DOD Contracting: Efforts Needed to Address Air Force Commercial Acquisition Risk
Published: 2006-09-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) has been urged by commissions, legislation, and a panel to make increased use of commercial acquisition to achieve certain benefits. To help ensure the increased use of commercial acquisition, the Office of the Secretary of Defense (OSD) established and the Air Force implemented two commercial acquisition goals to be achieved by the end of fiscal year 2005. In setting these goals, OSD expected that the increased use of commercial acquisition would provide DOD with greater access to commercial markets (products and service types) with increased competition, better prices, and new market entrants and/or technologies. The committee asked GAO to identify (1) the extent to which the Air Force has increased its use of commercial acquisition to obtain expected benefits and (2) the risks that are associated with this use.
section_title: What GAO Found
paragraphs: From 2001 to 2005, the Air Force increased spending using commercial acquisition from $4.8 billion to over $8 billion in an effort to provide greater access to commercial markets to increase competition, obtain better prices, and attract new market entrants (nontraditional contractors) and/or technologies. Even though the Air Force has significantly increased this spending, it has not measured the extent to which this increased use resulted in the benefits that were expected. For example, our analysis shows that for at least one of the expected benefits, attracting new market entrants, the expected benefit has not materialized. For the most part, traditional defense contractors received these contracts. Government contracting officials face risks in using commercial acquisition. For example, improperly classifying an acquisition as a commercial acquisition can leave the Air Force vulnerable to accepting prices that may not be the best value for the department. A high-ranking DOD acquisition official testified that he is concerned about items and services being identified as commercial that are not sold in an existing marketplace because under these circumstances, the government lacks assurances that the price is reasonable. At times, Air Force officials have disagreed about the classification of some acquisitions as commercial. The Air Force's use of commercial acquisition has also been accompanied by an increased amount of dollars being awarded for sole-source contracts. Despite DOD policy to avoid sole-source commercial acquisitions because of increased risk, sole-source commercial acquisition dollars awarded by the Air Force have more than doubled from 2000 to 2005. Further, of the 20 larger Air Force commercial product awards in 2004, half were awarded as sole-source.

section_title: Letter
paragraphs: For decades, the Department of Defense (DOD) has been urged by  commissions, panels, and legislation to make increased use of commercial  acquisitions to take advantage of the efficiencies of the commercial  marketplace. To help ensure the increased use of commercial acquisition,  the Office of the Secretary of Defense (OSD) established and the Air Force  implemented two commercial acquisition goals to be achieved by the end  of fiscal year 2005. These were to double the dollar value of commercial acquisition contract actions  awarded in 1999 (for the Air Force this meant going from about $3  billion to about $6 billion) and    strive to increase the number of commercial contract actions awarded  to 50 percent of all Air Force contract actions.
In setting these goals, OSD expected that the increased use of commercial  acquisition would provide DOD with greater access to commercial  markets (products and service types) with increased competition, better  prices, and new market entrants and/or technologies. You asked us to  examine the Air Force’s efforts to meet these goals and identify any  associated risks in commercial acquisition practices. Specifically, we  determined (1) the extent to which the Air Force has increased its use of  commercial acquisition to obtain expected benefits and (2) the risks  associated with Air Force use of commercial acquisition.
To conduct our work, we collected and reviewed information on Air Force  use of commercial acquisition from fiscal year 2001 through fiscal year  2005. We also reviewed all Air Force contracts awarded in fiscal year 2004  for products over $5 million using commercial acquisition. We reviewed  the files associated with these contracts at Air Force Materiel Command  (AFMC) locations including (1) Wright-Patterson Air Force Base, Ohio;   (2) Tinker Air Force Base, Oklahoma; (3) Robins Air Force Base, Georgia;  and (4) Hanscom Air Force Base, Massachusetts. We held discussions with  contracting officers and procurement management officials associated  with each of the selected contracts. We also met with representatives of  OSD and the Air Force to discuss various aspects of commercial  acquisition that included goals, progress toward achieving goals, benefits  expected, and associated risks. A more detailed discussion of our scope  and methodology is in appendix I. We conducted our review from July  2005 to September 2006 in accordance with generally accepted  government auditing standards.
subsections: section_title: Background
paragraphs: The definition of commercial acquisition has evolved over the last decade  to mean the purchase of items customarily used by and sold (or offered) to  the general public, including items with minor modifications of a type not  customarily available in the commercial marketplace made to meet federal  government requirements, or services of a type offered and sold  competitively in substantial quantities in the commercial marketplace.
The idea of increasing the government’s use of commercial acquisition is  not new. Figure 1 identifies key legislation and federal-level commissions  that emphasized the use of and expected benefits of commercial  acquisition over the last several decades.
1984 act: Reqired promotion of the use of commercil prodctwhenever prcticable.
Panel’ recommendation: Clled for the fcilittion of government ccess to commercil technolo- gie.
2003 act: Allowed different typeof contrct to e treted as commercicqition nder  certin circnce.
Commission’ recommenda- tion: DOD hold expnd the use of commercil prodct nd  commercil-tyle competition. 1986 act: Reqired DOD to cqire nondevelopmentl item(commercil item) to the mximm extent prcticable.
1994 act:   Expnded the commercil item definition to inclde nondevelop- mentl item, thoe not yet on the mrket, nd “of  type” item nd  nd-lone ervice.  Exempted commercil item procrement from reqirement to submit certified cot or pricing d to the government nder certin condition.  Provided preference for cqi- tion of commercil item nd tremlined mechni for their procrement. 1996 act:  Exempt commercil item  cqition from reqirement to  submit certified cot or pricing  d nd comply with cocconting ndrd.
The National Defense Authorization Act for Fiscal Year 1987 required DOD  to submit a report to Congress on its progress toward meeting the  requirement to acquire commercial items to the maximum extent  practicable.  DOD’s subsequent report to Congress in response to the  act’s requirement identified several impediments to the use of commercial  acquisition, including a requirement that contractors provide cost or  pricing data to the government. Identification of providing the government  cost or pricing data as an impediment was in contrast to requirements in  the Truth in Negotiations Act of 1962. This act generally requires  contractors to submit cost or pricing data to the government before the  award of a negotiated contract and certify that the data are accurate,  complete, and current as a way to provide information parity between the  contractor and the government. Because a primary maxim in contracting  is that competition drives down prices, one of the purposes of the  legislation was to provide the government with all the facts on the cost or  pricing data the contractor used to prepare a proposal, including, as  applicable here, when there is no competition. In that way, the  government believed it would have the information necessary to protect  itself from paying excessive prices.
In the late 1980s and early 1990s, however, concerns about impediments  that might prevent commercial companies from doing business with the  government continued. The concern about requiring cost or pricing data in  commercial acquisition was a factor in passing several laws in the 1990s  designed to streamline acquisition in general, and commercial acquisition  specifically, by more broadly exempting commercial acquisitions from the  cost or pricing data requirement (see fig. 1).
Although commercial acquisition regulations now preclude the  government from obtaining cost or pricing data from contractors in  commercial acquisitions, the government is permitted to obtain pricing  information from sources other than the offering contractor. If this  information proves inadequate, the government can require the offering  contractor to provide additional information, known as information other  than cost or pricing data, although the government must, to the maximum  extent practicable, limit the scope of the request to include only  information in a form regularly maintained by the offering contractor.
In early 2001, OSD reemphasized to the military departments and defense  agencies that commercial acquisition should be used to the maximum  extent possible to effectively provide the technological advantages needed  to win future conflicts. OSD concluded that the military departments and  agencies must uniformly look first to the commercial marketplace before  developing new systems, upgrading legacy systems or procuring spare  parts and support services. To help ensure the increased use of  commercial acquisition, OSD established and the Air Force implemented  two commercial acquisition goals to be achieved by the end of fiscal year  2005. These were to    double the dollar value of commercial acquisition contract actions  awarded in 1999 (for the Air Force this meant going from about $3 billion  to about $6 billion) and   strive to increase the number of commercial contract actions awarded to  50 percent of all Air Force contract actions.
In setting these goals, OSD expected that the increased use of commercial  acquisition would provide DOD with greater access to commercial  markets (products and service types) with increased competition, better  prices, and new market entrants and/or technologies. Additional expected  benefits of commercial acquisition are listed in appendix II.
section_title: The Air Force Has Increased Commercial Acquisition Spending
paragraphs: As its overall spending has increased, the Air Force has increased  spending using commercial acquisition, from $4.8 billion in fiscal year 2001  to over $8 billion in fiscal year 2005 (see fig. 2). The Air Force also has had  some success in achieving commercial acquisition goals; for example, it  has doubled the amount spent using commercial acquisition since fiscal  year 1999 (see fig. 3). However, it has not achieved the goal of making 50  percent of all contract actions commercial (see fig. 4). Nonetheless, the Air  Force did not establish measures nor did it collect information to  determine if the benefits expected from commercial acquisition were  being achieved. As a result, it is unclear if or how the Air Force has  benefited from increased use of commercial acquisition. The Air Force has  used commercial acquisition to buy a broad range of goods and services,  including major systems. For example, the Air Force used commercial  acquisition to buy the Joint Primary Aircraft Training System and a range  of goods and services such as radio and communication equipment,  aircraft components, and repair services. However, our analysis indicates  that for at least one of the expected benefits, attracting new market  entrants, the expected benefit has not materialized. The majority of Air  Force commercial contracts in fiscal years 2003-2004 were made to  traditional defense contractors.
subsections: section_title: Goals Measure Use of Commercial Acquisition
paragraphs: The Air Force was able to achieve its goal of doubling spending using  commercial acquisition by the end of fiscal year 2003 and has exceeded  that goal through fiscal year 2005 (see fig. 3).
However, the Air Force did not increase commercial contract actions  awarded to 50 percent of all awards (see fig. 4).
These goals expired at the end of fiscal year 2005 and were not extended  or renewed at the time this report was published. An Office of Under  Secretary of Defense, Defense Procurement and Acquisition Policy, senior  procurement analyst noted that he believed the goals have essentially been  met and that the current law stating that nondevelopmental items  (commercial items) are to be used to the maximum extent practicable is  sufficient.
section_title: Benefits Expected from Commercial Acquisition Have Not Been Measured
paragraphs: OSD has indicated that the increased use of commercial acquisition should  bring about the benefits of greater access to commercial markets,  including increased competition, getting better prices, and access to new  market entrants (contractors) and/or technologies. Although the Air Force  has increased the use of commercial acquisition, neither OSD nor the Air  Force has attempted to measure if the benefits expected from this  increased use are being achieved.  The Air Force has stated that the  appropriateness of the application of the FAR commercial item definition  determines its use of the authority, not whether any benefits would be  gained.
A study sponsored by the Air Force and conducted by the RAND  Corporation, a nonprofit research organization, in 2005 looked at Air  Force commercial acquisition and found that the data needed to determine  if the expected benefits of commercial acquisition were being realized  were not available. The report concluded that this lack of data has made  it difficult to measure whether this type of acquisition provides the  benefits claimed or what challenges exist. With respect to anticipated cost  and schedule savings, RAND reported that DOD provided no direction for  tracking these expected benefits, and as a result, such data are not  collected by either DOD or contractors. RAND also reported that DOD  does not develop estimates of the benefits expected from using  commercial acquisition versus other types of acquisitions prior to  commencing contract award activities. RAND did not comment on the  cost of quantifying commercial acquisition benefits.
section_title: Traditional Contractors Still Performing Most Commercial Air Force Contracts
paragraphs: While the Air Force has used commercial acquisition to buy a broad range  of goods and services, including major systems, it continues to do business  mainly with traditional contractors. By increasing the use of commercial  acquisition, OSD hoped the Air Force would be able to draw  nontraditional contractors into defense contracting and gain greater  access to new commercially developed technologies. Nontraditional  contractors were expected to offer more efficient business practices and  new technologies to meet government requirements. OSD commercial  acquisition guidance emphasizes the need to incorporate commercial  items into defense systems because the commercial sector often drives  critical technologies. Even with this increased emphasis on commercial  acquisition, the Air Force has primarily continued to award its commercial  contracts to traditional defense contractors.
To determine the extent to which the Air Force attracted nontraditional  contractors using commercial acquisition, we reviewed acquisition data on  the 98 contractors who received large (over $5 million) commercial  contracts in fiscal years 2003 and 2004. We found that 87 of the   98 contractors, or 89 percent, were included on DOD’s Top 100 or Air  Force Top 50 contractor lists or had previously received contracts with  DOD since fiscal year 1996. Only 11 contractors had not previously  received a contract or were not on either list (see fig. 5).
Further, 7 of the 11 contractors that had not previously received large  dollar contracts from DOD performed more routine services like  transportation, housekeeping, or architect and engineering services. A list  of the traditional and nontraditional contractors is included as appendix  III.
In a 2005 commercial acquisition study, RAND concluded that there is very  little evidence that the use of commercial acquisition has encouraged  greater numbers of civilian (non-DOD) commercial contractors to  compete for DOD contracts for major military-unique items.
In general, we found that commercial acquisition was used to buy a variety  of goods and services. These include but are not limited to aircraft engines  and structural components, telecommunication services, maintenance and  repair of equipment, program management/support services, and  housekeeping services.
We also found three major Air Force acquisition programs for which  commercial actions constituted at least 75 percent of contract dollars  obligated. The three major acquisition programs are  the latest version of the Air Force C-130 cargo aircraft; the Joint Primary Aircraft Training System, including a new trainer  aircraft, the ground-based training system, and a training management  system; and the National Airspace System to modernize DOD air traffic control  facilities in parallel with the Federal Aviation Administration (FAA) to  ensure safe operation of aircraft in accordance with statutes and  DOD/FAA agreements, according to an Air Force official.
section_title: Air Force Use of Commercial Acquisition in Certain Situations Increases Risk
paragraphs: Our work, that of DOD’s Inspector General, and that of others has shown  that government contracting officials face challenges using commercial  acquisition. For example, improperly classifying an acquisition as a  commercial acquisition leaves the Air Force vulnerable to accepting prices  that may not be the best value for the department because under  commercial acquisition regulations, the government is precluded from  requesting cost or pricing information. Our review of Air Force contract  files and DOD Inspector General reports showed that Air Force officials  disagreed about the designation of some acquisitions as commercial.  Furthermore, the director of Defense Procurement and Acquisition Policy  recently testified before the Federal Acquisition Advisory Panel that he is  concerned about some items and services being identified as commercial  that are not sold in an existing marketplace because there are no  assurances that the price is reasonable. The Air Force use of commercial  acquisition has been accompanied by an increased amount of dollars being  awarded sole-source. Similar to misclassifying acquisitions as commercial,  the lack of market-based competition may result in the Air Force’s  acceptance of prices that may not be the best value for the department.  OSD cites the general advantages of competition and in its policy urges  contracting officials to avoid sole-source situations because sometimes  contractors may attempt to exploit the lack of competitive markets and  demand unreasonable prices. While OSD acknowledges some sole-source  situations may be unavoidable, we found increasing sole-source spending  on Air Force commercial contracts over the last 6 years. Also, of the 20  new commercial awards for products over $5 million in fiscal year 2004,  half were awarded sole-source, with traditional contractors receiving most  of those sole-source awards.
subsections: section_title: Challenges and Risks Using Commercial Acquisition
paragraphs: Misclassification of items as commercial can leave the Air Force  vulnerable to accepting prices that are not the best value for the  department. Our review of Air Force contract files included two cases  where there were internal Air Force disagreements regarding  determinations of commerciality. The items in question were a C-130E and  a C-130H aircraft. During our review, some Air Force officials also  expressed concern, especially in sole-source situations, about their ability  to determine whether the prices being charged are reasonable. A major  difference between a Federal Acquisition Regulation (FAR) Part 15  “Contracting by Negotiation” and Part 12 “Acquisition of Commercial  Items” is that under Part 12 the government is prohibited from obtaining  cost or pricing data. Under FAR Part 15, the government is generally  required to obtain cost or pricing data (unless certain exceptions apply)  from contractors to help determine if it is getting a good price.
DOD’s Inspector General has recently issued reports asserting that three  Air Force acquisitions were inappropriately designated as commercial.  The Inspector General concluded that three Air Force acquisitions—the   C-130J cargo aircraft, the KC-767A tanker aircraft, and F-16 simulator  services—should not have been planned or purchased as commercial  acquisitions because they were unique to the military. For example, the  Inspector General reported in March 2006 that the Air Force had  improperly used commercial acquisition to buy F-16 simulator services  because contracting officials misinterpreted the definition of commercial  services. As a result, the Air Force placed itself at a disadvantage,  restricting its ability to determine whether the price charged was  reasonable. By using commercial acquisition, the Air Force was precluded  from requesting certified cost or pricing data for a service in which the  department is the sole customer. On the basis of the Inspector General’s  report, the Air Force agreed, and has begun, to change its contracting  approach from a commercial acquisition to a noncommercial acquisition.
Other recent efforts to improve the government’s use of commercial  acquisition include efforts by a high-level panel to consider changes to  potentially clarify the definition of commercial acquisition as well as  efforts by Air Force officials seeking similar regulatory changes.
The Federal Acquisition Advisory Panel is examining, among other things,  commercial acquisition practices. The Acquisition Advisory Panel is also  reviewing preliminary recommendations to modify the commercial item  definition found in federal regulation. The panel noted, in a briefing on its  Web page, that in the private sector, competition in efficient markets is a  principle relied on to a great extent to assure price reasonableness. The  panel cites three government commercial acquisition practices related to  the commercial item definition that depart from private-sector practices:  First, commercial acquisition procedures are used for sole-source  contracts; second, items are acquired commercially even when the  government is the predominant or only buyer; and third, the “commercial  item” definition is broad enough to admit items for which an efficient  market does not exist to ensure price reasonableness.
DOD’s Defense Procurement and Acquisition Policy Director recently  addressed the Acquisition Advisory Panel and identified concerns that  some acquisitions are being designated commercial that are not  commercial. The Director expressed his view that a commercial item is  one in which a marketplace exists, meaning the item has been sold to  commercial companies (not just DOD). The Director stated that if  someone is selling “to us (the government) and only to us, that’s not a  commercial price.” In addition, the Director testified that DOD intends to  create a tool, a decision matrix, that will enable contracting officials to  identify the right contracting mechanism after completing their market  research. The purpose is to have DOD and the military services use  commercial acquisition effectively and correctly, in a consistent way.
OSD guidance specifically states that commercial acquisition was not  intended to allow military-unique items to be purchased commercially.  Misclassification of items as commercial can leave the Air Force  vulnerable to accepting prices that are not the best value for the  department. When an item is designated as commercial, the Air Force  should be able to determine if the price is reasonable on the basis of prices  in the commercial market. If the Air Force designates an item as being  commercial when it is not readily available in the commercial market, this  limits its ability to assess the reasonableness of the contractor’s price  because it might, especially in sole-source situations, have less  information on prices to make its decision.
Restrictions on the use of commercial acquisition to procure military  unique major weapons systems were recently established in the Fiscal  Year 2006 DOD Authorization Act. The act requires that to use  commercial acquisition procedures for major weapon systems, the  Secretary of Defense must now (1) determine the procurement meets the  definition of “commercial item,” (2) determine that national security  objectives necessitate the purchase of the system as a commercial item,  and (3) give Congress at least 30 days notice before purchasing a major  acquisition program using commercial acquisition. To implement this  requirement, an interim Defense Federal Acquisition Regulation  Supplement (DFARS) rule is pending publication.  The Air Force intends  to implement the DFARS rule by requiring requests for Secretary of  Defense approval of major weapon systems to be purchased as  commercial items, include a description of the benefits associated with  increased competition, better prices, and new market entrants and/or  technologies.
When we discussed the purchase of major weapon systems using  commercial acquisition with top DOD officials, they informed us there are  plans to transition both the C-130J and the Joint Primary Aircraft Training  System (JPATS) contracts, as well as a future contract for F-16 fighter  aircraft simulator services, from commercial to noncommercial contracts.  Further, a top DOD acquisition official said that in the future DOD will  more carefully scrutinize the use of commercial acquisition, especially on  major acquisition programs.
Further, Air Force contracting officials have submitted proposals as cases  to the Defense Acquisition Regulation Council and the Civilian Agency  Acquisition Council seeking clarification of the definitions of “commercial  item” and “cost or pricing data” related to commercial acquisition. While  one case was closed, it highlights continued efforts to appropriately  classify items as commercial. For example, the Air Force proposed a  change to the DFARS, which was subsequently referred by Defense  Acquisition Regulation Council as a case for the Federal Acquisition  Regulation, to tighten the commercial item definition. The definition  found in federal regulation states in part: “commercial item means any  item, other than real property, that is of a type customarily used by the  general public.” In an attachment to the 2001 memo instituting the  commercial acquisition goals, OSD cautioned that the phrase “of a type” is  not intended to allow the use of commercial acquisition to acquire sole- source, military-unique items that are not closely related to items already  in the marketplace.
A second FAR case attempts to address confusion about what qualifies as  cost or pricing data in relation to commercial acquisition. The case, if  made final, will clarify that the government can ask contractors for cost or  pricing data, just not certified cost or pricing data.
section_title: Commercial Contract Awards Made in a Sole- Source Environment Can Increase Risk
paragraphs: OSD emphasis on increasing the use of commercial acquisition includes  guidance on limiting use of commercial acquisition for sole-source  procurements. This guidance advises contracting officials to avoid sole- source commercial acquisitions, in part because sometimes contractors  may attempt to exploit the lack of competition and demand unreasonable  prices. When such situations are unavoidable, OSD advocates use of other  price analysis tools outlined in federal regulation to mitigate risk.
The FAR provides that adequate price competition on contracts is  generally sufficient to determine price reasonableness. Adequate price  competition means (1) the government receiving at least two offers  submitted by responsible offerors, competing independently, that satisfy  the government requirement; (2) there was a reasonable expectation of  competition; or (3) a proposed price is clearly reasonable based on price  analysis. In the event price competition is not sufficient, the government  can seek additional information beginning with government and additional  sources other than the offeror, and last from the offeror if necessary.
There are circumstances when an acquisition, including one for  commercial items, can be awarded without competition. These include  instances in which (1) there is only one responsible source and there are  no other supplies or services that will satisfy agency requirements, such as  when a contractor has exclusive data rights and copyrights; (2) the  government has an unusual and compelling urgent need for a product or  service; or (3) the acquisition is required by statute or international  agreement. Such awards, for other than full and open competition must be  justified and approved in writing.
Despite guidance directing the Air Force to avoid sole-source situations,  from fiscal years 2000 through 2005, sole-source spending on Air Force  commercial acquisition contracts more than doubled. Specifically, sole- source dollars as a percentage of total commercial acquisition dollars for  awards over $5 million have increased from 12 percent in fiscal year 2000  to 26 percent in fiscal year 2005. This recent trend appears inconsistent  with OSD guidance to avoid sole-source commercial acquisition situations.
Our review found that of all 20 fiscal year 2004 commercial product  acquisition awards over $5 million, 10 of the Air Force’s were made on a  sole-source basis. Altogether, fiscal year 2004 obligations on the 20  contracts totaled $329 million. Obligations on the 10 sole-source awards  totaled $172 million, or 52 percent (additional observations from our  review of the 20 contracts are found in app. IV). Furthermore, at least one  of the expected benefits of commercial acquisition—attracting new  market entrants—has not materialized through the Air Force’s use of sole- source commercial acquisitions for products in fiscal year 2004.  Specifically, traditional defense contractors were used on 8 of the 10 fiscal  year 2004 sole-source product awards.
section_title: Conclusions
paragraphs: By establishing goals that only measure use and not the benefits expected,  the Air Force is unable to determine if it has benefited from increased use  of commercial acquisition. The benefits to the government of commercial  acquisition have not been demonstrated. Little evidence has been  collected on the claimed benefits such as cost savings, better pricing,  increased access to commercial vendors, and greater numbers of  commercial firms to compete for Air Force contracts.
Not only is it unclear whether commercial acquisition is bringing benefits  to the Air Force, the Air Force may be increasing risk without knowing if  the added risk is balanced by progress toward achieving benefits that may  have the potential to demonstrate considerable savings. While recognizing  that the Air Force may need to make some sole-source purchases using  commercial acquisition, the trend of increasing sole-source spending  appears contradictory to OSD guidance to limit situations where  contractors may attempt to exploit the lack of competitive markets and  demand unreasonable prices. When sole-source situations are necessary,  contracting officials should be able to identify the benefits of using  commercial acquisition for individual procurements that would otherwise  be unattainable.
section_title: Recommendations for Executive Action
paragraphs: To help ensure that the Air Force is able to measure the benefits expected  from commercial acquisition, we recommend collecting information that  would allow evaluating the extent of cost savings, increased access to  commercial markets, and greater access to nontraditional contractors. For  example, the Air Force could measure the number of nontraditional  contractors it reaches using commercial acquisition.
To help improve commercial acquisition and reduce the potential for risk  by limiting situations where commercial acquisition contracts are being  awarded sole-source, we also recommend that the Secretary of the Air  Force strive to limit the acquisition of commercial products and services  in sole-source environments in concert with OSD guidance. However, in  the cases where it is necessary to award sole-source, the Secretary should  collect the information necessary to evaluate the benefit(s) of awarding  commercial verses a noncommercial contract.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided written comments on a draft of this report.  DOD agreed  with the recommendations, in principle, and described the actions it will  take to address our recommendations.  The comments are discussed  below and are reprinted in appendix VII.
DOD partially agreed with our recommendation to measure the benefits  expected from commercial acquisition by collecting information to  evaluate the extent of cost savings, increased access to commercial  markets, and greater access to nontraditional contractors.  DOD stated  that it agrees in principle it would be worthwhile to know whether the  expected benefits from commercial acquisition are materializing and that  it will examine ways to collect information on the number of  nontraditional contractors it is reaching through commercial acquisition.   However, DOD noted that the collection of information for the expected  benefits would be expensive.  We believe DOD is taking the first step  necessary to evaluate whether it has benefited from the increased use of  commercial acquisition. We encourage such efforts, and would expect that  if DOD collects information on nontraditional contractors it reaches using  commercial acquisition and it is still unable to evaluate whether significant  benefits exist from using commercial acquisition, DOD will recognize the  need to collect additional information.
DOD’s comments included an attachment reflecting the Air Force views on  our draft report.  We incorporated those views where appropriate.
We will send copies of this report to the Secretary of Defense, the  Secretary of the Air Force, appropriate congressional committees, and  other interested parties. We will also make copies available to others on  request. In addition, this report will be available at no charge on GAO’s  Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-4841 or by e-mail at schinasik@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of the report. Other key contributors to this report were David E.  Cooper, Director, Penny Berrier Augustine, Assistant Director, Lily Chin,  Keith Hudson, Julia Kennon, Andrew Redd, Don Springman, Marie Ahearn,  and Robert Swierczek.
section_title: Appendix I: Scope and Methodology
paragraphs: To conduct our work, we reviewed federal acquisition and commercial  acquisition regulations, as well as the Office of Secretary of Defense  (OSD), Air Force, and Air Force Materiel Command (AFMC) guidance  pertaining to commercial acquisition. We also reviewed OSD and Air Force  commercial acquisition goals since 2001 as well as expected benefits and  risks associated with commercial acquisition. We met or held discussions  with representatives of OSD and the Air Force to discuss various aspects  of commercial acquisition including goals, progress toward achieving  goals, benefits expected, and associated risks. In addition we met with  Department of Defense (DOD) Inspector General officials to discuss audit  report findings related to commercial acquisition.
To understand the more recent determinations of commercial acquisition,  we reviewed all 20 large (over $5 million) Air Force commercial contracts  awarded for products in fiscal year 2004. We reviewed the contract files  associated with these contracts at locations of AFMC including (1) Wright- Patterson Air Force Base, Ohio; (2) Tinker Air Force Base, Oklahoma;   (3) Robins Air Force Base, Georgia; and (4) Hanscom Air Force Base,  Massachusetts. We also reviewed a commercial contract (including two  major modifications) for a major acquisition program called the Joint  Primary Aircraft Training System. We held discussions with contracting  officers and procurement management officials associated with the  selected contracts.
To examine the extent that Air Force commercial contracts were awarded  to new market entrants, we utilized data from DOD’s procurement  database (DD 350) for contract actions from fiscal year 1996 through fiscal  year 2004, which was the last full year of data available at the time we  performed our analysis. Query results were limited to contract actions  greater than $5 million, as the Federal Acquisition Regulation (FAR)  allowed actions below that threshold to employ simplified acquisition  procedures.
To determine the Air Force new market entrant contractors, we took the  contractors with contract actions in fiscal years 2003 and 2004 and  determined whether they had received any previous DOD military  department contracts from fiscal year 1996 through fiscal year 2002. We  considered contractors who had not received contracts during this period  new to DOD. We also examined Federal Supply/Service Class codes to  determine the nature of work performed by Air Force contractors.
To determine the extent to which the Air Force competed its commercial  contracts, we reviewed data the Air Force provided summarizing its sole- source commercial acquisitions from fiscal year 2000 through fiscal year  2005. We defined “sole-source” as those actions either not competed or not  available for competition, according to DOD classification codes. Again,  the data were for acquisitions over $5 million.
For our analysis of the use of commercial acquisition in Air Force major  acquisition programs, we included the Major Defense Acquisition  Programs listed on OSD’s Selected Acquisition Report summary tables for  fiscal years 2001 through 2005, except programs designated RDT&E  (Research, Development, Test, and Evaluation). We also included joint  programs from GAO’s 2006 Assessment of Selected Major Weapon  Programs for which the Air Force was mentioned as the lead buyer. We  queried the DD 350 database to determine commercial and total contract  obligations on these major acquisition programs over the period  constituting fiscal year 2004 through fiscal year 2005.
We conducted our review from July 2005 to September 2006 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Additional Benefits Expected from Using Commercial Acquisition
subsections: section_title: Expected Benefits to the Government
paragraphs: The government expected to benefit from the use of commercial  acquisition instead of noncommercial acquisition. Several of the benefits  expected include the government being able to  rely on the contractor’s quality assurance processes and warranties in lieu  of government inspections,   decrease the amount of time it normally takes to award a contract,    employ a streamlined contract clause structure, and    use simplified acquisition procedures on high dollar amount contracts in  certain circumstances.
section_title: Expected Benefits to Contractors
paragraphs: There are also several advantages to contractors of using commercial  acquisition when doing business with the government. Generally  contractors are    not required to submit cost or pricing data to the government,    not required to adhere to cost accounting standards on firm fixed-price    not required to disclose more technical data to the government than they  would customarily disclose to the public,   able to propose more than one product that will meet the government’s  need, and    able to submit existing product literature in lieu of unique technical  proposals.
section_title: Appendix III: Traditional and Nontraditional Air Force Contractor Analysis, Fiscal Years 1996-2004
paragraphs: To examine the extent that Air Force commercial contracts were awarded  to nontraditional contractors or new market entrants, we used data from  DOD’s procurement database (DD 350) for contract actions from fiscal  year 1996 through fiscal year 2004—the last full year of available data at  the time of analysis. Query results were limited to Air Force contract  actions greater than $5 million.
We identified 98 contractors who received commercial Air Force awards  in either fiscal year 2003 or fiscal year 2004. Forty-six of those 98  contractors also received large-dollar commercial awards in prior years  back through fiscal year 2000 or were included on DOD Top 100 or Air  Force Top 50 contractor lists. We considered them traditional contractors.  For the remaining 52 contractors who did not receive large-dollar awards  during that period (and who were not on DOD top 100 or Air Force top   50 contractor lists), we used DOD’s DD 350 procurement database to  determine if they had performed any contracts above $25,000 for the  Army, Navy, or Air Force military departments, from fiscal year 1996  through fiscal year 2002. Of the 52 contractors, 41 had received military  department awards during this period and were therefore considered  traditional contractors. We considered the 11 contractors who did not  perform military department contracts during this period to be new to  DOD. Table 1 lists the 87 total traditional contractors and the 11 new  contractors according to our analysis.
section_title: Appendix IV: Observations from Review of 20 Air Force Contracts Using Commercial Acquisition
paragraphs: We reviewed 20 larger Air Force commercial contracts awarded in fiscal  year 2004. We reviewed the contract files associated with these contracts  at locations of the Air Force Materiel Command including (1) Wright- Patterson Air Force Base, Ohio; (2) Tinker Air Force Base, Oklahoma;   (3) Robins Air Force Base, Georgia; and (4) Hanscom Air Force Base,  Massachusetts. We held discussions with contracting officers and  procurement management officials associated with most of the selected  contracts.
In three instances, parts for the C-5 military transport aircraft were  procured under a system in which contractors produced a prototype or  unique first article because these replacement parts did not already exist.  These first articles were then subject to successful testing before the  contractor was given approval to produce the remaining articles. As part  of each contract, the government paid for the manufacturers to construct  the unique first article and the various machine tooling they needed to  produce the articles.
In two other cases, there were internal Air Force disagreements regarding  determinations of commerciality. The items in question were C-130E and  C-130H aircraft procured by foreign governments from a sole-source  contractor, with the U.S. government (via the Air Force) acting as an  intermediary.
section_title: Appendix V: Use of Commercial Acquisition in Air Force Major Acquisition Programs
paragraphs: Overall, 9.5 percent ($2.6 billion) of all Air Force contract dollars to major  acquisitions were obligated under commercial acquisition from fiscal year  2004 through fiscal year 2005. We considered programs listed on OSD’s  Selected Acquisition Report summary tables from fiscal year 2001 through  fiscal year 2005 (except research and development programs) to be major  acquisition programs. We also included joint programs from GAO’s 2006  Defense Acquisitions: Assessments of Selected Major Weapon Programs  (GAO-06-391) for which the Air Force was listed as the lead buyer. We  found three major acquisitions with Air Force involvement for which  commercial actions constituted at least 75 percent of contract dollars  obligated, and these acquisitions are shaded in table 3. Excluding these  three acquisitions, commercial expenditures for the remaining 25 major  acquisition programs with Air Force involvement constituted less than 1  percent of total program dollars spent.
section_title: Appendix VI: Citations for Commissions, Legislation, and Panel Shown in Figure 1
paragraphs: 1972–Commission on Government Procurement—See Report of the  Commission on Government Procurement, Vol. 3, Pt. D, “Acquisition of  Commercial Products,” (Dec. 1972).  1984–Competition in Contracting Act of 1984—Pub. L. No. 98-369, Div. B,  Title VII.  1986–President’s Blue Ribbon Commission on Defense Management  (Packard Commission)—A Quest for Excellence: Final Report to the  President by the President’s Blue Ribbon Commission on Defense  Management (June 1986), 60-64.  1986–National Defense Authorization Act for Fiscal Year 1987—Pub. L. No.  99-661, Div. A, Title IV, Sec. 907(a) (1986).  1993–Advisory Panel on Streamlining and Codifying Acquisition Laws  (Sec. 800 Panel)–Established Pursuant to Section 800 of the National  Defense Authorization Act for Fiscal Year 1991, Pub. L. No. 101-510 (1990);  Streamlining Defense Acquisition Laws: Report of the Acquisition Law  Advisory Panel to the U.S. Congress, Intro. I-9 (1993).  1994–Federal Acquisition Streamlining Act—Pub. L. No. 103-355, Section  1202 and Title VIII (1994).  1996–Clinger-Cohen Act of 1996–Pub. L. No. 104-106, Div. D (1996),  formerly the Federal Acquisition Reform Act of 1996 and renamed in  Treasury, Postal Service and General Government Appropriations Act,  1997, contained in Omnibus Consolidated Appropriations Act, 1997, Pub.  L. No. 104-208, Section 808 (1996).  2003–Services Acquisition Reform Act of 2003—Pub. L. No. 108-136, Title  XIV, Section 1431, 1432 (2003).
section_title: Appendix VII: Comments from the Department of Defense