March 14, 2012 NCMA Boston Education Workshop Policy Update Copyright. Unpublished Work. Raytheon Company. Customer Success Is Our Mission is a registered trademark of Raytheon Company.

Page 210/17/2015 Talking Points Washington Environment DoD Efficiency Initiative - Impacts, Key Rules New FAR/DFARS Requirements – Business Systems – CAS Harmonization 2012 NDAA Update – Rules on the Horizon Just my thoughts, but…

Page 310/17/2015 Current Washington Environment Budget Pressures – Less wiggle room and shrinking DoD Key target for cuts- Proactive approach – $487B/ 10 years Efficiency Initiative remains DoD’s priority – Frees up funds needed in budget constrained environment – More programs at risk of termination—performance counts! Short term focus - Election year! – More campaigning, less action Sequestration- The big ax over DoD’s head – If no relief, even more painful budget cuts loom ahead – Automatic $492B in cuts Jan 2013

Page 4 Better Buying Power Initiative – Incentivize Productivity and Innovation in Industry Reward contractors for successful supply chain and indirect expense management – Part of incentive strategy and aligned to profit Increase the use of FPIF with 50/50 Cost share-120% ceiling as starting point Adjust progress payments to incentivize performance – Develop cash flow model and guidance of preferred financing hierarchy – Flow down to subcontractors Reinvigorate IRAD program—more defense related R&D

Page 5 Promote Real Competition Competitive Acquisition strategy at each program milestone – Focus on single bid contracts- directed 2% reduction starting in 2011 Negotiations on single bid offers – PCOs use certified or non-certified cost or pricing data Develop plan to improve competition rate by 10% annually Increase small business awards – Past performance factor, profit/fee consideration

Page 6 Target Affordability and Controlling Cost Growth Mandate Affordability as a requirement for ACAT programs – Affordability as a key performance parameter – Support engineering, cost and schedule tradeoffs Drive productivity growth through Will Cost/Should Cost management – Should Cost targets as management tools – Used as basis for contract negotiations and incentives Eliminate redundancy within warfighter portfolio Make Production rates economical and hold them stable – Define production rates change limits based on affordability assessments

Page 7 “Incentivize Productivity and Innovation in Industry” – Contract Financing Secretary Carter’s direction to OSD/DPAP - November 2010 – “I expect that the basis of negotiations shall be the use of customary progress payments. After agreement on price on the basis of customary progress payments, the contractor shall have the flexibility to propose an alternate payment arrangement for the Government’s consideration”, such as PBPs. New OSD Performance Based Payments Analysis Tool at:

Page 8 DFARS Proposed Rule- Performance Based Payments (PBP)- Overview Provides requirements for the use of the PBP tool to evaluate alternate financing arrangements To be used by contracting officers contemplating PBPs from new fixed price contracting awards resulting from solicitations issued after July 1, Proposed rule states “PBPs should never exceed the total costs incurred at any point during the contract” 10/17/2015

Page 9 Recommended Performance Based Payment Process Advocates two step negotiations to achieve PBPs from Customary Progress Payments – Conclude price negotiations using Customary Progress Payments – If PBPs are desired, submit PBP milestones schedules and events with expenditure profile – Government evaluates milestone schedule using cash flow model – Negotiate consideration (expectation: lower profit in return for improved cash flow) – non-profit consideration is acceptable – Obtain business clearance approval – Document adequate consideration for PBPs 10/17/2015

Page 10 Cash Flow Model - Experiences to Date This new DoD model of Contract Financing is here to stay – Part of the Carter Better Buying Power initiative – DFARS Rule in public comments phase Uneven execution – Lack of experience using model potentially hampers negotiations – Slower definitization of UCAs – Result: more actuals, reduces negotiations to profit/fee discussions Culture of excessive oversight – ignoring/modifying directive – Blind adherence to model reduces second guessing later Don’t forget about non-profit consideration – What’s else is important to your program? Extended warranties, tech data, etc – Document! Document! Document! decisions 10/17/2015

Page 11 DFARS Business Systems Rule Background Goal: Improve the effectiveness of the oversight of contractor business systems – Systems will “provide timely, reliable information for the management of DoD programs” Allows for Contracting Officers to withhold payments for business systems deficiencies – 5% for systems deficiencies Cumulative maximum is 10% for multiple systems deficiencies – Reduced to 2% when an acceptable corrective action plan is submitted Defines six contractors business systems – Purchasing Systems (DCMA) – Property Systems (DCMA) – Earned Value Management Systems (EVMS) (DCMA) – Accounting Systems (DCAA) – Estimating Systems (DCAA) – Materiel Management and Accounting Systems (MMAS) (DCAA) Applies to all CAS Covered Contracts Exempts small business contracts

Page 12 DFARS Business Systems Rule Key Changes DCMA/DCAA – Contracting Officers have the sole authority to determine if system deficiencies warrant withholds DCAA reports deficiency in accordance with GAGAS Contracting Officer consults with auditor, makes determination to withhold or discontinue withholds Due Process – Contracting officer initial determination of system deficiency – Contractor afforded 30 days to respond in writing – Contracting officer evaluates and makes final determination – Contractor allowed an additional 45 days to correct deficiency – DCMA/DCAA “Business Systems Review Panel” assesses all CO determinations before implementing Final Determination for withholds 10/17/2015

Page 13 IR&D REPORTING TO DTIC – Final Rule Allowability: The ACO or Corporate ACO shall determine whether IR&D or B&P projects are of potential interest to DoD. DFARS (c) (iii)(B) Requires major contractors to report independent research and development projects Applies only to major contractors who allocated $11M IR&D/Bid and Proposal costs to covered contracts the preceding fiscal year Limited to unclassified IR&D project summaries – FOIA Exemption (b) (4) applies (trade secrets, financial information that is privileged or confidential) Inputs must be updated at least annually and when project is completed

Page 14 CAS Harmonization – What’s the Big Deal? Pension Protection Act of 2006 (PPA) amended pension trust funding requirements – Effective in 2008 for most contractors Requires DoD to reimburse a larger portion of employee pension costs – recognized allowable costs – Significant contributions into pension trusts required by PPA – Significant negative cash flow to government contractors Decades before PPA funding recognized as cost under existing CAS Total industry amount of funding not recognized as cost in the billions PPA mandates harmonization of Cost Accounting Standards (CAS) with PPA funding requirements – Expect accelerated recognition of pension costs when harmonized BOTTOM LINE: Required change in regulation entitles contractors to equitable adjustments for pension contributions – May impact overhead rates in outyears

Page 15 March 2012 Contracts Policy Update FY 12 NDAA Key Bills Summary Copyright. Unpublished Work. Raytheon Company. Customer Success Is Our Mission is a registered trademark of Raytheon Company.

Page 1610/17/2015 “Where this new FAR rule come from?” Plenty of sources: – Congress – Secretary Carter’s Better Buying Power Initiatives – DoD IG UCA’s a big concern…more to follow Deliberative process – Most changes allow the public an opportunity to comment before implementation Industry associations play an important role in shaping policies on key issues – Aerospace Industries Association – National Defense Industry Association – TechAmerica, etc.

Page 17 DoD/IG Report- Undefinitized Contract Actions Required by law to review UCAs – Provide annual report to Congress – Latest report Issued Jan 2012 Results: – 251 UCAs reviewed, 216 had discrepancies Did not meet 180 day definitization requirement Did not adequately support profit determination Obligate funds within allowable limits Did not properly justify the use of a UCA DoD/IG Recommendations include: – OSD/DPAP revise DFARS with additional guidance on the use of UCAs Template for adequate authorization requests Why performance needs to begin immediately Instructions on how to address incurred costs in profit/fee determinations Reduced risk with substantial incurred costs 10/17/2015

Page 18 Summary of the Key Bills in FY 12 NDAA Section 803 – Extension of Applicability of Senior Executive Benchmark Compensation Amount for Purposes of Allowable Cost Limitations under Defense Contracts – Expands coverage of allowable costs for executive compensation beyond the top 5 executives of a federal contractor to all employees of the contractor. – Allowable cost cap is $400K Section 804- Supplier Risk Management – Requires DoD to manage supplier risk by directing contracting personnel to use a “credit card type bureau” to evaluate supplier risk on all DoD contract actions Section DCAA Annual Report – Requires DCAA to submit an annual report summarizing its audit activities the previous fiscal year. – Includes significant problems, abuses and deficiencies, number of audit reports and pending, length of time taken for each audit, questioned dollar value, etc. – Also requires a summary of recommendations to improve the audit process 10/17/2015

Page 19 Summary of the Key Bills in FY 12 NDAA Section 806 – Inclusion of Data on Contractor Performance in Past Performance Databases for Source Selection Decisions – Requires DoD to develop a strategy to ensure timely, accurate and complete information is included in past performance databases used for source selection decisions – Requires contractors be afforded up to 14 days to provide comments before information is posted. Section 813 – Extension of GAO Protest Authority over Task and Delivery Orders – Extends to September 20, 2016 the sunset date for GAO to hear protests of task and delivery orders under civilian agency contracts over $10M. Section 815 – Rights in Technical Data and Validation of Proprietary Data Restrictions – Clarifies treatment of IR&D/B&P under which the governmen receives Government Purpose License Rights in technical data – Grants DoD the right to require delivery of tech data of which the Government has rights, even if not required in the contract 10/17/2015

Page 20 Summary of the Key Bills in FY 12 NDAA Section 816- Covered Contracts for Purposes of Requirements on Contractor Business Systems – Amends Section 893 of FY 11 NDAA to define “Covered Contract” to mean any contract subject to cost accounting standards – Includes firm fixed price contracts – Exempts contracts for small businesses Section Detection and Avoidance of Counterfeit Electronic Parts – Established contractor responsibilities for detecting and avoiding the use or inclusion of counterfeit parts in goods or services intended for military or national security application – Includes contractors’ liability, preventative and reporting actions Section 823 – Prohibition on Collection of Political Information – Prohibits DoD from requiring a contractor to disclose political contributions in conjunction with a solicitation, RFP or other communications in connection with the award of a federal contract 10/17/2015

Page 21 Summary of the Key Bills in FY 12 NDAA Section Prohibition on Contracting with the Enemy in the US CENTCOM Theater of Operations – Allows HCA to void or restrict future contract awards to contractor determined by the Commander, CENTCOM as actively opposing US forces in a theater of operations Section Additional Access to Contractor and Subcontractor Records in US CENTCOM Theater of Operations – Allows SecDEF to examine records of contractor or subcontractor in CENTCOM Theater of Operations to ensure funds are not subject to extortion and corruption Section 852- Strategy for Securing the Defense Supply Chain and Industrial Base – Requires a sector by sector, tier by tier assessment of the defense industrial base that must identify critical new and emerging sectors of the defense industrial base – Requires a risk assessment of the Defense industrial base supply chain 10/17/2015

Page 22 Summary of the Key Bills in FY 12 NDAA Section 867- Five year extension of the Mentor Protégé Program Reauthorization of SBIR and STTR Programs – Increases Phase I ceiling award from $100K to $150K – Increases Phase II ceiling award from &750K to $1M Section 822-Higher Procurement Thresholds in Contingency Ops – SAT is $1M, Micro-purchase threshold is $25K 10/17/2015

Page 23 Just my Thoughts… Don’t be overwhelmed by a “Culture of Fear” – “Business Advisor”- make your decisions on stated guidance, experience – Oversight, second guessing goes with the territory Contracts – Expected to be at our best in times of turmoil – Team members depend on us to provide the BEST business advice for program execution Be proactive! Identify the business risks early Communicate, Communicate, Communicate! – Collaborate on the thorny issues to ensure a better product The Warfighter needs us to solve these challenges – You are not in this alone…successful program performance is a shared responsibility 10/17/2015

Page 24 Questions??? 10/17/2015