Practice Notes

The Software and Digital Technology Pilot Program

A Step in the Right Direction, but Still Not on Course

By Major MaCayn A. May

Virtually every aspect of the enterprise has a software dependent capability—our weapons, communications and resourcing. It would be hard to find a single, mission-essential function in any command, that doesn’t depend on software in some shape, form, or fashion. In short, software can be a critical enabler to increasing the lethality within warfighting formations, yet the vast majority of the processes and associated policy remains focused on the hardware of the enterprise.1

From smart munitions and semi-autonomous drones to digital command posts and cyber warfare tools, the past forty years have shown software to be one of the most significant aspects of military equipment and operations.2 Unfortunately, the acquisition and development of software has fallen behind due, in part, to how it is funded.3 The Software and Digital Technology Pilot Program is a crucial,4 but ultimately underwhelming, start to remedying this issue.

Fiscal Structure for Software Purchases

The fiscal analysis for funding software has traditionally been the same as the fiscal analysis for hardware. The starting point, and relevant point for this discussion, for analyzing any fiscal issue is to classify the acquisition.5 Software can be classified as an expense, an investment item, or a development item depending on the type of software and how it is procured.6 Expenses are “incurred to operate and maintain [the Department of Defense (DoD)], such as . . . services, supplies, and utilities”7 and are typically funded with operations and maintenance (O&M) funds.8 Investment items are “costs that result in the acquisition of, or an addition to, end items . . . and generally are of a long-term character.”9 They are typically funded with procurement funds.10 A development item involves the “systematic use of the knowledge and understanding gained from research, for the production of useful materials, devices, systems, or methods, including the design and development of prototypes and processes,”11 and is typically funded with research, development, testing and evaluation (RDT&E) funds.12 For research and development organizations that do not receive O&M, RDT&E can be used for expenses.13

Software is considered an expense item when commercially available off-the-shelf (COTS)14 software is purchased with a subscription or annual fee.15 As with any expense item, O&M or RDT&E can be used regardless of the total cost.16 If COTS software is purchased as-is, or with minor modification, COTS software is treated as an investment item and is purchased with procurement.17 If software—which is subject to the same expense/investment threshold determination as hardware—has a unit cost of $350,000 or less, it is purchased with O&M (or RDT&E for DoD research organizations)18 instead of procurement.19 Any kind of software acquired through software development services, as well as COTS software that requires more than minor modification, is classified as a development item20 and must be purchased with RDT&E.21 The requirement to use RDT&E also applies to any major upgrades to software.22

(Credit: Kheng Guan Toh - stock.adobe.com)

Funding’s Effect on Software Purchase and Development

The DoD has known its software acquisition and development methods are inefficient and unproductive since the 1980s.23 In the National Defense Authorization Act for Fiscal Year 2018, Congress once again attempted to solve this issue by directing the Defense Innovation Board to review DoD’s software acquisition regulations.24 In May 2019, the Defense Innovation Board released its Software Acquisition and Practices (SWAP) Report.25 The report found that fiscal restrictions designed for hardware acquisition did not function well with the unique characteristics of software acquisition and development.26

Hardware development occurs in a linear fashion that matches current fiscal policy.27 The DoD uses RDT&E to research and develop technology and experimental hardware, it uses procurement to purchase investment items or the developed hardware, and it uses O&M to sustain the hardware.28 Even if a contractor needs to develop or modify its hardware to meet the military’s needs, procurement can still be appropriate if the military is purchasing the end-product, not development services.29 Software is cyclical. Whether software is developed or purchased, it is never a final end-product in the same manner as hardware.30 As a product of continuous engineering, software requires regular development, additions, and maintenance to remain useable.31 Software is also expandable and upgradeable in ways that are not possible for hardware. The current fiscal restraints for RDT&E, procurement, and O&M do not match this cycle.

The SWAP Report recommended the creation of a new multi-year appropriation for software development.32 This new authority would combine RDT&E, procurement, and O&M-type funding into a single source of funding for the life cycle of the software.33 This would allow program offices to internally manage funding for projects and support an iterative approach to development without the standard planning, programming, budgeting and execution process slowing them down.34

“Colorless” Money35

The DoD has started moving forward on the SWAP Report’s recommendation for a new funding authority.36 In coordination with the Office of Management and Budget, DoD prepared a legislative proposal letter for a new budget activity: Budget Activity 8, Software and Digital Technology Pilot Programs.37 Under the umbrella of RDT&E (though separate and distinct from RDT&E), Activity 8 funding is “intended to be used for expenses necessary for agile development, test and evaluation, procurement and modification, and the operation and maintenance of these Pilot initiatives.”38 Nine projects from across the DoD were proposed for the pilot program for Fiscal Year 2021 and approved through the Fiscal Year 2021 Appropriations Act.39 A tenth program was proposed in the Fiscal Year 2022 DoD Budget Proposal, but only eight were approved for funding.40 Congress moved the funding from RDT&E, procurement, and O&M funding sources into the new “colorless” appropriation.41 Each project now has a single source of funding for all development, procurement, and maintenance requirements.

The Software and Digital Technology Pilot Program should last several years, but the DoD does not mean for it to develop into a permanent authority.42 The DoD’s goal is to use the projects as prototypes to collect data and help senior leaders develop a long-term solution to the software development funding problem.43 According to then-Under Secretary of Defense for Acquisition and Sustainment, Ellen Lord, the DoD hoped the first “year or two” of the program would convince Congress to implement a dedicated software funding authorization and any other procurement reform necessary to implement the new authority.44

(Credit: iQoncept - stock.adobe.com)

Software and Digital Technology Pilot Program Shortfalls

The pilot program is a promising step forward in bringing DoD software development in line with modern practices but has fallen short in several critical areas. First, the DoD considered only fully funded software development projects.45 One of the major complaints about software development is the length of time required to start a new project because RDT&E funding typically takes two years to obtain.46 The pilot program does not allow DoD to demonstrate how a complete life-cycle funding source would improve the time required to start a project or the expected delivery date for initial capabilities.

Second, the pilot program required each project to demonstrate that it was successfully moving forward to be included.47 A common cause for project failure is fiscal uncertainty.48 Giving struggling projects the flexibility to shift funding between development, purchase, and maintenance could allow projects to focus on developing initial operational capabilities and allocating remaining funds for additional capability-generating iterations.49

Third, the funding is thus far limited to DoD and service-level development projects.50 Lower-level commands are increasingly pushing for innovative solutions to tactical and operational problems.51 Delegating approval authority to lower-level commands to contract for smaller-dollar value software solutions to issues at their level, whether modified-COTS or newly developed software, would empower commands, provide senior DoD leaders with additional data to present to Congress, and identify potential DoD or service-wide software solutions that have already been partially tested in the field.52

However, these shortfalls have started to jeopardize the future of the pilot program. The DoD requested funding for ten new projects under the pilot program in its 2023 budget proposal, and Congress did not approve any of them in the 2023 Consolidated Appropriations Act.53 Two years into the program, the DoD has failed to provide meaningful data to Congress to demonstrate how “colorless” money has improved software development procurements.54 In its absence, Senator Patrick Leahy, Chair of the Senate Committee on Appropriations, said Congress would not approve any new projects and the DoD should not include any new projects in future budget proposals until it could provide the necessary data.55

Conclusion

As a data-gathering operation, the Software and Digital Technology Pilot Program has the potential to significantly improve DoD software development and procurement. However, the limited nature of the program has left unanswered questions about project initiation, project failure from fiscal uncertainty, and small-scale innovation, all of which now jeopardize the program’s future. The DoD needs to be deliberate in its approach but cannot afford any further delay in developing objective standards for measuring project success. The limited scope of the program and its current projects will make data gathering a challenge and will likely mean several more years of pilot programs without a permanent solution. TAL

MAJ May is the Command Judge Advocate at the 414th Contracting Support Brigade in Vicenza, Italy.

Notes

1. Bruce T. Crawford, Military Software is ‘Next Great Frontier’, Nat’l Def. (Apr. 21, 2017), https://www.nationaldefensemagazine.org/articles/2017/4/21/military-software-is-next-great-frontier.

2. See id.; Def. Innovation Bd., U.S. Dep’t of Def., Software is Never Done: Refactoring the Acquisition Code for Competitive Advantage 18–21 (2019) [hereinafter SWAP Report].

3. See SWAP Report, supra note 2, at 31-32.

4. See Jared Serbu, Pentagon Teeing Up Nine Programs to Test New ‘Color of Money’ for Software Development, Fed. News Network (Mar. 4, 2020, 7:40 AM), https://federalnewsnetwork.com/acquisition/2020/03/pentagon-teeing-up-nine-programs-to-test-new-color-of-money-for-software-development.

5. See 31 U.S.C. § 1301(a); U.S. Dep’t of Def., 7000.14-R, DoD Financial Management Regulation vol. 2A, ch. 01, paras. 2.1.3.1–2.1.3.2 (Oct. 2008) [hereinafter DoD FMR].

6. See 2A DoD FMR, supra note 5, paras. 2.12.2.1–2.12.2.5.

7. 2A DoD FMR, supra note 5, para. 2.1.2.1.

8. 2A DoD FMR, supra note 5, para. 2.1.3.3.

9. 2A DoD FMR, supra note 5, para. 2.1.2.2.

10. 2A DoD FMR, supra note 5, para. 2.1.3.3.

11. 2A DoD FMR, supra note 5, para. 2.13.1.2.

12. 2A DoD FMR, supra note 5, para. 2.13.2.1.1.

13. See 2A DoD FMR, supra note 5, para. 2.1.3.3.

14. Commercially available off-the-shelf items are “sold in substantial quantities in the commercial marketplace; and . . . without modification, in the same form in which it is sold in the commercial marketplace.” FAR 2.101 (2019) (defining commercially available off-the-shelf items).

15. U.S. Dep’t of Def., Def. Fin. & Acct. Serv., 37-100-23, The Army Management Structure for Fiscal Year 2023 app. A, para. D(8)(c) (Aug. 2022) [hereinafter DFAS Manual].

16. Id. app A, para. D(3)(c).

17. Id. app. A, para. D(8)(d); 2A DoD FMR, supra note 5, paras. 2.12.2.4.2, 2.12.2.5.2.

18. 2B DoD FMR, supra note 5, para. 1.5.6.

19. 2A DoD FMR, supra note 5, paras. 2.1.2.2, 2.1.3.3, 2.1.4.1.6; Consolidated Appropriations Act, 2023, H.R. 2617, 117th Cong. 137 (2022) (enacted as Pub. L. No. 117-328 on Dec. 29, 2022) (“During the current fiscal year, appropriations which are available to the Department of Defense for operation and maintenance may be used to purchase items having an investment item unit cost of not more than $350,000.”).

20. See 2A DoD FMR, supra note 5, para. 2.13.2.1.1.

21. DFAS Manual, supra note 15, app. A, para. D(8)(d), (e).

22. 2A DoD FMR, supra note 5, para. 2.12.2.3.

23. See SWAP Report, supra note 2, at 18–21.

24. National Defense Authorization Act for Fiscal Year 2018, Pub. L. No. 115-91, § 872, 131 Stat. 1283, 1497 (2017).

25. SWAP Report, supra note 2.

26. SWAP Report, supra note 2, app. E, at S77 (“Acquisition practices for hardware are almost never right for software: they are too slow, too expensive, and too focused on enterprise-wide uniformity instead of local customization.”).

27. SWAP Report, supra note 2, at ii, viii–ix.

28. See 2A DoD FMR, supra note 5, paras. 2.1.3.3, 2.1.4.1–2.1.4.3.9, 2.13.2.1.1.

29. Cf. U.S. Gov’t Accountability Off., Antideficiency Act Reports — Fiscal Year 2012, at 13 (2012), https://www.gao.gov/products/d03741 (finding that the Department of Defense’s use of procurement funds for a helicopter development project, which included engine design and development services, was improper and that RDT&E funds were the correct choice).

30. See SWAP Report, supra note 2, at ii, viii–ix, 15, app. E, at S77.

31. SWAP Report, supra note 2, app. E, at S77, app. F, at S134.

32. SWAP Report, supra note 2, at 33.

33. SWAP Report, supra note 2, at 33.

34. SWAP Report, supra note 2, app. E, at S78–79, app. F, at S134.

35. Funding provisions within an appropriation act are often referred to as “pots” or “colors” of money. A colorless pot of money is not tied to a particular provision’s restrictions. See Jared Serbu, Pentagon Wants to Use Its Biggest IT Program to Test ‘Colorless’ Software Appropriation, Fed. News Network (May 31, 2021, 2:46 PM), https://federalnewsnetwork.com/defense-main/2021/05/pentagon-wants-to-use-its-biggest-it-program-to-test-colorless-software-appropriation.

36. See Billy Mitchell, DOD Has OMB Support for Special Software-Only Appropriations Pilot, FEDSCOOP (Sept. 10, 2019), https://www.fedscoop.com/dod-omb-support-special-software-appropriations-pilots.

37. Id.; John F. Sargent Jr., Cong. Rsch. Serv., R44711, Department of Defense Research, Development, Test, and Evaluation (RDT&E): Appropriations Structure 3 tbl.1 (2022).

38. Sargent, supra note 37, at 4 (citing email communication between Office and Management Budget and Congressional Research Service staff, June 1, 2020).

39. The nine projects were: Defensive Cyber Operations Army, Risk Management Information, Maritime Tactical Command Control, Space Command and Control, National Background Investigation Services, Global Command and Control System-Joint, Algorithmic Warfare Cross Functional Team, Acquisition Visibility, and Joint Operational Medicine Information System. Off. of Under Sec’y of Def. for Acquisition & Sustainment, Budget Activity (BA) BA-08: Software and Digital Technology Pilot Program Frequently Asked Questions 4 (2020) [hereinafter BA-08 FAQ]. Each project was already fully funded and had “demonstrated a moderate to high degree of success.” Id. at 7.

40. Serbu, supra note 35. The proposed program was the Navy’s Next Generation Enterprise Network (NGEN), which would more than double the total appropriation for the Software and Digital Technology Pilot Program. Id.; Lauren C. Williams, Funding for DOD’s Software Pilots Holds Strong in 2022, FCW (Mar. 14, 2022), https://fcw.com/defense/2022/03/funding-dods-software-pilots-holds-strong-2022/363154. Of the original nine projects, only the Joint Operational Medicine Information System was not approved. Id.

41. BA-08 FAQ, supra note 39, at 3.

42. BA-08 FAQ, supra note 39, at 3.

43. BA-08 FAQ, supra note 39, at 7.

44. Serbu, supra note 4.

45. BA-08 FAQ, supra note 39, at 6–7.

46. See Brendan W. McGarry, Cong. Rsch. Serv., IF10429, Defense Primer: Planning, Programming, Budgeting and Execution (PPBE) Process 1 (2020).

47. BA-08 FAQ, supra note 39, at 6–7.

48. See Matthew R. Bogan et al., Failure Is Not an Option: A Root Cause Analysis of Failed Acquisition Programs 42 (Dec. 2017) (M.B.A. thesis, Naval Postgraduate School), https://calhoun.nps.edu/bitstream/handle/10945/56867/17Dec_Bogan_Percy_Kellerman.pdf?sequence=1&isAllowed=y.

49. SWAP Report, supra note 2, app. A, at S52.

50. See BA-08 FAQ, supra note 39, at 3-6.

51. For example, the 25th Infantry Division created its Lightning Labs program as “a pipeline that links problem aggregation and innovation at echelon to a strategically curated network of academic and industry partners.” About 25ID Lightning Labs, OpenHive, https://unum.nsin.us/lightning-labs/info (last visited Apr. 24, 2023). The XVIII Airborne Corps created The Dragon’s Lair, a Shark Tank clone allowing Soldiers to pitch innovative ideas to senior leaders. Maxine Baen, Army Invites Innovators to Enter 7th Dragon’s Lair, U.S. Army (June 20, 2022), https://www.army.mil/article/257540/army_invites_innovators_to_enter_7th_dragons_lair; see also U.S. Dep’t of Def., Off. of the Inspector Gen., D-2002-109, Acquisition: Army Claims Service Military Interdepartmental Purchase Requests (19 Jun. 2002), https://media.defense.gov/2002/Jun/19/2001715850/-1/-1/1/02-109.pdf (finding that U.S. Army Claims Service inappropriately obligated O&M for software development instead of RDT&E); U.S. Gov’t Accountability Off., Antideficiency Act Reports—Fiscal Year 2017, at 1 (2017) https://www.gao.gov/assets/690/688415.pdf; Letter from Michael McCCord to Hon. Gene Doaro, Comtroller Gen. of the U.S. (Oct. 18, 2016), https://www.gao.gov/assets/690/688398.pdf (finding purpose violation by Army G2 for obligating O&M instead of RDT&E to develop eleven intelligence quick-reaction capabilities into a cloud computing environment).

52. The Army recognized the need for software development services at lower echelons but chose to address the problem internally by creating the Army Software Factory in 2021. The Army Software Factory takes problem statements from anyone in the Army, and if approved, builds web applications to address the problem. Katie Davis Skelley, Software Factory Helps Transform Army from Industrial to Information Age, U.S. Army (May 27, 2022), https://www.army.mil/article/256990/software_factory_helps_transform_army_from_industrial_to_information_age.

53. Alexandra Lohr, Money Flows for Technology, Cybersecurity in New Defense Department Budget, Fed. News Network (Dec. 22, 2022, 4:28 PM), https://federalnewsnetwork.com/cybersecurity/2022/12/money-flows-for-technology-cybersecurity-in-new-defense-department-budget/?readmore=1.

54. 168 Cong. Rec. S8174 (daily ed. Dec. 20, 2022) (statement of Sen. Patrick Leahy).

55. Id. at S8174–75.