DAPA Introduces New Plans for Cost Reduction
(Source: The Korea Times; issued July 16, 2019)
The Defense Acquisition Program Administration (DAPA) laid out plans Monday to streamline its processing of procurement contracts. The administration also plans to introduce a standardized method of calculating the amount it will compensate defense firms for their arms production costs. DAPA hopes the new policy will encourage domestic defense companies to voluntarily reduce the amount spent on arms production.

The updated plans include the introduction of the concept of standard cost when calculating the amount of compensation offered to manufacturers by the arms procurement agency. Until now, the compensation has been calculated based on the actual expense incurred during the production process.

"The biggest beneficiaries of the agency's 45-year-old cost accounting process have been the country's defense firms because they are positioned to make more money if the cost of production is high. There is no incentive for them to reduce production costs," Kim Sang-mo, director general of the DAPA's Cost Accounting and Verification Group said.

"More incentives are needed to promote exports and encourage defense firms to develop new technologies," said Son Hyung-chan, the DAPA's deputy minister for contract management.

The standard cost will be decided based on a defense firm's business type and revenue size. The DAPA also plans to simplify due procedures in deciding the estimated prices for arms procurement contracts.

Currently, a defense firm has to submit documents for the estimated prime cost to the agency's cost accounting division and then the division teams up with a screening team inside the agency to calculate the prime cost based on field studies and other variables. Once the DAPA's contractor receives the research results, it decides the estimated price and notifies the agency's contracting team.

The change is calling for the defense firm to directly send any necessary documents for prime cost to the agency's contracting team after discussing with relevant third-party partners. The agency's contractor is enabled to directly communicate with the contracting team, while the cost accounting and screening teams will be abolished.

Other plans initiated by the procurement agency also includes those to encourage the exports of arms, encourage research and development, and encourage localization of products by increasing the amount of compensation for the costs in such areas.

DAPA collaborated with the Korea Defense Industry Association (KIDA), the Agency for Defense Development (ADD) and Defense Agency for Technology and Quality (DTaQ) and some other companies in defense industry to work out the upgraded plan.

Samil PwC has carried out the research on reform plans at request of the DAPA

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