Buying commercial in DoD: 15 years after acquisition reform

Monday - 5/21/2012, 5:28am EDT

Jared Serbu, reporter, Federal News Radio

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"It's time for the federal government to start running more like a business," Rep. William Clinger (R-Penn.) bellowed from the well of the House of Representatives in 1995.

The government contracting process was so arcane, so riddled with nonsensical complexities that few firms which operated in the day-to-day economy were willing to take the time to participate, said Clinger, the House Oversight chairman who went on to pass one of several procurement reform measures in the 1990s.

In the mid 1990s, the political mood was ripe for an overhaul of government purchasing. The Clinton administration was in the midst of its Reinventing Government initiative. The White House and lawmakers were using infamous tales of the Defense Department buying everyday commodities at extravagant prices to foot-stomp the need for streamlined buying practices.

"The age of the $500 hammer and the ashtray you can break on David Letterman is gone," President Bill Clinton said in his 1995 State of the Union address.

Two years earlier, Vice President Al Gore had appeared on The Late Show to decry what he said was a government specification that glass ashtrays be tested for breakage over a maple plank to ensure that no more than 35 shards of glass broke apart. Protected by the requisite — government-specified — safety goggles, he and Letterman demonstrated the process before a cheering TV audience.

Debates persist over whether the hammer — varying in price from $200 to $1,000 depending on which account one reads — ever truly existed. But the storyline was sufficiently fixed in Americans' minds as a symbol of government waste by then that it became a useful explanation for why reform was needed. Gore famously gave "hammer awards" to federal programs who found ways to avoid unnecessary spending.

The push toward simpler buying modeled after commercial practices took hold in two major pieces of legislation: The 1994 Federal Acquisition Streamlining Act and what later became known as the Clinger-Cohen act in 1996.

The 1990s reforms told DoD and other agencies that wherever possible, the government had to design its requirements so that products already on the commercial marketplace could do the job. Contracting officers were told to conduct market research to find out whether or not this was the case. And under a memo Defense Secretary William Perry issued in 1994, they would also have to start replacing military-specified standards for products with industry-led standards. The laws also set up simplified acquisition rules for commercial items.

Since then, DoD's purchases of commercial items have skyrocketed, according to numbers in the Federal Procurement Data System.

In 1996, DoD executed 475 contracts under the simplified commercial item procedures. By fiscal year 2011, commercial acquisition procedures were used for almost one-fifth of all the contracting dollars DoD obligated — nearly 13 million contracts worth almost $75 billion. Since 2005, DoD funds spent on those simplified acquisitions have more than doubled.

With Defense budgets on a downward trajectory, acquisition leaders from across the military services say they want to rely more on commercial products, not less.

"We're buying the state-of-the-market rather than state-of-the-art," said Rear Adm. John Korn, the Coast Guard's chief acquisition officer. "We're trying to be non-developmental as much as possible. If we can have open systems architecture and commercial equipment, it helps us standardize training and support and logistics."

The Army has started looking to commercial vendors to fulfill its needs as well. It's now regularly publishing the capability gaps that it needs to fill, hoping that industry already has a solution that won't require the military to build a new system from the ground up.

Over-the-top requirements

In some cases, that process has forced Army leaders to the realization that the requirements they're specifying are way over the top.

In the case of the Nett Warrior program for tactical communications, the Army determined by testing the system in the hands of soldiers at the twice-annual Network Integration Evaluation that it could cancel a many-years-old traditional military hardware development program that was projected to cost $12,000 per unit and replace it with an off-the-shelf solution priced at $2,000 instead.

The commercial replacement was first tested last year and is already being fielded.

Lt. Gen. Susan Lawrence, the Army's chief information officer, said at first leaders were mystified by the difference in cost and development time.

"So we started pulling the requirements document out and going through it. Lo-and-behold, the display that goes on the soldier's arm had to be tested under one meter of water for two hours. Think about that. That requirement means we're going to have a really cool device and a very dead soldier," she said. "That requirement made no sense whatsoever."

There are other success stories when it comes to substituting commercial innovation for what the military might otherwise try to design on its own. The Navy says it cut its costs to modernize and standardize the information technology systems on its ships through the CANES program by 44 percent by deciding to rely almost entirely on off-the-shelf technology. And a 2009 Defense Science Board report praised DoD for using the commercially available Boeing 737 as the basis for the new P-8A maritime surveillance aircraft, with some modifications to meet military needs such as aerial refueling.

But that same Defense Science Board report questioned how many modifications DoD can order to a commercial product before it no longer looks anything like a commercial product.

Defining what is commercial

The study panel found widely diverging definitions and acquisition procedures for commercial items across the DoD, and eventually came up with eight different categories of products which had been deemed "commercial" across various corners of the defense contracting world.

The Defense Science Board, a DoD advisory group, compiled a list of definitions for various levels of "commercial" buying.
  • Level 1. — DoD buys product from the original manufacturer and uses "as is."

  • Level 2. — DoD buys product and makes "minor modifications" that don't affect functionality, such as painting the component a different color.

  • Level 3. — DoD buys product and makes "significant modifications" that affect functionality, such as adding armored doors to a vehicle.

  • Level 4 — DoD buys product from original manufacturer but specifies "significant modifications" in the purchase agreement which are made prior to delivery to the government.

  • Level 5 — DoD buys product based on existing product but replaces subsystems with military-specified parts.

  • Level 6 — DoD directs manufacturer or system integrator to modify prototype to fit needs.

  • Level 7 — DoD directs manufacturer or system integrator to assemble component parts on existing systems into a new system.

  • Level 8 — DoD purchases a product that doesn't yet exist, but uses commercial processes in development

For example, level one, per the DSB's categorizations, was defined as something the Pentagon buys and uses literally off-the-shelf without modification. Level two might be a commercial product painted Army green.

Much further down the line, level eight was defined as something the Pentagon desires but doesn't even exist yet. Nonetheless, the product would be considered "commercial" because planners intend for it to be constructed on a commercial assembly line at some point.

The lack of specificity on what counts as a commercial product is a huge problem in the Defense Department, said Scott Amey, general counsel for the Project on Government Oversight.

"We're not seeing commercial products being sold with just minor modifications," he said. "These are major modifications, but since they're 'of a type' that can be sold in the commercial marketplace, they can get away with it," he said.

The "of a type" phrase in federal acquisition law makes the definition of a commercial item far too vague, Amey said. If a product or service isn't precisely what's offered in the public marketplace, but it's still "commercial of a type," it can still qualify for simplified acquisition procedures in which vendors don't have to provide DoD with their cost and pricing data.

"There were a lot of questions about the definitions back when acquisition reform was coming through in the mid-1990s, but the biggest problem is the fact that a lot of these are sole-source procurements," he said. "Everything back to the attempted procurement of the C-17, the C-130J, you name it. We've seen too many reports that talk about the misclassification of items as commercial when they're truly not. When contractors don't have to provide any cost or pricing data to the federal government, the government is stuck blindly buying at whatever the price the contractor sets with very little insight into whether that price is reasonable."

Abusing the "of a type" label

This year, DoD sided with watchdog groups and told Congress the "of a type" definition has been abused for years and asked lawmakers to remove the language from federal law entirely. Earlier this month, Shay Assad, the Pentagon's director of pricing told vendors that if DoD is the only meaningful customer for a product in a sole-source procurement, contracting officers are going to demand to see cost and pricing data from now on.

But DoD's purchases of honest-to-goodness commercial products have significantly accelerated over the past decade, said Dennis Moran, a retired Army major general who now works as a vice president at Harris Corp, which sells commercial products to the government.

"Before 9/11, I think the introduction of a commercially developed product within the Army would have been very difficult," he said. "The requirements process was very rigid, and the philosophy was that you had to have a big program of record to develop a new capability. And quite frankly, that model brought us a lot of success in the Cold War and in the first gulf war. But in Iraq and Afghanistan, there was an acknowledgement that that kind of model just wasn't going to give the warfighter the capability they required. Whether it was tactical communications, whether it was body armor, whether it was vehicles, whether it was aircraft, I think there was an acknowledgement that we could save lives and bring success to the battlefield if there was a framework to let industry bring capability to the field quickly."

DOD did that through the creation of a rapid equipping force and accelerated acquisitions for urgent wartime needs. Moran said the next challenge is going to be establishing repeatable, reliable, trustworthy processes for quickly buying commercial technologies once the needs aren't so urgent.

"That's what the agile acquisition process is all about, and it's not going to work everywhere," he said. "Is it going to work for tactical communications? Absolutely. Is it going to work in the acquisition of ships or bombers? Probably not. But I think [acting undersecretary of Defense for acquisition, technology and logistics] Frank Kendall is trying to figure out what's the best way to bring these approaches forward."

Read part two of this two-part series: Buying commercial in DoD: Pentagon struggles to stay away from customization

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