Foster Reliance on the Commercial Marketplace

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).