[Attorney Jeongwon and Attorney Jo Hee-tae] The Defense Acquisition Program Administration (hereinafter referred to as ‘DAPA’) is scheduled to hold a government-contractor review committee meeting soon to deliberate on changing the delivery method of key components of the Tactical Information Communication Network (TICN), such as shelters and heating/cooling units, from the existing contractor procurement to government procurement. Up until now, from TICN research and development through the third phase of the project, related key components have consistently been procured through contractor procurement, but ahead of the fourth phase, DAPA has suddenly taken the position of changing the procurement of related components from contractor to government procurement. However, at this point, serious questions are being raised as to whether changing TICN components from contractor to government procurement is appropriate and necessary.
When DAPA signs a prime contract with a system integrator, the principle is that the prime contract should include the products of subcontractors as well (Defense Industry Contract Administration Enforcement Rules Article 7, Paragraph 4). The principle is a lump-sum contract. Modern weapon systems demonstrate performance through the integration of various components, and given the nature of weapon systems directly related to soldiers’ survivability and safety, ensuring the reliability of quality is paramount. Therefore, it is not only efficient but also prevents the government from being embroiled in unnecessary disputes over responsibility in the future by having the system integrator take full responsibility for the entire process from component supply to system integration.
This principle of lump-sum contracting is not only applied to weapon system mass production contracts. In general public contracts as well, it is an established principle that the contracting party who signs a direct contract with the public entity is responsible for supplying all subordinate components. Exceptions allowing government procurement are made only for certain policy objectives, such as supporting small and medium-sized enterprises’ market access through the ‘Direct Purchase System for Construction Materials’ (even in such cases, conditions are attached to ensure that the quality and efficiency of the construction are not compromised).
On the other hand, regarding weapon system mass production contracts, clear standards for the principle of lump-sum contracts and exceptions have not been established, and DAPA has been criticized for making government-contractor classification decisions based on audit results focused on performance, appearing to act cautiously.
In 2012, the Board of Audit and Inspection pointed out that the initial separation of major components such as gas turbines and reduction gears for the next high-speed patrol boat No. 1 (Yoon Young-ha ship), which were government-procured equipment, was a mistake, as it caused delays in ship construction and delivery. Since then, DAPA, conscious of the audit results, has consistently signed lump-sum contracts for major components. However, the Board of Audit and Inspection pointed out in audits of the Cheongung mass production project in 2018 and the K2 tank mass production and Batch-II/III projects in 2019 that “by pursuing lump-sum contracts, additional profits that would not have been paid under government procurement were paid.” Following these audit results, DAPA changed its stance and has been separating major components for government procurement contracts whenever possible.
The problem lies in the fact that the Board of Audit and Inspection’s audits of government-contractor classification decisions are not reasonable. The Board of Audit and Inspection has conducted contradictory audits based on a double standard. When a project conducted under government procurement experiences problems such as defects in government-procured items causing overall project delays, the Board criticizes the failure to proceed under contractor procurement from the start. Conversely, for projects conducted under contractor procurement, the Board criticizes the failure to proceed under government procurement, which could have reduced costs. In short, the Board criticizes government procurement for not being contractor procurement and contractor procurement for not being government procurement.
Decisions on whether to proceed with lump-sum contracts or separate contracts in weapon system mass production projects should naturally be made by DAPA, the project executing agency that best understands the characteristics of the project, based on objective and professional judgment. However, in reality, classification decisions are made with consideration of the Board of Audit and Inspection, which conducts audits based on situational logic and a take-it-or-leave-it approach, which is regrettable.
In particular, in the cases of the 105mm Howitzer Performance Improvement (K105A1 project) and TICN mass production projects, DAPA itself judged that lump-sum contracts were appropriate and has proceeded accordingly, yet suddenly decided or is pushing to change subsequent projects to separate contracts. This is a measure difficult to accept logically or reasonably. It is clear that this is a measure taken in response to recent audit results from the Board of Audit and Inspection, which takes a negative stance on lump-sum contracts citing additional profit compensation to system integrators as a reason.
However, converting from lump-sum contracts already signed for initial production quantities to separate contracts for subsequent quantities (K105A1 project), or suddenly switching from lump-sum contracts used through the third delivery to separate contracts at the fourth delivery without special reasons (TICN mass production project), not only abandons timely operational deployment and strict quality assurance but also breaches legitimate administrative trust. Recent media reports confirm that numerous subcontractors with verified delivery capabilities have faced or are at risk of bankruptcy due to DAPA’s unilateral decision to switch to separate contracts. It is questionable whether it is justifiable to drag numerous subcontractors, who have built contractual status based on trust in existing lump-sum contracts, into such a quagmire.
In lump-sum contracts, the system integrator receives a predetermined general administrative fee and profit compensation in exchange for fully bearing responsibility for parts supplied by subcontractors. This comprehensive management and supervision responsibility of the system integrator enhances efficiency in project management and reduces unpredictable national risks. Considering the confusion, increased costs, and security gaps caused by delays in project execution due to problems with government-procured equipment, the argument that separate contracts should be pursued for budget savings is hollow. In weapon system acquisition, timely operational deployment of weapon systems with excellent quality and performance must be prioritized.
We sincerely hope that regarding the decision on the contract method for the TICN fourth phase project, DAPA will demonstrate proactive and confident administration that respects existing judgments and decisions. Furthermore, for rational and smooth future operations, it is necessary to establish clear principles and specific standards for government-contractor classification.
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