logical" points that can be used to determine subsystem or modular breakouts. Modules are typically broken out by type of product or resource. See Exhibit 4-1. These modules may be contracted separately, in parallel, series, phased, sequenced, etc.
The following factors should be considered in establishing specific modules:
A module is an economically and programmatically separable segment. It should have a substantial programmatic use even if no additional segments are acquired; that is, each module should provide for delivery, testing and implementation of a functional system or solution that is not dependent on any subsequent module in order to perform its significant functions.
Each module should comply with common or commercially acceptable IT standards when available and appropriate. Additionally, they must be developed within the Agencies standard IT architecture. Defining modules in this manner will reduce the integration risk.
In determining the discrete module structure, the program manager must consider OMB's modular implementation guidance for modular "separations." OMB's most recent guidance envisions modules that:
Are economically and programmatically separable;
Are (or should be) fully funded;
Have substantial programmatic use that is not dependent on any subsequent module;
Are capable of performing its principle functions even if no subsequent modules are acquired.
Although OMB recommends that the above guidance on what constitutes a module be applied to the "maximum extent practicable," it is difficult to envision a system where each module fully meets the above definition. In reality, the majority of systems require at least some degree of interoperability between modules. These modules will not operate at 100% without the other modules. The key to defining and implementing modular contracting is to phase the development to minimize the integration risk and allow each module, to the maximum extent practicable, be programmatically separable.
Exhibit 4-1. Sample System With Modules
4.3 Procurement Techniques
Selecting the appropriate procurement technique is a key element in the success of modular contracting. After completing the requirements, markets, conditions, constraints, contingencies, and designs, the Agency can determine the number and types of contracts that will best facilitate the acquisition. Only then can the Agency weigh the benefits of increased competition against the risk of having individual modules developed by potentially different contractors. The contract(s) structure should ensure that the procurement of the separate modules are independent of each other and that the agency is not obligated to purchase more than one module at a time or from the same contractor. Within this constraint, there are a wide variety of contract types and vehicles which provide the necessary flexibility to accommodate modular contracting.
An additional factor that must be considered in selecting a contract vehicle which will accommodate modular contracting is the time requirement specified in the Clinger/Cohen Act. The law states that a contract for a module or segment should, "to the maximum extent practicable," be awarded within 180 days after the date on which the solicitation is issued. Additionally, to the extent practicable, deliveries under the contract should be scheduled to occur within 18 months after issuance of solicitation. This requires that products be delivered within 12 months after contract award. Traditional procurement methods would have a difficult time meeting these requirements. Program offices must be efficient and streamline the traditional source selection process to meet these fairly stringent goals. Fortunately, new contractual vehicles such as task order contracts are now available which will greatly assist a program office in meeting the award goals.
Three fundamental choices exist with regard to contracting methods:
Indefinite delivery/indefinite quantity (IDIQ) contracts
Single contract with options
Successive competitive contracts
4.3.1 IDIQ Contracts
Nearly every IT product or service needed by the Federal Government is available to the program manager through existing IDIQ contracts. In most cases, program managers can have a major systems integrator or developer under award within 60 days of initiating a task order. This ease of task order award and vast array of products and development contractors makes these contracts particularly applicable for modular contracting. As such, task/delivery order contracts are generally appropriate for all types of modular acquisitions, but may be particularly applicable when the scope of subsequent modules cannot be clearly defined at contract award or significant developmental effort may be necessary.
Agencies can either use an existing IDIQ contract or award their own contract which could include any unique terms and conditions or requirements. Existing contracts vary as to the scope, applicable users, and fees, therefore, Agencies should survey all alternative sources to determine the best approach to meeting their unique contract requirements.
4.3.2 Single Contract with Options
A single contract with options may be most appropriate when the scope of subsequent modules can be clearly defined at contract inception. A single contract with options may also be appropriate when the integration risk is critical to the success of the overall system. In this case a single contractor must be used since the integration effort will involve unique skills obtainable only through the success of previous modules. In this approach, the contract pricing structure is adaptable based on the function of the task. Exhibit 4-2 illustrates a scenario in which a single contract is awarded with the pricing structure.
Exhibit 4-2. Sample Single Contract With Options
CLIN
DESCRIPTION
CLIN PRICING
1
System Design
Cost-plus-fixed-fee (CPFF)
2
System Requirements Analysis
Option 1: Module 1 Analysis
Option 2: Module 2 Analysis
Option 3: Module 3 Analysis
CPFF
3
System Coding
Option 1: Module 1 Coding
Option 2: Module 2 Coding
Option 3: Module 3 Coding
Firm fixed price (FFP)
4
System Testing
Option 1: Module 1 Testing
Option 2: Module 2 Testing
Option 3: Module 3 Testing
FFP
4.3.3 Successive Competitive Contracts
Successive competitive contracts may be most appropriate when there is sufficient time to award successive individual contracts, the administrative cost is outweighed by the potential cost/technical benefits derived from the competitive marketplace, and where contractor continuity is not a predominant concern. Exhibit 4-3 illustrates an example of successive contracts with the pricing structure based on the characteristics of the specific module function.
Exhibit 4-3. Sample of Successive Contracts
CONTRACT
FUNCTION
STRUCTURE
A
System Design
Option: Systems Integrator
CPFF
CPFF
B
Requirements Development
CPFF
C
Software Coding
FFP
D
Hardware & System
(Incl: Federal Supply Schedule (FSS), Government-wide Acquisition Contracts(GWAC)
FFP
E
Software Testing
FFP
4.4 Risk and Information Technology Management
Acquisitions experiencing problems under the traditional "procurement model" share three common key risks: extreme cost, lengthy implementation time, and unclear performance objectives. Modular contracting is a solution that can effectively address these three major and characteristic risks by reducing the scope and cost of an acquisition, reducing the time required to execute it, and requiring the definition of clear performance goals. However, while modular contracting does reduce some risks; it introduces new challenges. Even considering the new challenges, the benefits of modular contracting far exceed the problems associated with the traditional procurement approach.
4.4.1 Integration Risk
The key risk area raised by the modular acquisition methodology is integration risk. This risk is that the independently developed modules may be fully operational but, upon integration into the overall system, the individual modules reveal flaws or gaps resulting in degradation of system or module performance. Failure to manage the integration effort significantly raises the risk of system failure.
When the government takes a large requirement and breaks it down into successive acquisitions of interoperable increments, it must address the responsibility for and process of integration. In traditional system or solution buys, the problem of integration is contracted out as part of the overall acquisition. In modular buys, however, agencies must address integration in terms of government or contractor responsibility, standards, and deliverables. In reality, rarely does the government have the necessary in-house expertise to manage the integration effort and, in most cases, should consider bringing in contractor support for this critical effort.
4.4.2 Modular Interoperability Risk
The success of modular contracting rests on the definition of the systems' modules and their integration and interoperability. The single greatest way to mitigate and control this risk is the formulation and enforcement of an Agency-wide IT architecture based on common and commercial standards. All IT systems undertaken should comply with the agency-wide architecture. As the overall system is based on Agency standards, each module should, in turn, be consistent with the approved standards. While modular contracting success is possible lacking an architecture, it is highly improbable.
4.4.3 System Requirements and Configuration Control Risk
At a more tactical level, modular contracting success depends on the ability to manage system requirements. Requirements and changes to one or more module can prematurely commit or limit the agency to an unwise course of action while adversely impacting or facilitating efforts underway or completed elsewhere in the system. Thus, to mitigate this risk, program managers need to adopt effective requirements definition, configuration change control, reporting, and monitoring mechanisms involving agency personnel and module contractors, on both a module-specific and system-wide basis.
4.4.4 Contracting Technique Risk
The final key risk involves the selection of an appropriate contracting technique that can optimally be adapted to the agency needs and to modular contracting. The selection of the contracting technique should be carefully thought out during program acquisition strategy discussions. The contract must be flexible in that the government is not obligated to acquire future modules. The contracting techniques presented in Section 4.3 can be successfully applied to modular contracting; however, task order contracts are particularly appropriate for this type of contracting.
5. MODULAR CONTRACTING IMPLEMENTATION CONSIDERATIONS
The success of effective, efficient acquisition of IT using the modular contracting approach is dependent on an agency's ability to manage risk. Risk is defined as any part of a system program where substantial uncertainty exists regarding future events that could negatively affect meeting a system's performance goal. Risk management is essential to all acquisitions and should be part of any overall acquisition strategy. The requirement for risk management continues throughout the system life cycle; as previous uncertainties are known, others will arise.
Effectively managing the key risks identified in Section 4.4 and the decision (whether and how) to implement modular contracting requires incorporation of discrete steps within the life-cycle of acquisition.
5.1 Business Planning
At the strategic level, modular contracting should begin with a consideration of the agency's needed mission solutions. If the agency's program or annual performance plan (under GPRA) defines objectives or desired solutions as a series of steps, then modular contracting may be a compatible and effective strategy which would link the best acquisition method (modular contracting) and a program need (solution). This also enables the construction and definition of an agency IT architecture.
5.2 Alignment with Agency IT Architecture
A critical component of reducing the risks associated with modular contracting is the existence of a standard agency-wide IT architecture based on common and commercial standards. All systems developed should adhere to the agency architecture, thereby facilitating interoperability and integration with other agency systems. In turn, each module developed for a specific system should adhere to the agency-wide standards, thereby facilitating integration within the system.
5.3 Program Planning
With the increased information and knowledge of risks developed by a realistic architecture-based system design, more informed and effective modular contract planning is possible. The program manager should develop a baselined program management plan that defines how the overall system would be modularized, managed, integrated, and deployed to include such items as:
Module definition and go/no-go criteria
Will the agency assume the high risk integration role/responsibility, contract it out, etc.
Resource requirements, make or buy
Sequencing, phasing, scheduling module development, testing
Information needs from agency and contractor, performance measure development and utilization
Requirements and change control, configuration management
Decision-making processes
System testing, deployment, operational support
Security/privacy standards
5.4 System Design and Modular Construction
The number and composition of modules in an acquisition will largely depend on the unique characteristics of each program. With the foundation established through an overarching architecture and architecture/standards, along with a more realistic systems design, the program manager is then able to determine (a) whether modular contracting strategies are appropriate and (b) if so, after review of the system design discussed in Section 4.1, select the optimum modular breakout points. In this regard, ITMRA's "maximum practicable use" guidance can be judiciously applied. This step must be completed before deciding how to buy hardware, system software, databases, etc.
5.5 Program Management Techniques
Large-scale systems development, "grand design" class, and modular-oriented acquisition programs are dependent on effective acquisition-oriented program management. A meaningful and disciplined acquisition program management process is essential to effectively manage the risks, regardless of staffing and location.
OMB Circular A-109, Major Systems Acquisition, provides some guidance. Of particular note is the recognition of a "systems acquisition process" ( one that is different from the norm ( that must be managed more deliberately, fully and carefully. That process is defined to cover (
"the sequence of acquisition activities starting from the agency's reconciliation of its mission needs, with its capabilities, priorities, and resources, and extending through the introduction of a system into operational use or the otherwise successful achievement of program objectives" (para 5.i., emphasis added).
In this context, A-109 principles call for an integrated systematic approach for establishing mission needs, budgeting, contracting, managing the program, improving opportunities for innovative private sector contributions, and avoiding pre-mature commitment to unwise courses of action (that is, the same goals as the ITMRA). Doing so, facilitates early, critical, and credible communication with Congress, oversight functions, and higher-level executives in better relating major systems acquisition planning to Agency mission needs and goals. This alternative requires that the acquisition and risk management strategy analysis of reconciling mission needs with business and technical management concepts designed to achieve program objectives within resource constraints. This program management plan thus becomes the framework for managing research, development, test, production, fielding, support and other essential program activities. Decisions regarding content of specifications, for example, should be made sequentially throughout life of project no more than 1 to 2 years in advance ( and carried out in well-planned steps.
The need for program management is critical in modular contracting, especially given the inherent integration risks and the occurrence of multi-functional agency areas participating in system development (e.g., engineering, customers, procurement, finance, other agencies, oversight, etc.). Program management:
Vests authority, responsibility, and accountability for success in one individual
Establishes a single point of contact for the customer(s)
Facilitates rapid responses to problems and conflict resolutions
Keeps a central focus on program success with the ability to make trade-offs among cost, schedule, and performance to achieve success
Program manager and program management planning should focus on:
Non-technical program management such as:
Developing a program management plan as the conceptual basis for program execution
Planning and controlling the framework, milestone schedules, reporting, risk management, etc.
Systematic scheduling of all steps and products required for appropriate visibility, assignment, identification, and tracking
Information gathering to support decision making
Reviewing input from team members and contractors on all activities
Technical program management such as:
Controlling the system design so that all elements are integrated into the optimum system
Using configuration management to identify functional/physical characteristics (base lining), control changes, record/ report changes
Technical performance measurement and reviews
5.6 Managing Uncertainty and Risk
In each acquisition, a program management plan should be developed to systematically identify, analyze, and control the relevant unique and higher magnitude of risk areas. A systems development and/or modernization program management strategy must accomplish the above to develop the available options to reduce or control selected areas of risk through combinations of avoidance, control, assumption, and transfer.
This includes the use of:
Risk Planning
Risk Assessment
Risk Analysis
Risk Events
Risk Probabilities of Failure
To deal with:
Technical risks
Program stability risks
Programmatic risks
Cost & schedule risks
6. APPLICATION OF MODULAR CONTRACTING PRINCIPLES TO THE "MAXIMUM EXTENT PRACTICABLE"
Specific guidelines on what constitutes a module and the timeframes for the acquisitions are specified in the Federal legislation. In order to be considered truly "modular", the modules should be:
Economically and programmatically separable
Fully funded
Not dependent on any subsequent module
Capable of performing its principle functions even if no subsequent modules are acquired
Additionally, the contract for each module should:
To the maximum extent practicable, be awarded within 180 days after the date on which the solicitation is issued and, if the contract for that increment cannot be awarded within such period, the increment should be considered for cancellation; and
Be delivered within 18 months after the date on which the solicitation resulting in award of the contract was issued.
Agency attempts to strictly adhere to the stringent definitions and time constraints will impede implementation of modular contracting. There are cases where, based on a system design and other constraints, optimum module definition will not meet the stringent definitions. However, this does not necessitate that Agencies forego application of modular contracting principles.
Federal guidance clearly states the intent for agencies to use modular contracting to the maximum extent practicable. This intent includes the application of modular contracting principles to major IT acquisitions. These principles revolve around acquiring a system in discrete modules or increments in which the government is not obligated to procure more than one module at a time. The extent to which these principles can be applied is dependent upon the nature of the system. However, even traditional program development efforts can benefit from a modular contracting approach and should, to the maximum extent practicable, apply the modular contracting techniques and philosophies to those acquisitions.
7. CONCLUSIONS
If properly planned and applied, modular contracting can offer significant advantages over traditional system development approaches. In its simplest terms, modular contracting is acquisition of a major system of IT in successive acquisitions of interoperable modules. Its application allows the government to quickly access the latest in technology, make informed decisions at a time when all facts are available, and as the follow-on efforts are not guaranteed, provides a powerful incentive to the contractors to produce high-quality products within projected cost estimates.. The flexibility inherent in modular contracting can further allow the agency to control costs by stopping, or altering its acquisition of future modules, while retaining the maximum value from modules acquired to date.
One of the great enablers of modular contracting is the ready availability of task order contracts. Modular contracting requires responsive contract vehicles which can quickly compete modular tasks. Task order contracts are made to order for modular requirements. In most cases, a task order can be in place within 60 days of initiation. This more than satisfies the ITMRA requirement of having the contract in place within 180 days of issuing the solicitation.
While presenting a beneficial alternative to the traditional procurement model, modular contracting should not be viewed as a "silver bullet" solution. Its application does solve some very troubling issues while raising others. For example, modular contracting requires agencies to have in place an Agency-wide architecture and standards to ensure the module developers are designing to the same standards and that the modules will integrate. This is a critical requirement if modular contacting is to be successful. Successful application requires strong program management and careful attention to configuration management and system integration. These new challenges, however, do not negate the numerous benefits associated with modular contracting.
However, given ITMRA's requirements, the President's executive order, and the opportunities and advantages offered by modular contracting, Agencies should not become embroiled in whether or not to apply modular contracting techniques to a major system development or modernization acquisition, but rather the degree to which modular contracting can be adopted.
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