Foster Reliance on the Commercial Marketplace Background Line managers often have difficulty acquiring items commonly sold in the commercial marketplace because the federal procurement system generally relies on complex, rigid rules and procedures, excessive paperwork, detailed design specifications, and inprocess inspections and audits to buy goods and services. To make matters worse for the government, some contractors feel pressured to separate their government production facilities from their commercial facilities to minimize the burden of government regulations as they compete in the world marketplace. The IBM Federal Systems Company is a good example; it provides quality products and services to the federal government, yet federal agencies cannot normally buy from commercial IBM companies that serve other large private sector businesses. Controls on buying unique items developed for the federal government help ensure accountability, but are costly when applied to commercial products. The Center for Strategic and International Studies (CSIS) reports that it costs five times more to bid on a government requirement than on a commercial job. Once a contractor has obtained a government contract, it costs that contractor three times its usual administrative expenses to comply with government controls.1 For example, the Defense Science Board found that integrated circuits built to military specifications cost the government up to 15 times as much as better circuits cost private buyers.2 Need for Change Fostering reliance on the commercial marketplace should result in substantial savings to the government and its business partners. The current cost to industry of doing business with the government is high. A recent study done for the Defense Systems Management College indicates the added costs for all federally imposed requirements range up to 12 percent or more of total contract costs, depending on the contractor and the individual contract.3 While it is difficult to accurately estimate the savings that will accrue from greater reliance on the commercial marketplace, it is clear that the potential for savings is significant. Should savings of only 1 percent annually occur in total federal purchases of equipment and supplies, up to $700 million in savings per year could be passed to the government and taxpayer.4 The Use of Government Specifications. When the government contracts with commercial vendors, it sometimes imposes extensive detailed requirements. Take, for example, the Department of Defense's solicitations for bed pillows, cleaning cloths, and automotive drain pans. The specifications for these items are contained in 14, 14, and 8 pages respectively.5 Such requirements are often unlike anything a commercial firm includes in its contracts for commercial supplies. To help reduce the effect of these impediments and increase the use of commercial items, Congress directed the Department of Defense to prepare a simplified uniform contract.6 However, even a simplified contract may contain about 100 clauses, due to statutory requirements, with the average solicitation containing 30 to 70 clauses.7 The report Streamlining Defense Acquisition Law by the Acquisition Law Advisory Panel to the United States Congress (known as the Section 800 Panel) addressed this problem and recommended changes in statutes.8 The Panel identified 889 provisions of law related to defense acquisition and found that many of the statutes create barriers for commercial firms because they disrupt established manufacturing methods, sources of supply, and personnel practices. When the commercial item is on the shelf and the government asks a firm to certify it has used special sources for components, the firm cannot easily do so. To build a new item using governmentrequired practices is generally not economical for the government or the firm, especially if it is a small business. Where the size of the procurement is suitable to pay a contractor to apply contract provisions unique to the government, it costs the contractor, and eventually the government, more money. Any burdens the government imposes on U.S. suppliers affects the competitiveness of U.S. industry, because such burdens raise suppliers' thresholds of profitability. The procurement system should require only those extra costs that are absolutely necessary to satisfy public interests. In general, the more we rely on commercial techniques in the commercial marketplace, the more economic benefits will accrue. The government, and hence the taxpayers, will pay less to buy better products faster. A success story. FTS2000 procurement is an excellent success story of saving contract costsand taxpayer dollarsby relying more on the commercial marketplace and commercial practices. The federal government started in the early 1960s to slowly build its own longdistance network by leasing longdistance telephone lines and switches. This resulted in a rate of 30 to 40 cents per minute in the 1980s while commercial customers were paying 20 cents a minute. GSA developed a strategy to pay only for minutes used, like other commercial customers, and not lease equipment, which it had done previously. The competed FTS2000 contracts resulted in a perminute price of 8 cents by taking advantage of commercially optimized networks and good commercial practices. These contracts are saving hundreds of millions of dollars each year. Barriers to change. The major impediments to increased governmentcommercial integration can be grouped into five areas: -- complex federal rules and procedures make it difficult for contracting officials to perform market research, evaluate different ways of meeting needs, and select the best values; -- governmentunique "how to" specifications and standards limit competition and creativity by failing to use existing commercial specifications for form, fit, function, and performance; -- cost and pricing data submission requirements and special cost accounting standards impose substantial burdens and risks on contractors; -- technical data rights provisions discourage contractors from investing in and applying advanced commercial technologies to solve government problems; and -- the determination of a domestic end product under the Buy American Act9 is difficult to use and conflicts with the Trade Agreements Act10 test of "substantial transformation" of components into end products, often putting U.S. suppliers at a disadvantage compared with suppliers from other countries. A number of recommendations for reform and removal of impediments have already been identified. The Section 800 Panel considered these challenges and recommended specific changes in statutes. The President's Report on High Technology, issued in February 1993, includes recommendations to ease the burden on commercial contractors.11 In addition, because of the economic impact of a shrinking defense budget on major employers in the United States, the National Economic Council is also addressing the issue in its study of conversion of the defense industry. Without changes to the current system, the inability of the federal government to reap the benefits of commercial technology at good commercially discounted prices will inanely continue. Moreover, it will be a continuing drain on the resources of U.S. suppliers as they compete on a global scale and a hindrance to the ability of defense contractors to quickly convert their unique products and practices into commercial enterprises. Cross References to Other NPR Accompanying Reports Reinventing Support Services, SUP03: Improve Distribution Systems to Reduce Costly Inventories. Endnotes 1. Center for Strategic and International Studies, Integrating Civilian and Military Technologies: An Industry Survey (Washington, D.C., April 1993), p. 12. 2. Defense Science Board 1986 Summer Study, "Use of Commercial Components in Military Equipment," January 1987. 3. Defense Systems Management College, "Response to the Acquisition Law Advisory Panel," Fort Belvoir, VA, 1992. 4. General Services Administration, Federal Procurement Data Center, Federal Procurement Report, Fiscal Year 1992 (Washington, D.C., 1993), p. 8. 5. Military Specifications, MILP45819D (June 12, 1992); MILP43948A (December 31, 1986); and MILC850438 (March 24, 1987). 6. National Defense Authorization Act, Fiscal Year 1990, 824, Public Law 101189. 7. Defense Federal Acquisition Regulation Supplement, Parts 210 and 211. 8. National Defense Authorization Act, Fiscal Year 1991, 800 (Public Law 101510).
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