Contract Management: DLA Properly Implemented Best Value Contracting for Clothing and Textiles and Views the Supplier Base as Uncertain
Released: 2003-02-28T00:00:00

Letter

Background

DLA has three defense supply centers located in Philadelphia, Pennsylvania; Richmond, Virginia; and Columbus, Ohio. DSCP is the only center responsible for clothing and textiles, medical, subsistence, and general/industrial items.

According to the Federal Acquisition Regulation (FAR) Part 15, Contracting by Negotiation, an agency can obtain best value in negotiated procurements by using any one or a combination of source selection processes. In different types of procurements, the relative importance of cost or price may vary. For example, in procurements where the requirement is clearly defined and the risk of unsuccessful contract performance is minimal, cost or price may play a dominant role in source selection, such as in the lowest price/technically acceptable source selection process. In procurements where the requirement is not easily defined or the risk of unsuccessful contract performance is relatively high, technical capability and other factors such as past performance considerations may play a dominant role. In those procurements, it may be in the government’s best interest to consider award to other than the lowest priced or highest technically rated supplier and to evaluate the relative importance of other factors, including past performance, in a “tradeoff” process.

The FAR requires that past performance be evaluated in all source selections for negotiated competitive acquisitions expected to exceed $100,000, unless the contracting officer documents the reason past performance is not an appropriate evaluation factor. While DOD obtained a FAR deviation in 1999 that raised the threshold for requiring evaluation of past performance in procurements to those expected to exceed $5 million, DSCP’s “Best Value Handbook” requires past performance to be included as an evaluation factor for all negotiated competitive acquisitions exceeding $100,000.

DSCP Generally Followed Best Value Guidance and Has Taken Actions to Promote Compliance

Based on our random sample, we estimate that procurements conducted by DSCP in fiscal year 2001 generally complied with best value statutes and regulations with an emphasis on past performance, as implemented in major provisions of the FAR as well as DLA’s implementing acquisition directive. These criteria pertain to four functional areas of the contracting process: acquisition planning, solicitation content, proposal evaluation, and source selection decision documentation. DSCP has been proactive in taking steps to encourage contracting officers to comply with best value guidance.

DSCP Generally Followed Best Value Statutory and Regulatory Guidance

Of the 15 procurements in our sample, 12 were based on a tradeoff source selection process that considered factors other than price and technical acceptability, while 3 were based on the lowest price/technically acceptable source selection process. We found that the 15 procurements adequately addressed past performance based on FAR and DLA criteria. For each procurement based on a tradeoff process, past performance was the first or second evaluation factor in order of importance. For procurements based on the lowest price, the contracting officers considered past performance in general terms as part of the determination of the contractors’ eligibility for award.

All 15 of the procurements in our sample were required to have written acquisition plans under DLA’s acquisition directive implementing the FAR. Thirteen procurements had written acquisition plans, while 2 procurements awarded using simplified acquisition procedures under a test program for acquisitions of certain commercial items did not. A DSCP policy memorandum, dated August 21, 2002, reminded buyers and contracting officers of the need to prepare written acquisition plans for contract actions expected to exceed the simplified acquisition threshold, as the procurements here did. However, this memorandum was issued after the procurements included in our review had been completed.

The 12 procurements that were based on a tradeoff source selection process were subject to further requirements pertaining to solicitation content, proposal evaluations, and source selection decisions. Despite overall compliance with major regulatory provisions of the FAR, we found some cases where specific requirements were not met. However, mitigating circumstances lessened the effect of the lack of compliance. The results of our evaluation in each functional area are presented on the following pages.

The 12 procurements in our sample that were based on a tradeoff source selection process generally complied with the solicitation content criteria. Five solicitations, however, did not authorize prospective suppliers to provide information on problems encountered on prior contracts and corrective actions taken. Nevertheless, in these five solicitations, some suppliers identified problems and corrective actions taken, while others did not report any problems on their prior contracts. DSCP officials noted that offerors generally submit this information with their proposals even when it is not specifically authorized in the solicitation.

In addition, the solicitations for 7 of the 12 procurements that were based on a tradeoff process did not describe DLA’s approach for evaluating past performance of offerors with no relevant past performance history. The solicitations should have provided that a “neutral” rating be assigned to such offerors. The effect of not describing a neutral rating in the solicitation was mitigated in most of these cases, however. In two cases, DSCP officials did apply neutral ratings when evaluating the proposals.

In four cases, neutral ratings generally were not an issue in the evaluation of past performance, because nearly all offerors provided relevant past performance information in their proposals. In one case, where simplified acquisition procedures were used based on a tradeoff analysis, the contracting officer assigned unacceptable ratings to the proposals with no past performance history because they did not provide other information required by the solicitation.

On March 1, 2002, DSCP implemented a new proposal rating system to be used in evaluating clothing and textile best value acquisitions. It includes notice to offerors that a neutral rating will be assigned to an offeror with no relevant past performance. DSCP officials expect that all future solicitations will properly cite the neutral rating approach for offerors lacking relevant past performance history.

The 12 procurements that were based on a tradeoff source selection process generally complied with FAR requirements on proposal evaluations. For one of the procurements, however, DSCP did not evaluate and assess past performance on all of the factors and subfactors found in the solicitation. For that procurement, while the solicitation listed customer satisfaction as a subfactor, this subfactor was not considered when the proposals were evaluated. In addition, a commercial item procurement, conducted under the FAR simplified acquisition test program, did not evaluate past performance as discussed in the solicitation. While the solicitation stated that performance on prior contracts in subcontracting and assisting small businesses would be evaluated as a part of past performance, the evaluation of proposals did not consider these factors. Because these instances involved lower evaluation subfactors in the overall evaluation scheme, it is unclear whether the evaluation of these factors would have ultimately affected the source selection decisions.

The 12 procurements that were based on a tradeoff source selection process complied with the FAR in documenting the source selection decision. For example, a comparative analysis was made of the potential suppliers, as appropriate. DSCP has taken further steps to document the basis of source selection decisions by conducting training for its contracting personnel on the need to thoroughly document all factors considered in making final awards in the source selection decision document.

DSCP Has Employed Techniques to Promote Compliance

A recent DLA review of DSCP procurements found that the center is doing a good job of documenting best value tradeoff decisions in the files. DSCP has employed several techniques to promote compliance with best value contracting procedures. It has provided specific guidance on best value contracting, and a contract support group provides advice and review as procurements are planned and executed.

First, to provide its contracting personnel with detailed procedures for competitive negotiated procurements, DSCP developed and published in 1996 its own Guiding Principles for Best Value Source Selection, known as the “Best Value Handbook.” The handbook outlines the functions and responsibilities of key personnel in the best value source selection process as well as various approaches to source selection that are available for use. As stated in the handbook, best value is the preferred method of source selection and should be used to the maximum extent possible.

While other supply centers have issued policy guidance to implement the FAR as well as DOD directives, a DLA official said that DSCP is the only DLA center that has developed a handbook on best value contracting.

Second, like all the Directorates at DSCP, the Directorate of Clothing and Textiles has its own contract support team. Headed by a supervisory procurement analyst, the team consists of five procurement analysts, a contract price/cost analyst, an industrial specialist, and a procurement technician. The team supports the Directorate by providing contracting guidance and direction, developing procurement policies and procedures, and developing and administering procurement training. For example, a training program for contracting personnel emphasizes the need to thoroughly document all factors considered in making the final award. The team also encourages the Directorate to use past performance as an evaluation factor for all purchases over $100,000.

Further, DLA’s procurement management review program is designed to provide local, periodic, and specific subject/area reviews of the agency’s contracting offices by an independent and objective team of contracting professionals from the headquarters and field contracting staff. In April 2002, a DLA team reviewed DSCP’s Directorate of Clothing and Textiles procurements. The DLA team found the Directorate had substantially improved its documentation of tradeoff decisions related to best value source selection in the contract files. The best value tradeoff decisions documented in the files were characterized by the DLA team as among the best that the team had seen in the entire agency.

DLA Views Clothing and Textile Supplier Base as Uncertain

DLA officials view the future of the clothing and textile supplier base as uncertain. They noted that the Berry Amendment, which requires DOD to purchase certain items such as food, clothing, and textiles from domestic sources, helps maintain a domestic supplier base to meet some of DOD’s unique military requirements. They also stated that competition for DOD’s clothing and textile contracts has never been stronger, as clothing and textile companies that have traditionally not done business with DOD are now competing for DLA contracts. In fact, they informed us that some U.S. companies produce items only for DOD. However, they stated that this increase in competition among domestic suppliers is the “last gasp of a dying industry.” An increasing number of domestic suppliers are competing for DSCP’s clothing and textile contracts for a variety of reasons as the industry copes with a decline in employment and production, consolidations and bankruptcies, increased imports, and domestic suppliers moving overseas. If an item cannot be acquired from a domestic supplier, DLA can obtain a waiver from the Berry Amendment, allowing it to purchase the item from a foreign supplier. To better understand the future of the clothing and textile supplier base and to identify potential solutions to keep the industry viable, DSCP has initiated an industrial base study on the health of the clothing and textile industry.

Over the past few years, various free trade agreements have been implemented that have affected the clothing and textile supplier base. DSCP officials said that a further complication to the outlook for the clothing and textile supplier base is a World Trade Organization agreement that will eliminate quotas for many imported clothing and textile items by January 1, 2005. According to DSCP officials, the implementation of free trade agreements and the removal of the quotas may threaten second- and third-tier suppliers. For example, they stated that one U.S. company supplies wool fabrics to many domestic companies, including contractors that make coats for the military services. However, other U.S. companies are purchasing inexpensive wool fabrics imported from foreign countries, thus competing with the U.S. supplier. Because this U.S. supplier is losing business to foreign competitors, it may not have enough business to keep its factories operating. According to DSCP officials, if the supplier cannot keep its factories operating, it may eventually go out of business and those contractors that make coats for the military services will not have the company as a domestic supplier of wool.

In response to the World Trade Organization agreement, DSCP has initiated an industrial base study of the domestic clothing and textile industry to determine what will happen when quotas are removed at the beginning of 2005. The study’s preliminary findings support DSCP’s concern about the overall health of the U.S. supplier base for clothing and textile products. For example, DSCP has found that an increasing number of DSCP contractors are totally dependent on government work. Further, DSCP found that about 300 U.S. textile mills, which performed weaving and finishing and supplied yarn, closed from 1995 to 2001. DSCP is exploring whether the Berry Amendment will be sufficient to protect the domestic industrial base or whether there are other possible solutions to keep the industry viable and support readiness.

In those situations that involve critical military clothing and textile items, DSCP officials said that DLA, in the future, could strengthen the supplier base by increasingly providing contracts to a number of suppliers for national defense purposes to achieve industrial mobilization. For example, in fiscal year 2002, two industrial mobilization contracts were awarded at a cumulative value of $2.7 million for cold-weather underclothing.

DLA provides input to DOD’s Annual Industrial Capabilities Report, which is to be submitted to the Congress by March 1 of each year. Section 2504 of title 10, U.S. Code, requires the report to include, among other things, a description of the methods and analyses being undertaken by DOD to identify and address concerns regarding technological and industrial capabilities of the national technology and industrial base. DLA’s input generally focuses on specific items that are being procured. However, a DLA official told us that it would be possible to include a discussion of the clothing and textile industrial base if the situation warranted. Ultimately, the official said that it is up to DOD as to whether such information will be presented in the final report submitted to the Congress.

Recommendation for Executive Action

We recommend that the Secretary of Defense require the DLA Director to monitor the health of the clothing and textile industrial base and, if warranted, keep the Congress informed of the implications for future defense clothing and textile procurements. One means of informing the Congress may be DOD’s Annual Industrial Capabilities Report, which is submitted annually to the Congress.

Agency Comments and Our Evaluation

DOD provided written comments on a draft of this report. DOD generally agreed with the draft report and concurred with the recommendation. DOD stated that DLA will include the health of the clothing and textile industrial base as a topic in the next DOD Annual Industrial Capabilities Report, which is due March 1, 2004. DOD’s comments appear in appendix III.

We are sending copies of this report to interested congressional committees, the Secretary of Defense, and the Director, DLA. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov.

Please contact me at (202) 512-4841 if you have questions regarding this letter. An additional contact and staff acknowledgements are listed in appendix IV.

Appendix I: Scope and Methodology

To determine whether the Defense Logistics Agency’s (DLA) Defense Supply Center Philadelphia (DSCP) Directorate of Clothing and Textiles complied with selected statutory and regulatory guidance for best value contracting, including the use of past performance as an evaluation factor, we took a random sample of 15 of the 142 competed clothing and textile procurements in fiscal year 2001, each exceeding $100,000. Our sample size was based upon the assumption that the incidence of problems in source selection competition procedures would be 10 percent or less. This assumption gives a 95 percent confidence interval for the sample estimate that is accurate to within plus or minus 15 percent. The assumption of a low incidence of problems was accepted because DLA had just conducted a management review of DSCP prior to the start of fiscal year 2001 and found few problems.

Of the 15 procurements selected for our sample, 12 involved a tradeoff source selection process comparing price and other factors using criteria found in the Federal Acquisition Regulation (FAR) Part 15, Contracting by Negotiation or FAR Part 13, Simplified Acquisition Procedures—Test Program for Certain Commercial Items, for purchases of commercial items exceeding the simplified acquisition threshold but not exceeding $5 million. In addition, 3 were awarded based on a lowest price/technically acceptable source selection process using criteria found in (1) FAR Part 12, Acquisition of Commercial Items, (2) FAR Part 13, Simplified Acquisition Procedures—Test Program for Certain Commercial Items, or (3) FAR Part 15.

To assess whether DLA properly implemented statutory and regulatory guidance for best value purchases, we reviewed FAR Part 7, Acquisition Planning; FAR Part 12; FAR Part 13; FAR Part 15; and the Defense Logistics Acquisition Directive. We identified and applied major provisions of the FAR and the DLA acquisition directive pertaining to acquisition planning, solicitation content, proposal evaluation, and source selection decision documentation, with a focus on past performance. Finally, we reviewed DSCP’s 1996 Guiding Principles for Best Value Source Selection, known as the “Best Value Handbook.”

To obtain DLA’s views on the domestic supplier base for clothing and textiles, we contacted DLA officials from DSCP. We also spoke with officials from the American Apparel and Footwear Association to obtain a general understanding of the industry. We did not independently verify the information the officials provided to us. During our review, DSCP was conducting a clothing and textile study of the industrial base and officials provided us with documentation dealing with the supplier base. This study has not yet been completed. In addition, we gathered information on DOD’s Annual Industrial Capabilities Report submitted to the Congress by March 1 of each year.

We performed our work from August 2002 to January 2003 in accordance with generally accepted government auditing standards.

Appendix II: Sample of Clothing and Textile Procurements

The table below lists the procurements included in our sample. Dollar amounts shown for the improved physical fitness uniform pants and sound protector procurements represent actual obligations placed against the contracts in fiscal year 2001. Dollar amounts shown for the remaining procurements represent estimated contract values, including the basic contract period and all option periods.

Appendix III: Comments from the Department of Defense

Appendix IV: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

In addition to the name above, Robert L. Ackley, Marie P. Ahearn, Carl S. Barden, Charles D. Groves, John D. Heere, and William E. Petrick, Jr. made key contributions to this report.