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Open Issues in Federal Acquisition Reform

Author(s):

Michael E. Heberling, Ph.D.
Michael E. Heberling, Ph.D., Policy and Business Analyst, Anteon Corporation, Dayton OH 45431, 937/254-7950.
Tracy J. Houpt
Tracy J. Houpt, Program Manager, Manufacturing Technology Directorate, Wright Laboratory, Wright-Patterson AFB, OH 45433, 937/255-5669.

82nd Annual International Conference Proceedings - 1997 

Abstract. With the adoption of several major reform initiatives, the defense community has been able to make positive changes in its buying practices. However, several open issues remain that complicate the DoD's ability to fully take advantage of the advanced technologies and capabilities of the commercial sector. This presentation will address those issues and make recommendations for additional acquisition reform.

Introduction. Although the military acquisition budget is down 65 percent from its 1985 peak [1], the Department of Defense continues to have requirements for new systems, many of these being military-unique. While performance is still important, affordability issues are becoming paramount. By necessity, the DoD is turning to the commercial market.

To address this and other procurement issues, Congress passed the Federal Acquisition Streamlining Act (FASA) and the Federal Acquisition Reform Act (FARA). These two pieces of legislation have made major and positive changes to the DoD's procurement system. Numerous areas frequently seen as barriers to the procurement of commercial items have been modified or eliminated. A major tenet of the reform initiatives is to use commercial products to the maximum extent possible in meeting military requirements.

Unfortunately, this latest acquisition reform does not directly address the case of a purely commercial firm producing military-unique items. A dual use capable firm with no prior DoD experience, can still encounter numerous government terms, conditions, and practices which are at odds with those in the commercial sector.

Open Issues. The Air Force has two industrial base pilots (IBP) that seek to provide data and lessons learned to assist the DoD and industry in applying commercial processes to defense acquisition. The two programs: "Military Products Using Best Commercial/Military Practices" and "Military Products From Commercial Lines" are administered by the Manufacturing Technology Directorate of Wright Laboratory. In the first pilot, the product is the horizontal tail stabilizer for the C-17 aircraft. Here, the contractor is using similar practices to make both military and commercial products. In the other program, the Air Force seeks to demonstrate the production of electronic modules for the F-22 Advanced Tactical Fighter using a commercial automotive manufacturing line.

Together, these two pilots have found a number of issues which complicate commercial acquisition by the DoD. Much of the difficulty can be traced to the unique nature of military products relative to commercial products: lower volumes, higher performance requirements and longer life spans. Before the DoD can fully take advantage of the advanced technologies and capabilities of the commercial sector, a number of procurement related issues need to be addressed in future reform initiatives.

Reluctance Of Commercial Firms. Many commercial firms are fully capable of meeting military requirements. However, they are unwilling to seek DoD business. For commercial firms, competitive markets are the driving force leading to efficient internal operations. It is rare for one customer to dictate terms and conditions that change the internal operation of another firm. On occasion, suppliers will make special arrangements for preferred customers (i.e., those that show a significant long term commitment). However, few commercial firms would put the DoD in this preferred category.

Typically these firms manage successful businesses without DoD customers and, since DoD business is not perceived as a big money-maker, they are not motivated to pursue DoD work. Rightly or wrongly, many commercial suppliers see the DoD as a difficult customer with extensive reporting, compliance and oversight requirements. While originally designed to protect the Government's interests, many regulations now serve to impede access to the commercial sector. In addition, the instability of requirements and budgets, the government's right to terminate contracts at will, the potential for a protest, and the penalties that result from failing to comply with a government procurement regulation are all reasons that many companies avoid DoD business. In fact, many commercial world-class manufacturers do not even read the Commerce Business Daily (CBD) when seeking new work.

Supportability/Obsolescence. The technology in many commercial fields is changing rapidly. This becomes a problem when the subsystems evolve faster than the platform that they go into. While this is true for the automobile industry, the problem goes away with a hardware change, that is, a new model which is designed to take advantage of the latest technology. So while the subsystems rapidly change, the hardware "leapfrogs" to catch-up. We may be talking about a time lag of three to five years.

However, in the case of military hardware, the platforms will be around for possibly 30 years [Note: a recent congressional study found that the Air Force will need about 66 B-52s through the year 2030 [2]. This will put these platforms at 70 years of service!]. There is no "leapfrogging" of hardware to accommodate the changing subsystems. There are two possible solutions to this problem. The first and least desirable is to maintain the old subsystems using the obsolete technology. This will be extremely expensive. The other option is to design military hardware to accommodate changing technology in the subsystems. This translates into frequent and possibly expensive upgrades.

Warranties. A warranty of three years or thirty thousand miles is appropriate for an automobile. What should the warranty be for an aircraft? The DoD would obviously like a longer warranty. However, such a warranty would run counter to common commercial practice. Therefore, even if the DoD were willing to pay a premium for such a warranty, commercial firms may be unwilling to accommodate. This would force a commercial firm to change its internal operations for what may well be a small customer. This leaves the DoD with two less than desirable alternatives. The first is to accept the limited commercial warranties even though this will only cover a fraction of the expected life span of the weapon system. The other choice is to upgrade the systems at a rate that reflects changing commercial technology and standard practice for warranties.

Liability. In the commercial sector, it is common practice to include the liability risk in the price of the product. This is spread over thousands, hundreds of thousands, or even millions of units. The liability associated with military products is less defined and brings potentially higher risk for the commercial firm. The increasing use of performance specifications as opposed to MILSPECS shifts the liability issue away from the DoD to the commercial designer and producer.

Buying in Small Lot Sizes. We are in a new era of lean and flexible manufacturing. This allows companies to economically manufacture their products in small lot sizes. Unfortunately, producing the items in small lot sizes is only half the problem. The other half is to be able to buy the parts that go into the products in small lot sizes. While commercial firms do produce in small lot sizes, they produce many small lot sizes. This equates to cumulative large volumes which minimizes the parts buying problem. However, in the case of military products, the total volume is small. Many of the commercial parts suppliers have minimum orders. If the order is under this amount, these firms will either not sell their products or they will charge a premium for the low quantity.

Commercial Item Definition. A major initiative of FASA and FARA is to use commercial products to the maximum extent possible in meeting military requirements. FASA modified or eliminated numerous barriers to reform, including the Truth in Negotiations Act (TINA), government cost accounting standards (CAS), and technical data rights. The advertised benefits (lower costs, shorter lead times, plus relief from statutory reporting and compliance requirements) will only be realized if the procurement falls under the definition of a commercial item. Herein lies the problem.

The IBP has found that, although the revised acquisition regulations work well for commercial off-the-shelf items, the new regulations are not clear when it comes to procuring military-unique products from dual use capable commercial firms. By default, the solution is to treat dual use firms as if they were defense contractors, requiring them to adhere to unique government contracting laws designed to promote fairness, discourage fraud, and further socio-economic objectives. In addition, extensive cost and pricing data is required to verify the fairness and the reasonableness of their offer.

The point to be made is that there remains sufficient ambiguity in the current acquisition regulations to warrant, if not an expansion, at least a clarification of the definition to accommodate products made by dual-use firms [3]. Much of the confusion and conflicting interpretations surrounding the issue could be eliminated by expanding the definition through a legislative change. The Section 800 Panel recommended five definitions for a commercial item. Unfortunately, FASA and FARA adopted only four of these. The omitted definition directly addresses dual-use capable commercial firms:

"An item may be considered to meet the definition of a commercial item even though it is produced in response to a government drawing or specification provided, that the item is purchased from a company or business unit which ordinarily uses customer drawings or specifications to produce similar items for the general public using the same workforce, plant, or equipment [4].

The only problem with this 800 Panel definition is the phrase "government drawing or specification" which does not reflect the current emphasis on performance and commercial specifications. This shortfall could be remedied by replacing the obsolete phrase with "government performance requirements".

Cost and Pricing Issues. In the absence of competition, the contracting officer can still require cost and pricing data from those firms, defense or commercial, that make military-unique items. While the new regulations have made it easier to qualify for an exception to the cost and pricing data requirements of TINA and CAS for commercial-off-the-shelf items, it is more difficult for military-unique products to meet the criteria of adequate price competition or one of the TINA exceptions. This occurs because a military-unique item made by a dual use firm typically does not have a catalog or market price, or may not qualify as a commercial item.

For commercial items, it is assumed that market forces will ensure a fair and reasonable price. Under these conditions the DoD benefits from a very competitive domestic and international market. However, when the DoD turns to the commercial sector to meet its military-unique requirements, pricing becomes a major challenge which severely complicates access to the commercial sector. This will require a thorough understanding of market research and the adoption of commercial price analysis techniques.

Conclusion. In order to expand the defense industrial base to include purely commercial firms, the DoD must continue its efforts to be commercial-like in its procurement practices. The goal of future acquisition reform is to establish a defense procurement system that:

  1. Remains sensitive to the fiscal and ethical responsibilities inherent in government procurement,
  2. Facilitates the production of both commercial and military-unique products in a single business unit without altering either their accounting systems or management practices,
  3. Gives proper consideration to the customary commercial practices of commercial firms when developing acquisition strategies and contracting arrangements. This includes adopting industry standards to define requirements and the adoption of a design-for-manufacturability philosophy, and finally,
  4. Encourages a cultural change that focuses on risk-management rather than on risk-aversion. This will require management support at all levels and better training of the acquisition workforce in commercial procurement practices.

REFERENCES

  1. Statement by Colleen Preston, Deputy Under Secretary of Defense (Acquisition Reform) before the Committee on Government Reform and Oversight, United States House of Representatives, February 21, 1995.
  2. Kandebo, Stanley W., "Boeing Proposes Reengining B-52s." Aviation Week and Space Technology, June 24, 1996, 75.
  3. Heberling, Michael E. and Tracy J. Houpt, "What Is and What Is Not a Commercial Item." Contract Management, August 1995, 10-15.
  4. Streamlining Defense Acquisition Laws, Report of the DoD Acquisition Law Advisory Panel (Section 800 Panel); Chapter 8: Commercial Items, January 1993, 8-18.

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