Federal Contracting: Commercial Item Test Program Beneficial, but Actions Needed to Mitigate Potential Risks
Published: 2014-02-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Federal agencies rely on the commercial marketplace for a range of goods and services. In 1996, Congress authorized the use of simplified acquisition procedures for commercial items now valued up to $6.5 million under the Test Program for Certain Commercial Items. The test program is currently authorized until January 2015. However, due to a lack of reliable data, Congress has had limited insights into the actual use and benefits of the test program.
The House Armed Services Committee report that accompanied the National Defense Authorization Act for Fiscal Year 2013 mandated GAO to report on the use of the authority provided under the test program. This report addresses (1) the extent to which federal agencies have used the test program, and (2) its benefits and risks, if any. DOD, DHS, and DOI accounted for 74 percent of test program use in fiscal year 2011 based on data reported in FPDS-NG. For five components within these three agencies, GAO assessed data, reviewed regulations and agency policies, analyzed 26 of the largest test program contracts, and interviewed contracting officials.
section_title: What GAO Found
paragraphs: Federal agencies use the test program for a relatively small portion of all commercial items and services bought. In fiscal year 2011, of the $90 billion agencies obligated on new awards for commercial items and services, federal agencies obligated $1.9 billion or about 2 percent using the test program, based on data reported in the Federal Procurement Data System-Next Generation (FPDS-NG). Within the largest reported users of the test program--the Departments of Defense (DOD), Homeland Security (DHS), and the Interior (DOI)--the five components GAO reviewed used the test program for about 9 percent of obligations, and 12 percent of the components' new commercial awards that fell within test program thresholds in fiscal year 2011. Agency officials cited the types of goods and services being acquired, the complexity of the acquisition, and the existence of other contracting approaches as factors affecting test program use. For example, the Coast Guard's Aviation Logistics Center used the test program for 139 of 370 new awards that fell within test program thresholds, whereas its Headquarters Contract Operations used the test program for only 3 of 164 new awards. Coast Guard officials explained that the commercial nature of the parts and services bought by the Aviation Logistics Center lends itself to using the test program, while the headquarters office used existing contracts, which can be another means to fulfill recurring needs for commercial supplies such as information technology services. DOD, DHS, and DOI officials acknowledge that they do not collect or assess data to determine whether the test program is used to the maximum extent practicable. As such, its limited use may indicate missed opportunities.
GAO found that the test program reduced contracting lead time and administrative burdens and generally did not incur additional risks above those on other federal acquisition efforts for those contracts GAO reviewed. GAO compared agencies' estimated timeframes for awarding contracts using negotiated procedures--which officials reported would be used in the absence of the test program--with actual lead times for eight competitively awarded test program contracts and found that test program contracts were generally awarded in fewer days. For example, the Army awarded a $1.3 million contract for blast barriers and bunkers in 20 days, about 160 days less than suggested by command guidance. According to officials from the agencies and components GAO reviewed, test program contracts are reviewed using existing internal controls and standard contract review processes. GAO found that contracting officers generally documented their efforts to identify commercial sources, but 16 of the 26 test program contracts GAO reviewed were awarded noncompetitively. While these awards were justified and approved in accordance with federal regulations when required, GAO and others have found that noncompetitive contracting poses risks of not getting the best value because these awards lack a direct market mechanism to help establish pricing. In some cases, DOD requires contracting officers to prepare a determination that the acquisition meets the commercial item definition. Neither DHS nor DOI have a similar requirement, potentially increasing their risks. Not ensuring the proper classification of an item as commercial can leave the government vulnerable to accepting prices that may not be the best value.
section_title: What GAO Recommends
paragraphs: GAO recommends that (1) DOD, DHS, and DOI collect and assess data to evaluate program use; and (2) DHS and DOI require a commercial item determination for certain acquisitions to better manage risk. DOD concurred, but DHS and DOI did not, stating that current procedures were adequate. GAO maintains that both recommended actions are still warranted for DHS and DOI.

section_title: Letter
paragraphs: Federal agencies rely on the commercial marketplace for a range of  goods and services to conduct business and meet their mission needs. In  1996, Congress authorized the use of simplified acquisition procedures— previously allowed for small purchases—for commercial items not  exceeding $5 million under the Test Program for Certain Commercial  Items (test program). Based on the premise that market forces would  ensure reasonable prices for commercial items, the test program aimed to  simplify the contracting process by providing contracting officers with  additional procedural discretion and flexibility for the acquisition of  commercial items. Further, effective and efficient access to commercial  products and services can help agencies achieve their missions and save  time and administrative costs in an era of constrained budgets. The test  program authority was initially only 3 years but has been repeatedly  extended. The most recent extension expired on January 1, 2012, and  the authority was not extended at that time. In January 2013, Congress  extended the authority for use of the test program, retroactively from  January 1, 2012, to January 1, 2015.
The House Armed Services Committee report that accompanied the  National Defense Authorization Act for Fiscal Year 2013 mandated GAO  to report on the use of the authority provided under the test program. This report addresses (1) the extent to which federal agencies have used  the test program, and (2) its benefits and risks, if any.
To determine the extent to which federal agencies have used the test  program, we analyzed data on contract actions awarded using the  authority from the Federal Procurement Data System-Next  Generation (FPDS-NG).because it was the most recent fiscal year with complete data available  when we began our review due to the authority’s expiration in 2012.  Based on reported obligations, we determined that the departments of  Defense (DOD), Homeland Security (DHS), and the Interior (DOI)  collectively accounted for about 74 percent of all test program obligations.  Within these departments, we focused on the five components reporting  the greatest use of the test program as follows: DOD’s Army Materiel  Command, Naval Supply Systems Command, and Air Force Materiel  Command; DHS’ U.S. Coast Guard; and DOI’s Acquisition Services  Directorate.
We used fiscal year 2011 data from FPDS-NG  We assessed the reliability of the FPDS-NG data by randomly selecting a  generalizable sample of 243 contracts with obligations in fiscal year 2011  that were coded as having used the test program. We obtained evidence  from the contract files to verify that the contracts had been awarded using  the test program and determined the FPDS-NG data were sufficiently  reliable to identify the minimum extent to which the five components used  the test program. We did not sample contracts that were identified as not  using the test program, and as such, did not assess the extent to which  test program actions and obligations may be underreported. We also  analyzed the number of new awards for commercial items and services in  fiscal year 2011 and identified the percentage that used the test program.  We did not assess the test program’s higher threshold of $12 million  when used in support of a contingency operation or to facilitate the  defense against or recovery from nuclear, biological, chemical, or  radiological attack since we determined that these contracts accounted  for only 2 percent of fiscal year 2011 obligations made by the components  in our review. We interviewed contracting officials from each department  and component to determine the factors that influenced whether or not  the test program was used.
To determine the benefits and risks of using the test program, we  reviewed relevant legislation, applicable Federal Acquisition Regulation  (FAR) provisions, and agency guidance. We also selected a nonrandom,  nongeneralizable sample of at least four of the largest test program  contracts from each of the five components for a total of 26 contracts. For  the 26 contracts sampled, we reviewed the contract and other relevant  documents, such as acquisition plans, market research documentation  and solicitations, and interviewed contracting officials to determine how  the test program was used and to obtain their views on the benefits and  risks of its use. For eight competitively awarded test program contracts,  we also compared the actual number of days from solicitation issuance to  award with the estimated number of days from solicitation issuance to  award of a contract using competitive negotiated procedures, based on  agency guidance. Appendix I provides additional details on our scope and  methodology. Appendix II provides information on the 26 contracts we  reviewed.
We conducted this performance audit from March 2013 to February 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The acquisition reforms of the mid-1990s resulted in a number of  regulatory changes that promoted the acquisition of commercial items  and services. These reforms grew out of the belief that (1) ever- increasing procurement laws and regulations resulted in federal  contracting processes that were overly burdensome and time consuming;  and (2) acquiring commercial items would improve quality and cost  outcomes by leveraging the innovation of the commercial market and  using market forces to lower prices. Commercial items and services are  those generally available in the commercial marketplace in contrast with  items developed to meet specific federal government requirements.  Figure 1 identifies key laws related to the commercial item test program.
As part of the acquisition reform efforts, the Federal Acquisition  Streamlining Act of 1994 (FASA) authorized agencies to use simplified  procedures for the acquisition of supplies and services not exceeding  $100,000. Simplified procedures for purchasing commercial items allow  agencies to select contractors using expedited evaluation and selection  procedures and to keep documentation to a minimum, which can reduce  the government’s administrative costs. For example, evaluation of a  contractor’s past performance may be based on one or more of the  following: the contracting officer’s knowledge and previous experience  with the supply or service being acquired, customer surveys, and past  performance questionnaire replies.
Additionally, FASA established a statutory preference for the acquisition  of commercial items and defined the term “commercial item.” For  example, FASA required agencies to conduct market research to  determine whether commercial items are available to meet agency needs;  to define requirements in terms of functions to be performed, performance  required, or essential physical characteristics so that commercial items  can be procured; and to acquire commercial items to the maximum extent  practicable to meet agency needs. The definition of commercial item  includes items customarily used by and sold (or offered) to the general  public, including with minor modifications “of a type” not necessarily  available in the commercial marketplace made to meet federal  government requirements, or services “of a type” offered and sold  competitively in substantial quantities in the commercial marketplace. Including “of a type” items allows vendors to make adjustments to  commercial products so that they meet government requirements even if  those products have not been sold in a commercial setting or subjected to  competitive price pressures.
FAR § 2.101. nuclear, biological, chemical, or radiological attack. These thresholds  have been changed periodically to take inflation into account, resulting in  the current thresholds of $6.5 million for commercial acquisitions and  $12 million for commercial acquisitions in support of contingency-related  operations. The authority lapsed in 2012, but was subsequently  reauthorized by Congress until January 1, 2015.
subsections: section_title: Regulations Related to Commercial Acquisitions
paragraphs: Various provisions of the FAR govern the policies and contracting  methods for commercial item acquisitions. FAR Part 12—Acquisition of  Commercial Items prescribes the policies unique to the acquisition of  commercial items. For example, contracting officers can use streamlined  posting and solicitation procedures, which can reduce the time needed to  advertise actions and solicit offers, respectively. Contracting officers are  also required to use firm-fixed-price contracts or fixed-price contracts with  economic adjustments, though the FAR also allows for the use of time- and-materials contracts or labor-hour contracts under certain  circumstances. FAR Part 12 also instructs contracting officers to use the  policies in conjunction with the solicitation, evaluation, and award policies  and procedures described in other parts of the FAR, specifically FAR Part  13—Simplified Acquisition Procedures, FAR Part 14—Sealed Bidding, or  FAR Part 15—Contracting by Negotiation, that the contracting officer  believes are most appropriate. As shown in table 1, the combination of  the procedures provided for under FAR Parts 12 and 13 generally  constitute the flexibilities provided under test program. By contrast,  contracting by negotiated procedures requires more steps during the  evaluation process and more detailed contract file documentation, but can  provide contracting officers with greater visibility into the costs and  technical capabilities of the offerors, if needed.
The FAR states that contracting activities must use the simplified  procedures authorized by the test program to the maximum extent  practicable. However, when buying goods and services, federal  contracting officers are required to procure from or through required  government supply sources, which are listed in order of priority. For  example, one of the required government supply sources for both  supplies and services is the General Services Administration’s federal  supply schedule program. The schedule program provides federal  agencies with a simplified method for procuring various quantities of a  wide range of commercially available goods and services. Further,  agencies can use existing indefinite-delivery contracts which allow them  to issue task orders for services or delivery orders for supplies. Similarly,  agencies may have pre-existing blanket purchase agreements which also  provide a simplified method of fulfilling repetitive needs for supplies and  services. In the absence of a required government supply source,  contracting officers can generally use existing contracts or award new  contracts for commercial items using either simplified or negotiated  procedures within the test program thresholds.
When using the test program, the FAR also requires competition to the  maximum extent practicable, which can generally be achieved by posting  the proposed contract action to the governmentwide point of entry located  at Federal Business Opportunities (FedBizOpps), or by soliciting sources  from the local trade area. Noncompetitive awards are permissible under  certain circumstances such as when only one responsible source and no  other supplies or services will satisfy agency requirements, or when    competition is precluded by the terms of an international agreement. Noncompetitive awards are also permissible under Section 8(a) of the  Small Business Act which authorizes the Small Business Administration  (SBA) to enter into contracts on a competitive or noncompetitive basis  with other agencies and award subcontracts for performing those  contracts to firms eligible for program participation. SBA’s subcontractors  are referred to as “8(a) contractors.”
section_title: Related Work Identified Challenges with Test Program Data and Commercial Acquisitions
paragraphs: Our prior reports on the initial use of the test program found that there  was limited data to assess its use or benefits. For example, in 2001 we  reported that the agencies had not collected data to provide a basis for  measuring whether the test program was maximizing efficiency and  economy and minimizing administrative burden and cost. Similarly, in  2003, we reported that the test program data reported in FPDS were not  reliable and recommended that agencies take action to ensure data  reliability. Subsequently, DOD requested a change in 2007 to FPDS-NG  to improve test program reporting. As a result, FPDS-NG was modified in  2009 to include a specific, single reporting field to identify test program  contracts. We also recommended that DOD and the Office of Federal  Procurement Policy (OFPP), which provides overall direction for  government-wide procurement policies, develop evaluation mechanisms  for measuring test program benefits. DOD stated that it would develop a  methodology to evaluate the benefits of the test program on the basis of  such metrics as contracting lead time, and share the results with OFPP.  However, according to DOD and OFPP officials, no action has been  taken to do so.
Our work and that of others has shown that government contracting  officials face risks in using commercial acquisitions in certain  circumstances. For example, in 2006 we reported that improper  classification of an item as commercial can leave the government  vulnerable to accepting prices that may not be the best value if the item is  not sold in numbers sufficient for the government to determine the  reasonableness of the vendor’s prices as the government is precluded  from requesting certified cost or pricing information. The DOD Inspector General also issued a report in 2006 that found that contracting officials  did not adequately justify the commercial nature of the items or services  being acquired and concluded that the commercial item definition was too  broad and allowed contracting officials to award contracts for defense  systems and subsystems that had no commercial market and no  meaningful price history. The Inspector General recommended that DOD  propose a legislative change to tighten the commercial item definition to  state that the commercial item exception to submission of certified cost or  pricing data must only apply to the acquisition of commercial items that  are sold in substantial quantities to the general public. At the time, DOD  did not concur with the recommendation. In January 2007, the  Acquisition Advisory Panel issued a report that concluded that the  broadness of the commercial item definition, specifically the “of a type”  provision for commercial services disadvantages the government in  pricing, particularly when there is limited or no competition.
To ensure that an item meets the commercial item definition, DOD  amended the Defense Federal Acquisition Regulation Supplement  (DFARS) in 2008 to require DOD contracting officers to include a written  determination in the contract file that an acquisition meets the definition of  “commercial item” specified in the FAR when using commercial item  procedures for acquisitions exceeding $1 million. DOD amended this requirement in 2012 to require approval one level above the contracting  officer when the commercial item determination is based on the “of a  type” commercial procurements or items “offered for sale,” but not yet  sold to the general public.
In 2006, we also noted the risks associated with commercial item  acquisitions in a noncompetitive environment such as when there is only  one responsible source and there are no other supplies or services that  will satisfy agency requirements. We found that similar to misclassifying acquisitions as commercial, the lack of market-based competition for  commercial items for which there is only one responsible source may  result in prices that may not be the best value for the government. In  situations when the government is acquiring a commercial item  noncompetitively, agencies may use various means to determine that that  the proposed price is reasonable, such as by comparison with prices  found reasonable on previous purchases, or comparison with a  commercial price list. In 2010, we also found that for services supporting  DOD weapons programs, the government’s lack of access to proprietary  technical data—information used to define a design and to produce,  support, maintain or operate an item—and a heavy reliance on specific  contractors for expertise limit, or even preclude the possibility of,  competition.
section_title: Test Program Contracts Constitute Small Portion of Commercial Buying Activity, but Components Do Not Monitor or Assess Its Use
paragraphs: Federal agencies’ use of the commercial item test program represents a  relatively small portion of all commercial buying activity. In fiscal year  2011, of the $90 billion agencies obligated on new awards for commercial  items and services, federal agencies obligated $1.9 billion or about two  percent using the test program based on data reported in FPDS-NG. For  new awards within the test program thresholds of $150,000 to $6.5  million, test program contracts constituted about 9 percent of obligations  and 12 percent of awards for the five components we reviewed. Table 2  summarizes the extent of use of the test program for the five components  we reviewed.
We identified significant variation in test program use between and within  the components we reviewed which agency and component officials  attributed to a variety of factors including the types of goods and services  being acquired, the complexity of the acquisition, and the existence of  other contracting approaches. For example, within DOD, the Army  Material Command awarded about 7 percent of its new awards in fiscal  year 2011 using the test program; by contrast, the Naval Supply System  Command awarded about 26 percent of its new awards in that year using  the test program. Similarly, within the Coast Guard, the Aviation Logistics  Center used the test program for 139 of 370 new commercial awards; in  contrast, the Coast Guard’s Headquarters Contract Operations used the  test program for only 3 of 164 new awards. Coast Guard officials  explained that the nature of the products and services purchased by the  Aviation Logistics Center—including parts and services for aircraft  maintenance, upgrades, and repair—lends itself to using the test  program. By contrast, officials explained that the relatively lower use at  Coast Guard headquarters is due to the fact that they use pre-existing  indefinite-delivery order contracts to procure commercial items and  services within test program thresholds such as information technology  services. In that regard, we found that 126 of 164 new Coast Guard  headquarters awards, or 77 percent, were delivery orders.
Department and component officials generally believe that the test  program is used as much as possible, but noted that it is one tool among  many others in the contracting officer’s tool kit. These officials explained  that the decision regarding the appropriate contracting method for a  commercial item is left to the contracting officers’ discretion and may be  based on factors including the estimated value of the contract at award,  the urgency of the requirement, the availability of existing contracts or  vehicles, as well as the nature of the item or service being acquired.  Further, several officials noted that they would not use the test program  for complex commercial procurements, regardless of the estimated value,  if they believed a negotiated procedure was necessary to evaluate the  costs and technical capabilities of the offerors. Federal internal control  standards call for managers to measure and assess performance over  time to ensure effectiveness and efficiency of operations and compliance  with applicable laws and regulations. These officials acknowledge,  however, that their departments or components do not collect or assess  data to determine whether the test program is used to the maximum  extent practicable as required by the FAR, which may result in missed  opportunities to use the test program.
We also found evidence that test program contracts may be  underreported. For example, based on data reported in FPDS-NG, the  Army Materiel Command’s Mission Installation Contracting Command- Fort Knox reported that it used the test program for 2 of 538, less than 1  percent, of new commercial awards in fiscal year 2011 that fell within test  program thresholds. A Fort Knox contracting official told us that he  believed actual use of the test program was likely to be much greater and  attributed the underreporting to how their contract writing system defaults  to a “non-test program” setting. We did not assess the extent to which test  program contracts were underreported.
section_title: Test Program Can Reduce the Time to Award Contracts with Manageable Risk
paragraphs: The test program contracts we reviewed were generally awarded more  quickly and with less administrative burden than had the contracts been  awarded using negotiated procedures and generally did not incur risks  above those experienced on other federal acquisition efforts. The  agencies and components we reviewed reported they generally applied  their existing internal controls when reviewing and approving test program  contracts. Further, contracting officers generally documented their efforts  to identify commercial sources, but nevertheless awarded 16 of the 26  test program contracts noncompetitively. While these awards were  justified and approved in accordance with federal regulations when  required, our work and that of others has found that noncompetitive  contracting poses risks of overspending because these awards lack a  direct market mechanism to help establish pricing. DOD regulations  require a written and approved commercial item determination in some  cases to mitigate risks associated with misapplication of the commercial  item definition; neither DHS nor DOI have a similar requirement.
subsections: section_title: Test Program Can Reduce Contracting Lead Time and Administrative Workload, but Data Are Not Specifically Collected to Assess Benefits
paragraphs: OFPP staff and agency contracting and policy officials we interviewed  believed the test program provided benefits in terms of reducing lead time  and administrative workload, however, data are not specifically collected  to assess test program benefits on the basis of such metrics as  contracting lead time, according to officials. Officials noted that when the  test program authority lapsed in 2012, OFPP and DOD requested from  the civilian agencies and military departments examples of how the test  program has been used and benefits of its use. Our review of some of the  responses provided found that contracting activities consider the test  program a useful tool to manage workload and save resources. For  example, a Naval Supply Systems Command office prepared a workforce  analysis that identified the contracting full-time equivalents associated  with additional processing time which would be required if the test  program were not available. In the absence of the test program or  additional funding, the office concluded that the capacity to perform  contract administration and oversight would likely be negatively impacted.
Based on our review of the test program contracts, the use of the test  program reduced contracting lead time and administrative burdens in  comparison to the agencies’ estimated lead times for awarding contracts  using negotiated procedures. As we reported in 2011, most agencies we  reviewed have established guidance for contracting lead times that serve  as internal deadlines for contracting offices and provide program offices  with information about contract processing times. For the purposes of  our lead time analysis, we reviewed agency lead time guidance from each  of the components we reviewed that identified the estimated time needed  to award a contract using negotiated procedures, focusing specifically on  the number of days from when the agency issued a solicitation to contract  award. The lead times established in the guidance varied considerably  and did not consistently account for a number of factors such as the  degree or type of competition (i.e., competed or not competed), the  commercial availability and type of item or service procured, and  estimated contract value of the acquisition. Recognizing these limitations,  we compared the expected lead times for negotiated competitive  procurements based on agency guidance with the actual lead times we  observed for eight test program contracts we reviewed. For these  contracts, we identified the number of days from solicitation issuance to  contract award and compared these actual days with the estimated time  to award a competitive negotiated contract based on each respective  agency’s guidance. As shown in table 3, seven of the eight test program  contracts we reviewed that were competitively awarded were awarded in  fewer days than identified in agency guidance. In general, test program  contracts that were not competed were awarded in fewer days than those  that were competed.
According to contracting officers we interviewed, the test program  provided them flexibility and discretion with respect to evaluating offers  and making contract awards and allowed them to keep documentation to  a minimum. For example, an Army contracting officer competitively  awarded a $1.3 million firm-fixed-price contract for blast barriers and  bunkers for installations in Kuwait in 20 days after receiving quotes from  23 local contractors and evaluating them for technical acceptability and  price.awarded a $2.3 million firm-fixed-price contract for aircraft services for  firefighting missions in Colorado in 55 days after evaluating six quotations  submitted by regional businesses for price and aircraft capability, among  other criteria. According to contracting officers we interviewed, had the  test program not been available, they would have used negotiated  procedures under FAR Part 15. In that regard, they would have been  required to establish formal evaluation criteria, convene an evaluation  team, and evaluate proposals against the criteria, as well as notify  unsuccessful offerors and generally conduct negotiations with the offerors  in the competitive range.
In another example, a DOI contracting officer competitively  In contrast, under simplified acquisition procedures, if using price and  other factors, the contracting officer must ensure that quotations or offers  can be evaluated in an efficient and minimally burdensome fashion.  Formal evaluation plans, and establishing a competitive range,  conducting discussions, and scoring quotations or offers are not required.  Some contracting officers explained that they chose to use simplified  procedures under the test program because it would have taken  additional time to use negotiated procedures to acquire the same goods  and services.
Contracting officers used the combined posting and solicitation issuance  procedures allowed for all commercial item acquisitions in combination  with the other flexibilities of the test program to varying degrees. For  example, contracting officers did not consistently issue combined notice  and solicitation, or establish a reduced solicitation response time that  affords potential offerors a reasonable opportunity to respond to the  commercial item acquisition. Contracting officers used the combined  notice and solicitation issuance procedure in only 6 of the 26 contracts we  reviewed. In 8 contracts involving noncompetitively awarded small  business 8(a) contracts, there was no requirement to post notice of the  proposed contract action. In other cases, contracting officers provided  several reasons why they chose not to use the combined notice and  solicitation issuance procedure. For example, a Coast Guard contracting  official explained that she did not use the combined posting and  solicitation issuance procedures for a test program contract for ship  repairs valued at approximately $800,000 because it is the office’s  practice to issue a separate notice and solicitation for all ship repair  contracts valued over $150,000 to encourage competition among the  limited number of vendors that can provide these services. We also found  that in some cases contracting officers did not reduce the solicitation  response time and allowed a solicitation response time of 30 days or  more. Contracting officials at the agencies we reviewed reported that  combined posting and solicitation issuance procedures are more likely to  be used in test program awards where there is limited time to complete  an acquisition due to urgency, the need to award contracts before the end  of the fiscal year, or when the specifications of the requirement are not  complex.
section_title: Test Program Does Not Generally Introduce Additional Risk When Internal Controls Are in Place
paragraphs: According to officials from the agencies and components we reviewed,  test program contracts are reviewed using existing internal controls and  standard contract review processes, which are often based on dollar  thresholds. Consequently, these officials noted that there is no difference  between the reviews they conduct prior to awarding a test program  contract versus other, comparably-valued contracts. Further, the FAR  requires that agency needs are described in sufficient detail to allow for  the conduct of market research. Market research establishes the  foundation for the agency description of need, the solicitation, and  resulting contract. Further, it is intended to help the agency determine if  there is a commercial market, which helps ensure that the prices offered  are subject to market forces. We found that the contracting officers  responsible for the contracts we reviewed documented their market  research in 24 of 26 cases. In the remaining two cases, agency officials  could not provide evidence that market research was conducted.
The FAR also requires test program contracts to be competed to the  maximum extent practicable, unless contracting officers justify awarding  them noncompetitively. Noncompetitive awards are permissible under  certain circumstances such as when only one responsible source and no  other supplies or services will satisfy agency requirements, or under the  8(a) small business program. Most contracts, however, were not awarded  competitively. Our review found that 10 of the 26 contracts were awarded  competitively and the remaining 16 were awarded on a noncompetitive  basis and included justifications and approvals when required by federal  regulations (see appendix II). In 8 cases, the contracts were awarded  noncompetitively to small businesses. In another 7 cases, contracting  officers justified the decision to award the contract noncompetitively on  the basis that only a single contractor could satisfy the government’s  requirements. For example, the Coast Guard awarded a $4.3 million  contract for aircraft spare parts on a noncompetitive basis because the  contractor owned the technical data—information used to define a design  and to produce, support, maintain or operate an item—for the needed  item. In another example, the Army justified a $1.6 million noncompetitive  award to upgrade a mobile radio system on the basis that the vendor was  the only source since it owns proprietary rights in the hardware and  software. In the remaining noncompetitive award, the Army awarded a  $1.2 million contract for computer systems equipment and  troubleshooting on behalf of the Saudi Arabian National Guard on the  basis that competition was precluded by the terms of an international  agreement.
Our work and that of others has found that noncompetitive contracting  poses risks of overspending because these awards lack a direct market  mechanism to help establish pricing. For example, we have reported that  competitive contracts can help save the taxpayer money, improve  contractor performance, curb fraud, and promote accountability for  results. important role in helping agencies meet needs that arise, they also  present a risk because they place agencies in the position of having to  negotiate contracts without the benefit of a direct market mechanism to  help establish pricing. a “of the type” or “offered for sale” language contained in the commercial  item definition. The purpose of the determination and higher level  approval is to mitigate against the potential risk associated with  misapplication of the commercial item definition. As we found in 2006,  improper classification of an item as commercial can leave the  government vulnerable to accepting prices that may not be the best value  if the item is not sold in numbers sufficient for the government to  determine the reasonableness of the vendor’s prices as the government  is precluded from requesting certified cost or pricing information for  commercial items.
We found that contracting officers documented the required commercial  item determinations in 11 of 13 DOD contracts we reviewed valued over  $1 million. For 2 contracts, however, the commercial item determination  was not documented and agency officials could not provide an  explanation. Overall, about 18 percent of the new commercial item  awards in fiscal year 2011 for the 3 DOD components we reviewed had  an estimated value each of $1 million at award. At the Coast Guard and  the Department of the Interior’s Acquisition Services Directorate, 22 and  39 percent, respectively, of their new contract awards had an estimated  value at award of $1 million or more. While DOD requires its components  to prepare written determinations for certain commercial acquisitions,  neither DHS nor DOI require or prepare commercial item determinations.  Without such determinations, DHS and DOI may be vulnerable to  misclassifying an item as commercial and thereby accepting prices that  may not have been subject to market forces. Federal internal control  standards call for managers to identify, analyze, and decide what actions  should be taken to manage risk.
section_title: Conclusions
paragraphs: Agencies face increased pressure to award contracts for the billions of  dollars the federal government spends acquiring commercial goods and  services each year more efficiently and effectively. The commercial item  test program was intended to achieve such efficiencies by streamlining  the acquisition process for commercial items and services and relying on  the commercial marketplace to help improve quality and reduce prices.  We found that contracts awarded using the test program represented a  small fraction of the total amount spent on commercial goods and  services in fiscal year 2011, in part because of the existence of other  means or approaches to acquire commercial items that may be better  suited for the particular good or service being acquired. When the test  program is used, we found that it helps reduce contracting lead times  when compared to the agencies’ guidance on the time contracting officers  should plan for if they intended to award a negotiated contract. The  agencies we reviewed do not monitor or assess whether the test program  is used to the maximum extent practicable and without further action by  senior agency leadership, the possibility exists that the agencies are  missing opportunities to further reduce their contracting lead times and  administrative burdens.
From an oversight perspective, the agencies we reviewed indicated they  generally subjected contracts awarded using the test program to their  existing contract review and approval processes associated with  contracts of similar value. The risks and challenges we identified are not  unique to the test program, but generally affect commercial item  acquisitions. For example, we found that contracting officers generally  documented their market research as required for the use of the test  program, but fewer than half of the contracts were competitively awarded.  In that regard, while there are benefits to acquiring commercial items,  doing so should not be construed as being synonymous with buying  goods and services competitively.  The limited competition we observed  is a potential risk because our work and that of others has found that  noncompetitive contracting poses risks of overspending because these  awards lack a direct market mechanism to help establish pricing. Another  challenge agencies faced when acquiring commercial items is the  potential to inappropriately determine the good or service to be acquired  is a commercial item. DOD officials have recognized that the  misapplication of a commercial item definition may expose the  government to additional risk and took steps to mitigate some of this risk  by requiring its contracting personnel document their determination that  the good or service being acquired met the definition of a commercial  item, a prerequisite for using the authority. Neither DHS nor DOI require  their contracting officers to do so and the absence of this safeguard may  increase the risks to those agencies.
section_title: Recommendations for Executive Action
paragraphs: To increase the potential benefits from using the test program and  mitigate potential risks, we are making the following two  recommendations:
We recommend that the Secretaries of Defense, Homeland Security,  and the Interior collect and assess data to determine whether their  agencies are using the simplified procedures authorized by the test  program to the maximum extent practicable, as required by the FAR.
To mitigate the potential risk of improperly designating a good or  service as a commercial item, we recommend the Secretaries of  Homeland Security and the Interior require contracting officers within  their agencies to make a written commercial item determination at a  level that they determine appropriate for their agencies.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD, DHS, DOI, and the Office of  Management and Budget for comment. DOD concurred with our  recommendation directed to the Secretary of Defense, but DHS and DOI  did not concur with the recommendations directed to them. In an email  response on January 30, 2014, the Associate Administrator of the Office  of Federal Procurement Policy, Office of Management and Budget  generally agreed with our findings and included additional comments. The  agencies’ comments and our responses are summarized below. Written  comments from DOD, DHS, and DOI are reproduced in appendices III,  IV, and V, respectively. DOI also provided technical comments, which we  incorporated as appropriate.
Regarding our recommendation to increase the potential benefits from  using the test program by assessing test program use, DOD agreed with  our recommendation and indicated it will establish a process to collect  and assess data to do so. DHS and DOI both disagreed, noting they  questioned the value of such an assessment and that current procedures  were adequate. DHS stated that a retroactive review to assess data on  when the program was not used would be costly and labor intensive and  would likely not result in findings that could be broadly addressed through  policy changes or internal controls. DOI also questioned the value of  assessing test program use, and indicated that doing such an  assessment would imply that the use of the test program is a higher  priority than other tools available to contracting officers. We did not intend  for either DHS or DOI to retroactively assess the reasons why contracting  officers did not choose to use the test program and agree that doing so  would not be cost-effective. However, the wide variation in the  components’ use of the authority and the lack of management visibility  into its use indicates to us that the components may be missing  opportunities to further reduce their lead times and administrative burden.  Given the improved reliability of test program data reported in FPDS-NG,  agencies have data they can readily use to assess their commercial  acquisition portfolios to help ensure that they maximize available  resources by taking advantage of opportunities to use the test program  when appropriate to reduce administrative burden. Similarly, the Office of  Management and Budget noted that in the event that the authority was  made permanent, it would expect agencies to periodically review their use  of the test program as part of their management reviews. Consequently,  we continue to believe that collecting and assessing data on the  program’s use would be beneficial.
DHS and DOI suggested that the temporary nature of the test program  hindered its use and recommend that the authority be made permanent.  We believe our work provides a basis for helping inform the debate as to  the future of the authority; however, as our review focused on three  agencies, making such a recommendation was beyond the scope of our  review.
DHS and DOI also disagreed with our recommendation to mitigate  potential test program risks by requiring contracting officers to make a  written commercial item determination in certain cases. DHS stated that  market research and existing internal controls are sufficient to ensure the  test program is not misused to purchase non-commercial items. Similarly,  DOI stated that information needed to confirm the commerciality of the  item or service being purchased should be documented as part of market  research and that an additional requirement would deviate from ongoing  efforts to streamline the acquisition process. The Office of Management  and Budget also noted that it was unclear whether there were  weaknesses with the current safeguards that necessitated additional  determinations, but stated that it would expect agencies to make sure the  authority was used only to acquire commercial items as part of their  management reviews. While we found that for the contracts we reviewed  the risks associated with using the test program are generally no greater  than other commercial acquisitions when internal controls are in place,  GAO and others have noted risks associated with the potential  misapplication of the commercial item definition. DOD has taken action to  address this risk by requiring a commercial item determination in certain  cases, such as when purchasing commercial items “of a type” or “offered  for sale” as authorized under the commercial item definition. We continue  to believe that the requirement for a commercial item determination in  certain cases provides an additional safeguard against a known risk and  that such a requirement could be implemented within the existing  framework of internal controls already in place.
We are sending copies of this report to Secretaries of Defense, Homeland  Security, and the Interior; the Director, Office of Management and Budget;  and interested congressional committees. This report will also be  available at no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at dinapolit@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Staff who made key contributions  to this report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: This report focuses on the federal government’s use of the Test Program  for Certain Commercial Items (test program) authority provided under  Federal Acquisition Regulation (FAR) Subpart 13.5. This report  addresses (1) the extent to which federal agencies have used the test  program, and (2) its benefits and risks, if any.
To determine the extent to which federal agencies have used the test  program, we analyzed data on contract actions awarded using the  authority from the Federal Procurement Data System-Next Generation  (FPDS-NG). We used fiscal year 2011 data from FPDS-NG because it  was the most recent fiscal year with complete data available when we  began our review due to a lapse in the program’s authority in 2012.  Based on obligations reported for fiscal year 2011, we determined that  the departments of Defense (DOD), Homeland Security (DHS), and the  Interior (DOI) were the largest dollar users of the test program,  collectively accounting for 74 percent of test program obligations. Within  these departments, we focused on the five components reporting the  greatest use of the test program as follows:
DOD: Army Materiel Command, Naval Supply Systems Command,  and Air Force Materiel Command (53 percent of DOD use);
DHS: U.S. Coast Guard (54 percent of DHS use); and
DOI: Acquisition Services Directorate (65 percent of DOI use).
To assess the reliability of the test program data reported in FPDS-NG,  we drew a stratified, random sample of 243 contracts from the population  of all contracts with positive obligations in fiscal year 2011 for the five  components we reviewed. We grouped the three DOD components into  one stratum as they all operate under DOD supplemental regulations.  The two civilian components were grouped into their own strata. We sent  a list of sampled contracts to each of the five components and asked  them to verify whether they were correctly coded in FPDS-NG and to  provide documentation from the contract file that the test program was  used. Based on this assessment, we determined that the test program  data reported in FPDS-NG were sufficiently reliable to determine the  minimum extent to which the test program was used by the components  we reviewed. We did not sample contracts that were identified as not  using the test program, and as such, did not assess the extent to which  test program actions and obligations may be underreported.
To assess the extent to which agencies used the test program, we  analyzed the number of new awards for commercial items and services in  fiscal year 2011 that fell within the test program thresholds of $150,000 to  $6.5 million (based on the estimated value at award) and identified the  percentage that used the test program. We interviewed contracting  officials at the department and component-level to identify the factors they  considered when determining whether or not to use the test program. We  did not assess the test program’s higher threshold of $12 million when  used in support of a contingency operation or to facilitate the defense  against or recovery from nuclear, biological, chemical, or radiological  attack since we determined that these contracts accounted for only 2  percent of fiscal year 2011 obligations made by the components in our  review.
To determine the benefits and risks of using the commercial item test  program, we reviewed relevant legislation, including the Federal  Acquisition Streamlining Act of 1994 and the Clinger-Cohen Act of 1996,  as well as applicable Federal Acquisition Regulation (FAR) provisions.  We reviewed agency and component policy and guidance related to test  program use and oversight, commercial item acquisitions, simplified  acquisition procedures, and contingency contracting. We also interviewed  contracting officials from each of the five components as well as officials  from DOD’s Defense Procurement and Acquisition Policy and the Office  of Management and Budget’s Office of Federal Procurement Policy.  Further, we selected and reviewed a nonrandom, nongeneralizable  sample of 26 test program contracts including at least four of the largest  test program contracts from each of the five components. For the  selected contracts, we reviewed the contract and other relevant  documents, such as acquisition plans, market research documentation,  solicitations, and justifications and approvals, and interviewed the  contracting officers who awarded the contracts, or other cognizant  officials.
To assess test program benefits, we analyzed contract file documents  and interviewed contracting officers for the selected 26 contracts to  determine how they applied the simplified procedures and how the  procedures resulted in either a savings of time or reduction in  administrative burden. We reviewed relevant regulation and compared  the requirements for using the test program under FAR Part 13 versus  negotiated procedures under FAR Part 15 which most officials told us  they would likely use in the absence of the test program or existing  mechanisms such as indefinite-delivery contracts and blanket purchase  agreements. For eight competitively awarded test program contracts, we  also compared the contracting lead time—the amount of time between  issuance of a solicitation and the date of contract award—for contracts  awarded using the FAR Part 13 test program and the estimated lead time  for contracts using FAR Part 15 negotiated procedures based on agency  guidance. We also analyzed the extent to which time savings, if any,  were derived from the flexibility afforded by the test program versus the  streamlined procedures available for all FAR Part 12 commercial item  acquisitions that are independent of the test program. In addition, we  analyzed contract file documents and interviewed contracting officers to  determine how they used the test program and what procedures they  would have used if the test program were not available.
To identify and assess risk, we analyzed agency policies and interviewed  contracting officials to determine the manner in which test program  contracts are reviewed and approved. For noncompetitive awards, we  determined whether the awards were justified in writing and approved at  the required level when required. Additionally, we analyzed contract file  documents to determine the extent to which contacting officers conducted  market research. For DOD components, we reviewed test program  contract files to determine whether commercial item determinations were  included when required by DOD regulation and whether these  determinations were approved at the required level. We determined  whether or not the required documentation was provided but did not  assess its adequacy.
To identify instances, if any, of fraud, waste, or abuse of the test program  authority, we contacted inspector general offices at DOD, DHS, and DOI,  as well as the military services. We obtained and reviewed relevant  documentation, and discussed with agency officials, as needed. We also  obtained information from OFPP officials on the extent to which the test  program has been cited in bid protests.
We conducted this performance audit from March 2013 to February 2014  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Summary of Contracts GAO Reviewed
section_title: Appendix III: Comments from the Department of Defense
section_title: Appendix IV: Comments from the Department of Homeland Security
section_title: Appendix V: Comments from the Department of the Interior
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact name above, the following staff members made  key contributions to this report: Penny Berrier, Assistant Director; Jacob  Beier; Gary Bianchi; Danielle Greene; Robert Graves; Ioan Ifrim; Julia  Kennon; Angie Nichols-Friedman; Ada Nwadugbo; Dae Park; Kenneth  Patton; Sylvia Schatz; Erin Schoening; and Roxanna Sun.