Naval Operating Base, Arkladelphia Naval

Naval Operating Base, Arkladelphia

Naval contracting officer, Lieutenant June Early, is faced with a challenging situation. The Trustworthy Equipment Company is acting in a sole source capacity for a machine used in the repair and maintenance of naval submarines. The machine will save the Navy both time and money. However, the costs given to the Navy by Trustworthy appear to be unreasonable and most often due to inefficient management. The questions that Lieutenant Early must face are: Should she question the costs due to inefficient management? What action should she take regarding a 3.3% contingency allowance? Lastly, what should Lieutenant Early do if the company is not willing to reduce its costs?

As Karrass (1995) notes, when dealing with a sole source situation, the balance of power is clearly on the side of the supplier. However, Lieutenant Early must remember that as a buyer, there are still options that can sway that power more in favor of the Navy. Although Early may think Trustworthy is the only source, she has to remember she has alternatives. First, the Navy can do without the machines. Yes, it would cost the Navy in increased costs and time spent in the process of repair and maintenance; however, reminding Trustworthy that this option is available to the military may help in persuading them to make reasonable adjustments. In addition, although Trustworthy is the only provider currently of this machine, the Navy may wish to invite other companies to create machinery to perform the necessary tasks to create competition for Trustworthy. Or, the Navy itself may want to manufacture the machines it needs, especially given the relatively low number of the machines needed. Letting Trustworthy know that there are these other viable options, and explaining that there are ways that the company can improve its efficiencies that are certain to not only help bring this contract to fruition, but also help the company be more profitable, may persuade the company to make reasonable concessions.

A contingency allowance, according to Bent (2001), is a factor to cover oversights or unknowns in a project. In the past, some would simply add a fixed percentage to a project to cover these unknowns; however, today it is more common for a company to perform a risk analysis to determine the amount of contingency (Mak, Wong, & Picken, 1998). At 3.3%, Lieutenant Early needs to discover if this figure was based on factors specific to this project, or simply pulled out of the air. If the project is well-defined and there is little chance that the company will run into unknowns, this figure may be too high and another point of negotiation.

There are several options Lieutenant Early has available, should Trustworthy be unwilling to eliminate some of the unusual cost items. First, Early could simply pay the price Trustworthy wants. It has been determined that even at that price, the machines will still save the Navy money and time. Early may decide not to use the machines at all, and simply go with manual repair and maintenance, as before. Or, Early may decide to approach other manufacturers to see if they can design a machine to provide a similar function, or design something in house. If would be prudent for Early to use a combination of these alternatives, if Trustworthy refuses to make concessions on their costs. The Navy could buy some of the Trustworthy machines while exploring the options of making the remainder in house or contracting another manufacturer to come up with a similarly functioned machine.