DOD Contracting
Efforts Needed to Address Air Force Commercial Acquisition Risk Gao ID: GAO-06-995 September 29, 2006The Department of Defense (DOD) has been urged by commissions, legislation, and a panel to make increased use of commercial acquisition to achieve certain benefits. To help ensure the increased use of commercial acquisition, the Office of the Secretary of Defense (OSD) established and the Air Force implemented two commercial acquisition goals to be achieved by the end of fiscal year 2005. In setting these goals, OSD expected that the increased use of commercial acquisition would provide DOD with greater access to commercial markets (products and service types) with increased competition, better prices, and new market entrants and/or technologies. The committee asked GAO to identify (1) the extent to which the Air Force has increased its use of commercial acquisition to obtain expected benefits and (2) the risks that are associated with this use.
From 2001 to 2005, the Air Force increased spending using commercial acquisition from $4.8 billion to over $8 billion in an effort to provide greater access to commercial markets to increase competition, obtain better prices, and attract new market entrants (nontraditional contractors) and/or technologies. Even though the Air Force has significantly increased this spending, it has not measured the extent to which this increased use resulted in the benefits that were expected. For example, our analysis shows that for at least one of the expected benefits, attracting new market entrants, the expected benefit has not materialized. For the most part, traditional defense contractors received these contracts. Government contracting officials face risks in using commercial acquisition. For example, improperly classifying an acquisition as a commercial acquisition can leave the Air Force vulnerable to accepting prices that may not be the best value for the department. A high-ranking DOD acquisition official testified that he is concerned about items and services being identified as commercial that are not sold in an existing marketplace because under these circumstances, the government lacks assurances that the price is reasonable. At times, Air Force officials have disagreed about the classification of some acquisitions as commercial. The Air Force's use of commercial acquisition has also been accompanied by an increased amount of dollars being awarded for sole-source contracts. Despite DOD policy to avoid sole-source commercial acquisitions because of increased risk, sole-source commercial acquisition dollars awarded by the Air Force have more than doubled from 2000 to 2005. Further, of the 20 larger Air Force commercial product awards in 2004, half were awarded as sole-source.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-995, DOD Contracting: Efforts Needed to Address Air Force Commercial Acquisition Risk
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Report to the Subcommittee on Readiness and Management Support,
Committee on Armed Services, U.S. Senate:
United States Government Accountability Office:
GAO:
September 2006:
DOD Contracting:
Efforts Needed to Address Air Force Commercial Acquisition Risk:
DOD Contracting:
GAO-06-995:
GAO Highlights:
Highlights of GAO-06-995, a report to Subcommittee on Readiness and
Management Support, Committee on Armed Services, U.S. Senate
Why GAO Did This Study:
The Department of Defense (DOD) has been urged by commissions,
legislation, and a panel to make increased use of commercial
acquisition to achieve certain benefits. To help ensure the increased
use of commercial acquisition, the Office of the Secretary of Defense
(OSD) established and the Air Force implemented two commercial
acquisition goals to be achieved by the end of fiscal year 2005. In
setting these goals, OSD expected that the increased use of commercial
acquisition would provide DOD with greater access to commercial markets
(products and service types) with increased competition, better prices,
and new market entrants and/or technologies. The committee asked GAO to
identify (1) the extent to which the Air Force has increased its use of
commercial acquisition to obtain expected benefits and (2) the risks
that are associated with this use.
What GAO Found:
From 2001 to 2005, the Air Force increased spending using commercial
acquisition from $4.8 billion to over $8 billion in an effort to
provide greater access to commercial markets to increase competition,
obtain better prices, and attract new market entrants (nontraditional
contractors) and/or technologies (see fig. below). Even though the Air
Force has significantly increased this spending, it has not measured
the extent to which this increased use resulted in the benefits that
were expected. For example, our analysis shows that for at least one of
the expected benefits, attracting new market entrants, the expected
benefit has not materialized. For the most part, traditional defense
contractors received these contracts.
Government contracting officials face risks in using commercial
acquisition. For example, improperly classifying an acquisition as a
commercial acquisition can leave the Air Force vulnerable to accepting
prices that may not be the best value for the department. A high-
ranking DOD acquisition official testified that he is concerned about
items and services being identified as commercial that are not sold in
an existing marketplace because under these circumstances, the
government lacks assurances that the price is reasonable. At times, Air
Force officials have disagreed about the classification of some
acquisitions as commercial. The Air Force‘s use of commercial
acquisition has also been accompanied by an increased amount of dollars
being awarded for sole-source contracts. Despite DOD policy to avoid
sole-source commercial acquisitions because of increased risk, sole-
source commercial acquisition dollars awarded by the Air Force have
more than doubled from 2000 to 2005. Further, of the 20 larger Air
Force commercial product awards in 2004, half were awarded as sole-
source.
Figure: Air Force Increases in Commercial Acquisition Spending, Fiscal
Years 2001-2005:
[See PDF for Image]
Source: Air Force.
[End of Section]
What GAO Recommends:
GAO recommends that the Air Force collect information to be able to
measure the benefits expected from commercial acquisition and, to
reduce the potential for risk, limit sole-source acquisition of
commercial products and services in concert with DOD guidance. In
written comments, DOD agreed with the recommendations, in principle,
and identified actions to address them.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-995].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine Schinasi at
(202) 512-4841 or schinasik@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
The Air Force Has Increased Commercial Acquisition Spending:
Air Force Use of Commercial Acquisition in Certain Situations Increases
Risk:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Additional Benefits Expected from Using Commercial
Acquisition:
Appendix III: Traditional and Nontraditional Air Force Contractor
Analysis, Fiscal Years 1996-2004:
Appendix IV: Observations from Review of 20 Air Force Contracts Using
Commercial Acquisition:
Appendix V: Use of Commercial Acquisition in Air Force Major
Acquisition Programs:
Appendix VI: Citations for Commissions, Legislation, and Panel Shown in
Figure 1:
Appendix VII: Comments from the Department of Defense:
Tables:
Table 1: Listing of Traditional Air Force Contractors, Fiscal Years
2003-2004:
Table 2: Nontraditional Air Force Contractors (New Market Entrants),
Fiscal Years 2003-2004, and Description of Contracted Item or Service:
Table 3: Commercial Contract Actions in Air Force Major Acquisition
Programs, Fiscal Years 2004-2005:
Figures:
Figure 1: Overview of Commercial Acquisition Legislative History:
Figure 2: Air Force Increases in Commercial Acquisition Spending,
Fiscal Years 2001-2005:
Figure 3: Air Force Progress in Meeting Commercial Acquisition Dollar
Goal, Fiscal Years 2001-2005:
Figure 4: Air Force Progress toward Commercial Acquisition Contract
Award Goal, Fiscal Years 2001-2005:
Figure 5: Nontraditional and Traditional Air Force Commercial
Acquisition Contractors, Fiscal Years 2003-2004:
Abbreviations:
AFMC: Air Force Materiel Command:
DFARS: Defense Federal Acquisition Regulation Supplement:
DOD: Department of Defense:
FAA: Federal Aviation Administration:
FAR: Federal Acquisition Regulation:
IG: Inspector General:
OSD: Office of the Secretary of Defense:
RDT&E: Research, Development, Test and Evaluation:
United States Government Accountability Office:
Washington, DC 20548:
September 29, 2006:
The Honorable John Ensign:
Chairman: The Honorable Daniel K. Akaka:
Ranking Minority Member:
Subcommittee on Readiness and Management Support:
Committee on Armed Services:
United States Senate:
For decades, the Department of Defense (DOD) has been urged by
commissions, panels, and legislation to make increased use of
commercial acquisitions to take advantage of the efficiencies of the
commercial marketplace. To help ensure the increased use of commercial
acquisition,[Footnote 1] the Office of the Secretary of Defense (OSD)
established and the Air Force implemented two commercial acquisition
goals to be achieved by the end of fiscal year 2005. These were to:
* double the dollar value of commercial acquisition contract actions
awarded in 1999 (for the Air Force this meant going from about $3
billion to about $6 billion) and:
* strive to increase the number of commercial contract actions awarded
to 50 percent of all Air Force contract actions.[Footnote 2]
In setting these goals, OSD expected that the increased use of
commercial acquisition would provide DOD with greater access to
commercial markets (products and service types) with increased
competition, better prices, and new market entrants and/or
technologies. You asked us to examine the Air Force's efforts to meet
these goals and identify any associated risks in commercial acquisition
practices. Specifically, we determined (1) the extent to which the Air
Force has increased its use of commercial acquisition to obtain
expected benefits and (2) the risks associated with Air Force use of
commercial acquisition.
To conduct our work, we collected and reviewed information on Air Force
use of commercial acquisition from fiscal year 2001 through fiscal year
2005. We also reviewed all Air Force contracts awarded in fiscal year
2004 for products over $5 million using commercial
acquisition.[Footnote 3] We reviewed the files associated with these
contracts at Air Force Materiel Command (AFMC) locations including (1)
Wright-Patterson Air Force Base, Ohio; (2) Tinker Air Force Base,
Oklahoma; (3) Robins Air Force Base, Georgia; and (4) Hanscom Air Force
Base, Massachusetts. We held discussions with contracting officers and
procurement management officials associated with each of the selected
contracts. We also met with representatives of OSD and the Air Force to
discuss various aspects of commercial acquisition that included goals,
progress toward achieving goals, benefits expected, and associated
risks. A more detailed discussion of our scope and methodology is in
appendix I. We conducted our review from July 2005 to September 2006 in
accordance with generally accepted government auditing standards.
Results in Brief:
The Air Force has increased its spending using commercial acquisition
from $4.8 billion to over $8 billion from fiscal year 2001 to fiscal
year 2005. This increase responds to OSD's emphasis to expand
commercial acquisition to provide the benefits of greater access to
commercial markets so that DOD can increase competition, obtain better
prices, and attract new market entrants (nontraditional contractors)
and/or technologies. While the Air Force more than doubled its spending
on commercial acquisition, it has not attempted to determine the extent
that the increased use of commercial acquisition has resulted in the
benefits expected. Our analysis indicates that for at least one of the
expected benefits, attracting new market entrants, the expected benefit
has not materialized. For the most part the Air Force's commercial
acquisition was with traditional defense contractors.
Our work, that of DOD's Inspector General, and that of others has shown
that government contracting officials face challenges in using
commercial acquisition. For example, improperly classifying an
acquisition as a commercial acquisition leaves the Air Force vulnerable
to accepting prices that may not be the best value for the department
because under commercial acquisition regulations the government is
prohibited from requesting cost or pricing data. A high-ranking DOD
acquisition official recently testified before the Federal Acquisition
Advisory Panel that he is concerned about items and services being
identified as commercial that are not sold in an existing marketplace
because under these circumstances the government lacks assurances that
the price paid is reasonable.[Footnote 4] Our review of Air Force
contract files showed that Air Force officials disagreed about the
classification of some acquisitions as commercial. The Air Force's use
of commercial acquisition has also been accompanied by an increased
amount of dollars being awarded sole-source. Similar to misclassifying
acquisitions as commercial, the lack of market-based competition may
result in the Air Force's acceptance of prices that may not be the best
value for the department. Some Air Force contracting officials were
concerned with whether they had sufficient data to ensure they were
negotiating good deals, especially in a sole-source situation. OSD
cites the general advantages of competition and in its policy urges
contracting officials to avoid sole-source situations because sometimes
contractors may attempt to exploit the lack of competitive markets and
demand unreasonable prices. While OSD acknowledges some sole-source
situations may be unavoidable, we found increasing sole-source spending
on Air Force commercial contracts over the last 6 years. Of the 20 new
commercial acquisition awards for products in fiscal year 2004, half
were awarded sole-source.
We are making two recommendations to help ensure that the Air Force is
able to measure the benefits expected of commercial acquisition and
improve commercial acquisition by mitigating risks in certain
circumstances. DOD agreed with the recommendations, in principle, and
identified actions to address them.
Background:
The definition of commercial acquisition has evolved over the last
decade to mean the purchase of items customarily used by and sold (or
offered) to the general public, including items with minor
modifications of a type not customarily available in the commercial
marketplace made to meet federal government requirements, or services
of a type offered and sold competitively in substantial quantities in
the commercial marketplace.[Footnote 5]
The idea of increasing the government's use of commercial acquisition
is not new. Figure 1 identifies key legislation and federal-level
commissions that emphasized the use of and expected benefits of
commercial acquisition over the last several decades.
Figure 1: Overview of Commercial Acquisition Legislative History:
[See PDF for image]
Source: GAO analysis and presentation of data from selected
commissions, panels, and legislation affecting affecting commercial
acquisition.
Note: Citations for the Commissions, Legislation, and Panel shown in
figure 1 are listed in appendix VI.
[End of figure]
The National Defense Authorization Act for Fiscal Year 1987 required
DOD to submit a report to Congress on its progress toward meeting the
requirement to acquire commercial items to the maximum extent
practicable.[Footnote 6] DOD's subsequent report to Congress in
response to the act's requirement identified several impediments to the
use of commercial acquisition, including a requirement that contractors
provide cost or pricing data to the government. Identification of
providing the government cost or pricing data as an impediment was in
contrast to requirements in the Truth in Negotiations Act of 1962. This
act generally requires contractors to submit cost or pricing data to
the government before the award of a negotiated contract and certify
that the data are accurate, complete, and current as a way to provide
information parity between the contractor and the government. [Footnote
7] Because a primary maxim in contracting is that competition drives
down prices, one of the purposes of the legislation was to provide the
government with all the facts on the cost or pricing data the
contractor used to prepare a proposal, including, as applicable here,
when there is no competition. In that way, the government believed it
would have the information necessary to protect itself from paying
excessive prices.
In the late 1980s and early 1990s, however, concerns about impediments
that might prevent commercial companies from doing business with the
government continued. The concern about requiring cost or pricing data
in commercial acquisition was a factor in passing several laws in the
1990s designed to streamline acquisition in general, and commercial
acquisition specifically, by more broadly exempting commercial
acquisitions from the cost or pricing data requirement (see fig. 1).
Although commercial acquisition regulations now preclude the government
from obtaining cost or pricing data from contractors in commercial
acquisitions, the government is permitted to obtain pricing information
from sources other than the offering contractor. If this information
proves inadequate, the government can require the offering contractor
to provide additional information, known as information other than cost
or pricing data, although the government must, to the maximum extent
practicable, limit the scope of the request to include only information
in a form regularly maintained by the offering contractor.[Footnote 8]
In early 2001, OSD reemphasized to the military departments and defense
agencies that commercial acquisition should be used to the maximum
extent possible to effectively provide the technological advantages
needed to win future conflicts. OSD concluded that the military
departments and agencies must uniformly look first to the commercial
marketplace before developing new systems, upgrading legacy systems or
procuring spare parts and support services. To help ensure the
increased use of commercial acquisition, OSD established and the Air
Force implemented two commercial acquisition goals to be achieved by
the end of fiscal year 2005. These were to:
* double the dollar value of commercial acquisition contract actions
awarded in 1999 (for the Air Force this meant going from about $3
billion to about $6 billion) and:
* strive to increase the number of commercial contract actions awarded
to 50 percent of all Air Force contract actions.[Footnote 9]
In setting these goals, OSD expected that the increased use of
commercial acquisition would provide DOD with greater access to
commercial markets (products and service types) with increased
competition, better prices, and new market entrants and/or
technologies. Additional expected benefits of commercial acquisition
are listed in appendix II.
The Air Force Has Increased Commercial Acquisition Spending:
As its overall spending has increased, the Air Force has increased
spending using commercial acquisition, from $4.8 billion in fiscal year
2001 to over $8 billion in fiscal year 2005 (see fig. 2). The Air Force
also has had some success in achieving commercial acquisition goals;
for example, it has doubled the amount spent using commercial
acquisition since fiscal year 1999 (see fig. 3). However, it has not
achieved the goal of making 50 percent of all contract actions
commercial (see fig. 4). Nonetheless, the Air Force did not establish
measures nor did it collect information to determine if the benefits
expected from commercial acquisition were being achieved. As a result,
it is unclear if or how the Air Force has benefited from increased use
of commercial acquisition. The Air Force has used commercial
acquisition to buy a broad range of goods and services, including major
systems. For example, the Air Force used commercial acquisition to buy
the Joint Primary Aircraft Training System and a range of goods and
services such as radio and communication equipment, aircraft
components, and repair services. However, our analysis indicates that
for at least one of the expected benefits, attracting new market
entrants, the expected benefit has not materialized. The majority of
Air Force commercial contracts in fiscal years 2003-2004 were made to
traditional defense contractors.
Figure 2: Air Force Increases in Commercial Acquisition Spending,
Fiscal Years 2001-2005:
[See PDF for image]
Source: Air Force.
[End of figure]
Goals Measure Use of Commercial Acquisition:
The Air Force was able to achieve its goal of doubling spending using
commercial acquisition by the end of fiscal year 2003 and has exceeded
that goal through fiscal year 2005 (see fig. 3).
Figure 3: Air Force Progress in Meeting Commercial Acquisition Dollar
Goal, Fiscal Years 2001-2005:
[See PDF for image]
Source: Air Force.
[End of figure]
However, the Air Force did not increase commercial contract actions
awarded to 50 percent of all awards (see fig. 4).
Figure 4: Air Force Progress toward Commercial Acquisition Contract
Award Goal, Fiscal Years 2001-2005:
[See PDF for image]
Source: Air Force.
[End of figure]
These goals expired at the end of fiscal year 2005 and were not
extended or renewed at the time this report was published. An Office of
Under Secretary of Defense, Defense Procurement and Acquisition Policy,
senior procurement analyst noted that he believed the goals have
essentially been met and that the current law stating that
nondevelopmental items (commercial items) are to be used to the maximum
extent practicable[Footnote 10] is sufficient.
Benefits Expected from Commercial Acquisition Have Not Been Measured:
OSD has indicated that the increased use of commercial acquisition
should bring about the benefits of greater access to commercial
markets, including increased competition, getting better prices, and
access to new market entrants (contractors) and/or technologies.
Although the Air Force has increased the use of commercial acquisition,
neither OSD nor the Air Force has attempted to measure if the benefits
expected from this increased use are being achieved. The Air Force has
stated that the appropriateness of the application of the FAR
commercial item definition determines its use of the authority, not
whether any benefits would be gained.
A study sponsored by the Air Force and conducted by the RAND
Corporation, a nonprofit research organization, in 2005 looked at Air
Force commercial acquisition and found that the data needed to
determine if the expected benefits of commercial acquisition were being
realized were not available.[Footnote 11] The report concluded that
this lack of data has made it difficult to measure whether this type of
acquisition provides the benefits claimed or what challenges exist.
With respect to anticipated cost and schedule savings, RAND reported
that DOD provided no direction for tracking these expected benefits,
and as a result, such data are not collected by either DOD or
contractors. RAND also reported that DOD does not develop estimates of
the benefits expected from using commercial acquisition versus other
types of acquisitions prior to commencing contract award activities.
RAND did not comment on the cost of quantifying commercial acquisition
benefits.
Traditional Contractors Still Performing Most Commercial Air Force
Contracts:
While the Air Force has used commercial acquisition to buy a broad
range of goods and services, including major systems, it continues to
do business mainly with traditional contractors. By increasing the use
of commercial acquisition, OSD hoped the Air Force would be able to
draw nontraditional contractors into defense contracting and gain
greater access to new commercially developed technologies.
Nontraditional contractors were expected to offer more efficient
business practices and new technologies to meet government
requirements. OSD commercial acquisition guidance emphasizes the need
to incorporate commercial items into defense systems because the
commercial sector often drives critical technologies. Even with this
increased emphasis on commercial acquisition, the Air Force has
primarily continued to award its commercial contracts to traditional
defense contractors.
To determine the extent to which the Air Force attracted nontraditional
contractors using commercial acquisition, we reviewed acquisition data
on the 98 contractors who received large (over $5 million) commercial
contracts in fiscal years 2003 and 2004. We found that 87 of the 98
contractors, or 89 percent, were included on DOD's Top 100 or Air Force
Top 50 contractor lists[Footnote 12] or had previously received
contracts with DOD[Footnote 13] since fiscal year 1996.[Footnote 14]
Only 11 contractors had not previously received a contract or were not
on either list (see fig. 5).
Figure 5: Nontraditional and Traditional Air Force Commercial
Acquisition Contractors, Fiscal Years 2003-2004:
[See PDF for image]
Source: GAO analysis of DOD data.
[End of figure]
Further, 7 of the 11 contractors that had not previously received large
dollar contracts from DOD performed more routine services like
transportation, housekeeping, or architect and engineering services. A
list of the traditional and nontraditional contractors is included as
appendix III.
In a 2005 commercial acquisition study, RAND concluded that there is
very little evidence that the use of commercial acquisition has
encouraged greater numbers of civilian (non-DOD) commercial contractors
to compete for DOD contracts for major military-unique items.[Footnote
15]
In general, we found that commercial acquisition was used to buy a
variety of goods and services. These include but are not limited to
aircraft engines and structural components, telecommunication services,
maintenance and repair of equipment, program management/ support
services, and housekeeping services.
We also found three major Air Force acquisition programs for which
commercial actions constituted at least 75 percent of contract dollars
obligated. The three major acquisition programs are:
* the latest version of the Air Force C-130 cargo aircraft;
* the Joint Primary Aircraft Training System, including a new trainer
aircraft, the ground-based training system, and a training management
system; and:
* the National Airspace System to modernize DOD air traffic control
facilities in parallel with the Federal Aviation Administration (FAA)
to ensure safe operation of aircraft in accordance with statutes and
DOD/FAA agreements, according to an Air Force official.
Air Force Use of Commercial Acquisition in Certain Situations Increases
Risk:
Our work, that of DOD's Inspector General, and that of others has shown
that government contracting officials face challenges using commercial
acquisition. For example, improperly classifying an acquisition as a
commercial acquisition leaves the Air Force vulnerable to accepting
prices that may not be the best value for the department because under
commercial acquisition regulations, the government is precluded from
requesting cost or pricing information. Our review of Air Force
contract files and DOD Inspector General reports showed that Air Force
officials disagreed about the designation of some acquisitions as
commercial. Furthermore, the director of Defense Procurement and
Acquisition Policy recently testified before the Federal Acquisition
Advisory Panel that he is concerned about some items and services being
identified as commercial that are not sold in an existing marketplace
because there are no assurances that the price is reasonable. The Air
Force use of commercial acquisition has been accompanied by an
increased amount of dollars being awarded sole-source. Similar to
misclassifying acquisitions as commercial, the lack of market-based
competition may result in the Air Force's acceptance of prices that may
not be the best value for the department. OSD cites the general
advantages of competition and in its policy urges contracting officials
to avoid sole-source situations because sometimes contractors may
attempt to exploit the lack of competitive markets and demand
unreasonable prices. While OSD acknowledges some sole-source situations
may be unavoidable, we found increasing sole-source spending on Air
Force commercial contracts over the last 6 years. Also, of the 20 new
commercial awards for products over $5 million in fiscal year 2004,
half were awarded sole-source, with traditional contractors receiving
most of those sole-source awards.
Challenges and Risks Using Commercial Acquisition:
Misclassification of items as commercial can leave the Air Force
vulnerable to accepting prices that are not the best value for the
department. Our review of Air Force contract files included two cases
where there were internal Air Force disagreements regarding
determinations of commerciality. The items in question were a C-130E
and a C-130H aircraft. During our review, some Air Force officials also
expressed concern, especially in sole-source situations, about their
ability to determine whether the prices being charged are reasonable. A
major difference between a Federal Acquisition Regulation (FAR) Part 15
"Contracting by Negotiation" and Part 12 "Acquisition of Commercial
Items" is that under Part 12 the government is prohibited from
obtaining cost or pricing data. Under FAR Part 15, the government is
generally required to obtain cost or pricing data (unless certain
exceptions apply) from contractors to help determine if it is getting a
good price.
DOD's Inspector General has recently issued reports asserting that
three Air Force acquisitions were inappropriately designated as
commercial.[Footnote 16] The Inspector General concluded that three Air
Force acquisitions--the C-130J cargo aircraft, the KC-767A tanker
aircraft, and F-16 simulator services--should not have been planned or
purchased as commercial acquisitions because they were unique to the
military. For example, the Inspector General reported in March 2006
that the Air Force had improperly used commercial acquisition to buy F-
16 simulator services because contracting officials misinterpreted the
definition of commercial services. As a result, the Air Force placed
itself at a disadvantage, restricting its ability to determine whether
the price charged was reasonable. By using commercial acquisition, the
Air Force was precluded from requesting certified cost or pricing data
for a service in which the department is the sole customer. On the
basis of the Inspector General's report, the Air Force agreed, and has
begun, to change its contracting approach from a commercial acquisition
to a noncommercial acquisition.
Other recent efforts to improve the government's use of commercial
acquisition include efforts by a high-level panel to consider changes
to potentially clarify the definition of commercial acquisition as well
as efforts by Air Force officials seeking similar regulatory changes.
The Federal Acquisition Advisory Panel is examining, among other
things, commercial acquisition practices. The Acquisition Advisory
Panel is also reviewing preliminary recommendations to modify the
commercial item definition found in federal regulation. The panel
noted, in a briefing on its Web page, that in the private sector,
competition in efficient markets is a principle relied on to a great
extent to assure price reasonableness. The panel cites three government
commercial acquisition practices related to the commercial item
definition that depart from private-sector practices: First, commercial
acquisition procedures are used for sole-source contracts; second,
items are acquired commercially even when the government is the
predominant or only buyer; and third, the "commercial item" definition
is broad enough to admit items for which an efficient market does not
exist to ensure price reasonableness.
DOD's Defense Procurement and Acquisition Policy Director recently
addressed the Acquisition Advisory Panel and identified concerns that
some acquisitions are being designated commercial that are not
commercial.[Footnote 17] The Director expressed his view that a
commercial item is one in which a marketplace exists, meaning the item
has been sold to commercial companies (not just DOD). The Director
stated that if someone is selling "to us (the government) and only to
us, that's not a commercial price." In addition, the Director testified
that DOD intends to create a tool, a decision matrix, that will enable
contracting officials to identify the right contracting mechanism after
completing their market research. The purpose is to have DOD and the
military services use commercial acquisition effectively and correctly,
in a consistent way.
OSD guidance specifically states that commercial acquisition was not
intended to allow military-unique items to be purchased commercially.
Misclassification of items as commercial can leave the Air Force
vulnerable to accepting prices that are not the best value for the
department. When an item is designated as commercial, the Air Force
should be able to determine if the price is reasonable on the basis of
prices in the commercial market. If the Air Force designates an item as
being commercial when it is not readily available in the commercial
market, this limits its ability to assess the reasonableness of the
contractor's price because it might, especially in sole-source
situations, have less information on prices to make its decision.
Restrictions on the use of commercial acquisition to procure military
unique major weapons systems were recently established in the Fiscal
Year 2006 DOD Authorization Act.[Footnote 18] The act requires that to
use commercial acquisition procedures for major weapon systems, the
Secretary of Defense must now (1) determine the procurement meets the
definition of "commercial item," (2) determine that national security
objectives necessitate the purchase of the system as a commercial item,
and (3) give Congress at least 30 days notice before purchasing a major
acquisition program using commercial acquisition. To implement this
requirement, an interim Defense Federal Acquisition Regulation
Supplement (DFARS) rule is pending publication.[Footnote 19] The Air
Force intends to implement the DFARS rule by requiring requests for
Secretary of Defense approval of major weapon systems to be purchased
as commercial items, include a description of the benefits associated
with increased competition, better prices, and new market entrants and/
or technologies.
When we discussed the purchase of major weapon systems using commercial
acquisition with top DOD officials, they informed us there are plans to
transition both the C-130J and the Joint Primary Aircraft Training
System (JPATS) contracts, as well as a future contract for F-16 fighter
aircraft simulator services, from commercial to noncommercial
contracts. Further, a top DOD acquisition official said that in the
future DOD will more carefully scrutinize the use of commercial
acquisition, especially on major acquisition programs.
Further, Air Force contracting officials have submitted proposals as
cases to the Defense Acquisition Regulation Council and the Civilian
Agency Acquisition Council seeking clarification of the definitions of
"commercial item" and "cost or pricing data" related to commercial
acquisition. While one case was closed, it highlights continued efforts
to appropriately classify items as commercial. For example, the Air
Force proposed a change to the DFARS,[Footnote 20] which was
subsequently referred by Defense Acquisition Regulation Council as a
case for the Federal Acquisition Regulation,[Footnote 21] to tighten
the commercial item definition. The definition found in federal
regulation states in part: "commercial item means any item, other than
real property, that is of a type customarily used by the general
public." In an attachment to the 2001 memo instituting the commercial
acquisition goals, OSD cautioned that the phrase "of a type" is not
intended to allow the use of commercial acquisition to acquire sole-
source, military-unique items that are not closely related to items
already in the marketplace.
A second FAR case attempts to address confusion about what qualifies as
cost or pricing data in relation to commercial acquisition.[Footnote
22] The case, if made final, will clarify that the government can ask
contractors for cost or pricing data, just not certified cost or
pricing data.
Commercial Contract Awards Made in a Sole-Source Environment Can
Increase Risk:
OSD emphasis on increasing the use of commercial acquisition includes
guidance on limiting use of commercial acquisition for sole-source
procurements. This guidance advises contracting officials to avoid sole-
source commercial acquisitions, in part because sometimes contractors
may attempt to exploit the lack of competition and demand unreasonable
prices. When such situations are unavoidable, OSD advocates use of
other price analysis tools outlined in federal regulation to mitigate
risk.
The FAR provides that adequate price competition on contracts is
generally sufficient to determine price reasonableness. Adequate price
competition means (1) the government receiving at least two offers
submitted by responsible offerors, competing independently, that
satisfy the government requirement; (2) there was a reasonable
expectation of competition; or (3) a proposed price is clearly
reasonable based on price analysis.[Footnote 23] In the event price
competition is not sufficient, the government can seek additional
information beginning with government and additional sources other than
the offeror, and last from the offeror if necessary.[Footnote 24]
There are circumstances when an acquisition, including one for
commercial items, can be awarded without competition. These include
instances in which (1) there is only one responsible source and there
are no other supplies or services that will satisfy agency
requirements, such as when a contractor has exclusive data rights and
copyrights; (2) the government has an unusual and compelling urgent
need for a product or service; or (3) the acquisition is required by
statute or international agreement. Such awards, for other than full
and open competition must be justified and approved in
writing.[Footnote 25]
Despite guidance directing the Air Force to avoid sole-source
situations, from fiscal years 2000 through 2005, sole-source spending
on Air Force commercial acquisition contracts more than doubled.
Specifically, sole-source dollars as a percentage of total commercial
acquisition dollars for awards over $5 million have increased from 12
percent in fiscal year 2000 to 26 percent in fiscal year 2005. This
recent trend appears inconsistent with OSD guidance to avoid sole-
source commercial acquisition situations.
Our review found that of all 20 fiscal year 2004 commercial product
acquisition awards over $5 million, 10 of the Air Force's were made on
a sole-source basis. Altogether, fiscal year 2004 obligations on the 20
contracts totaled $329 million. Obligations on the 10 sole-source
awards totaled $172 million, or 52 percent (additional observations
from our review of the 20 contracts are found in app. IV).[Footnote 26]
Furthermore, at least one of the expected benefits of commercial
acquisition--attracting new market entrants--has not materialized
through the Air Force's use of sole-source commercial acquisitions for
products in fiscal year 2004. Specifically, traditional defense
contractors were used on 8 of the 10 fiscal year 2004 sole-source
product awards.
Conclusions:
By establishing goals that only measure use and not the benefits
expected, the Air Force is unable to determine if it has benefited from
increased use of commercial acquisition. The benefits to the government
of commercial acquisition have not been demonstrated. Little evidence
has been collected on the claimed benefits such as cost savings, better
pricing, increased access to commercial vendors, and greater numbers of
commercial firms to compete for Air Force contracts.
Not only is it unclear whether commercial acquisition is bringing
benefits to the Air Force, the Air Force may be increasing risk without
knowing if the added risk is balanced by progress toward achieving
benefits that may have the potential to demonstrate considerable
savings. While recognizing that the Air Force may need to make some
sole-source purchases using commercial acquisition, the trend of
increasing sole-source spending appears contradictory to OSD guidance
to limit situations where contractors may attempt to exploit the lack
of competitive markets and demand unreasonable prices. When sole-source
situations are necessary, contracting officials should be able to
identify the benefits of using commercial acquisition for individual
procurements that would otherwise be unattainable.
Recommendations for Executive Action:
To help ensure that the Air Force is able to measure the benefits
expected from commercial acquisition, we recommend collecting
information that would allow evaluating the extent of cost savings,
increased access to commercial markets, and greater access to
nontraditional contractors. For example, the Air Force could measure
the number of nontraditional contractors it reaches using commercial
acquisition.
To help improve commercial acquisition and reduce the potential for
risk by limiting situations where commercial acquisition contracts are
being awarded sole-source, we also recommend that the Secretary of the
Air Force strive to limit the acquisition of commercial products and
services in sole-source environments in concert with OSD guidance.
However, in the cases where it is necessary to award sole-source, the
Secretary should collect the information necessary to evaluate the
benefit(s) of awarding commercial verses a noncommercial contract.
Agency Comments and Our Evaluation:
DOD provided written comments on a draft of this report. DOD agreed
with the recommendations, in principle, and described the actions it
will take to address our recommendations. The comments are discussed
below and are reprinted in appendix VII.
DOD partially agreed with our recommendation to measure the benefits
expected from commercial acquisition by collecting information to
evaluate the extent of cost savings, increased access to commercial
markets, and greater access to nontraditional contractors. DOD stated
that it agrees in principle it would be worthwhile to know whether the
expected benefits from commercial acquisition are materializing and
that it will examine ways to collect information on the number of
nontraditional contractors it is reaching through commercial
acquisition. However, DOD noted that the collection of information for
the expected benefits would be expensive. We believe DOD is taking the
first step necessary to evaluate whether it has benefited from the
increased use of commercial acquisition. We encourage such efforts, and
would expect that if DOD collects information on nontraditional
contractors it reaches using commercial acquisition and it is still
unable to evaluate whether significant benefits exist from using
commercial acquisition, DOD will recognize the need to collect
additional information.
DOD's comments included an attachment reflecting the Air Force views on
our draft report. We incorporated those views where appropriate.
We will send copies of this report to the Secretary of Defense, the
Secretary of the Air Force, appropriate congressional committees, and
other interested parties. We will also make copies available to others
on request. In addition, this report will be available at no charge on
GAO's Web site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-4841 or by e-mail at schinasik@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of the report. Other key contributors to
this report were David E. Cooper, Director, Penny Berrier Augustine,
Assistant Director, Lily Chin, Keith Hudson, Julia Kennon, Andrew Redd,
Don Springman, Marie Ahearn, and Robert Swierczek.
Signed by:
Katherine V. Schinasi, Managing Director:
Acquisition and Sourcing Management:
[End of section]
Appendix I: Scope and Methodology:
To conduct our work, we reviewed federal acquisition and commercial
acquisition regulations, as well as the Office of Secretary of Defense
(OSD), Air Force, and Air Force Materiel Command (AFMC) guidance
pertaining to commercial acquisition. We also reviewed OSD and Air
Force commercial acquisition goals since 2001 as well as expected
benefits and risks associated with commercial acquisition. We met or
held discussions with representatives of OSD and the Air Force to
discuss various aspects of commercial acquisition including goals,
progress toward achieving goals, benefits expected, and associated
risks. In addition we met with Department of Defense (DOD) Inspector
General officials to discuss audit report findings related to
commercial acquisition.
To understand the more recent determinations of commercial acquisition,
we reviewed all 20 large (over $5 million) Air Force commercial
contracts awarded for products in fiscal year 2004. We reviewed the
contract files associated with these contracts at locations of AFMC
including (1) Wright-Patterson Air Force Base, Ohio; (2) Tinker Air
Force Base, Oklahoma; (3) Robins Air Force Base, Georgia; and (4)
Hanscom Air Force Base, Massachusetts. We also reviewed a commercial
contract (including two major modifications) for a major acquisition
program called the Joint Primary Aircraft Training System. We held
discussions with contracting officers and procurement management
officials associated with the selected contracts.
To examine the extent that Air Force commercial contracts were awarded
to new market entrants, we utilized data from DOD's procurement
database (DD 350) for contract actions from fiscal year 1996 through
fiscal year 2004, which was the last full year of data available at the
time we performed our analysis. Query results were limited to contract
actions greater than $5 million, as the Federal Acquisition Regulation
(FAR) allowed actions below that threshold to employ simplified
acquisition procedures.[Footnote 27]
To determine the Air Force new market entrant contractors,[Footnote 28]
we took the contractors with contract actions in fiscal years 2003 and
2004 and determined whether they had received any previous DOD military
department contracts from fiscal year 1996 through fiscal year
2002.[Footnote 29] We considered contractors who had not received
contracts during this period new to DOD. We also examined Federal
Supply/Service Class codes to determine the nature of work performed by
Air Force contractors.
To determine the extent to which the Air Force competed its commercial
contracts, we reviewed data the Air Force provided summarizing its sole-
source commercial acquisitions from fiscal year 2000 through fiscal
year 2005. We defined "sole-source" as those actions either not
competed or not available for competition, according to DOD
classification codes. Again, the data were for acquisitions over $5
million.
For our analysis of the use of commercial acquisition in Air Force
major acquisition programs, we included the Major Defense Acquisition
Programs listed on OSD's Selected Acquisition Report summary tables for
fiscal years 2001 through 2005, except programs designated RDT&E
(Research, Development, Test, and Evaluation). We also included joint
programs from GAO's 2006 Assessment of Selected Major Weapon Programs
for which the Air Force was mentioned as the lead buyer. We queried the
DD 350 database to determine commercial and total contract obligations
on these major acquisition programs over the period constituting fiscal
year 2004 through fiscal year 2005.
We conducted our review from July 2005 to September 2006 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Additional Benefits Expected from Using Commercial
Acquisition:
Expected Benefits to the Government:
The government expected to benefit from the use of commercial
acquisition instead of noncommercial acquisition. Several of the
benefits expected include the government being able to:
* rely on the contractor's quality assurance processes and warranties
in lieu of government inspections,[Footnote 30]
* decrease the amount of time it normally takes to award a
contract,[Footnote 31]
* employ a streamlined contract clause structure,[Footnote 32] and:
* use simplified acquisition procedures on high dollar amount contracts
in certain circumstances.[Footnote 33]
Expected Benefits to Contractors:
There are also several advantages to contractors of using commercial
acquisition when doing business with the government. Generally
contractors are:
* not required to submit cost or pricing data to the
government,[Footnote 34]
* not required to adhere to cost accounting standards on firm fixed-
price contracts,[Footnote 35]
* not required to disclose more technical data to the government than
they would customarily disclose to the public,[Footnote 36]
* able to propose more than one product that will meet the government's
need,[Footnote 37] and:
* able to submit existing product literature in lieu of unique
technical proposals.[Footnote 38]
[End of section]
Appendix III: Traditional and Nontraditional Air Force Contractor
Analysis, Fiscal Years 1996-2004:
To examine the extent that Air Force commercial contracts were awarded
to nontraditional contractors or new market entrants, we used data from
DOD's procurement database (DD 350) for contract actions from fiscal
year 1996 through fiscal year 2004--the last full year of available
data at the time of analysis. Query results were limited to Air Force
contract actions greater than $5 million.
We identified 98 contractors who received commercial Air Force awards
in either fiscal year 2003 or fiscal year 2004. Forty-six of those 98
contractors also received large-dollar commercial awards in prior years
back through fiscal year 2000 or were included on DOD Top 100 or Air
Force Top 50 contractor lists.[Footnote 39] We considered them
traditional contractors. For the remaining 52 contractors who did not
receive large-dollar awards during that period (and who were not on DOD
top 100 or Air Force top 50 contractor lists), we used DOD's DD 350
procurement database to determine if they had performed any contracts
above $25,000 for the Army, Navy, or Air Force military departments,
from fiscal year 1996 through fiscal year 2002. Of the 52 contractors,
41 had received military department awards during this period and were
therefore considered traditional contractors. We considered the 11
contractors who did not perform military department contracts during
this period to be new to DOD. Table 1 lists the 87 total traditional
contractors and the 11 new contractors according to our analysis.
Table 1: Listing of Traditional Air Force Contractors, Fiscal Years
2003-2004:
ABB Automation;
Intergraph.
ACS Defense;
International Business Machine.
Adacel Systems;
ITT Industries ITT Gilfi.
Aeroflex Wichita;
Jacobs Engineering Group.
Aerovironment;
King Aerospace.
AIL Systems;
Kovatch.
Akima;
L3 Communications.
Alaska Industrial Resources;
Lockheed Martin.
Alutiiq Security Technology;
Logtec.
American Management Systems;
Lynden Air Cargo LLC.
ARINC;
Madison Research.
ASAP Software;
Messier Bugatti.
ATAP;
Motorola.
BAE Systems Enterprise Systems;
MRA Systems.
Balance Industries;
MTC Technologies.
Beta Fluid Systems LLC;
NMC Wollard.
Booz Allen Hamilton;
Northrop Grumman.
California Industrial Facilities;
Oklahoma Gas and Electric.
Cardio Theater Holdings;
Point Blank Body Armor.
CDW Government;
Raytheon Company.
CFM International;
Redcom Laboratories.
Channing Bete;
Rockwell Collins.
Chugach Alaska;
Rohde Schwarz.
CPI Aerostructures;
Rollsroyce.
Dell Computer;
Science Applications International.
Digicon;
Siemens Dematic.
Digital Support;
Steelcase.
Digitalnet Government Solution;
Stinar.
Dynamics Research;
Sytex.
E. F. Johnson;
T Square Logistics Services.
Equipto Electronics;
Telos.
Evergreen Helicopters of Alaska;
Teradyne.
Fluke;
Texas Commission for the Blind.
FMC;
Boeing.
General Dynamics;
The Carlyle Group.
General Electric;
The Rendon Group.
Global Ground Support;
Titan.
Goodrich;
TMP Worldwide Advertising.
Government Scientific Source;
Tokyo Electric Power.
GTSI;
United Technologies.
Hillstrom, David M;
Westover Consultants.
Honeywell International;
Work Services.
Industries for the Blind;
XS International.
Integrated Information Technology.
Source: GAO analysis of DOD data.
[End of table]
Table 2: Nontraditional Air Force Contractors (New Market Entrants),
Fiscal Years 2003-2004, and Description of Contracted Item or Service:
Description of item or service: Aircraft and airframe structural comps;
Contractor: Flight Refuelling Limited; Merlin Express, Inc. (Also M7
Aerospace).
Description of item or service: Transportation of things;
Contractor: Ukranian Avia Transport Co.
Description of item or service: Architect and Engineering-General;
Contractor: Geosierra, LLC.
Description of item or service: Maintenance, repair, and rebuilding of
equipment;
Contractor: KNI; Midwest Mechanical Contractors.
Description of item or service: Housekeeping services;
Contractor: AA Food Services, Inc; Austin Associates; USProtect Corp;
Wasatch Energy LLC; Worldwide Security Services.
Source: GAO analysis of DOD data.
[End of table]
[End of section]
Appendix IV: Observations from Review of 20 Air Force Contracts Using
Commercial Acquisition:
We reviewed 20 larger Air Force commercial contracts awarded in fiscal
year 2004. We reviewed the contract files associated with these
contracts at locations of the Air Force Materiel Command including (1)
Wright-Patterson Air Force Base, Ohio; (2) Tinker Air Force Base,
Oklahoma; (3) Robins Air Force Base, Georgia; and (4) Hanscom Air Force
Base, Massachusetts. We held discussions with contracting officers and
procurement management officials associated with most of the selected
contracts.
In three instances, parts for the C-5 military transport aircraft were
procured under a system in which contractors produced a prototype or
unique first article because these replacement parts did not already
exist. These first articles were then subject to successful testing
before the contractor was given approval to produce the remaining
articles. As part of each contract, the government paid for the
manufacturers to construct the unique first article and the various
machine tooling they needed to produce the articles.
In two other cases, there were internal Air Force disagreements
regarding determinations of commerciality. The items in question were C-
130E and C-130H aircraft procured by foreign governments from a sole-
source contractor, with the U.S. government (via the Air Force) acting
as an intermediary.
[End of section]
Appendix V: Use of Commercial Acquisition in Air Force Major
Acquisition Programs:
Overall, 9.5 percent ($2.6 billion) of all Air Force contract dollars
to major acquisitions were obligated under commercial acquisition from
fiscal year 2004 through fiscal year 2005.[Footnote 40] We considered
programs listed on OSD's Selected Acquisition Report summary tables
from fiscal year 2001 through fiscal year 2005 (except research and
development programs) to be major acquisition programs. We also
included joint programs from GAO's 2006 Defense Acquisitions:
Assessments of Selected Major Weapon Programs (GAO-06-391) for which
the Air Force was listed as the lead buyer.[Footnote 41] We found three
major acquisitions with Air Force involvement for which commercial
actions constituted at least 75 percent of contract dollars obligated,
and these acquisitions are shaded in table 3.[Footnote 42] Excluding
these three acquisitions, commercial expenditures for the remaining 25
major acquisition programs with Air Force involvement constituted less
than 1 percent of total program dollars spent.
Table 3: Commercial Contract Actions in Air Force Major Acquisition
Programs, Fiscal Years 2004-2005:
Major acquisition program: AEHF;
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: AMRAAM;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$1,275,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.2%.
Major acquisition program: AWACS RSIP (E-3);
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$2,160,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 5.5%.
Major acquisition program: B1-B CMUP;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$3,323,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 1.8%.
Major acquisition program: B1-CMUP Computer Upgrade;
2004: No record;
2005: No record;
Total commercial major acquisition program dollars 2004-2005: No
record;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: No record.
Major acquisition program: B-2 RMP;
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: C-130 AMP;
2004: no commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$1,083,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.3%.
Major acquisition program: C-130J;
2004: commercial actions account for at least 75 percent of dollars
obligated;
2005: commercial actions account for at least 75 percent of dollars
obligated;
Total commercial major acquisition program dollars 2004-2005:
$1,776,055,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 94.7%.
Major acquisition program: C-17A;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$31,365,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.4%.
Major acquisition program: C-5 RERP;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$6,210,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.9%.
Major acquisition program: EELV;
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: F-22;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005: $179,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: GBS;
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: Global Hawk;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005: $581,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.1%.
Major acquisition program: JASSM;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005: $72,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: JDAM;
2004: commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: $118,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: JPATS;
2004: commercial actions account for at least 75 percent of dollars
obligated;
2005: commercial actions account for at least 75 percent of dollars
obligated;
Total commercial major acquisition program dollars 2004-2005:
$613,917,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 79.8%.
Major acquisition program: F-35 (JSF);
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: JSTARS;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$16,884,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 2.9%.
Major acquisition program: JTRS AMF;
2004: No record;
2005: No record;
Total commercial major acquisition program dollars 2004-2005: No
record;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: No record.
Major acquisition program: Minuteman III GRP;
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: Minuteman III PRP;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$91,316,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 13.0%.
Major acquisition program: NAS;
2004: no commercial actions;
2005: commercial actions account for at least 75 percent of dollars
obligated;
Total commercial major acquisition program dollars 2004-2005:
$2,370,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 92.0%.
Major acquisition program: NAVSTAR GPS;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$32,395,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 2.8%.
Major acquisition program: NPOESS;
2004: commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: $90,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: MP RTIP; 2004: no commercial actions; 2005:
no commercial actions; Total commercial major acquisition program
dollars 2004-2005: 0; Commercial dollars as a percentage of total major
acquisition program dollars 2004-2005: 0.0%.
Major acquisition program: MPS;
2004: No record;
2005: No record;
Total commercial major acquisition program dollars 2004-2005: No
record;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: No record.
Major acquisition program: MQ-9 Predator B;
2004: No data;
2005: No data;
Total commercial major acquisition program dollars 2004-2005: No data;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: No data.
Major acquisition program: SBIRS (High);
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: SDB;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005: $546,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.3%.
Major acquisition program: TITAN IV;
2004: no commercial actions;
2005: no commercial actions;
Total commercial major acquisition program dollars 2004-2005: 0;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 0.0%.
Major acquisition program: TSAT;
2004: No record;
2005: No record;
Total commercial major acquisition program dollars 2004-2005: No
record;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: No record.
Major acquisition program: Wideband Gapfiller;
2004: commercial actions;
2005: commercial actions;
Total commercial major acquisition program dollars 2004-2005:
$4,281,000;
Commercial dollars as a percentage of total major acquisition program
dollars 2004-2005: 6.8%.
Source: GAO analysis of DOD and Air Force data.
[End of table]
[End of section]
Appendix VI: Citations for Commissions, Legislation, and Panel Shown in
Figure 1:
1972-Commission on Government Procurement--See Report of the Commission
on Government Procurement, Vol. 3, Pt. D, "Acquisition of Commercial
Products," (Dec. 1972).
1984-Competition in Contracting Act of 1984--Pub. L. No. 98-369, Div.
B, Title VII.
1986-President's Blue Ribbon Commission on Defense Management (Packard
Commission)--A Quest for Excellence: Final Report to the President by
the President's Blue Ribbon Commission on Defense Management (June
1986), 60-64.
1986-National Defense Authorization Act for Fiscal Year 1987--Pub. L.
No. 99-661, Div. A, Title IV, Sec. 907(a) (1986).
1993-Advisory Panel on Streamlining and Codifying Acquisition Laws
(Sec. 800 Panel)-Established Pursuant to Section 800 of the National
Defense Authorization Act for Fiscal Year 1991, Pub. L. No. 101-510
(1990); Streamlining Defense Acquisition Laws: Report of the
Acquisition Law Advisory Panel to the U.S. Congress, Intro. I-9 (1993).
1994-Federal Acquisition Streamlining Act--Pub. L. No. 103-355, Section
1202 and Title VIII (1994).
1996-Clinger-Cohen Act of 1996-Pub. L. No. 104-106, Div. D (1996),
formerly the Federal Acquisition Reform Act of 1996 and renamed in
Treasury, Postal Service and General Government Appropriations Act,
1997, contained in Omnibus Consolidated Appropriations Act, 1997, Pub.
L. No. 104-208, Section 808 (1996).
2003-Services Acquisition Reform Act of 2003--Pub. L. No. 108-136,
Title XIV, Section 1431, 1432 (2003).
[End of section]
Appendix VII: Comments from the Department of Defense:
Office Of The Under Secretary Of Defense:
3000 Defense Pentagon:
Washington, DC 20301-3000:
Acquisition, Technology And Logistics:
SEP 14 2006:
Ms. Katherine V. Schinasi:
Managing Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. Schinasi:
This is the Department of Defense (DoD) response to the GAO Draft
Report, GAO-06-995, `Dod Contracting: Efforts Needed to Address Air
Force Commercial Acquisition Risk,' dated August 1, 2006, (GAO Code
120461).
The Department appreciates the opportunity to comment on the draft
report. Our comments to the draft report recommendations are enclosed
as well as comments from the Office of the Assistant Secretary of the
Air Force.
Sincerely,
Signed by:
Shay D. Assad:
Director, Defense Procurement and Acquisition Policy:
Enclosures: As stated:
GAO Draft Report Dated August l, 2006 GAO-06-995 (GAO Code 120461):
"DOD Contracting: Efforts Needed To Address Air Force Commercial
Acquisition Risk"
Department Of Defense Comments To The GAO Recommendation:
Recommendation 1: The GAO recommended that the Secretary of the Air
Force collect information that would allow evaluating the extent of
cost savings, increased access to commercial markets, and greater
access to non-traditional contractors to ensure that the Air Force is
able to measure the benefits expected from commercial acquisition. (p.
19/GAO Draft Report):
DOD Response: Partially concur. We agree in principle that it would be
worthwhile to know whether the expected benefits from commercial
acquisition are materializing. However, the suggested collection of
information, which would be expensive to establish for the breadth of
the Air Force mission, would not influence individual acquisition
decisions. We will examine ways to collect information on the number of
non-traditional contractors we are reaching through commercial
acquisitions.
Recommendation 2: The GAO recommended that the Secretary of the Air
Force strive to limit the acquisition of commercial products and
services in sole source environments in concert with the OSD guidance.
If it is necessary to award sole source, collect the information
necessary to evaluate the benefits of awarding a commercial verses a
noncommercial contract. (p. 20/GAO Draft Report):
DOD Response: Concur. the Air Force will identify benefits associated
with Major Defense Acquisition Programs that are to be acquired as
commercial items as explained in the attached memorandum from Office of
the Assistant Secretary to the Air Force.
[End of Section]
FOOTNOTES
[1] We will use the term "commercial acquisition" throughout this
report to refer to commercial item acquisition using Federal
Acquisition Regulation Part 12--Acquisition of Commercial Items.
[2] A "contract action" is defined as any new contract award and/or new
delivery order placed against a contract award with a value greater
than $25,000.
[3] In fiscal year 2004, the Air Force awarded 20 commercial
acquisition contracts each with a value of $5 million or more.
[4] This is a panel authorized by Section 1423 of the Services
Acquisition Reform Act of 2003 (Div. A, Title XIV, National Defense
Authorization Act for Fiscal Year 2004, Pub. L. No. 108-136, (2003))
with representation from acquisition experts in government, private
industry, and academia.
[5] See Federal Acquisition Regulation (FAR) 2.101. In part "Commercial
item" means
(1) Any item, other than real property, that is of a type customarily
used by the general public or by non-governmental entities for purposes
other than governmental purposes, and--
(i) Has been sold, leased, or licensed to the general public; or
(ii) Has been offered for sale, lease, or license to the general
public;
(2) Any item that evolved from an item described in paragraph (1) of
this definition through advances in technology or performance and that
is not yet available in the commercial marketplace, but will be
available in the commercial marketplace in time to satisfy the delivery
requirements under a Government solicitation;
(3) Any item that would satisfy a criterion expressed in paragraphs (1)
or (2) of this definition, but for--
(i) Modifications of a type customarily available in the commercial
marketplace; or
(ii) Minor modifications of a type not customarily available in the
commercial marketplace made to meet Federal Government requirements.
Minor modifications means modifications that do not significantly alter
the nongovernmental function or essential physical characteristics of
an item or component, or change the purpose of a process. Factors to be
considered in determining whether a modification is minor include the
value and size of the modification and the comparative value and size
of the final product. Dollar values and percentages may be used as
guideposts, but are not conclusive evidence that a modification is
minor;
(4) Any combination of items meeting the requirements of (1), (2) , (3)
or (5) of this definition that are of a type customarily combined and
sold in combination to the general public;
(5) Installation services, maintenance services, repair services,
training services, and other services in support of an item in (1)
through (4) and the source of such services provides similar services
contemporaneously to the general public under terms and conditions
similar to those offered to the federal government;
(6) Services of a type offered and sold competitively in substantial
quantities in the commercial marketplace based on established catalog
or market prices.
[6] Defense Acquisition Improvement Act of 1986, contained in the
National Defense Authorization Act for Fiscal Year 1987, Pub. L. No. 99-
661, Div. A, Title IV, Section 907(b), (1986).
[7] The Truth in Negotiations Act (TINA) provided a limited exemption
for the submission of cost or pricing data when a negotiated price was
based on established catalog or market prices of commercial items sold
in substantial quantities to the general public, now known as
commercial-off-the-shelf.
[8] FAR 15.402 and 15.403-3.
[9] A contract action being defined as any new contract award and/or
new delivery order placed against a contract awarded with a value
greater than $25,000.
[10] Defense Acquisition Improvement Act of 1986, contained in the
National Defense Authorization Act for Fiscal Year 1987, Pub. L. No. 99-
661, Div. A, Title IV, Section 907(a), (1986).
[11] RAND, Price-Based Acquisition: Issues and Challenges for Defense
Department Procurement of Weapon Systems, (Santa Monica, California:
2005).
[12] These lists, compiled by DOD's Statistical Information Analysis
Division, present summary data on the companies receiving the largest
dollar volume of DOD and Air Force prime contract awards. We used only
those lists describing contractors' standings for fiscal year 2004.
[13] We limited our evaluation to contractors that had done business
with the Army, Navy, and Air Force.
[14] Fiscal year 1996 marks the first year for which DOD's procurement
database (DD 350) utilized the commercial item designation.
[15] RAND, Price-Based Acquisition: Issues and Challenges for Defense
Department Procurement of Weapon Systems, (Santa Monica, CA: 2005).
[16] Inspector General, DOD, Acquisition: Contracting for and
Performance of the C-130J Aircraft, D-2004-102, July 23, 2004;
Management Accountability Review of the Boeing KC-767A Tanker Program,
OIG-2004-171, May 13, 2005; and Acquisition: Procurement Procedures
Used for F-16 Mission Training Center Simulator Services, D-2006-065,
March 24, 2006, (Washington, D.C.)
[17] Transcript of proceedings of a public meeting before the
Acquisition Advisory Panel, June 14, 2006.
[18] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163 section 803 (2006).
[19] DFARS Case 2006-D012, Procurement of Major Weapon Systems as
Commercial Items.
[20] DFARS Case 2004-D019 was closed and proposed as FAR case 2005-043.
[21] FAR Case 2005-043 closed with no further action because the
Federal Acquisition Regulation Civilian Agency Acquisition Council
decided that the proposed change was not necessary. The council
concluded there was insufficient rationale to adopt the DOD-proposed
definition or otherwise clarify the meaning "of a type" as it relates
to commercial items.
[22] FAR Case 2005-036.
[23] FAR 15.403-1(c).
[24] FAR 15.402.
[25] FAR 6.303.
[26] Including fiscal year 2005 obligations on those same contracts,
sole-source actions account for 39 percent of total obligated dollars.
[27] FAR 13.500.
[28] Contractors were identified and grouped by parent companies as of
fiscal year 2004. Parent companies were determined by matching Data
Universal Numbering System (DUNS) numbers or by matching company names
in DOD's DD 350 procurement database. When possible, company names were
matched with names on DOD's Statistical Information Analysis Division
fiscal year 2004 Top 100 DOD parent companies and subsidiaries list. In
some cases where subsidiary lists were not available, companies with
the same DUNS number but different names (and vice versa) were counted
as one company. We considered all companies with distinct names and
DUNS numbers as separate entities.
[29] We did not consider as new any contractors appearing on DOD's
Statistical Information Analysis Division (SIAD) fiscal year 2004 DOD
Top 100 and Air Force Top 50 contractor lists, but we did include them
in our total number of contractors receiving awards in fiscal years
2003 or 2004 if they received awards in either of those years. The DOD
Top 100 and Air Force Top 50 lists are compiled by DOD's Statistical
Information Analysis Division. The lists represent those contractors
receiving the largest dollar volume of DOD prime contract awards. We
used only those lists describing contractors' standings for fiscal year
2004.
[30] Federal Acquisition Regulation (FAR) 12.208, 12.402 and 12.404(b).
[31] FAR 12.204(b), 12.205(c).
[32] FAR 12.301(d),(e) and (f) and 12.302
[33] FAR 13.500(e).
[34] FAR 15.403-1(b)(3).
[35] FAR 12.214.
[36] FAR 12.211.
[37] FAR 12.205(b).
[38] FAR 12.205(a).
[39] These lists, compiled by DOD's Statistical Information Analysis
Division, present summary data on companies receiving the largest
dollar volume of DOD and Air Force prime contract awards. We used only
those lists describing contractors' standings for fiscal year 2004.
[40] We identified 33 major acquisition programs, but DD 350 records or
data were available on only 28 of those programs.
[41] Major acquisition programs were coded in the DD 350 database as
Major Defense Acquisition Programs (MDAPs) beginning in fiscal year
2004. Prior to that, the DD 350 database did not distinguish some
specific MDAPs such as the B-2 RMP (Radar Modernization Program) from
the overall weapon system of which it is a part (i.e., the B-2 Spirit
bomber). For this reason, we limited our data to fiscal years 2004 and
2005.
[42] Our determination that 75 percent of a program's contract dollars
were obligated under commercial acquisition is based solely on data for
fiscal years 2004 and 2005. In some cases a program may have dedicated
a larger percentage of its contract dollars to commercial acquisition
in previous years. For example, $685 million of the $690 million
obligated in fiscal years 2001-2003 for the Wideband Gapfiller was
commercial. The DD 350 database does not, however, group contract data
collected for these years under the program name Wideband Gapfiller.
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