Acquisition Management

R. Marshall Engelbeck

CHAPTER
1

Reform of the Federal Acquisition System

This book is written for members of the acquisition team, especially contract managers, to show how they can meet the challenges of change brought about by: (1) the crusade to make the federal government more efficient and user friendly, (2) the end of the Cold War, and (3) improved communications technology. A book on this subject is important because the “Reinvention of Government” initiative of 1994 has kicked off the most extensive revolution in acquisition and logistic processes since the end of World War II. In addition, everyone involved in the buying or selling of goods and services in the federal market must understand the doctrine upon which these changes to the acquisition process are founded and how they will affect how the federal government does business.

The Department of Defense (DoD) adopted the term acquisition in 1970 as an alternative to the term procurement. Acquisition became part of the government-wide regulatory system in 1984 with the issuance of the Federal Acquisition Regulation (FAR). ¹ In The Government Contracts Reference Book, the authors point out that the terms acquisition and procurement are synonymous. Procurement is used in the United States Code, while acquisition is usually used in the FAR. ² Acquisition is defined in the FAR as:

. . .the acquiring by contract with appropriated funds of supplies and services (including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated. Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract. ³

A successful acquisition is built on relationships. Not only is a constructive association between the buyer and seller necessary, but real-time linking between their functional staffs and collaborative relationships within the integrated acquisition team are vital as well. In part this is due to the exponential growth of the Internet and its by-product the Website. These tools are erasing the time, place, and organizational barriers that once made acquisition a line-flow process. The hypothesis of this book is that a proactive approach to acquisition management is a prerequisite to providing the user with a best-value product when and where it is needed. Keys to achieving this objective are to reduce procurement cost through: (1) understanding that the key element in the development of a product or service is a strategic relationship between the contractor and its suppliers, (2) enhancing market research techniques, (3) implementing a cross-functional integrated acquisition team approach, (4) focusing on managing the risks and opportunities associated with the acquisition, (5) using the contract agreement as the common language by all members of an integrated acquisition team, and (6) maximizing the use of electronic data transfer.

The objective of this first chapter is to illustrate how the federal government is responding to pressure from its constituents by being more responsive and cost-conscious. An outgrowth of this initiative has been an effort to change how government will purchase goods and services in the post–Cold War era. Reinvention of the acquisition system started over six years ago when the federal government revised its primary acquisition directive, the Federal Acquisition Regulation (FAR). Among the many changes made to this document was, for the first time, the development and inclusion of a statement of guiding principles and standards. These guiding principles define the core vision of the federal acquisition system. This chapter also addresses the performance standards that were included with the guiding principles because the standards define the critical factors of an effective and efficient acquisition system.

This chapter will also explain why the government’s acquisition system needed to be reinvented by reviewing some of the most significant characteristics of the government market, and then briefly summarizing the history of government acquisition over the past 60 years or so.

CHARACTERISTICS OF THE GOVERNMENT MARKET

In procuring its needs, the federal government wears two hats. First, it acts in a contracting capacity and is expected to exercise good business judgment when determining requirements and purchasing a wide variety of goods and services from every sector of the economy. Second, the government also is the defender of the taxpayer’s interest and is expected to act even-handedly while implementing social and political policies.

The dollar value and number of purchases, i.e., $183.1 billion from 487,264,000 contractual transactions in fiscal year 1999, make the federal government by far the largest buyer of goods and services in the world.

Ten years ago approximately 50 percent of the total dollars spent by the federal government were for supplies and equipment, with other services, excluding R&D, A&E, and ADP services, totaling just over 25 percent. As Table 1-1 shows, expenditures for supplies and equipment in 1999 fell to around one-third of the total. The reduction in defense spending was a major factor in this decrease. On the other hand, the amount spent for services rose to 41 percent. This trend illustrates an increase in outsourcing service-related tasks to contractors in the private sector as well as the effect of government’s increased dependence on electronic data interchange.

In FY 1999 the Department of Defense spent $123.2 billion, or 67% of the total federal contract dollars spent in that fiscal year. The next five top government spenders were the Department of Energy ($15.6 billion), the National Aeronautics and Space Administration (NASA) ($10.9 billion), the General Services Administration (GSA) ($7.6 billion), the Department of Health and Human Resources ($4.1 billion), and the Department of Veterans Affairs ($4.0 billion). ⁵ What is significant is that DoD expenditures exceed the other five by $82.4 billion. DoD procurement exceeded the amount purchased by the next four agencies by a factor of three. Consequently, its domination of government acquisition no doubt has a great deal of influence on the policies and procedures contained in the FAR.

Dr. J. Ronald Fox, former professor of business at Harvard and Assistant Secretary of the Army, in his book Arming of America: How the U.S. Buys Weapons, cites the 1962 study of the defense market by Merton J. Peck and Frederic M. Scherer of the RAND Corporation. They concluded that the defense market differs from the commercial market in that it is not determined by supply and demand. First Congress determines how much the DoD will spend and for what. This decision is influenced by political and economic conditions as well as international events and the interests of the members of Congress. ⁶ A market system does not now exist in the weapon acquisition process . . . a market system in its entirety can never exist for the acquisition of weapons. ⁷

Table 1-1 Major Categories of Federal Government Purchases ⁴ —1999

The government market as a whole is also described as being a monopsony, i.e., consisting of only one buyer. Writing in Contract Management magazine, W. Gregor Macfarlan states, “as a monopsony, the government inherently regulates the marketplace to its own ends through defined requirements and specified processes that satisfy those requirements. The more influential the monopsony, the fewer the opportunities for the marketplace to express its competitive dynamics.” ⁸

It is only when the government purchases off-the-shelf items on the commercial market that the true forces of supply and demand apply. A majority of goods and services in this category have traditionally been procured through the sealed bidding method. Sealed bid purchases, although high in the number of contracting actions, historically have represented a relatively low percentage of the total dollar value of purchases in any one fiscal year. Negotiated procurements have traditionally led in the number of solicitations and dollar amount. In 1990 solicitations for negotiated procurements equaled 85.4 percent of the total action and 93.1 percent of the total dollars. ⁹

Fair and open competition is the core philosophy of our supply-based economic system. It is widely believed that competition generates low prices and promotes efficiency, innovation, and quality. To realize these benefits, federal procurement policy is founded on giving every potential responsible supplier an equal opportunity to meet the government’s needs. For over 100 years procurement procedures also have been directed toward full and open competition, while government contracting officers have aspired to protect the “integrity of the acquisition system.” Separate studies by the RAND Corporation, the Battelle Memorial Institute, and the Office of the Secretary of Defense concluded that a reduction in contract price of 25 to 30 percent can be realized when genuine price competition exists. ¹⁰ The perception that potential price reductions can best be realized from competition also is prevalent in Congress and has been a factor in the government’s efforts to launch such policies as dual-sourcing and leader-follower development contracts and to perform fact-finding and postaward as a replacement for competition.

When the criteria for classifying a procurement competitive were limited to goods and services purchased via advertised bidding, less than 50 percent of all procurements were judged to be competitive. ¹¹ Then in 1984, Congress passed the Competition in Contracting Act (CICA), in which it reemphasized the need for the government buyer to reap the benefits of competition. The act also states that negotiated procurements can be considered competitive when there is more than one prospective seller. The percentage of purchase actions classified as competitive increased from 44 percent in 1984 to 67 percent in 1990. Stanley Sherman, then Professor of Purchasing at George Washington University, points out that this occurred at the same time the broader private economy, especially manufacturers of commercial products, were experiencing an unmistakable trend toward fewer competitive purchases. ¹²

An agreement between the buyer and seller in the commercial sector is subject to the Uniform Commercial Code (UCC). ¹³ On the other hand, purchases by the federal government are governed primarily by the FAR. Compared to the FAR, the UCC is broad and flexible. The FAR, which was codified on April 1, 1984, is “designed to prescribe, structure, and control the method and procedures by which is conducted in a defined segment of our economy—government procurement.” ¹⁴ Further executive orders, regulations, rules, and procedures are frequently issued that are designed to provide additional detailed instructions to the operation agencies within the Executive Branch while:

• Ensuring fairness of contract award by affording all interested and responsible suppliers equal opportunity to obtain the contract

• Giving the government the right to change its mind and cancel a procurement, with reimbursement limited to cost incurred and profit limited to items delivered

• Requiring contractors to disclose their cost or pricing data in order to ensure the price is fair and reasonable

• Giving a share of contracts to small business, small disadvantaged business, contractors in labor surplus areas, and minority groups. ¹⁵

Sherman believes the greatest distinction between the public and private sectors is the absence of a profit-and-loss standard in the public sector. The bottom line provides a means to measure success. The commercial firm can purchase the stated requirement directly, without so much oversight, and is graded on its competitive position in the market and its profitability. The federal government does not have such a single standard for success. Instead it has multiple goals, including cost, schedule, and technical performance as well as the social and economic goals of the nation. ¹⁶

THE FEDERAL ACQUISITION SYSTEM: THE PAST 50 YEARS

After more than 50 years of war and near–world war confrontations, the American taxpayer was ready for a peace dividend in the form of lower taxes and an end to deficit budgets that hindered economic growth and their standard of living. This period in our nation’s history began in 1940 with President Franklin Roosevelt’s call to the nation to be the “great arsenal of democracy,” ¹⁷ which occurred just a year prior to the United States entering into war with Germany, Italy, and Japan. For the next five years the nation’s industry and procurement system built and supported a two-ocean navy and a military of over seven million troops fighting simultaneously in Europe and the Pacific theaters. Materiel and supplies produced in this country also helped maintain the war efforts of our allies. After a short respite, during which U.S. military capabilities were cut back, the American people were again called to deter an external threat. This time it was communism, exported by the Soviet Union. The next 40 years would be known as the Cold War period, beginning with the European Recovery Program (Marshall Plan) in 1947, continuing through the Korean War (1950–1953) and Vietnam War (1964–1973) and ending with the collapse of the Soviet Union from within in the early 1990s. During this time the American economy not only supported significant defense and foreign aid expenditures, but also significantly increased its social programs.

At the end of the Cold War the balance sheet showed our national economy had been able to build and support an armed force second to none while providing the commercial sector with countless commercial goods and also expanding social services. A review of the Gross Domestic Product (GDP) between 1968 and 1998 (Figure 1-1, Federal Budget Categories as a Percentage of GDP), shows that the percentage of GDP allocated to entitlements increased 4.4 percent, while defense spending fell from 9.4 to 3.2 percent of GDP. This represents a reduction of almost one-third of the amount spent for defense in 1968. During the same period total outlays decreased by 0.9 percent, and the budget deficit as a percentage of GDP decreased from 3.2 to 0.3. Note that as entitlements rose from 6.9 percent of GDP, the deficit was decreased by 1.9 percent. The legacy of the era has downplayed how economic expansion enabled the nation to meet commercial and defense needs simultaneously. Instead, commentary concentrated mainly on the inefficiencies of the federal government. Public opinion ¹⁸ questioned the federal government’s ability to operate effectively and efficiently. This apprehension was fueled by budget deficits, the individual tax burden, and stories in the media of unsuccessful programs and government purchases gone wrong.

Figure 1-1 Federal Budget Categories as a Percentage of GDP ¹⁹

THE FEDERAL ACQUISITION SYSTEM: VIEWED FROM THE INSIDE LOOKING OUT

Acquisition management is a well-established activity within government, with a set of management responsibilities that are perceived to be broader in scope than procurement. ²⁰ This is because it traditionally has focused on large-scale purchases of major defense systems, usually under the direction of a project or program manager. Acquisition follows an integrated systems approach with applicable technical and management disciplines collaborating to achieve the goals of the acquisition. This integrated team often includes members from logistics, production, quality assurance, finance, contract management, and the appropriate technical disciplines. ²¹

An acquisition of a product or service often consists of multiple procurements. The term procurement, when applied to the government environment, includes all stages of the process of acquiring property or services, beginning with the determination of a need for the property or service and ending with contract completion and closeout. In the private sector it is comparable to materials management, which is a concept that integrates the flow and control of materials and services, beginning with identifying the need and ending after delivery to the ultimate user. ²² “Both [acquisition and materials management] are interface functions that interact with both supplier’s and customer’s organizations as well as with internal functions and activities.” ²³

In the federal government, Congress is the source of funds and thereby exercises the ultimate control over government procurement. The executive branch and its associated agencies have been given the authority to regulate the acquisition system. Over the past 200 years, both Congress and the executive branch have relied on legislation to fulfill their constitutional responsibilities to protect the public interest and ensure fairness through common treatment. As Figure 1-2 (Most Significant Procurement Legislation, 1795–1994) illustrates, there has been a noticeable increase in the amount of legislation regulating procurement since the end of World War II.

Over the past few years writing directives to solve the issues has not been left solely to Congress. Agencies within the executive branch have issued supplements to regulations and have developed unique rules and practices in the acquisition process. The DoD FAR supplements are a prime example. The practice has been that whenever there is a snafu, the bureaucracy has responded by revising or writing a regulation to ensure that the problem doesn’t recur. The result was a maze of intertwined legal and accounting rules. ²⁴

The purpose of the Truth in Negotiations Act (TINA) of 1962, ²⁵ and subsequent revisions, was to “assure that the Government is placed on an informational parity with contractors in price negotiations and avoid excessive contractor prices and profits. Failure by a contractor to disclose current, accurate, or complete cost or pricing data may result in over pricing and government recovery of excess cost.” ²⁶ The contractor also can be charged with fraud if the disclosure is intentionally incorrect. TINA provides the buyer information on the seller’s cost, which is unique to government acquisition. It can also be viewed as a way the government obtains information compensating for the absence of the market forces and enhances its bargaining power. The requirement to provide cost or pricing data does not apply to sealed bids but does apply to modifications to contracts awarded under the sealed bidding process.

The requirement for consistency in a contractor’s accounting practices was the subject of PL 91-379, which was passed as part of the Defense Production Act in 1970. This law was the result of criticism by Admiral Rickhover, the father of the nuclear submarine, of the government’s ability to identify properly the contractor’s cost to specific contracts. ²⁷ He also stated, “the single most serious deficiency in government procurement was the lack of uniform standards,” in testimony before the House Committee on Banking and Currency in 1968. This motivated the Senate Banking Committee to direct the Comptroller General to study contractor accounting practices. The end result was a law in 1972 requiring the establishment of a Cost Accounting Standards Board, which would from time to time review accounting practices and promulgate cost accounting standards. As a condition of contracting with the government, other provisions of the law are: (1) defense contractors and subcontractors with more than $10 million in contracts and subcontracts must disclose their accounting practices, and (2) there must be a contract price adjustment, with interest, for any increased cost paid by the government because of the contractor’s failure to follow the cost accounting standards created by the board. ²⁸

The Competition in Contracting Act (CICA) of 1984 (PL 98-369) represents another significant legislative initiative. The goal of this legislation is to make the government operate more as a business by requiring more competition. ²⁹ It represents a reaction by Congress to stories of inefficiencies, e.g., $400 hammers and $3,000 coffee pots. CICA was an alteration of Congress’s “historic preference for formal advertising....; it reversed nearly two centuries of tradition...” by “placing negotiated procurement (a World War I innovation to gain flexibility) on the same level as formal advertising.” ³⁰ Statistics reported in his book Government Procurement Management led Dr. Stanley N. Sherman to conclude that the upward trend in modifications to ongoing contracts between 1985 and 1990 may have offset an apparent increase in competitive procurements. ³¹

The “federal buying system is undoubtedly the most thoroughly examined, carefully thought-out, and fully documented procurement system in existence.” ³² There have been investigations and studies of the federal procurement process, their stated objective often being to make the government operate more like a business.

In the 1980s there were two major examinations by commissions composed of distinguished citizens from the private sector. Both had charters to hold hearings, make site visits, and submit recommendations on ways to “fix” the procurement system. In 1983 the Grace Commission analyzed the procurement process and submitted recommendations on how to improve federal acquisition. Next, the president’s Blue Ribbon Commission on Defense Management, headed by former Deputy Secretary of Defense David Packard, issued a report in June 1986 titled Quest for Excellence. The Packard Commission had a broader scope than did the Grace Commission, addressing national security planning, military organization and command, acquisition organization and procedures, and government industry accountability. ³³ Both commissions submitted recommendations that resulted in passing new or revised laws and issuing more regulations.

The net result of legislation and procedures created by Congress and executive agencies themselves was placed in perspective in a 1987 study by the Center for Strategic and International Studies (CSIS) titled “US Defense Acquisition: A Process in Trouble.” The study found “procurement regulations alone total more than 30,000 pages and were issued by 79 different offices.” In addition, “defense activities were monitored by 55 subcommittees of 29 congressional committees, assisted by more than 20,000 staff and supporting agency members.” ³⁴ Laws, regulations, check lists, and oversight had replaced individual responsibility and accountability.

This all adds up to thousands of pages of regulations and instructions, some of which may even have the force and effect of law because they have been authorized by Congress. ³⁵ Under a unique concept called the “Christian doctrine,” when a federal procurement contract does not contain a clause that is required either by statute, regulation, or executive order, then it is automatically “incorporated by operation of law.” The roots of this doctrine can be traced to a 1963 court case that ruled the Termination for Convenience of the Government clause, required by regulation, that had been excluded from a contract is to be read into a contract whether or not it was physically included in the contract, unless a proper deviation from the contract has been obtained. ³⁶ The Christian doctrine became a method whereby contracting officers (COs) could argue that a required clause is automatically incorporated into the contract by operation of the law. A more recent case law provides clarification. For the Christian doctrine to be applied, the clause must express or implement a deeply ingrained strand of public procurement policy, and then only if its incorporation is not sought by the party who is intended to benefit from the clause’s presence. ³⁷

In his book The Death of Common Sense, Phillip K. Howard reports that since the 1950s the nation has experienced, in the name of due process, the rise in the use of rules and regulations as a way to minimize discretionary government administrative decisions: “Our regulatory system has become an instruction manual. Detailed rule after detailed rule addressing every eventuality, or every situation the lawmakers and bureaucrats can think of.” ³⁸

Maintaining an even playing field is key to the government procurement process. All potential suppliers are to be offered an equal opportunity to bid on a potential contract, and the CO must be able to justify the contract award decision publicly. This is a constraint purchasers in the private sector do not enjoy. Therefore, being able to base the award on objective criteria, i.e., written specifications and lowest price, has traditionally been essential to defending the award in the event of a protest by an unsuccessful bidder. Various critics of the process have noted that constraint-driven management may be the enemy of goal-driven management. ³⁹

THE FEDERAL ACQUISITION SYSTEM: VIEWED FROM THE OUTSIDE LOOKING IN

Examples of $400-hammers and $3,000-coffee pots have initiated numerous audits and investigations, editorials, and jokes on late-night talk shows. However, this is not a recent phenomenon. The fear of profiteering from the sale of goods and services to the government is as old as the nation itself. History cites examples at Valley Forge, during the Civil War, the war with Spain, and World Wars I and II. ⁴⁰ The American public has looked with a judicious eye at selling to the government for quite some time, especially in the defense industry, where the thought of anyone profiting from war is especially disturbing. U.S. National Survey: Public Attitudes in Defense Management, published in 1986 as part of the final report to the president by the Blue Ribbon Commission on Defense Management (Packard Commission) reported, “four in five Americans think that defense contractors should feel an obligation, when doing business with DoD, to observe ethical standards higher than those observed in their normal business practices.” ⁴¹ The report concluded that “the lack of confidence in defense contractors may affect public support for important defense programs, and thus weaken our national security.” ⁴²

Jacob Goodwin, in the Brotherhood of Arms: General Dynamics and the Business of Defending America, relates the story of Harry Truman, then a senator from Missouri and chairman of a Senate committee investigating the nation’s defense program, during a visit to the Consolidated plant in San Diego in the early 1940s. Senator Truman, getting tired of hearing about the virtues of Consolidated’s latest aircraft, interrupted the owner, Reuben Fleet, saying, “Dammit, I want to see your books, Fleet. I’m not interested in your rise from rags to riches story.” ⁴³

Over the past 50 years, American industry has become divided into two segments, i.e., contractors who specialize in government contracts and those who do not. However, industry as a whole has become more and more reluctant to participate in the defense market. In 1988 Dr. David V. Lamm of the Naval Postgraduate School published the results of a study conducted to determine why companies refuse to participate in defense contracts. The conclusion, which was based on a response of 427 of the 1,300 firms surveyed (33 percent), was that almost 50 percent of the responding firms indicated they did not want defense contracts. The most prevalent reasons they gave were burdensome paperwork and bidding methods, inflexible policies, and more attractive commercial opportunities. ⁴⁴

A CORE VISION FOR THE FEDERAL GOVERNMENT IN THE 21st CENTURY

In 1993 President Bill Clinton asked Vice President Al Gore to work on making government function more efficiently and cost less. The challenge was to regain public confidence in the federal government’s ability to solve problems by fostering partnerships and community solutions. ⁴⁵ The vice president formed a National Performance Review (NPR) team, which issued a report in September 1993. The NPR report, From Red Tape to Results: Creating a Government That Works Better and Costs Less, called for revising federal procurement regulations into guiding principles instead of rigid rules, decentralizing authority to purchase computers, testing an electronic marketplace, increasing the small purchase threshold, and relying more on off-the-shelf commercial products. ⁴⁶

In October 1994 the president signed into law the Federal Acquisition Streamlining Act (FASA), which is the most significant attempt to reform the government’s acquisition process since World War II, and is a flow-down of the core vision and guiding principles from the NPR. The act also includes 20 recommendations on procurement from the NPR team’s report. FASA charges the executive branch with reinventing the acquisition process by increasing personal initiative and decreasing mandatory controls. The overall goal of FASA is to streamline the contracting process through eliminating non–value-added rules and procedures, shortening procurement lead times, encouraging the use of automated purchasing procedures, using electronic commerce to the maximum, encouraging the use of commercial products to satisfy government requirements, and using proven contractors as a way to reduce risk. ⁴⁷

Playing a major role in this reform effort is the Office of Federal Procurement Policy (OFPP). Created by Congress in 1974, the OFPP is located organizationally in the White House under the Office of Management and Budget. OFPP is charged with the distribution of uniform policies and procedures and the maintenance of the Federal Acquisition Regulation System. The FAR, a part of that system, had replaced previously existing regulation systems in 1984. ⁴⁸ In his 1990 book, Procurement and Public Management, Steve Kelman, later to become administrator of OFPP, describes federal procurement “as a system in trouble” ⁴⁹ and the government industry relationship as “a culture of distrust.” ⁵⁰ Mr. Kelman instructed the task force assigned to oversee the administrative aspects of revising the FAR to incorporate such business practices as: