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TITLE VIII--ACQUISITION POLICY, ACQUISITION MANAGEMENT, AND RELATED MATTERS

Subtitle A—Provisions Relating to Major Defense Acquisition Programs

JWNDAA Section

House Conference Report 109-702

(a) LIMITATIONS ON CONTRACTORS ACTING AS LEAD SYSTEM INTEGRATORS.—

(1) IN GENERAL.—Chapter 141 of title 10, United States Code, is amended by adding at the end the following new section:

‘‘§ 2410p. Contracts: limitations on lead system integrators

‘‘(a) IN GENERAL.—Except as provided in subsection (b), no entity performing lead system integrator functions in the acquisition of a major system by the Department of Defense may have any direct financial interest in the development or construction of any individual system or element of any system of systems.

‘‘(b) EXCEPTION.—An entity described in subsection (a) may have a direct financial interest in the development or construction of an individual system or element of a system of systems if—

‘‘(1) the Secretary of Defense certifies to the Committees on Armed Services of the Senate and the House of Representatives that—

‘‘(A) the entity was selected by the Department of Defense as a contractor to develop or construct the system or element concerned through the use of competitive procedures; and

‘‘(B) the Department took appropriate steps to prevent any organizational conflict of interest in the selection process; or

‘‘(2) the entity was selected by a subcontractor to serve as a lower-tier subcontractor, through a process over which the entity exercised no control.

‘‘(c) CONSTRUCTION.—Nothing in this section shall be construed to preclude an entity described in subsection (a) from performing work necessary to integrate two or more individual systems or elements of a system of systems with each other.’’.

(2) CLERICAL AMENDMENT.—The table of sections at the beginning of chapter 141 of such title is amended by adding at the end the following new item:

‘‘2410p. Contracts: limitations on lead system integrators’’.

(3) EFFECTIVE DATE.—Section 2410p of title 10, United States Code, as added by paragraph (1), shall apply with respect to contracts entered into after December 31, 2006.

(b) UPDATE OF REGULATIONS ON LEAD SYSTEM INTEGRATORS.—Not later than December 31, 2006, the Secretary of Defense shall update the acquisition regulations of the Department of Defense in order to specify fully in such regulations the matters with respect to lead system integrators set forth in section 805(b) of the National Defense Authorization Act for Fiscal Year 2006 (Public Law 109–163; 119 Stat. 3372) and the amendments made by subsection (a).

(c) ADDITIONAL REPORT REQUIREMENTS.—The Secretary of Defense shall include in the report required by section 805 of such Act—

(1) a precise and comprehensive definition of the term ‘‘lead system integrator’’, as that term is used in such section; and

(2) a specification of various types of contracts and fee structures that are appropriate for use by lead system integrators in the production, fielding, and sustainment of complex systems.

The Senate amendment contained a provision (sec. 842) that would: (1) limit the participation of lead systems integrators (LSI) in the development or construction of any individual system or element of a system of systems; (2) direct the Secretary of Defense to update regulations on LSIs; and (3) direct the Secretary to include a specification of various types of contracts and fee structures, including award and incentive fees, that are appropriate for use by LSIs.

The House bill contained no similar provision.

The House recedes with an amendment that would limit the participation of LSIs in the development or construction of any individual system or element of a system of systems.

Senate Armed Services Committee Report 109-254

The committee recommends a provision that would limit the participation of lead systems integrators (LSI) in the development or construction of any individual system or element of a systems of systems. The provision would also direct the Secretary of Defense to define the term `lead systems integrator' and to update regulations on LSIs taking into consideration the importance of LSIs in the production, fielding and sustainment of complex systems; the unique engineering skills of LSIs; and the management and organizational skills and capabilities of LSI. Finally, the provision would direct the Secretary to include a specification of various types of contracts and fee structures, including award and incentive fees, that are appropriate for use by LSIs.

The committee remains concerned with organizational conflicts of interest, the potential for a company to end up in a situation whereby the company is essentially evaluating itself or its competitors in making contract awards. The potential for organizational conflicts of interest continues to grow as the Department of Defense contracts for more work relating to acquisition, engineering, planning, integrating, or managing a system of systems as a major defense acquisition program.

Section 805 of the National Defense Authorization Act for Fiscal Year 2006 (Public Law 109-163) required the Secretary to submit a report to the congressional defense committees, not later than September 30, 2006, on the use of LSIs in the acquisition of major systems. The report required by section 805 directed that the Department include a detailed description of the actions taken, or to be taken, regarding `the prevention of organization conflicts of interest arising out of any financial interest of lead systems integrators without system responsibility in the development or production of individual elements of a major weapons systems.'

The committee understands that this report may be a work in progress. However, the committee believes that the financial interests of the Department and the taxpayer need to be protected now, not at some point in the future. In testimony before the Subcommittee on Airland of the Committee on Armed Services on March 1, 2006, the Government Accountability Office (GAO) stated,

"And ideally, you'd want the LSI to be financially indifferent to the outcome of the program." The provision would address the immediate need to place limitations on the financial interest of LSIs in the acquisition process.

In a December 2005 report, entitled `DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes', the GAO noted that the Department has paid out an estimated $8.0 billion in award fees to date on a set of contracts they studied for the report. The committee believes that the Department must review the types of contracts involving LSIs and large complex systems, and issue guidance regarding the use of award and incentive contracts when contracting with LSIs for complex systems.