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significant cost factors in establishment and operation of procurement and distribution systems, techniques, and operational arrangements

• Restricting interagency directed sources of supply to those determined to be cost-effective or to be necessary in support of war readiness and other national interest requirements

• Providing for the financing of interagency support activities on an industrially funded basis, with cost of doing business included in charges to agencies, rather than by direct annual appropriations

• Establishing criteria for development of Federal specifications to achieve greater consideration of cost-benefit analysis, including the state-of-the-art, in commercial product development

• Requiring agencies to establish new programs for on-the-job training of procurement personnel in the development and use of cost-effective techniques and systems • Improving the system of gathering and disseminating procurement statistics so that Congress, the public, and the executive branch can readily determine what is being bought by the procuring agencies.

CHAPTER 2

The Marketplace

The commercial market encompasses the products and services provided to fulfill the needs and desires of Government institutions, the general public, and industrial users. In order to evaluate the effectiveness of Federal procurement, it is necessary to understand the scope of Government requirements for commercial products in relation to the total market and to recognize the differences between the business practices of the Government and those of the private sector.

In addition to background information on the Federal market, this chapter addresses problems encountered in analyzing procurement statistics by commodity and agency. It also outlines the types of systems used by the Government in the procurement and distribution of commercial products.

THE FEDERAL MARKET

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Most industries that produce commercial products sell a relatively small share of their total output to the Government. Of the 178 product groups representing industries that manufacture primary products 1 reported in the 1967 Census of Manufactures, 123 shipped two percent or less of their output to the Government. Of the remaining 55, only nine shipped more than 10 percent to the Government. Some significant product lines are shown in table 1. The Government also purchases commercial products from wholesalers. Of 250,556 wholesale establishments reporting $227.9 billion in sales by SIC group and class of customer in the 1967 Census of Business, the

1 By Standard Industrial Classifications (SIC).

overall average percentage of sales to the Government was 1.6 percent. Only six SIC groups showed sales to the Government amounting to more than three percent of total sales (table 2).

The legal principles involved in contracting with the Government are much the same as those governing contracts in the private sector. There must be a valid offer and acceptance, consideration, certainty of terms, and competent parties. Although the Government has the inherent power to enter into contracts, its agents must do so within the limitations of Federal laws and regulations. These laws differ from laws governing purely commercial contracts.

Government contracts are used extensively as a device for carrying out national programs and fulfilling social and economic goals established by statute, by Executive order, or by agency regulation. Thus the acceptance of a Government contract often obligates the supplier to considerably more than the delivery of the product or service ordered.

Government contracts differ from commercial contracts because of laws governing their financial aspects. Except when authorized by statute, contracts may not be made unless adequate funds have been appropriated and are available. Most appropriations are restricted to a single fiscal year, thus precluding multi-year contracts except under special statutory authority.

Although the Federal market is small relative to the total market for commercial products, it nevertheless represents the largest single concentration of purchasing power in the United States. Since the monies used to procure goods and services are public funds, the Government is accountable for its handling of

TABLE 1. PERCENTAGE OF INDUSTRY SHIPMENTS TO THE GOVERNMENT, 1967

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Source: Percentages calculated by the Commission from data in 1967 Census of Manufactures, Special Report, Distribution of Manufacturers' Shipments and Sales by Class of Customer, Department of Commerce, May 1971, table 1.

TABLE 2. PERCENTAGE OF SALES TO THE GOVERNMENT BY WHOLESALERS AMOUNTING TO MORE THAN THREE PERCENT OF TOTAL SALES

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Source: 1967 Census of Business, Wholesale Trade Sales by Class of Customer, Department of Commerce, Sept. 1970, table 1.

the funds. On the basis of past experience in Government procurement, an extensive and complex set of statutes and regulations designed to guarantee fair and equitable treatment of all parties has evolved.

Unlike the private sector, Government contracts must be in written form. The handshake, oral agreement, or other less formal methods of expressing agreement frequently used in the private sector are not binding in Government procurement.

The Government formally enters into a contract when the written agreement is signed by the Government's officially authorized agent, the contracting officer. It is important to note that a contracting officer cannot bind the Government if he exceeds the limit of his actual authority. His authority is prescribed by laws and regulations that all persons are presumed to know. Commercial suppliers not intimately

familiar with the special rules of the Federal market may find their claims for compensation for work done in connection with a contract, but not authorized by the contracting officer, entangled in administrative and legal complications.

The Federal market is comprised of two distinct sectors. The first consists of industries that supply sophisticated systems for the major defense and aerospace programs. The second is made up of industries that furnish commercial goods and services to Federal and non-Federal users.

The defense and aerospace market is dominated by a few large corporations or divisional operations that are primarily dependent on the Government market. This market is characterized by a few sellers and a single buyer. Sales generally result from negotiations, with price determined by cost analyses.

As a buyer of commercial products, the Government has little influence on industrial practices. Prices are established by competitive demand in the open market, not by cost analysis. However, the procedures used to sell to the Government and the degrees of risks assumed by sellers under Government contracts differ from standard commercial procedures and contracts.

The Government procurement process requires potential suppliers to develop an information base concerning Government needs and to respond to contractual solicitations in unique ways. These needs are expressed almost exclusively through specifications or purchase descriptions. Frequently, aggregate requirements for specific products or services may be consolidated for central procurement by a designated agency. Customer services or other assistance normally offered to users in the private sector are generally considered unnecessary by most Government buyers in the interest of securing the lowest possible price and of avoiding the appearance of favoritism.

PROCUREMENT STATISTICS

No single organization in the Government is responsible for collecting and reporting data on what the executive agencies buy or on the total value of their purchases. The public and Congress have a right to this type of information; with it the executive branch could improve procurement management.

Recommendation 1. Improve the system for collection and dissemination of statistics on procurement by commodity and agency to meet congressional, executive branch, and industry needs.

Each agency collects the procurement data it deems necessary for internal management and for submission of reports to the Office of Management and Budget (OMB) and Congress. Some activities, such as those in the Department of Defense (DOD) and the General Services Administration (GSA), compile and publish extensive data involving procurement transactions. Others publish little data; and some, none at all. The Federal Procurement

Regulations (FPR) prescribe the information to be reported to GSA by each civilian executive agency. GSA then issues a compilation of the data submitted by these agencies.3

Parties interested in the total procurement activity of the executive agencies generally add the figures reported by DOD with those compiled by GSA. This results in a figure that is large and impressive but incomplete and potentially misleading.

GSA data does not include all executive agencies, and many of the figures reported for specific agencies are incomplete. For example, it does not include procurements made by the Equal Employment Opportunity Commission (EEOC), the Federal Maritime Commission (FMC), or the U.S. Postal Service (USPS). The United States Tax Court is reported although it is part of the judicial branch.' In fiscal 1972, figures reported for the U.S. Department of Agriculture (USDA) totaled only $261 million although its procurement obligations would exceed $2.6 billion if the food acquired for sale or donation were included."

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Some agencies do not appear to realize they are required to report their procurements to GSA, or they interpret their specific authorizing legislation and the FPR as exempting them from reporting.

Data on the dollar value of purchases, what is bought, and who buys it are needed to develop an efficient, economical procurement system. Following are some reasons why the system for collecting and disseminating procurement statistics should be improved:

• Congress needs this basic information to make informed decisions on matters of broad public policy relating to procurement programs.

• The executive branch needs this information to determine the policies necessary for managing the procurement process.

• Interagency support activities require this

FPR 1-16.804.

U.S. General Services Administration, Office of Finance, Procurement by Civilian Executive Agencies, July 1, 1971-June 30, 1972. 4 The Tax Reform Act of 1969, Public Law 91-172, 83 Stat. 483, 26 U.S.C. 7441 (1970).

5 Note 3, supra.

Agricultural Trade Development and Assistance Act of 1954, ch. 469, 68 Stat. 454; 7 U.S.C. 1704 and 1721 (1970). See also Part A, Appendix D.

information to develop and improve the services they offer.

• Suppliers need this information to develop programs to serve the Federal market. Full information creates a more competitive marketplace and provides a more equal opportunity for individual suppliers to compete.

project grants. What one agency may purchase by contract, another may obtain by grant, especially a project grant. It is reasonable to assume that if a commonly accepted definition of procurement existed for all agencies, many project grants would fall within the definition of procurement and be reported.

Defining Procurement

Part of the problem lies in an understanding of what is meant by "procurement." For example, until recently the Veterans Administration did not classify the purchase of hospital or nursing home care for a veteran as procurement to be reported. Because there have been many changes in the methods of reporting to GSA, the data for agency participation and categories of procurement vary from year to year and cannot be used for comparative analysis over an extended period.

Civilian agencies do not report procurements made through the Government Printing Office (an agency of the legislative branch) or Federal Prison Industries, Inc. (a U.S. Government corporation). Defense activities normally do not report transactions paid for directly with nonappropriated funds. To the extent that nonappropriated fund activities obtain items from Federal supply operations financed by a revolving general-purpose stock fund, the total value of transactions reported includes procurements paid for with nonappropriated funds. In the case of commissary resale, the stock fund is essentially a nonappropriated fund activity, but it is capitalized by the Government.

DOD reports procurements made for foreign governments although the funds for these purchases are drawn from a trust account maintained by the Department of the Treasury in which foreign governments make deposits for this purpose. Transportation under Government bills of lading (GBL) and Government transportation requests (GTR) are special categories of procurement expressly excluded from the DOD and GSA reporting system.

It is estimated that Federal expenditures through grants and revenue sharing totaled more than $39 billion in fiscal 1972, exclusive of

U.S. Office of Management and Budget, Special Analyses of the

Procurement Classification

The lack of accurate or complete data makes it extremely difficult to estimate the total value of commercial products procured. Moreover, there is no commonly understood definition of a commercial product. Each agency has different management systems, with the result that no two systems report against the same data base. Very few activities report data in a manner that permits a valid analysis of the types and kinds of commercial products they are buying.

Both GSA and DOD compile extensive procurement statistics and provide breakdowns which make it possible to estimate their procurements of commercial products by commodity or product group. DOD, however, does not provide a commodity-group breakdown for military procurements of less than $10,000. There were 10.2 million of these actions during fiscal 1972 that, although amounting to only 10.1 percent of the dollars spent by DOD,* still totaled $3.9 billion.10 In this connection, DOD stated:

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Contracts and purchases below $10,000 each for which product and service information is not collected are excluded. In each of the Fiscal Years 1969 through 1972, these small transactions totaled from $3 to $4 billion. This exclusion tends to understate procurement of commercial type items and services more than military hard goods items which usually are bought in large dollar amounts. It is known, for example, that Subsistence (FS Group 89) is severely understated for

United States Government, Fiscal Year 1973, table P-9, Federal Aid to State and Local Governments, p. 254. For a discussion on grants, see Part F.

& Military Prime Contract Awards and Subcontract Payments Or Commitments, July 1971-June 1972, Sept. 1972, p. 38. (Figure rounded by the Commission.)

Calculated by the Commission.

10 Note 8, supra, p. 9. (Figure rounded by the Commission.)

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