STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

10 USC § 23062;
10 USC § 2306(N(3);
41 USC § 254(d)(1)

Waiver/Exemption: Agency head may waive in
"exceptional areas". Statutory exceptions where:
(1) adequate price competition; (2) established
catalog or market prices; or (3) law or regulation.

52.214-26, Audit~Sealed Bidding

52.214-27, Price reduction for defective cost or pricing

52.214-28, Subcontractor cost or pricing data

52.215-2, Audit-negotiation

52.215-22, Price reduction for defective cost or pricing data

52.215-23, Price reduction for defective cost or pricing data—
modifications

52.215-24 Subcontractor cost or pricing data

52.215-25, Subcontractor cost or pricing data--modifications -

STATUTE(S) REQUESTED FOR WAIVER APPLICABLE FAR CLAUSES APPLICABLE DFARS CLAUSES
Truth in Negotiations Act; Price Reduction for Subpart 15.802, Policy Subpart 215.804, Cost or pricing data
Defective Cost and Pricing Data; Contract Subpart 15.803, General Subpart 239.7406, Cost or pricing data
Modifications; Audit of Cost and Pricing Data Subpart 15.804, Cost or pricing data 252.211-7009, Submission of cost or pricing data

252.211-7010, Price reduction for defective cost or-pricing
252.211-7011, Audit of contract modifications--commercial
252.215-7000, Aggregate price adjustment

Contingent Fees
10 USC § 2306(b);
41 USC § 254(a)

Waiver/Exemption: A limited number of exceptions
are provided to the representation requirement, but

not to the covenant requirement.

Subpart 3.4, Contingent fees

Subpart 22.607, Agents

Subpart 31.205-38(f), Selling costs

52.203-4, Contingent fee representation and agreement
52.203-5, Covenant against contingent fees

Subpart 203.409, Misrepresentations or violations of the
covenant against contingent fees
Subpart 225,7303-4, Sales commissions, and contingent fees

| 15 % Statutory Limit on CPFF Contracts
10 USC § 2306(u)
10 USC § 254(b)

L Wai uption: None.

Subpart 15.903(d)(1), Contracting officer responsibilitics
Subpart 16.102, Policies

Marking of Supplies; National Stock Number
| 10 USC § 2384(b)

: Exempts commercial items
sold in substantial quantities to the general public
where (1) sold at catalog or market prices; or (2)
awarded through use of competitive procedures.

Subpart 217.73, Identification of sources of supply
252.217-7026, Identification of sources of supply

RAFT



WHY: This is another requirement levied on the contractor that he is forced to administer
and track. This leads to additional overhead with no value added. The contractor always has
the right to submit suggestions for improvements or trade-offs to the program office. There
is no need to levy a specific clause delineating a right that exists.

252.210-7005 Bill of Materials

Requires a bill of materials be submitted that is in accordance with MIL-STD-295 .

WHY: It is not common in the commercial sector to require a bill of materials to a specific
standard. The contractor will have a system for preparing a bill of materials; however, this
requirement could make him establish a new system to be compliant with the MIL-STD. This
directly translates into increased costs.

252.219-7008. Pilot Mentor-Protéeé P

WHY: It is not standard commercial practice to dictate socio-economic programs.
Contracts and subcontracts are awarded on a "best value” concept.

Restricts the contractors choice of sources for specific items or specific effort.
WHY: This is not a standard commercial practice. Contracts and subcontracts are awarded
on a “best value" concept, subject to imporvexport license restrictions.

Requires contractors to establish a separate material management and accounting system for
Government contracts with rules, procedures, and reporting requirements that could be
different from commercial accounting methods.

WHY: This single group of requirements is probably the greatest barrier for commercial
company involvement in Government contracts. Developing an approved Government
accounting system, maintaining that system, opening the system to innumerable reviews and
auditors, and exposing the firm to significant legal penalties for errors is an expensive and
cumbersome undertaking with excessive risk in the view of many commercial firms. The pilot
program may accept a cost accounting process consistent with commercial methods of doing
business.

7
Requires notification by the contractor of the effect of substantial changes in the contractor's
labor rolls.

WHY: This is not a clause commonly used in the commercial arena. As such, it has the
potential of causing an overhead cost for tracking this information. No value added.

A-22


requirement to exercise'some CLINs concurrently or, conversely, the authority to require that
all of the options will be priced as separately exercisable line items. Since the Government
generally has to add a special provision anyway, this clause is redundant; it is just another
convoluted, confusing clause that the contractor must track.

These regulations prescribe preferences and obligations for the prime contractor with regard
to special business interests. _

WHY: These socio-economic preferences are incompatible with commercial business
practices and add extra costs to the contract. To mandate supplier preferences based on
factors other than best value is counter to the normal subcontracting process in the
commercial marketplace and is a barrier for commercial firms desiring to enter the defense
sector. A statutory waiver has been requested.(15 USC 648) ~

52.2222 Pavment for Overtime Premium

Authorizes the use of overtime in the performance of the contract not-to-exceed a specific
amount.

WHY: This clause requires the contractor to track overtime as well as directs him on how he
may compensate his employees. This is not a clause that would normally be used in the
commercial sector. It levees an additional administrative burden on the contractor.
Additionally, it restricts the contractor's flexibility in incentivizing his employees.

The Buy American Act (41 U.S.C. 10) provides that the Government give preference to
domestic end products.

WHY: To encourage subcontractor selection from the widest range of available sources and
encourage the "best value” sourcing used in the commercial marketplace, foreign
subcontracting should not be prohibited. Statutory waiver of the Buy American Act for CDE
subcontractors is being requested. This statutory and contract clause requirements are
redundant and inclusion in the contract adds oversight and reporting costs while adding no
value. :

A-18


Attachment B

Process Action Team
Department of Defense
Military Specifications and Standards

Blueprint for Change

This is a draft report of the
Process Action Team's
Strategy and Recommendations


procurement would seemingly threaten this long established system. However, as an initial
step, commercial practices in inventory, process and quality control could be employed at the
depots, in combination with wider field support, for a substantial increase in efficiency and
decrease in costs. While some geographic realignment might occur, the total business for sub-
tier suppliers would remain the same. This is due to the way engine manufacturers run their
business and their dependence on suppliers for sixty to seventy percent of their hardware.

Socio-Economic Programs and Safeguards

Over a period of many years, Congress has created a careful system of safeguards protecting the
social and economic rights of the American public. Originally, they guaranteed work rights and
labor standards. They expanded, however, to cover a variety of areas including supply and
supplier preferences; small business; equal opportunity and affirmative action; contractor
responsibility; and contractor integrity. While they may provide guarantees, they also created a
burden of expensive oversight and reporting which is reflected in higher costs and longer
production schedules. Many of the reporting and oversight requirements have been levied by
additional federal and DoD regulations and contract clauses.

During the same period, the jet engine industry developed and adopted a set of commercial
procurement ethics, often paralleling or exceeding federal regulations. Each company enforces
these rules through standard codes of ethics applying to every employee and all of the
company's contracting and production processes. They were created and are enforced today,
not because of obedience to government regulations, but because of simple good business sense
within a competitive worldwide marketplace. While the Air Force lists the specific laws to be
reevaluated in the pilot program study (Attachment A), the descriptions below outline the
positions of the jet engine industry.

- Supply and supplier preference. The jet engine industry is a global enterprise
and has well established world-wide supply channels for both commercial and military
products. Retroactive compliance with clauses forcing alterations in this existing network
would not be economically practical or feasible. Also, securing waivers or exemptions would

add to the procurement cost, defeating the lower price intent.

- Small and small disadvantaged business. There remains a continuing need
to set aside some federal procurement dollars from full and open competition, assuring small
business and small disadvantaged businesses a better chance to succeed. However, many
statutes require companies to develop special subcontracting plans, and in some cases, impose
similar requirements on subcontractors. Again, this is a burden on commercial business.
Where the item has already been manufactured, it is impossible to alter the supplier selection
after the fact. Also, for the jet engine industry, not only are supplier networks well established,
but the industry is already strongly supportive of small and small disadvantaged business.
From a survey of jet engine companies on the Panel, the percentage of small and small
disadvantaged subcontractors is similar between the military and commercial sides -- with some
actually higher on the commercial side, where no regulatory requirement exists. In fact, the
DoD requirement for cost-based accounting results in many small and small disadvantaged
businesses refusing to participate as sub-tier suppliers.

- Affirmative action and equal opportunity. | These programs are mandated by
law. The additional regulatory and administrative compliance imposed by DoD and the military
services imposed through contract requirements achieve marginal social benefit at a significant
cost in paperwork. The jet engine industry already complies with these laws through adherence
to other, over-arching federal laws, i.e., 29 USC 793, the American Disabilities Act; standard

12


DRAFT MEMORANDUM

MEMORANDUM FOR Deputy Under Secretary of Defense (Acquisition Reform)

Subject: Establishment, Tasking and goals of the Commercial Procurement Practices
Implementation Team

1. Commercial practice procurement of military jet engines has a forty year history in the
Department of Defense. These engines have been acquired for specific aircraft and are often
differentiated from their commercial counterpart only by military-required modifications. In fact,
jet engine manufacturers have an extensive history of building similar products for both the
commercial and military markets. It is not uncommon that engines , both commercial and military
are manufactured in the same facility, with the same people, processes, materials and suppliers.

2. On that basis, the Defense Science Board has determined that the military jet engine industry is
an ideal candidate for a commercial practices procurement program. The Board agreed that it was
possible; that there are no insurmountable obstacles. Through the elimination of regulatory,
process and traditional impediments, in combination with government and industry leadership and
understanding, the government could procure jet engines using commercial practices. The result
will be that both government and industry would experience a reduction of overhead costs and a
shortening of the manufacturing and qualification process.

3. At this time, the Board feels that the program can cover mature production engines, as well as
their follow-on support. Although commercial practice development of large military engines is
not practical now, there are opportunities in the development of smaller engines for target or
reconnaissance vehicles.

4. To implement the recommendations of the Board, establish and fund a joint team of government
and industry representatives. This team will create a detailed, time-phased plan for commercial
practices on current engine programs where practical; follow-on procurements of current in-
production engines; and on future engines as they complete qualification and enter production. The
team will also explore opportunities to implement commercial practices during jet engine
development.

5. Provide a plan of action with milestones to implement commercial practices for military jet
engine procurement within six months of the date of this memorandum.

Signature Block
Under Secretary of Defense (Acquisition & Technology)

C-1


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

Enhanced Program Stability & Baseline
Description Requirement Program Deviation

Reports
10 USC § 2435

| Waiver/Exemption: None.

Policies Relating to Defense Industrial Base;
Definitions;
10 USC § 2440

| Waiver Exemption: None

Subpart 208.72, Industrial preparedness production planning

Research & Development Cooperative Projects;
Allied Countries
10 USC § 2350 a(c)

| WaivevExemption: None.

Subpart 225.871, NATO
245.603-71, Disposal of contractor inventory for NATO

Appropriations Act Limitation on Obligation
Authority
PL 102-396

| Waiver Exemption: None.

UNCODIFIED TO DATE (A TBD Section of Part 25)

UNCODIFIED TO DATE

Limitations on Fixed Price Research
PL 101-165, § 9048

| WaivevExemption: None.

Subpart 35.006, Contracting methods and contract type

Subpart 235.006, Contracting methods and contract type

DRAFT



25.7

Prevents the contractor from precluding qualifying Country sources from competing for
subcontracts.

5.7
Restricts the contractor to the use of domestic sources for Specific items.
WHY: . This is not a standard commercial practice. Contracts and subcontracts are awarded
on a "best value” concept, subject to imporv/export license restrictions.

71-7027
Requires the contractor to allow the Government to order tech data generated in the
performance of the contract for period of 3 years after acceptance of all items delivered under
the contract.

WHY: Nota common commercial practice. The contractor will have to price risk involved
in the potential interrupt in his workload to comply with this requirement. This clause
potentially limits commercial contractors from choosing to compete for a contract.

7-71 ji 1 W}
Allows the Government to withhold up to ten percent of the contract amount until all data is
satisfactorily delivered and accepted.
WHY: Nota common commercial practice. It could preclude commercial industry
participation in the program. Removal of this clause does not force Government acceptance
of an inferior product, nor does it infringe on the Government's right to obtain a product that
meets the contractual requirements.

7-71 See) i ji v.
Requires the contractor to provide interim reports annually and a final report listing any
inventions and allowing the government to make copies of any patent applications.
WHY: Nota common commercial practice. Requires additional administration and
potentially discourages the commercial sector from wanting to participate in a DOD contract.

7 . . sading
Notifies the contractor that 10 USC 2307(e) permits the head of the agency to reduce or
suspend payments to the Contractor upon a determination that the contractor's request for
payment is based on fraud.

WHY: Not a common commercial practice. The deletion of this clause would not affect the
ability of the government to pursue fraud charges through the Justice Department.

Requires the contractor to establish, maintain and use a specific type of cos/schedule control
system.

A-23


Introduction

In April, 1993, the Under Secretary of Defense (Acquisition) asked the Defense Science Board
(DSB) to undertake a study to define comprehensive modifications to the process the
Department of Defense uses to acquire goods and services. Out of that initial tasking grew a
number of complementary studies, each looking at a specific industry or technical capability
with the intention of reducing costs and increasing acquisition efficiencies through the
application of commercial practices.

In September, Robert J. Herman, Chairman of the DSB Task Force on Defense Acquisition
Reform, asked General Bernard P. Randolph, USAF (Retired), to form a panel to study Jet
Engines as a Pilot Industry. The purpose was to determine the feasibility of procuring all
military jet engines using commercial practices.

Initially, a small panel was formed, consisting of the DSB members and Tepresentatives from
General Electric Aircraft Engines, Pratt & Whitney Government Engines, and the Air Force. As
the members looked more closely at the issues, it was agreed that the panel should be expanded
to include representatives from the entire American military jet engine industry, all the military
services, the Joint Chiefs staff, and the Center for Strategic & International Studies. Each
representative brought extensive knowledge and experience to the table. The fully evolved
panel is listed at the end of this report.

Defense Acquisition Reform

Department of Defense acquisition reform is not a new interest; studies have been conducted for
decades. In fact, a Center for Strategic & International Studies publication, Road Map for
Milspec Reform, lists over a dozen studies about military specifications and standards since
1986. Each one of them served a purpose and each had a portion of the recommendations
enacted. For example, the 1989 Defense Management Review was able to eliminate more than
6,000 military and federal specifications, but it fell short of its goal of eliminating federal and
military specifications and standards for commercial products and processes.

There are another half dozen current studies considering improvements in the military aircraft
procurement process. These studies, including those by the Massachusetts Institute of
Technology and the current Aeronautical Systems Center, look at streamlining the entire aircraft
acquisition process. All of these studies enlisted participation of broad sections of the
government and industry communities, and call for sweeping reform.

Acquiring commercial products and applying commercial practices is not a new concept. For
years, the government has bought selected commercial products. There are even laws, and
federal and defense regulations recommending such procurements and making them
administratively possible. As the Panel confirmed, one of the largest continuing examples of
commercial procurement is jet engines for military aircraft. These commercial procurements,
however, have typically been for selected items to be used on certain systems.

The end of the Cold War suggested that a new approach was needed for military procurement;
the old ways were no longer satisfactory. Smaller budgets, problems and inefficiencies in the
current system, and a leadership determination to reduce costs of procurement and end products
all indicated that a commercial procurement system is a better solution.

In November, 1993, the Department of Defense sent a number of proposed reforms to the


Mandates that the contractor identify supplies which he does not manufacture or to which he
will not contribute significant added value. Also prescribes accounting procedures to insure
that unit prices are in proportion to unit costs.

WHY: These requirements do not apply to commercial items for which there are established
market prices. However, where there are other bases for determining fair and reasonable
price using other than cost (e.g., CDE) then the provisions apply, but are inappropriate and
contrary to commercial practices. This degree of intrusive insight into the seller's processes is
not necessary to properly regulate the buyer-seller relationship for CDE.

52.215-27 Termination of Defined Benefit Pension Pian

Requires the contractor to notify the Government when it intends to terminate a defined
benefit pension plan. Requires the contractor to refund to the Government its equitable share.
This is a flowdown requirement to all subcontractors.

2215-39 Reversion or Adjustment of Plans for Post Retirement Benefits other than

me vires sie or contractor to notify the Government when it intends to terminate or reduce a
PRE plan. If PRB fund assets revert or inure to the contractor, the contractor shall make a
refund or give credit to the Government for its equitable share.

WHY: This type of provision is not something normally required in a commercial contract.
This requires a contractor to account for costs in a way different for the Government than for
other customers. Dictating the type of accounting he must do, as well as adding a provision
that is a potential liability to the contractor increases the cost to the Government. It could
discourage commercial contractors. Additionally, these mandated procedures require
increased administrative support since the prime must construct a tracking system for his
subcontractors.

This clause states that, if the contractor did not propose Facilities Capital Cost of Money,
then it is an unallowable cost to the contract.

WHY: Deleting this clause is a fall-out from the statutory waiver to relieve the CDE
contractor from mandated cost accounting standards. If the Government doesn't dictate the
contractor's accounting system, then issues about what costs are allowable go away.

52.215- i

$2215:37 Commercial Pricig Ceehicnter otis

Requires contractors to certify that the prices offered to the Government are no higher than
the lowest commercial price that the items were sold to the public during the most recent
regular reporting period for which sales data are reasonably available. Any higher priced
items must be separately identified, including how much higher the prices are, and a written
justification as to why the prices are higher. The Government is also given the right to audit
Contractor records in order to verify the certified information. If the Goverment is charged
a higher price because the centification i is inaccurate, incomplete, or misleading, the price must
be reduced.

WHY: This certification, which is a contract condition of award for commercial items,


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

| Prohibits Limitation on Subcontractor Selling
Directly to the USG

Subpart 3.503, Unreasonable restrictions on subcontractor
sales

“exceptional cases” the “audit and price reduction”
clauses, Exemptions for contracts under sealed bid
and with foreign prime and subcontractors.

Waiyer/Exemption: Exempts contracts: (1) for small
purchases; (2) for certain utililies services; and (3) with
certain foreign contractors.

10 USC § 2402 52,203-6, Restrictions on subcontractor sales to the
| 41 USC § 253(g) Government
| Weives/Exemption: None.
Protests to the GAO and the GSBCA. Subpart 7.307, Appeals Subpart 233.104, Protests to GAO
31 USC § 3553(c) & (d); Subpart 22.608-3, Protests against eligibility
40 USC § 759(h)(2) & (3) Subpart 22.608-6, Post-award
Part 33, Protests, disputes, and appeals
| Waiver/Exemption: None. 52.233-2, Service of protest
52.233-3, Protest afer award
Examination of Records by DoD and GAO Subpart 15. 106-1, Examination of records clause
J 10 USC § 2313; 52.215-1, Examination of records by comptroller general
41 USC § 254 (b) & (c)
Waiver/Exemption: Agency head may waive in

Allowable Costs Under Defense Contracts
10 USC § 2324

Subpart 231.70, Penalties for unallowable cosis
252.231-7001, Penalties for unallowable costs

[ iieeaxcmatio: None.
Warranty of Data on Major Systems

10 USC § 2403

Subpart 246.770, Warranties in weapon systems acquisitions
252.246-7001, Warranty of data

Waiver/Exemption: Waiver permitted if in the interests of
national defense or warranty would not be cost effective.
Class waivers may be granted upon notification to Congress.

Cert, of Claims and Adjustments
10 USC § 2410

Waiver/Exemption: None.

Subpart 233.70, Certification of claims and requests for
adjustment or relief

252.233-7000, Certification of claims and requests for
adjustment or relief

|



STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

Walsh-Healey Public Contracts Act of 1936
41 USC § 35-45

Waiver/Exemption: Secretary of Labor and OSHA
may exempt. C.F.R. exceptions: (1) purchases in
the “open market", (2) public exigency; (3)
perishables; (4) certain agricultural products; and
(4 transportation and communciation services.

Subpart 22.6, Walsh Healey Public Contracts Act
52.222-19, Walsh Healey Public Contracts Act

representation
52.222-20, Walsh Healey Public Contracts Act

Waiver/Exemption: Also (1) coal dealers; (2) certain small
businesses; (3) public utilities and services; (4) commodity

exchanges; (5) periodicals, (6) articles manufactured outside
U.S.; and (7)where related solely to safety and health
standards,

Subpart 222.6, Walsh Healey Public Contracts Act

Drug Free Workplace--Certifications
41 USC § 701

: None,

Subpart 23.5, Drug-free workplace
52.223-5, Certification regarding a drug-free workplace
52.223-6, Drug-free work-place

Subpart 223.5, Drug-free workplace
252.223-7004, Drug-free work force

Women Owned Businesses
PL 100-533

Subpart 19.9, Contracting opportunities for women-owned
small businesses
$2.219-13, Utilization of women-owned small businesses

Waiver/Exemption: No clause required in contracts for: (1)
small purchases; (2) purchases outside U.S.; and (3)
personal services.

Equal Opportunity
EO 11246

ion: Secretary of Labor waiver
permitted for commercial supplies. C.F.R. exempts
contracts for: (1) less than $10K and indefinite
quantities under threshold; (2) work outside U.S.;
(3) State and local governments; (4) certain
educational institutions; and work near Indian
reservations.

Subpart 22.8, Equal employment opportunity

52.222-21, Certification of non segregated facilities

52.222-22, Previous contracts and compliance reports

52.222-23, Notice of requirement for affirmative action to
ensure equal employment opportunity

$2.222-25, Affirmative action compliance

52.222-26, Equal opportunity

52.222-27, Affirmative action compliance requirements

52,222-28, Equal opportunity pre-award clearances of
subcontracts

Waiver/Exemption: Agency head may exempt for national
security or under the FAR where "special circumstances in
the national interest so require".

Subpart 222.8, Equal employment opportunity

AR

DRAFT.



STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

Major Systems and Munitions Programs;
Survivability and Lethality Testing required
before Full-Scale Testing

10 USC § 2366

Waiver/Exemption: SECDEF may waive where
“unreasonably expensive and impractical".

Operational Test and Evaluation of Defense

Acquisition Programs
10 USC § 2399

: None.

Director of Operational Test and Evaluation
10 USC § 138(e)

: None.

Selected Acquisition Reports & Unit Cost Reports
10 USC § 2432 and § 2433

ion: None for §2433. SECDEF
may walve §2432 if: (a) the program has not
entered FSD or EMD; (b) a reasonable cost
estimate has not been established; and (c) the
system configuration is not well defined.

Independent Cost Estimates; Operational
Manpower Requirements; Requirement for
Approval

10 USC § 2434(a)

Waiver/Exemption: None.

nna



can be a nightmare for a large commercial contractor who sells products nationally or
internationally. It requires management information on all Prices charged at all locations

and significant manpower to monitor and administer the System to insure accurate information
is available at the most detailed level at all times. This requirement is a major deterrent to
commercial contractors doing Government business. An example of this requirement causing
commercial contractors to refuse to do business with the Government during Desert Storm is
cited in the Executive Summary of the Section 800 report.

52-216-7 Allowable Cost snd Payment

Lit
Provides direction to the contractor on invoicing, reimbursing costs, payment, negotiation of
final indirect rates, billing rates, quick close-out procedures, audit and final payment. The
second clause provides the same direction but is used in undefinitized contractual actions.
WHY: While most commercial contracts would include a clause for invoicing and payment,
it is unlikely that they would contain language Tegarding such things as payment of
unallowable versus allowable costs, post performance negotiation of overhead rates and
unilateral authoriry to audit at any time prior to payment. These rigid administrative
requirements drive a contractor to separately track costs and cause him to increase his
proposed profit to cover his liability for expenses that the Government may unilaterally
determine are unacceptable.

15

Requires the Contractor to annually submit to the Administrative Contracting Officer and
audit activity proposed indirect cost rates for negotiation with the Government.

WHY: Negotiation of indirect cost rates is inconsistent with commercial practice.
Commercial contractors would be required to significantly modify their accounting system in
order to comply with this requirement.

52.216-10 Incentive Fee

sve Pri ftom. FY
Provides detail on Contractor required submissions, Government responsibilities, and
procedures for administering the payment and adjusting the price on fixed-price-incentive
(firm target) targets.
WHY: This method of price determination and detailed payment procedures is inconsistent
with commercial practice, requires dedicated manpower and costs, and could be simplified
significantly for the CDE contract. A commercial contractor may be discouraged from CDE
participation because of unique Government pricing and payment requirements.

72! : lv
‘This clause permits the exercise of options upon receipt of written notification by the
Government
WHY: This clause is generally tailored to direct the contractor to a separate option exercise
Clause in the special provisions portion (Section H) of the contract. This allows the flexibility
of listing a number of line items with their option exercise windows and additional provisions
that are unique to each procurement. Examples of these additional provisions include: the’

A-17


Brig. General Raymond Preston, USAF (Retired), Williams International

Paul Jodon, Textron Lycoming

Michael D. Rudy, Teledyne Ryan Aeronautical - CAE

Colonel Dan L. Abbott, USA, Office of the Under Secretary of the Army (RDA)
Captain Charles Thompson, USN, Naval Air Systems Command

Colonel (Select) Stephen Busch, USAF, Air Force Materiel Command

Lt. Colonel Dennis Kirlin, USAF, The Joint Staff

Debra van Opstal, Center for Strategic & International Studies

John R. Booth, SAIC

Edward Burke, SAIC

16


Like many other goods and services created for the government, jet engine manufacture is
governed by numerous laws, military specifications, and regulations. Often these regulations
are layered from federal to defense to the particular military service. As was pointed out earlier,
for those companies not already participating in government contracting, these regulatory
requirements are enough to discourage participation in the market.

These laws were intended to serve the best interests of the public. They attempted to guarantee
fair and reasonable prices, equal access for all qualified bidders, and full support of social and
economic goals. Military specifications were also intended to protect the public interest by
ensuring a regimented quality and manufacturing process for military-unique products. While
the objective of these actions must be continued, the result of the current broad regulatory
control, unfortunately, has been an expensive and inefficient system incorporating many unique
requirements, without achieving many of the desired effects.

For the jet engine industry, like many other industries, requirements have grown to be
duplicative and burdensome. The Department of Defense adds reporting requirements on top of
Federal directives. Many government-unique requirements impact hiring and employment,
suppliers and sources of supply, and the pricing of products.

The commercial jet engine, usually built next to the military counterpart, is not under such
restrictions. Production is governed by accepted industry-wide manufacture and quality
practices, and general Federal or Federal Aviation Administration rules which, while similarly
detailed and demanding, place most of the responsibility for compliance on the contractor for
day-to-day operations. Generally Accepted Accounting Principles (GAAP), instead of detailed
cost accounting and reporting procedures, are standard within the industry. This does not mean
that the price of today's domestic jet engine is radically lower. It varies widely, depending on
each customer's desire for the total package of engine, spare parts, and support. The result over
the years, however, has been that the government oversight and reporting requirements have
become institutionalized and impacted the commercial price.

It was not the Panel's goal to construct a list of objectionable laws, regulations, and milspecs.
This has been done many times by government and industry teams far more staffed and
supported than our small group. Instead, we examined existing lists to determine which could
be best applied to the jet engine manufacturing process.

The Panel determined that the Air Force's draft list of recommended statute and regulation
waivers, created to support the Department of Defense's Commercial Derivative Engine Pilot
Program, best fits the needs of the jet engine industry. Although the list was built for the
commercial practice procurement of a single engine model, its application is sweeping. The
document lists 52 different statutes and hundreds of supporting federal and defense regulations.
It covers manufacturing, accounting, socio-economic, and environmental requirements. The list
of statutes and regulations, as well as the explanations and applications, are in Attachment A.

Isolating candidate military standards and specifications that adversely impact the jet engine
manufacturing process was an equally easy task. The list was provided by the Department of
Defense Process Action Team's November, 1993, draft report on Military Specifications and
Standards. The Team's vision was well explained in the opening paragraph:

"Standardization reform is an integral part of the acquisition reform vision, a vision
intended to revolutionize the way the government does business. At the root of the
standardization problem are 31,000 military specifications and standards. Over the past
20 years or so, it has been an uphill, and not always successful, struggle to keep these
documents up-to-date in a world of continuous and planned obsolescence. As DoD's


SECTION 809 NOMINATION PACKAGE
COMMERCIAL DERIVATIVE ENGINE (CDE)
A TWO PHASED PILOT PROGRAM

NOMINATION OF CDE AS AN ACQUISITION PILOT PROGRAM

NAME OF PROGRAM: Commercial Derivative Engine (CDE) Phase 1 (F117 Engine for
the C-17A aircraft) and CDE Phase 2 (for the acquisition(s) of commercial derivative
engines)

iL, Ww. D

Following are the regulations that the Air Force proposes be waived for the CDE
procurement The waivers would apply to any CDE-unique procurements (with engine,
engine component and engine support contractors) that the Air Force requires to support the
C-17A (Phase 1) and other aircraft (Phase 2) programs.

FAR REGULATIONS
EAR Part 6

Requires procedures and establishes authority for competitive acquisition and methods of
justifying sole-source acquisition

WHY: Commercial methods are free to choose competitive or non-competitive acquisitions
based on their effectiveness. This waiver aims to tailor the justification requirements and level
of approval for follow-on sole source and competitive acquisition of engines, engine
components and engine support.

FAR Part7

Requires acquisition planning for all acquisitions to promote full and open competition.
WHY: This regulation needs to be waived to recognize that the Acquisition Plan (AP) and
the Acquisition Strategy Report (ASR) are duplicative. The AP serves the purpose of this
FAR requirement. There is no need for a separate ASR.

52.203-2 Certifi {Ind Jent Price D oe
Requires the Offeror to certify that his offer has been arrived at independently without
agreement from other Offerors.

WHY: This certification requires administration

Requires the Offeror to affirm whether or not he has employed or retained anyone to solicit
or obtain the contract and if he has made an agreement to provide them with a commission
for obtaining the contract.

A-14


STATUTES (AND CLAUSES) R'

ESTED FOR WAIVER

{  STaTUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

Validation of Proprictary Data Restrictions
10 USC § 2321

Waiver/Exemption: None.

227.403-73, Validation of restrictive markings on technical
data

252.227-7037, Validation of restrictive markings o1
technical data :

Procurement Limitations Imposed by the Buy
America Act .

10 USC § 2506 (Renumbered as 10 USC § 2533)

10 USC § 2507 (Renumbered as 10 USC §

2534(b)

Waiyer/Exemption: Buy American Act exemptions
| apply, as below.

225.7004, Restriction on machine tools and powered and
non-powered valves

225.7007, Restriction on acquisition of foreign buses

225.7010, Restriction on certain chemical weapon antidote

225.7014, Restriction on carbonyl iron powders

225.7016, Restriction on air circuit breakers for naval vessels

252,225-7017, Preference for U.S. or Canadian valves and
machine tools

252.225-7023, Restriction on acquisition of carbonyl! iron

powder
252.225-7029, Restriction on acquisition of air circuit
breakers

Waiyer/Exemption: SECDEF amy waive in the interests of
national security.

Buy American Act
41 USC § 10a-10d

Walver/Exemption; Exception for supplies and
materials: (1) to be used outside U.S. or (2)

} available wihtin the U.S. in insufficient commercial
quantities of a satisfactory quality.

25.1, Buy American Act—supplies

25.2, Buy American Act--construction
52.225-1, Buy American certificate
52.225-3, Buy American Act--supplics
52.225-5, Buy American Act--construction

: Also waived where: (1) unreasonable
cost; (2) inconsistent with public interest; and (3) for
commissary resale.

225.1, Buy American Act--supplies

225.2, Buy American Act--construction

252.225-7000, Buy American Act--Balance of Payments
program certificate

252.225-7001, Buy American Act and Balance of Payments
program

DRAFT



The Panel's task then became one of determining the obstacles or issues impacting this
procurement shift for an entire industry. In the past, regulations had been waived or agreements
created for single engine procurements. The success of this proposal calls for across-the-board
evaluation, and either waiver or elimination of a broad array of statutes, and federal and military
regulations, specifications and standards. It was found that this aspect had been studied
repeatedly, by both government and industry groups. Few of the recommendations, however,
had been acted upon.

The Panel lastly explored the necessary ground work for such a procurement shift with the
objective of understanding the process and issues for the adoption of commercial practices. The
intent was not to build the program. That will require a wider, concentrated government and
industry study. Instead, the intent was to lay a foundation on which to build a carefully mapped
out implementation program. To be successful, the program must be practical, feasible and
supported by all related government agencies and the jet engine industry. The Panel feels that
the following comments and strategies answer many of the questions needed to create a
commercial practice procurement program for the jet engine industry.

The Jet Engine Industry

The jet engine industry is one of the oldest established, large-scale aerospace manufacturing
communities in the country. Engines have been built by many of the same companies since late
in World War I. Originally creating engines for military aircraft, the industry long ago entered
the commercial world in response to growing demands for civilian aircraft with higher speeds
and longer flight duration. As the understanding of jet engines grew, so did product
diversification. Today jet engine products include large systems for military and commercial
aircraft applications, marine and industrial engines, and small transport and helicopter engines.
Smaller engines are used in cruise missiles, as well as target and reconnaissance vehicles.
Some of the smallest of these engines are used in auxiliary power units or APU's, which are
common to both military and commercial customers.

In the United States, the industry is primarily served by seven manufacturers; two large
(General Electric and Pratt & Whitney) and five smaller (Allied Signal Engines, Allison
Engines, Williams International, Textron Lycoming, and Teledyne Ryan Aeronautical - CAE).
All of these companies were represented on this Panel. The Panel also recognized that the jet
engine industry includes a number of smaller firms which provide components, modules, and
services supporting the seven original equipment manufacturers (OEM's). These companies
form a subcontractor base which the Panel felt was adequately represented by the seven industry
panelists.

The national economic impact of these companies is significant. While engine assembly is
concentrated in the eastern half of the country, suppliers are located throughout the country. In
fact, the actual assembly accounts for less than half of the total effort involved in jet engine
manufacture. A network of hundreds of vendors, supplying the largest castings and forgings to
the smallest fasteners, provide the parts necessary to create a jet engine. It is not unusual for the
major manufacturers to use the same suppliers for common systems or parts.

The jet engine industry is not characterized by high product volumes, as is the automotive or
electronics communities. Pratt & Whitney, for example, manufacturers less than a thousand
large engines per year. Some of these engines, however, list over 1,700 part numbers. Each
number, in turn, may represent up to hundreds of individual parts in the engine. The key is
that each engine is made up of high technology and high reliability components, and assembled

5


President for review and presentation to the Congress. Included in these proposals was a series
of pilot commercial programs. One of these programs called for a specific commercially
procured jet engine; others described various weapons systems and products. The common
element was that all were to be procured through commercial means. These pilot procurements
are program specific and do not possess the magnitude of opportunities that a total conversion
of mature military programs would have on the jet engine industry.

This study is a logical extension of proposed pilot programs. The government and Department
of Defense already buy parts and services using commercial practices. Procurement of
commercial jet engines for certain military aircraft is an accepted and understood practice.
Therefore, the next step is to consider procurement of all production qualified military jet
engines through commercial methods.

The military jet engine industry is an ideal candidate for commercial practices procurement. Jet
engine manufacturers have an extensive history of building similar products for both the
commercial and military markets. It is not uncommon that engines, both commercial and
military, are manufactured in the same facility, with the same people, processes, materials and
suppliers. Some of the engines are even considered "dual use," differentiated only by minor
military-required modifications -- if any at all. For example, since 1982, over 1,500 engines
have been procured through limited commercial practices for the KC-135 tanker aircraft.
Commercial jet engines also have been procured for other military aircraft including the newer
KC-10 tanker aircraft, Air Force One, and the current C-17 airlift aircraft.

Panel Overview

After reviewing the situation described above, the DSB formed the Panel to determine the
feasibility of commercially procuring jet engines on an industry-wide basis. It had been
assumed that it was possible, but there was no agreement between the government and industry
"sides" that an entire industry could be moved from a regulation-controlled procurement process
into a commercial practices procurement.

The joint government and industry Panel agreed that it is possible; there are no insurmountable
obstacles. Through the elimination of regulatory, process and traditional impediments, in
combination with government and industry leadership, training, patience and understanding, the
government could procure in-production jet engines using commercial practices. The result
would be the same high quality military jet engines, but procured with a minimum of oversight,
reporting, accounting -- before, during and after delivery of the engines.

Under commercial practice procurement, both government and industry would enjoy a reduction
of overhead costs and a shortening of the manufacturing and qualification process. Although
previous studies have estimated these potential savings to be as high forty percent, actual figures
can not be established until the implementation team determines what specific changes will be
made in the shift to commercial practice procurement.

ngine production facility at each cor and that ial practi urement initi
apply only to mature production engines. It would not be practical to reduce oversight,
reporting or accounting for one military engine line within a manufacturing facility if others
were left under regulatory control. Also, the nature of development programs makes it
impractical to employ commercial practices during the development of new large military
engines at this time. The development of engines for small, unmanned vehicles, however, may
provide an opportunity commercial practice procurement.

4


Air Force

Recommended
Pilot Program Waivers
on

Statutes and Regulations

Draft

Attachment A


portion of the jet engine manufacturing business influences the now increasing commercial
segment. The cost of government compliance in a common facility with common products
spills over on to the commercial line; raising the price of the commercial product.
Consequently, the American commercial jet engine manufacturer is losing some of its world
market competitive edge. Also, since overseas jet engine makers are often government
supported, this cost disadvantage carries even heavier weight.

Panel discussions brought out a developing scenario within the jet engine industry. If the
government continues these unique processes and standards, the industry may tend to segregate
the government business from the commercial business in an effort to minimize non value-
added costs. As the demand for military products declines through a shrinking defense budget,
the costs of maintaining a separate capability will rise and the company will reevaluate the
economic reality of doing business with the government. The potential would be a reduction in
the military industrial base and a parallel reduction in the national surge capability. Adoption of
commercial practice procurement could help preclude such a scenario.

Commercial Practices in the Jet Engine Industry

As stated earlier, the Panel agreed that a solution to cost and efficiency problems facing the
government and the jet engine industry is the adoption of commercial practices for acquisition of
qualified, in-production engines. Commercial practices, simply defined, are the use of the most
practical method, i.e. competitive market driven, cost effective and without unnecessary
oversight. However, it is understood that there must be an accepted definition and consistency
in the implementation of commercial practices.

To achieve these practices, a number of standard and resilient issues must be addressed by both
government and industry leadership. A maze of regulations, practices, processes, traditions --
even expectations -- have evolved through decades of constructing administrative safeguards
and procedures. The purpose of each individual safeguard is to protect the public dollar,
provide access for qualified bidders to federal procurement contracts, and guarantee the product
ordered will be the product delivered. Unfortunately, taken as a body, the impact is counter-
productive and expensive.

In the commercial engine business, the safeguards are built in. First, operational safety and
satisfactory capability is assured through Federal Aviation Regulations (and counterparts in
England, France, Japan, etc.), which must be complied with and demonstrated before formal
certification is granted for that engine model. Even though certified, a low reliability product
will lose its market share; a product priced too high will not be purchased; a product not using
current technology will be ignored. These are basic commercial truths, accepted around the
world and not maintained or enforced by a program of "how to" regulations or excessive
oversight laws.

To establish commercial practices for jet engine procurement, the Panel examined a number of
potential barriers. These included regulatory obstructions or impediments; determining a fair
and reasonable price; research and development; socio-economic programs and safeguards; and
government and industry issues of transitioning to a commercial practice facility. All of them
can be solved. For many, solutions already exist.

Regulatory and Statutory Barriers


STATUTES (AND CLAUSES) REQUESTED FOR W.

ER

STATUTE(S) REQUESTED FOR WAIVER | APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

— a

Small and Small Disadvantaged Businesses
Subcontracting Plan
15 USC § 637(a)

Waiver/Exemption: Exempts contracts: (1) under
$10K; (2) to be performed outside the U.S.; and (3)
for personal services.

Subpart 19.7, Subcontracting with small and small
disadvantaged business concerns

52.219-9, Small business and small disadvantaged
business subcontracting plan

52.219-10, Incentive subcontracting program for
small business

52.219-16, Liquidated damages--small business
subcontracting plan,

Waiver/Exemption: Also not required for contract
modifications where no 52.219-8 contract clause.

Subpart 219.7 Subcontracting with small business

252.219-7003, Small business and small disadvantaged
business subcontracting plan (DoD contracts)

252.219-7004, Small business and small disadvantaged
business subcontracting plan

252.219-7005, Incentive for subcontracting with small
business

Small Business; Small Purchase Set-Aside

Subpart 13.105, Small business-small purchase sct-asides

Subpart 219.201, General policy

15 USC § 644(a) & (j) Subpart 19.202-1, Encouraging small business participation Subpart 219.501, General
Subpart 19.501, Set asides for small business--general
: None.
Preference for Labor Surplus Area Subpart 6.203, Set asides for small business and labor Subpart 206.203, Set asides for small business and labor
15 USC § 644(d), (e), and () surplus areas surplus areas

Subpart 19.504, Set-aside program order of precedence

Part 20, Labor surplus arca concerns

$2.219-5, Notice of total small business and labor surplus
area set asides

52.220-1, Preference for labor surplus

52.220-2, Notice of total labor surplus area set-aside

52.220-3, Utilization of labor surplus arca concerns

52.220-4, Labor surplus area subcontracting program

Waiver/Exemption: “Utilization” clause not required in
contracts for: (1) small purchases; (2) purchases outside the

U.S.; and (3) personal services.

DRAFT



APPENDIX dD. wae ES ae
TOTHE REPORTOF | %
THE DEFENSE SCIENCE BOARD TASK FORCE...
. ON ess
DEFENSE ACQUISITION REFORM (PHASE II)

JET ENGINE COMMERCIAL .
PRACTICES PANEL |

FINAL. REPORT

MAY 13, 1994 ~

Office of the Under Secretary of Defense for
Acquisition and Technology

Washington, D.C. 20301-3140


MIL-P-46843
MIL-P-55110
MIL-STD-881
MIL-STD-1567
MIL-STD-337
MIL-STD-470
MIL-STD-471
MIL_-STD-499
MIL-STD-781

MIL-STD-785

MIL-STD-790
MIL-STD-1543
MIL-STD-1843
MIL-STD-810
MIL-STD-882
MIL-STD-973
MIL-STD-1388
DOD-STD-1467
DOD-STD-2167
DOD-STD-2168
MIL-STD-1472

‘Printed Wiring Assemblies

Printed Wiring Boards

Work Breakdown Structure

Work Measurement

Design to Cost

Maintainability Program Requirements for Systems and Equipment
Maintainability Demonstration

Engineering Management

Reliability Testing for Engineering Development, Qualification, and
Production

Reliability Program for Systems and Equipment Development and
Production .

Reliability Assurance Program for Electronic Parts Specifications
Reliability Program Requirements for Space and Missiles Systems
Reliability-Centered Maintenance for Aircraft, Engines and Equipment
Environment Test Methods and Engineering Guidelines

System Safety Program Requirements

Configuration Management

Logistics Support Analysis

Software Support Environment

Defense System Software Development

Defense System Software Quality Program

Human Engineering Design Criteria for Military Systems, Equipment
and Facilities

B-2


not commonly exist. They must be developed, approved, disseminated, taught -- and accepted.
Similarly, there are few contracting personnel familiar with market pricing research or methods.
Again, a cadre of market pricing qualified personnel must be trained.

Commercial Application to Jet Engine Research and Development

Jet engines, like any other product, must pass through the research and development phase
before entering operational production. Our joint government and industry Panel spent many
hours trying to fit military jet engines into the commercial development practice model, but was
unsuccessful for the majority of developmental applications. Our recommendation is that
system development of new military aeronautical engines, or major modifications of current
engines -- for the present time -- retain the current regulatory control approach. We discovered
both technical and business obstacles to commercial practices for military research and
development.

On the technical side, the military customer and contractor team determines the requirements and
specifications for the entire system, including the engine. This is a highly integrated effort
between the military customer, airframer, engine manufacturer, and system integrator. The
airframe and engine interfaces must be carefully defined and specified. In recent years, this
integration has been streamlined somewhat through the introduction Integrated Product
Development teams, a reduction in proposal paperwork, and a new level of communications and
coordination between the government customer and the aerospace contractor. Successful new
programs, including the F-22 fighter aircraft, demonstrate the ongoing efforts at research and
development improvement.

To make aircraft integration work, the developing components must be created under the same
system. It would be unmanageable for the airframer, engine manufacturer and weapon system
integrator to employ different approaches -- i.e., airframer use military specifications and
standards, and the engine contractor use commercial practices. The result would be
incompatible technical interfaces, data requirements, and funding profiles and amounts.

On the business side, contracts for research and development are normally priced to recognize
the risk inherent in these types of acquisitions. The use of a cost type contract provides the
necessary flexibility for the government to react to threat and requirement changes. To expect
the jet engine industry to assume all the risk during this acquisition stage would not be prudent
business practice and would result in increased costs to the government. A parallel business
concern is that the military service, over the development period, will change their priorities for
program support. As currently practiced, the combined impact of funding, funding profiles and
priority changes do not support commercial practice development.

These technical and business ‘actors make military acquisition a higher risk than typical
commercial system development. Since the jet engine industry team would not control the risk
factors as they would in a commercial development, the current risk becomes unacceptable.

Once the engine is developed, qualified for production, and introduced into the field with a first
production quantity, commercial practices could then be applied to the acquisition of all
subsequent engines. This would take advantage of the engine companies’ common facilities,
people, processes, and suppliers for both military and commercial production.

There are a number of situations or methods, however, where commercial practices may be

immediately introduced into aircraft jet engine research and development. For example,
commercial practices may be applied for engine acquisition of closely related models needing

10


budgetary and manpower resources are reduced, however, there is little hope that
military documents can be kept either technically current or on track with commercial
Practices, products, and processes. And the greater the divergence between the
commercial and military sectors, the less the likelihood that military products and
systems can be purchased from or produced in commercial operations." (Italics added)

This list (Attachment B) details over sixty military standards and specifications which may
adversely impact the manufacture of jet engines. Note that it was compiled by a joint
government and industry team from Defense Instructions and Manuals; previous
recommendations from the Defense Management Review Working Group Nine; industry
association reports; and July, 1992, testimony before the House Armed Services Committee.
All specifications and standards identified by the Process Action Team may not apply to the jet
engine industry. We believe, however, this list is an excellent place to begin an assessment to
remove the restrictive "how to" parameters. It should also be noted, that since military
specifications and standards are not created by statute, they may be changed by the department
or agency responsible for their promulgation.

Some of these laws, regulations and standards must be eliminated, some waived, and some
modified. Identifying needed changes and implementing them is a very difficult process. It will
require full participation and acceptance of Congress, staffers, DoD and industry leaders.
However, these problem areas are well known by both the government customer and the
industry contractor, and extremely well documented. It is a matter of action.

Setting Fair and Reasonable Prices

The Panel felt that this was one of the most sensitive issues for both the DoD and Congress.
For decades, regulations and legislation have been written in an effort to assure that the public
teceived the best product or service for the tax dollar. The image of commercial practices
procurement, without the guardian cost controls and reporting, is foreign or at least
uncomfortable to many in the government. Although setting the "fair and reasonable" price for
a commercially procured jet engine will not be difficult, it will require the government to
understand and practice commercial market pricing analysis. This will mean a cultural and
administrative change from the previous traditional cost analysis as the price basis.

Jet engines have a pricing history stretching back over 40 years. The tools available to both the
government and industry include flat market pricing using previous procurements of the same
engine; recent buys of other military engine models from the same or competitive contractors;
prior engine prices with escalation based on consumer price index; and yearly catalogues for
engines, spares and support. These are the same tools and methods used by the jet engine
industry to set commercial prices, as well as the same tools used by the purchaser to verify the
prices.

Engine alterations or additions, which make them military-unique, may also be determined
through individual market pricing of subsystems or assemblies, and standardized industry labor
rates. Typically, one or more of these prices are verifiable as matters of record or catalogue.

The prices of after-delivery support and warrantees are also matters of record. The jet engine
industry has a history of providing maintenance, both at their facilities and in the field. Such
services can be tailored to fit the requirements and location, in the United States or at overseas
bases.

The administrative issue arising out of the adoption of market pricing is that such concepts are
not generally practiced by the government. Systemic vehicles, such as processes and forms, do

9


or services. Potentially,’a contractor specializing in the defense arena may be required to
operate a number of different ways on programs operating under different FAR supplements.

A-25


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER APPLICABLE FAR CLAUSES APPLICABLE DFARS CLAUSES
Sales Commissions Subpart 225.7308, Contract clause
22 USC § 2779 252.225-7027, Limitation on sales commissions and fees
ion: None. :
Jewel Bearings Subpart 8.2, Jewel bearings and related items
PL 101-511, § 8121 52.208-1, Required sources for jewel bearings and related
items
Waiver/Exemption: None. 52,208-2, Jewel bearings and related items certificate

A-13


MIL-STD-1800
MIL-STD-1528

MIL-STD-1785 -

DOD-STD-100
MIL-T-31000

MIL-STD-1521
MIL-STD-1250

MIL-STD-1520
MIL-STD-1535
MIL-STD-1568

MIL-STD-1686

MIL-STD-2164
MIL-Q-9858
MIL-I-45208
MIL-STD-105
MIL-STD-45662
MIL-STD-1310
DOD-E-8983
MIL-I-6870

MIL-STD-980

Human Engineering Performance Requirements for Systems

Manufacturing Management Program

System Security Engineering Program Management Requirements
Engineering Drawing Practices

Technical Data Package

Technical Reviews and Audits for Systems Equipment

Corrosion Prevention and Deterioration Control in Electronic Compo-
nents

Corrective Action and Disposition System for Nonconforming Material
Supplier Quality Assurance Program Requirements

Materials and Processes for Corrosion Prevention and Control in
Aerospace Weapons Systems

Electrostatic Discharge Control Program for Protection of Electronic
Parts, Assemblies and Equipment

Environmental Stress Screening Process for Electronic Equipment
Quality Program Requirements

Inspection System Requirements

Sampling Procedures and Tables for Inspection by Attributes
Calibrations System Requirements

Shipboard Bonding, Grounding, and Other Technology

Electronic Equipment, Aerospace, Extended Space Environment

Inspection Program Requirements, Nondestructive for Aircraft and
Missile Materials and Parts

Foreign Object Damage Prevention in Aerospace Products

B-3


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

L

APPLICABLE DFARS CLAUSES

— -

Cargo Preference Act and Preference for U.S. Flag
Vessels

Part 47.5, Ocean transportation by U.S. flag vessels
52.247-64, Preference for privately owned U.S. flag

Subpart 247.5, Ocean transportation by U.S. flag vessels
252.247-7022, Representation of extent of transportation by

10 USC § 2631 commercial vessels sea
46 USC 1241(b) 252.247-7023, Transportation of supplies by sea ~
Waiver/Exemption: Temporary waivers available for: (1) 252.247-7024, Notification of transportation of supplies by
small purchases; (2) transportation between foreign sea
countries under Foreign Assistance Act funding: (3)
Waiver/Exemption: May be waived by Congress, classified shipments; and (4) Panama Canal Commission or
| the President, or the Secretary of Defense. treaty shipments.
Trade Agreements Act of 1979 25.4, Purchases under the Trade Agreements Act of 1979 225.4, Purchases under the Trade Agreements Act of 1979
19 USC § 2512(a) et seq. 52.225-8, Buy American Act--Trade Agreements Act 252.225-7006, Buy America Act--Trade Agreements Act--
. --Balance of payments certification Balance of payments program certificate
i : President may defer or waive 52.225-9, Buy American Act--Trade Agreements Act 252.225-7007, Trade Agrcements Act
| where: (1) delay not more than two years; (2) --Balance of payments program
authority to agency heads to waive subject to
interagency review on a case-by-case basis when in
the national interest; or (3) authority for SECDEF
to waive subject to interagency review for
reciprocal procurement agreement countries.
Berry Amendment Subpart 225.7002, Restrictions on food, clothing, fabrics,
PL 102-396, § 9005 and specialty metals
Subpart 225.7003, Restrictions on hand or measuring tools
252.225-7012, Preference for certain domestic commodities
252.225-7013, Domestic wool preference
252.225-7014, Preference for domestic specialty metals
252.225-7015, Preference for domestic hand or measuring
tools
ion: SECDEF may waive on basis
of nonavailability. Waiver/Exemption: Exceptions permitted for: (1) small
purchases; (2) articles for use outside U.S.; (3) acquired by
vessels in foreign waters; (4) emergency acquisitions; (5)
commissary resale; (6) inadequate U.S. quantities or
quality; and (7) where necessary to comply with foreign
agreements.
A.19 DRAFT



under high quality control conditions.

Although the companies are widely dispersed and follow their own management philosophies, a
number of additional common threads bind them together. First, jet engines are not the sole
business of the companies. Although they do not account for the largest source of sales, they
are a significant portion of total company income. The second similarity is that jet engine sales
are declining, both military and commercial. Due to the declining defense budget, the greatest
sales losses are on the military side. Engine sales at Pratt & Whitney, for example, have
declined from $7.1B in 1991 to $5.1B in 1993, with the military side accounting for the
majority of the decline.

The third common thread binding jet engine companies is that, except for one company,
emphasis within the engine divisions has shifted from military to commercial sales. For
example, 80 percent of 1960's General Electric engine sales used to go to the military. In 1993,
that had declined to 40 percent -- and is continuing to drop. Pratt & Whitney is experiencing the
same loss. Military business today accounts for about half the sales volume; it is expected soon
to drop to a quarter. The sales shift is the same for the smaller manufacturers. Today, military
business accounts for 60 percent of Williams International engine sales. It is predicted to drop
to 10 percent in the near future. The government, represented primarily by the military
services, has become the minority business partner. Today, General Electric has about 250
commercial engine customers, both American and off shore. In fact, 51 percent of General
Electric's engine sales are to foreign customers, military and commercial.

This is a mature business with world wide capabilities for sale and total service of the product.
It is a prime candidate for a "pilot" industry.

Jet Engine Economic and Industrial Base Issues

As mentioned earlier, both the government and jet engine industry are experiencing procurement
problems, resulting in increases in engine costs and long procurement processes.

Many problems are common to DoD procurement practices and are well known by both the
government customer and the commercial contractor. Stiff controlling layers of regulations,
detailed cost accounting requirements unique to DoD acquisitions, some duplicative or
outmoded processes driven by military specifications, redundant socio-economic requirements,
and continual oversight for all phases of manufacture add costs and time to the entire process.
These are not new issues, nor have they been ignored in the past.

Their primary impact is that they increase the cost of an engine through greater overhead and
lengthened manufacturing and qualification process. For example, one of the most pressing
business issues is the government's cost accounting requirements. Since commercial industry
normally doesn't record costs by contract, contractors must establish cost reporting systems for
government business. The entire cost management and reporting system (SF 1411 and SF
1412) satisfies government statutes and regulations but does not add value or quality to the
product. The result is extra burden, which is passed back to the government -- and, to some
degree, to the commercial customer for the parallel commercial item. Similar arguments could
be made for some military specifications and standards, as well as out-dated restrictive laws and
regulations. Further, DoD engine contractors have difficulty in retaining some of their key
suppliers who refuse to create the unique DoD compliance systems.

Higher engine costs, however, have created a related issue. For the jet engine company
wanting to run as a single-system, integrated business, the result is that the declining military

6


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

Regulation of Contractor Inventory Systems by Subpart 242.72, Contractor material management and
SECDEF accounting system

10 USC § 2410b 252.242-7004, Material management and accounting system

| Waiver/Exemption: None.

Prompt Payment Act
31 USC § 3901(a)(1) and (a)(3)

Subpart 32.9, Prompt payment

52.232-25, Prompt payment

52.232-26, Prompt payment for fixed-price architect-
engineering contracts

52.232-27, Prompt payment for construction contracts

Waiver/Exemption: Clause does not apply where: (1)
purchases are to foreign vendors outside the U.S.; and (2)
payment terms and late payment penalties have been
established by other authorities.

Subpart 232.9, Prompt payment

Cost Accounting Standards, CAS Board
41 USC § 422

Part 30, Cost accounting standards administration

52.230-1, Cost accounting standards notices and certification
(national defense)

52,.230-2, Cost accounting standards

52.230-3, Disclosure and consistency of cost accounting,
practices

52,230-4, Consistency in cost accounting practices

52.230-5, Administration of cost accounting standards

Waiver/Exemption: Waived for: (1) sealed bid; (2)
negotiated contracts and subcontracts below $100K; (3)
small businesses; (4) foreign gevernments; (5)catalog or
market prices; (6) educational institutions; set-aside, labor-
surplus area contracts; (7) U.K. contractors; (83) NATO PHM
ship program, (9) contracts outside U.S.; (10) fixed price
contracts; and (11) where contractor refuses and is only
available source.

A-3

DRAFT



Requires notification by the contractor of intent to file for bankruptcy.
WHY: This is not a clause commonly used in the commercial arena. As such, it has the
potential of causing an overhead cost for tracking this information. No value added.

52.243-6 Change Order Accounting

This provision prescribes the format the contractor is to use when submitting proposals for
costing change orders.

WHY: Deleting this clause is a flowdown from deleting the cost accounting standard
clauses. Levying this type of accounting system could preclude commercial contractors from
participating due to the need for establishing a separate accounting system. If the contractor
elects to add this system, it imposes an increased cost to the overhead pool.

52.2441 Subcontracts (Fixed Price Contracts)

52.244-2 Subcontracts (Cost Reimbursement and Letter Contracts)

This clause requires the contractor to notify the Government (and get the Contracting Officer
approval) prior to entering into specifically identified subcontracts. Additionally it requires
that detailed subcontractor cost information be provided to the Government to assist the
Contracting Officer in making the approval decision.

WHY: This takes the management responsibility for the contract away from the contractor
when he is the one performing the work. It requires a flowdown to subcontractor and
vendors and is a costly system to implement and administer. While much of this information
will be obtained by the contractor in his performance of the contract, it is doubtful that it
would be to the level of detail prescribed in this clause.

Requires the competition of subcontracts.

WHY: This is a requirement not levied on the commercial arena. There are additional costs
for the administration of the purchasing system to ensure ongoing compliance with this
provision. Additionally, it discourages the long term advantages that are used in the
commercial market place of investing in a "preferred supplier” concept and working with that
supplier over the life of the product to continually improve the product's quality and price.

52.246-24 Limitation of Liability High Value I
Provides that the contractor shall not be liable for loss of or damage to property of the
Government that occurs after Government acceptance of the supplies

WHY: This is not a clause that would normally appear in commercial contract. It places an
additional administrative burden on the prime.

5224721 C ial Bill of Lading Notati
Directs the contractor to ensure, before shipping, that specific shipping notations are
annotated. .

WHY: The commercial sector does not have a specific clause that is levied across the
board for them to use in providing shipping notations. This is another specific regulation
levied upon the contractor that he will have to track. Shipping notations are something that
can be addressed between the program office and the contractor for each specific contract.

A-20


Vv:
Encourages the contractor to voluntarily prepare and submit value engineering change
proposals, allowing the contractor to share in any realized savings.
WHY: This type of "continuous improvement” engineering is currently encouraged through
the incentive structure of the contract. Having a separate clause requiring value engineering
is only duplicative and an additional cost since it drives a Tequirement to track the value
engineering system.

Notifies the contractor that use of a clause with an authorized deviation is indicated by the
addition of (Deviation) after the clause.

WHY: No value added. These clauses state the obvious and are merely administrative in
nature.

DoD FAR CLAUSES:
215.872:3 (d) Work Measurement

Requires contractor to have a work measurement system.

WHY: No value added. This requirement is a military-unique one imposing a substantial
overhead burden on the contractor and an administrative burden on the Government.
Whatever abuses mandating such a System is supposed to correct are far out-weighed by the
costs of a work measurement system.

3-71 isplav i
Requires the contractor to display the DoD Hotline posters prepared by the DoD IG.
WHY: This is another instance of requiring something of the contractor that is not normally
Tequired in the commercial sector. The deletion of this clause does not prevent someone
from calling the DoD IG.

7003 - v Wi

7 7 . 7
n

Prescribes that the contractor shall not deny consideration for a subcontract award under the

contract because he is subject to on-site inspections under the INF ueaty.

WHY: This is not a standard commercial practice. Contracts/subcontracts are awarded on

the basis of the "best value” concept. (Clause is in need of revision as it relates to Soviets.)

7 set
Requires the contractor to have a system to send suggestions for potential acquisition
Streamlining ideas to the program office.

A-21


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

Gratuities
10 USC § 2207

Waiver/Exemption: Exempts personal service

contracts,

3.101-2, Solicitation and acceptance of gratuities by
Government personnel

Subpart 3.2, Contractor gratuitics to Government personnel

52.203-3, Gratuities

Waiver/Exemption: Exempts contracts between defense

agencies and foreign countries that do not obligate DoD

appropriated funds,

Subpart 203.203, Reporting violations of the gratuities clause

Debarred or Suspended Subcontractors

10 USC § 2393(d)
Waiver/Exemption: None.

9.405-2, Restrictions on subcontracting

52.209-6, Protecting the Governments interest when
subcontracting with contractors debarred, suspended
or proposed for debarment

Subpart 209.4, Debarment, suspension, and ineligibility

Compensation to Former DoD Employees
19 USC § 2397b

Waicr/Exemption: Exempts contractors below
310M in defense sales,

3.104-1, General
3.104-2, Applicability
3.104-3, Statutory prohi

ions & restrictions

203.170-1, Policy

Compensation to Former DoD Employees

3.104-1, General

203.170-3, Penalties

(Defense contractors) 3,104-2, Applicability 252.203-7000, Statutory prohibitions on compensation to
10 USC § 2397¢ 3.104-3, Statutory prohibitions & restrictions former DoD cmployces
Waiver/Exemption: Exempts contractors below

310M In defense sales.

Prohibition of Employment of Persons Convicted of
Fraud

203.570-2, Policy
252.203-7001, Special prohibition of employment

Waiver/Exemption: Small purchase exemption only.

Waiver/Exemption: None.

10 USC § 2408

| Walver/Exemption: None.
Byrd Amendment Subpart 3.8, Limitation on the payment of funds to influence
31 USC § 1352 federal transactions

52.203-11, Certification and disclosure regarding payments
to influence 1 federal transactions

52,203-12, Li tions on payments to influence certain
federal transactions

A-9

DRAFT



Defense Science Board
Acquisition Reform Task Force
(Phase II)

Jet Engine Commercial Practices Panel
Final Report

Executive Summary

After considerable discussion of issues surrounding the feasibility of, procuring all military jet
engines through commercial practices, the Jet Engine Commercial Practices Panel reached the
following findings and recommendations. They are presented here in brief, with explanation
Provided in the report.

Tasking -- To determine the feasibility of acquiring military jet engines using
commercial practices.

Findings -- The Panel finds that:

I. It is feasible and desirable to use commercial practices, industry wide, to procure and
support mature military engine production and support programs; and,

2. It is not appropriate, at this time, to use purely commercial practices in the research
and development phase of the acquisition cycle for large military engines. There are
opportunities, however, in the development of smaller engines for target or reconnaissance
vehicles.

Recommendations -- The Panel recommends that:

1. A detailed, comprehensive program be established to convert the military jet engine
industry to commercial practices for procuring and supporting mature engine, production and
support programs; and

2. The Administration, Congress, and Department of Defense provide the necessary
waivers and exceptions to the various laws, regulations, standards and specifications that will
allow pure commercial practices to be used to procure and support mature military engine
production and support programs; and

3. A joint government and industry team, under the direction of the Deputy Under
Secretary of Defense (Acquisition Reform), be established and funded to implement the
program. The team will create a detailed, time-phased plan for commercial practices on current
programs where practical; follow-on procurements of current in-production engines; and on
future engines as they complete qualification and enter production. The team will also explore
opportunities to implement commercial practices during jet engine development.

RoR oi ok ak 2k ok a a


Management and Manufacturing Specifications and Standards
Requiring Priority Action

The following list was prepared using DoDI 5000.2; the list of key acquisition documents in
DoD 4120.3-M; two industry Surveys conducted by the Army Materiel Command and the
Office of the Secretary of Defense’s Defense Management Review-Working Group Nine; and
the American Defense Preparedness Association Report, "Doing Business With DoD, The
Cost Premium" and their statements on Military Specifications and Standards before the
House Armed Services Committee, Subcommittee on Investigations, July 22, 1992.
MIL-STD-490 Specifications Practices
MIL-STD-2000 Soldering Technology
MIL-STD-45743 Soldering
MIL-STD-202 Test Methods for Electronic and Electrical Component Parts
MIL-STD-275 _Printed Wiring for Electrical Equipment ,
MIL-STD-454 Electronic Equipment Requirements

MIL-STD-461 Electromagnetic Emission and Susceptibility Requirements for the
Control of Electromagnetic Interference

MIL-STD-462 Measurement of Electromagnetic Interface Characteristics

MIL-STD-463 Definitions and Systems of Units, Electromagnetic Interference, and
Electromagnetic Compatibility Technology

MIL-STD-883 Test Methods and Procedures for Microelectronics
MIL-STD-2165 Testability Program for Electronic System and Equipment
MIL-STD-5400 Electronic Equipment, Aerospace, General Specification
MIL-E-6051 System Electromagnetic Compatibility Requirements
MIL-C-28809 Circuit Card Assemblies, Rigid, Flexible and Rigid-Flex
MIL-M-38510 Microcircuits




competitive commercial practice; and common business sense. There appears to be no need for
redundant requirements written into DoD contracts.

- Contractor responsibility. In 1936, the Walsh-Healy Act was enacted to
guarantee minimum wage standards. Two years later, the act was superseded by the Fair Labor
Standards Act. It's limitation on the award of contracts for commercial items to "manufacturers
or regular dealers" is also obsolete today. The recent Office of Federal Procurement Policy Act
stated that government product or service needs may be met by "reasonable sources." The jet
engine industry, using commercial practices, meets the criteria of a reasonable source without
the need for extensive reporting requirements.

- Contractor integrity. | While there is an indisputable need to maintain high
standards of contractor integrity in government procurement, the enforcement mechanisms
established by laws force contractors to collect data supporting their certification that they are
not guilty of unethical or illegal behavior. These certification requirements are inconsistent with
the goal of commercial procurement and integration of commercial and military jet engine
production lines. Each jet engine company has a standard code of ethics which is consistent
with commercial procurement practices.

Transition Issues

Under the best of circumstances, transitioning from a regulatory and military standardized
acquisition system to a commercial practice system will be challenging. There will be issues
prior, during and following the change. The impact will be felt by both government and
industry personnel. As mentioned throughout the report, the primary ingredient will be strong
knowledgeable leadership from the government and the jet engine industry. This must be
followed by training, patience and acceptance. These strengths can solve any problem.
Through discussion and survey, the panel determined the following primary transition issues.

- Laws and regulations. The Panel agreed that the most important issue will be
the elimination or waiver of commercial practice blocking laws and regulations. The elimination
of these restraints will be the most difficult for the government to accept, as they would often be
replaced only by common commercial industry practice or company codes. Public interest is
protected by the competitive world market in jet engines. The elimination of certain laws and
regulations would also impact the industry. For example, the industry safeguarding standard
protest process would also be on the table for elimination as a non-commercial practice.

- Current contracts. Under the assumption that the laws, regulations and milspecs
issue has been settled, current jet engine contracts must be renegotiated to commercial market
pricing standards. The process will be made easier, in many cases, by engine systems which
are common or nearly common in military and commercial aircraft.

- Performance-based specifications. Under the current DoD acquisition
system, engines are ordered using detailed, often voluminous, lists of specifications and
standards. Commercial practices, however, focus on fundamental performance-based engine
specifications. Changes to performance-based specifications and the attendant acquisition
approach that follows will require acceptance and training of operational analysts, contract
writers, logistics support specialists and the entire government procurement team. Although
there has been a recent move within DoD to incorporate performance-based specifications and
an attendant reduction of detailed "how to" specifications, the adoption of this approach as the
standard will require sweeping change in the total procurement system. The DoD Process
Action Team on Military Specifications and Standards strongly endorsed this approach and

13


was possible for an entire industry -- in this case the jet engine industry -- to apply well
established and successful commercial practices to reduce DoD procurement costs and raise
efficiency. We feel it is not only possible, but practical as the DoD has already procured
commercial jet engines for a variety of aircraft. The products are similar, if not identical, in
many cases, especially at the component part level -- and they are produced in the same
facilities, by the same people, using the same or similar processes.

We then turned our attention to what must be accomplished to achieve universal commercial
practices for in-production jet engine procurement. The Panel again agreed that with the
impediments of law, culture, tradition and process, commercial practices adoption will not be an
easy task. However, it is one which can be achieved through leadership, dedication and
extensive training. As stated at the beginning of the report, there are no insurmountable
obstacles to the adoption of commercial practice acquisition for the jet engine industry.

The Panel is pleased to present these findings and observations, but we realize that our limited
resources did not allow extensive investigation or prepare us to make detailed recommendations.
We raised many issues and indicated the solutions, but we did not create a step-by-step
implementation program. That must be accomplished by a more representational (government
and industry) and full time implementation team under the direction of the Deputy Under
Secretary of Defense (Acquisition Reform) (see Attachment C). Representation must come not
only from industry and DoD procurement, but from the military operations, Congressional
committee staffs and supporting budget offices.

This team will create a detailed, time-phased plan for commercial practice procurement on
programs where practical; for follow-on procurements of current in-production engines; and for
future engines as they complete qualification and enter production. The team will also explore
opportunities to implement commercial practice procurement during the engine development
phase.

We feel that while the full time team will be able to create an action plan in six months or less, it
will take a concentrated follow-on effort to inaugurate across-the-board commercial practice
procurement of mature jet engines.

Asa final ht, the Panel feel: TO} ust be implemented in i ty, ACTOSS

Asa final thought, the Panel feels that the program must be implemented in its entirety, across
the jet engine industry, for all in-production engines. Partial implementation of a few engine
models, facilities or companies will not generate the government or industry commitment
needed for success. It would become, instead, another expensive experiment with a detailed
after-action report.

We, the members of the Defense Science Board's Jet Engine Panel, would be priviledged to
participate in that implementation effort.

General Bernard P. Randolph, USAF (Retired), DSB Member and Panel Chairman
Robert A. Fuhrman, DSB Acquisition Reform Task Force Member
Dr. Jacques S. Gansler, DSB Acquisition Reform Task Force Member
A. J. Beauregard, Lockheed Aeronautical Company

Dr. Thomas E. Cooper, General Electric Company

James R. Nelson, General Electric Aircraft Engines

Robert F. Bescher, Pratt & Whitney Government Engines

Michael Summers, Pratt & Whitney, United Technologies

Joel W. Marsh, United Technologies

Dr. Robert C. Gunness, Allied Signal Aerospace

S. Michael Hudson, Allison Engine Company

15


Table of Contents

Executive Summary 1
Introduction 3
Defense Acquisition Reform 3
Panel Overview 4
The Jet Engine Industry 5
Jet Engine Economic and Industrial Base Issues 6
Commercial Practices in the Jet Engine Industry 7
Regulatory and Statutory Barriers 7
Setting Fair and Reasonable Prices 9
Commercial Application to Jet Engine Research and Development 10
Post Production Contractor Support 11
Socio-Economic Programs and Safeguards 12
Transition Issues 13
Conclusions, recommendations and a final thought 14
Attachment A: Air Force Recommended Pilot Program Waivers on Statutes and
Regulations A-l
Attachment B: DoD Process Action Team Blueprint for Change for Military

Specifications and Standards B-1

Attachment C: Draft Memorandum for Deputy Under Secretary of Defense (Acquisition
Reform) C-1


”. sohte- ion by .
25. USC 283

Specifies the detailed reporting information and Procedures entailed in contractor retention of
patent rights.

WHY: Procedural and reporting requirements are inconsistent with commercial methods

of doing business. It is desirable for the contractor to retain patent rights and necessary for
the Goverment to retain use rights; but, a more simplified, commercial approach with
minimal reporting would facilitate commercial subcontractor/vendor involvement.

Wi
Provides a limitation of the amount that can be withheld from the contractor during the
performance of the contract.
WHY: No value added. This clause later states that the Contracting Officer can determine
that this limitation is inappropriate. Additionally, the Air Force proposes that all clauses that
have withholding provisions be waived. So, the waiver of this Clause would be a fall-out from
deleting the other clauses.

Provides for progress payments based on a Percentage of costs incurred under a complicated
set of criteria and rules.

WHY: In the commercial marketplace the buyer makes progress Payments for a long term
fixed price project based on accomplishments rather than incurred costs. The Government-
unique procedure of paying based on costs demands a Special accounting system to accrue
Costs and is intrusive to commercial firms.

21 Ni ih Ww.
Provides for notification to the contractor of the Government's intent to disallow costs. It
also gives him a time frame in which he can respond to this decision. The Contracting Officer
then has the ability to make a final, unilateral determination about the allowabililty of the cost.
WHY: This drives the contractor to establishing a separate accounting system for allowable
vs. unallowable costs. This increases the overhead, and eventually the cost to the
Government. Additionally, this clause serves to intimidate the contractor by giving the
Government the right to threaten that a cost tay be considered "unallowable". This is a
potential liability to the contractor that he will price in his risk factors affecting profit.

42

Requires the contractor to send a prepaid notice of shipment to the transportation officer to
be received 24 hours before the shipment is received.

WHY: While this is done by some commercial businesses, it is not done in all commercial
business. If the contractor does not have the Government-mandated system, it would
increase the cost of his overhead to require set up of a unique one. This decision should be
left up to the individual program office and contractor.

52.242-13 Bankruptey

A-19


TATUT!

AND CLAUSES) RE

ESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER

APPLICABLE FAR CLAUSES

APPLICABLE DFARS CLAUSES

[ Rehabilitation Act of 1973; Affirmative Action for
the Handicapped
29 USC § 793

| Waiver/Exemption: President may waive ifin the

national interest. C.F.R. exempts contracts for: (1)
less than $2.5K and for indefinite quantities under
threshold; (2) work outside U.S.; and (3) State and

Subpart 22.14, Employment of the handicapped
52.222-36, Affirmative action for handicapped workers

: Contracting agency head may waive in
the interests of national security, or after determining

Subpart 222.1400, Employment of the handicapped

Waiver/Exemption: Clause does not apply in
contracts under $100K or to be performed outside
the US.

52.223-2, Clean air and water

Waiver/Exemption: Contracting Agency head may waive if
in the paramount interest of the U.S., or exempt a class of
contracts after consultation with the head of the EPA.

local governments. special circumstances in the national interest so require.
Clean Water Act Subpart 23.105, Solicitation, provision, and contract clause Subpart 223.104, Exemptions
33 USC § 1318 52.223-1, Clean air and water certification

Clean Air Act
42, USC § 7606

Waiver/Exemption: Clause does not apply in
contracts under $100K or to be performed outside
the US.

52.223-1, Clean air and water certification
52.223-2, Clean air and water
52.223-3, Clean air and water

Waiver/Exemption: Contracting Agency head may waive if
in the paramount interest of the U.S., or exempt a class of

contracts after consultation with the head of the EPA.

Affirmative Action for Disabled and Vict Nam Era
Veterans, Readjustment Act of 1972
38 USC § 4212

Waiver/Exemption: C.F.R. exempts contracts for:
(U) less than $10K and indefinite orders under
threshold; (2) work outside the U.S.; and (3) State
and local governments.

Subpart 22.13 Special disabled and Victnam cra vetcrans

52.222-35, Affirmative action for special disabled and
Vietnam era veterans

52.222-37, Employment reports on special disabled
veterans and veterans of the Vietnam era

Waiver/Exemption: Agency head may waive for contracts in
the interests of national security, or in the national interest

and it: (a) is impractical to act on each request individually;
or (b) will substantially contribute to the convenience of
administering the Act.

Subpart 222.1300, Special disabled and Vietnam cra
veterans

AT

DRAFT



This report is a product of the Defense Science Board (DSB). The
DSB is a Federal Advisory Committee established to provide
independent advice to the Secretary of Defense. Statements,
opinions, conclusions and recommendations in this report do not
necessarily represent the official position of the Department of
Defense. , : : i

This document is UNCLASSIFIED
Security review completed by OASD (Public Affairs),
Directorate for Freedom of Information and Security Review
Ref # 94-S-4445


MIL-STD-1367 Packaging, Handling, Storage, and Transportation Program Require-
ments for Systems and Equipment

MIL-STD-1379 Military Training - Military Unique Training Requirements
MIL-M-15071 Equipment and Systems Contexts Requirements for Manuals, Technical
MIL-M-38784 General Style and Format Requirements Manual, Technical
MIL-M-63036 Preparation of Operators Manual, Technical

MIL-M-63041 Depot Maintenance Work Requirements Manual, Technical

MIL-S-8879 Screw Threads, Controlled Radius Roots With Increased Minor Diam-
eter

B-4


WHY: Not pan of staridard commercial Practices,

Vv

Requires the Offeror to warrant that no Person or agency has been employed or retained to
solicit or obtain this contract for a contingent fee, except a bona fide employee.
WHY: Not part of standard commercial Practices,

Requires that any Government contractor who retains a marketing consultant in connection
with a Government contract must provide to the Contracting Officer as a condition of award,
an extensively detailed certification on the consultant and the nature of the consultant
services.

WHY: Certifications of this type are normally not required as a condition of commercial
business contracts, they involve contractor time and money, and provide no added value to

the ultimate product being purchased by the Government. This cost adds unnecessarily to
contractor overhead expense.

Requires the contractor to specify the use of new or used material in the performance of the
Contract. It also it requires the contractor to notify the Government if he believes that used
or reconditioned supplies are in the Government's interest.

WHY: This is not a clause normally found in the commercial sector. It places an additional
burden on the contractor to track these materials and ensure compliance with this regulation.

15.703 isitions Requiring Make-or-Buy P

5 . i -

Requires contractors to submit make-or-buy programs on non-R&D contracts whose value is
expected to exceed $5M. Requires the contractor to notify the government of proposed
Changes to the Make-or-Buy Plan. It also requires him to get the Government's approval
before making changes.

WHY: This isa Government-unique requirement. In the commercial Sector, the buyer is
concemed only with the end product— not the make-or-buy business decisions that the
producer makes. The requirement for the Government to approve these business decisions
drives the commercial sector away from Goverment contracts. This requirement also
imposes an administrative burden, which directly translates into cost to the Government.

A-15


WHY: Not a commercial requirement. Places an additional burden of contractors to

establish and maintain a system that may not be compatible with the one they currently
operate. This has a tendency to be very costly and discourages the commercial sector

involvement.

252,242-7000 Post-A ward Conference

Requires the contractor to attend any postaward conference convened by the contracting
activity.

WHY: No value added. Post award conferences are listed in another section of our
contracts, if they are required. This clause is merely duplicative in nature, and does not need
to be mandated.

252.242-7002 Submission of C ial Freight Bills for Audi .
Requires the contractor to furnish individual freight bills in excess of $500 to the General
Services Administration (GSA) for audit

WHY: Nota commercial requirement. This causes an additional administrative burden for
the contractor that is passed on to the Government.

252.242-7005

Provides a minimum set of standards upon which the Offerors must base, a written summary
of the management procedures he will establish and maintain during contract performance.
After contract award, the contractor is required to implement these.

WHY: This is not a commercial requirement. This places an additional burden on
Contractors to operate in a specific way. It is not appropriate for the Government to tell
contractors how to manage their cost and schedule. This clause adds additional cost to the
contract and discourages commercial sector involvement.

252.248-7000 Preparation of VECPs

Requires preparation of VECPs be in accordance with the prescribed format in MIL-STD-
973,

WHY: The Government can evaluate VECPs in any format as long as the required
information is there. Having a specific format adds costs, discourages commercial firms and,
probably, discourages some VECPs. The Government should be open to money-saving
opportunities in any format

AE. AFMC and ASC FAR SUPPLEMENTS

These regulations serve to levy additional requirements on the contractor.

WHY: Since most of the regulations are already supplemented by the DOD FAR supplement,
the lower level supplements tend to be more of "how to” type of regulations. They are often
based on lessons learned under mistakes made in other programs, and while they may have
been necessary at the time, they require an additional burden on contractors to maintain
service, command and center unique supplements that dictate how they should run a program.
These regulations are not used in the commercial sector, nor are they used in other commands


STATUTES (AND CLAUSES) REQUESTED FOR WAIVER

STATUTE(S) REQUESTED FOR WAIVER APPLICABLE FAR CLAUSES APPLICABLE DFARS CLAUSES
Officials not to Benefit 3.102, Officials not to benefit
41 USC § 22 52.203-1, Officials not to benefit

Waiver/Exemption: None - except for contracts ©
awarded under certain agricultural statutes.

Anti-Kickback Act

3.502, Subcontractor kickbacks

203.502, Subcontractor kickbacks

41 USC § Si ef. seq. 52.203-7, Anti-kickback procedures
: None.
Procurement Integrity Act Certificate of Subpart 3.104, Procurement integrity Subpart 203.104, Procurement integrity
Procurement Integrity 43.106, Procurement integrity modifications
41 USC § 423 52.203-8, Requirement for certificate of procurement
integrity
Waiver/Exemption: None. 52.203-9, Requirement for certificate of procurement

integrity—modification
52.203-10, Price or fee adjustment for illegal or

improper action
52,203-13, Procurement integrity--service contracting

Rights in Technical Data
10 USC § 2320

Waiver/Exemption: None.

Subpart 27.4, Rights in data and copyrights

52,227-14, Rights in data—gencral

52.227-15, Representation of limited rights data and
testricted computer software

52.227-17, Rights in data—special works

52.227-22, Major systems--minimal rights

Subpart 227.4, Rights in data and copyrights

252.227-7013, Rights in technical data and computer
software

252.227-7018, Restrictive markings on technical data

252.227-7019, Identification of restricted rights computer
software

252.227-7022, Government rights (unlimited)

252.227-7026, Deferred delivery on technical data or
computer software

252.227-7027, Deferred ordering of technical data or
computer software

252.227-7028, Requirement for technical data representation

252.227-7029, Certification of technical data conformity

252.227-7030, Technical data—withholding of payment

252.227-7036, Certification of technical data conformity

NDALT



only limited research and developmental modifications. If it is only a matter of a modified
gearbox and accessories integrated into another system, commercial practices could be applied.
Commercial practices are also applicable where commercial engines fit the military
requirements, with little or no adaptation. Well known examples include the engines for the C-
17 and KC-135 aircraft.

A third potential area is for smaller, limited purpose, unmanned aerial vehicles such as target or
reconnaissance vehicles. Since these aircraft often have simpler, integrated flight systems and
are required to perform profile activities -- which can be precisely described by performance
specifications -- their development lends itself to total commercial procurement. A potential
example of this is the current TIER I+ unmanned, high altitude, long endurance reconnaissance
vehicle.

A final possibility is an alteration of the "standard" contracting method for research and
development. The use of a value added approach with a not-to-exceed number for research and
development, in some cases, may be a more efficient process than a cost plus fixed fee contract
with all the oversight requirements. Payments would then be based on milestone achievements.
This would give the contractor incentive while the government retained ultimate control.

While the first step in commercial practice jet engine procurement will be taken with mature
production engines, research and development will follow as the commercial practices move
beyond the "pilot" stage. It is a matter of time, initial acceptance and program expansion.

Post Production Contractor Support

The complete transition to commercial practice procurement would include post production
support. Depending on the needs of the government customer, this may mean a variety of
services such as configuration control, logistics management, spares acquisition and
distribution, cataloguing, user conferences, technical publications, support equipment, and
actual repair and maintenance services. Although both commercial and military aircraft require
such support, the commercial air carrier and the military services differ in their approaches.
The government customer typically controls the configuration, technical publications and relies
on an internal program of organic logistic support and repair depots. Commercial customers
rely on the engine manufacturer for configuration control, technical publications and, depending
on their size and internal capabilities, full or augmenting OEM field support.

There are more differences. The government has endorsed a deep inventory system of spare
parts and components, which can be drawn upon into the future. The commercial practice
system, used by commercial carriers, calls for just-in-time delivery of required parts for
maintenance and repairs. Although the government system insures surge availability of the
original part at a previously agreed upon price, it does not have the same ability to react to
technology advances or requirement changes as does the commercial practice system. The
commercial practice system allows for these considerations and maintains smaller inventories
appropriate for today's lean industry.

As with the original manufacture, commercial spares quality and reliability are upheld by
industry standards and Federal Aviation Regulations requirements, as well as the requirements
of other customers countries.

Post production aircraft support has already become a political and economic issue. Today's

organic logistics support depot system has strong backing within the government; including that
of local and state delegations, and small business. The adoption of commercial practice

11


Attachment C

Memorandum

for

Deputy Under Secretary of Defense

(Acquisition Reform)

Draft


noted the required changes within the whole system.

- Personnel adjustments. Both the government and industry will have to make
numerous and gradual in-plant changes to adjust to commercial standards. Although defense
oversight will decline significantly, it is not without precedence and safeguards. The Federal
Aviation Administration normally keeps a small contingent of representatives at jet engine plants
for inspection and acceptance. The DoD, however, locates large numbers of DPRO and DCAA
personnel at engine producers. For example, there are 296 defense oversight personnel at
General Electric's two manufacturing sites; 221 at Pratt & Whitney's; 35 at Allison and 30 at
Allied Signal Engines. FAA augments their minimum number of onsite personnel by certifying
contractor in-plant personnel as FAA designated inspectors, both for engineering and
manufacturing disciplines. Also, instead of continual oversight, FAA conducts broad in-plant
inspection visits, typically every two to three years. There will have to be a plan for the orderly
draw down of "outside" government personnel and training and certification of "inside" jet
engine plant personnel.

- Military standards, specifications and regulation replacement. This is
another primary issue and related to the personnel draw down. As the military specification and
standards, or "how to's,” are withdrawn, they will be replaced by commercial standards or
equivalents. For many manufacturing and quality processes, replacements will come from
industry-accepted ASTM, SAE, AIA, ANSI and ASQC standards, as well as ISO 9000. As
military specifications, standards and regulations are controlled by the department or agency, the
replacement process will be a negotiation item.

- Security. | Many DoD engines in production contain classified performance or
technical characteristics. Commercial practices, of course, do not provide for classification
accountability or reporting systems. Both DoD and industry Panel participants, however, agree
that this issue can be resolved through negotiation and common sense.

- Culture change. DoD leadership is committed to acquisition reform. This reform
will occur in a number of ways; commercial practices among them. Panel members discussed
at length, however, that many government jet engine acquisition team members are not familiar
with commercial practices. They may be directed to use commercial practices, but they will not
know or understand the methods or alternatives. This will require senior level support and
regulatory changes, and a training program for the entire procurement team. Additionally,
commercial practice information will have to flow up the Congressional chain, so that the
traditional reporting methods or cost tests may be dropped and replaced by industry standards.
The need for culture change will also apply to traditional funding periods. Congress and DoD
will have to routinely accept commercial program funding practices to gain the advantage of
flexibility and the ability to adjust to real market changes.

- Jet engine development in smaller facilities. Earlier in this report, the
Panel suggested that development should remain largely on a military specification and
regulatory basis at this time. For Pratt & Whitney and General Electric, large producers with
separate facilities for development and production, this is an appropriate solution. For smaller
producers, such as Williams and Teledyne, this raises problems. At their facilities,
development and production are done at the same facility -- and on the same floor. There is
concern that the inspection and audit oversight of the development program will inevitably pass
back over to the production engine line, defeating the commercial practice model. Avoiding this
will require training, understanding and experience of both the DoD and company personnel.

Conclusions, recommendations and a final thought

As stated at the beginning of this paper, the initial objective of the Panel was to determine if it

14