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Federal Policy Changes: Effects On Purchasers, Private and Public

Author(s):

Stanley N. Sherman, D.B.A., C.P.M.
Stanley N. Sherman, D.B.A., C.P.M., National Association of Purchasing Management Professor George Washington University, Washington D.C. 20052 202/994-4762

81st Annual International Conference Proceedings - 1996 - Chicago, IL

Abstract. Dramatic changes in buying practices have dominated the thinking of private sector purchasers for at least ten years. Driven by the TQM philosophy, this era of change has expanded the role of innovative purchasers in corporate life, reduced the cost of buying, made companies more competitive, and secured higher quality products and services. During much of this period Federal purchasers were directed to continue, and to increase, their use of traditional hard-line, price-oriented buying methods. Softening of this approach began to be noticed in the Federal bureaucracy during the 1993-95 time period, and real change has finally invaded the Federal buying world. This paper is a summary review of these changes at the Federal level. Both executive and legislative initiatives are involved. Regulations have been modified, attitudes and practices of many professionals have changed. The author appraises some of the practical improvements that may be achieved and speculates whether and when one might expect improvements to be observable.

A Period of Real Change. At the First Worldwide Research Symposium on Purchasing and Supply Chain Management, the author presented a paper summarizing the significant statutory changes brought by enactment of the Federal Acquisition Streamlining Act of 1994.(1) That enactment, known as FASA, keynoted important changes, but many of its provisions could not have practical impact until the new rules were implemented through modifications of the Federal Acquisition Regulation (FAR). Those modifications have now been issued. Furthermore, there have been several initiatives by members of the executive branch aimed at rapidly incorporating the new styles of management that have proven so successful in the private sector. A few of the actions taken so far and some new items that may be placed into effect during 1996 are briefly reviewed in this paper. The number of specific changes being proposed or adopted is so large that space does not allow addressing them all. One overall point that should be made is that liberalization has primarily focused on process and rule changes that should permit the Government to secure wider use of commercial products and to take advantage of effective commercial practices.

Discretion: A Challenge for Policy Makers. It remains difficult to make direct comparisons between government buying and private sector buying. Some very effective private sector buying practices, such as prequalification of potential suppliers prior to allowing submission of offers, is not easily done by governments at any level. The fear of improper influence or partiality in source selection, plus procedures encouraging challenges of public decisions, limit empowerment in some ways. Even so, many executives recognize that the nature of buying decisions and the idea of empowering personnel require that discretion be exercised by the persons charged with procurement. Most of the changes in Federal procurement law and regulation in the last two years have been in the direction of making the rules flexible enough to encourage lower levels of the bureaucracy to make responsible decisions.

Federal Procurement Rule Changes Now In Effect.
Milspec Reform. Noteworthy progress toward emulating private sector practices in specifications and standards has been achieved. The objective of making changes in this area was to reduce the use of military documents and increase reliance on commercial specifications and standards. This process of change was set in motion by Defense Secretary William Perry's June 1994 memorandum.(2) This effort, applicable to the Government's largest buyer, represents a dramatic reversal of years of government practice. Prior to the memorandum, a waiver was required for an acquisition manager to cite other than milspecs when initiating procurement. Upon its issuance a waiver was required if the manager decided to cite a milspec. The Secretary's action brought about a review of some 1700 military-unique specifications and standards in an attempt to identify non-value-added documents. It even opened the door to reconsideration of some 28,000 milspecs.(3) One recent development is establishment of the Defense Standardization Homepage giving immediate access to developments in the standardization area to Internet users. The Homepage address is: http://www.acq.osd.mil/es/std/stdhome.html.

Market Research. Limited encouragement for agencies to use market research has been in place since 1984, with little result. The current changes go much further. FASA directed and the FAR has now implemented specific requirements that agencies conduct market research to determine

  1. whether available commercial items meet the agency need, or
  2. whether a commercial item can be modified to meet the need.(4)

Market research is also to be used to identify terms and conditions customary in commercial transactions pertinent to the item needed by the agency. This change could be significant because it allows and encourages contracting officers to tailor their solicitations and contracts to meet the needs of the particular acquisition. Nevertheless, standard provisions are published for commercial item purchases. To facilitate this process a new standard form 1449 has been published, and some of the government's unique statutes have been made inapplicable to commercial item purchases.

In cases where an agency's needs are such that consideration of a commercial product must be conditioned on the product's demonstrated performance, the agency head is authorized to require the offeror to show that the product has achieved "market acceptance." Placing this authority at that level appears to be designed to discourage casual rejection of a commercial product, in cases where testing is impracticable, without full consideration of the product's uses in non-governmental applications.

Quality Assurance. For procurement of commercial items, Government agencies are enjoined to rely on the contractor's quality assurance system to ensure receipt of qualified material. A major exception occurs when normal market practice requires in-process inspection. The in-process inspection is to be done consistently with commercial practice. Related to this move toward commercial practices, the Government has now adopted Uniform Commercial Code principles for acceptance of goods. Additionally, the rules now specify that implied warranties of merchantability and fitness for use are minimum warranties for government purchases.

Rights in Technical Data and Computer Software. In an effort to resolve longstanding controversy, agencies have now been enjoined to acquire technical data related to commercial products in the same manner as it is customarily provided to commercial customers. Furthermore, when acquiring commercial software, the license acquired is to be consistent with that provided to the general public. This change should not be confused with the new Department of Defense clauses on rights in technical data and computer software which were issued on June 28, 1995. The DOD action applies to DOD contracts only.(5)

Cost and Pricing Data. Perhaps the most observable change in rules pertinent to cost and pricing data is the increase in the threshold from $100,000 to $500,000 at which agencies may request the data. Equally as important is the new rule that contracting officers shall not require certified cost and pricing data in cases in which an exemption from the requirement is applicable. Furthermore, cost or price data has now been defined as being limited to certified cost or pricing data in accordance with TINA and FAR 15.804 (this is being referred to as the bright-line test). Under the new rules contracting officers are barred from seeking cost or pricing data when adequate competition exists, and they are instructed to seek the least intrusive information necessary to determine price reasonableness. These rules create a hierarchy of choice regarding the collection of data for pricing purposes, with the least desired choice being collection of cost or price data (as defined by the bright-line test). All of these changes apply across the board, but other significant changes have been implemented which are directed at liberalizing commercial item procurement.

Procurement Card Purchases. Authority to use purchase cards by Federal buyers began in 1989, but use grew slowly until 1994 when their use exploded with the introduction of FASA changes. The technique (known as micropurchasing in the bureaucracy) now accounts for $2 billion of the Federal small purchase activity.(6) Procurement cards enable banks to pay for purchases more quickly than the agencies and dramatically reduces the administrative cost of small purchases just as has been demonstrated in the private sector. But the system is subjected to criticism because purchases up to $2500 use the system and are no longer set aside for small business. This element, criticism by groups that may be adversely affected, is a major factor restricting optimism relative to change in the direction of reduced structure and procedure in Federal procurement.

Federal Acquisition Computer Network (FACNET) and Simplified Acquisition Procedures. Under FASA, Federal agencies are required to establish an electronic buying system. Considerable effort has been devoted to this project, known as FACNET. Design of the system has proceeded slowly because of the huge scope of the Federal acquisitions programs and the number of agencies and interest groups involved. While some implementing FAR changes were issued in July, 1995, many issues remain, and even the basic architecture of the system had not been established as late as November 1995. Because FASA linked authority to use the new $100,000 simplified acquisition threshold to implementation of FACNET, full introduction of the two on a government-wide basis is proving difficult. In July 1995 as an interim measure toward use of the full $100,000 small purchase threshold, FAR Part 13 authorized agencies to use simplified procedures for purchases up to $50,000. One benefit of the simplified procedures is shortened lead time. Research has shown that purchases within the threshold require an average of 26 days. Negotiated purchases above the threshold have an average lead time of 210 days.

Creating a FACNET system architecture adequate to protect data security, prevent fraud, enable verification of transaction receipt, and minimize the need for system changes is only part of the system's start-up challenge. Other elements include software development, communications connectivity, network management, data repository management, a system of registration for supply sources, and clarification regarding services and prices.(7) Interestingly, adoption of EDI by federal agencies has been called "incredibly simple."(8)

Contract Financing. FASA opened the door to creating a system of financing for procurement of commercial items. This is now covered in FAR Part 32.2 and enables use of installment payments as well as other forms of commercial item financing. The rules for noncommercial contract financing have also been altered to encourage performance-based financing in place of cost-based payments. The initial regulatory implementation in this area encountered adverse public comments because it appeared to create procedural barriers to such financing. The comments resulted in new rules concerning the subject issued in July 1995.9 Significant reduction of bureaucratic procedures associated with financing were established. The objective appears to be to make government a more flexible and desirable customer.

Proposed Federal Procurement Rule Changes.
Competition Standard. Modifying the Federal rules defining what constitutes adequate competition has generated much controversy. The issue relates to competitive negotiated procurement where the established standard is to secure "full and open competition." Some experts in the field hold a strong commitment to having an unmistakably objective price criterion for source selection. They fear that judgment in the hands of ministerial personnel may lead to bias or preferences or prejudices in the decision-making process. Experts with a more open view express the need for professionals in the field to exercise their judgment and are willing to accept such discretion because it enables better matching of needs and capabilities. This issue is vital but unresolved at this time. There have been reports that a compromise rule will enable Federal contracting officers to decide the competitive range in negotiated procurement on the basis of "efficiency."(10)

Summary. The steps cited in this paper are merely representative of the scope of purchase process changes now being considered or adopted at the Federal level. The effort could be characterized as a major restructuring by those who hope for real improvement. Unfortunately, the actions taken in the last two years directly follow the actions of the previous thirty years during which, step by step, each year, the Congress and the Executive Branch added rules and procedures specifically designed to restrict decisions at the purchasing office level and to add oversight procedures designed to protect against potential errors or malpractices.(11) The protective web thereby created has proven effective in slowing the procurement process and inhibiting contracting officers' discretion. There is no evidence that it has reduced errors or malpractices. The web will not easily give way to more innovative behavior and is already being stoutly defended by established members of the legal profession.(12) The defense is rooted in the concept that taxpayers and the public interest require special protection beyond that afforded by commercial law in the form of complex rules, procedures and oversight.

References

  1. Sherman, Stanley N., "Purchasing, Government Style: The Reinvention," Proceedings, 1st WW Research Symposium on Purchasing and Supply Chain Management, Tempe, AZ, March 23-25, 1995.
  2. 64 FCR 391, Nov. 6, 1995
  3. 64 FCR 392, Nov. 6, 1995
  4. 64 FCR 230, Sept 18, 1995.
  5. Gabig, Jerome S. Jr., "The New DOD Clauses on Rights in Technical Data and Computer Software," Special Supp., 64 FCR 271, Oct 2, 1995.
  6. Welsh, Bill and Hoskins, Terry, "13 Months After FASA: OFPP's Kelman Sizes Up Procurement Reform Progress," Contract Management, November 1995, p. 42.
  7. 64 FCR 63, July 24, 1995.
  8. Wenberg II, Cdr. Marvin, USN, "Electronic Data Interchange: Legally Sufficient and Incredibly Simple," Contract Management, December, 1995, p. 21.
  9. 64 FCR 275, October 2, 1995.
  10. 64 FCR 435, Nov. 20, 1995.
  11. Sherman, Stanley N., "Purchasing in Turmoil: The Pentagon Buying Malaise, Its Causes and Persistence," Proceedings of the 1989 Purchasing and Materials Management Research Symposium, March 15, 1989.
  12. Doke, Jr., Marshall J., "Competition Requirements in Public Contracting: The Myth of Full and Open Competition," Special Supp., 64 FCR 41, July 17, 1995.

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