tended use of the simplified procedures will reduce administrative costs. It would also enhance competition, particularly from small businesses, by simplifying solicitation documents.

The purchasing power of the dollar on the basis of wholesale prices declined about 20.4 percent from 1958 to 1971. If the decline of the dollar were the sole basis for changing the ceiling, the new level would be about $2,900, but this would not consider the increases in the costs of operating and managing the procurement function. The wages of purchasing personnel alone have increased by about 85 percent since 1958.5

Raising the ceiling for small purchase procedures to $10,000 would provide a potential for savings in administrative costs without significantly affecting the dollar percentage of formal advertising." GAO has estimated potential administrative savings by DOD of over $100 million annually, if contracts under $10,000 could be awarded under small purchase simplified procedures."

Raising the ceiling to more than $10,000 would provide very little additional administrative savings since there are relatively few actions over $10,000. On the other hand, a change to $5,000 or some other figure below $10,000 would reduce potential savings. Authority for the executive branch to adjust the threshold periodically, based on economic considerations, would improve total effectiveness and assure more orderly consideration of procurement costs.

Indefinite Quantity and Indefinite Delivery Contracts

Indefinite quantity contracts are used when the Government has a recurring need for an item or items within a commodity area but does not know precisely, or within a reasonable variation, the quantity or specific identity of its requirements for a specified period of time. Indefinite delivery contracts are used when the precise time of Government need is uncertain. This latter type includes fixed-quantity contracts that provide for an indefinite delivery time."

Indefinite quantity and indefinite delivery contracts are used for such items as tires, office supplies, food products, and furniture. An increase in negotiating authority to $10,000 would encourage greater use of this type of contracting for recurring requirements at field activities. The main advantages of these contracts are delay in passage of title until delivery of goods, price advantages of consolidated purchasing without incurring warehousing and distribution costs, and simplification of ordering by elimination of individual purchases. They have been recognized by GAO as techniques worthy of prime consideration in every small purchase procurement operation. 10 Many variations of this type of contracting are currently in use, but the most common are requirements contracts and multiple-award contracts.

'Calculated by the Commission from data in Statistical Abstract of the United States, 1972, table 557, p. 340.

Calculated by the Commission from Civil Service Commission Pay Rates of the General Schedule, 1958-1971. (Assumes GS-9, step 1.)

In fiscal 1972, DOD formally advertised military procurements of less than $10,000 amounted to $259.5 million. (See letter from Office of the Assistant Secretary of Defense (Installations and Logistics) to the Commission, Nov. 1, 1972.) When compared to the total DOD military procurement dollars and actions (Military Prime Contract Awards and Subcontract Payments or Commitments, July 1971-June 1972, OSD (Comptroller), pp. 48-49), this represents 0.7 percent of the dollars and 7.8 percent of the actions.

'Letter (B-160725) from the Assistant Comptroller General to the Commission, Nov. 30, 1972.

8 Department of Defense procurement actions between $10,000 and $25,000 were only 8/10 of 1 percent of the total number in fiscal 1972. (Letter from the Under Secretary of the Navy to the Commission, Nov. 10, 1972; percentage calculated by the Commission.)

REQUIREMENTS CONTRACTS

Requirements contracts generally provide more favorable prices than other types of term contracts since they give exclusive rights to one contractor during a specified time for all requirements generated within the scope of the contract. By guaranteeing all of an activity's business for a period of time, the solicitation is highly competitive although the precise quantities needed are not identified in advance. It also permits suppliers to adapt their produc

9 ASPR 3-409 and FPR 1-3.409.

10 U.S. Comptroller General, Report B-162394, Requirements Contracting and Other Aspects of Small Purchases in the Department of Defense, Feb. 5, 1969.

tion schedules to continuing requirements. Normally a requirements contract is for a list of items with estimated quantities that are used to determine total dollar value in making the award. Contracts generally are for a one-year period with funds obligated by separate delivery orders. The need for product identification, estimated quantities, and exclusive use are the major limitations of this type contract.

Requirements contracts are extremely effective for procuring commodities such as milk or bread. For perishables, the user generally is authorized to schedule deliveries directly with the vendor. Payment of monthly invoices is supported by delivery tickets. This type of contract is also used by central procurement offices for various supplies and services. These offices may authorize or require field activities to place calls under the contracts on a regional basis or on a national basis as in the case of Federal Supply Schedules.

Recent innovations at field activities have increased the potential for use of requirements contracts to provide total support for a function or activity. One concept is to contract for a family of products to support an operational function on an as-needed basis. Pricing is based on a discount from nationally distributed price lists. An example of this method is the Air Force Contractor Operated Parts Store (COPARS) where all requirements for support of a vehicle fleet are covered by contract prices discounted from manufacturer's list prices. Composition of the fleet identifies the requirement and establishes the scope.

Functional support contracts provide several advantages not previously available in one contract:

• Formal advertising can be used even for brand-name items or parts.

sequent contract period rather than under the pressure of filling individual priority requirements.

• Government stock can be eliminated or reduced to operating minimums since administrative leadtime is eliminated and the supplying contractor is able to anticipate a station's requirements on the basis of the scope of the function to be supported.

• A variety of product lines is available to the user.

• The system provides a tailored contract for support of a function or activity, with greater incentives for competition than would be provided by individual small purchases. This support may include related services such as operation of an issue station at the worksite.

• Since the Government does not take title to property until it is received for use, the problem of excess and surplus is practically eliminated.

• Delivery arrangements can provide for the user, such as a mechanic or workman, to communicate requirements orally to the supplier. This procedure simplifies ordering, reduces delivery time, and assures acceptance of proper products.

• With prices based on the nationally distributed price list in effect at the time of product acceptance, the business risks of the seller are reduced since he can operate on a margin without undue concern for unanticipated price increases.

Constraints to the use of functional support contracts include:

• Mandatory agency or interagency sources result in the exclusion of many standard fastmoving items from the contract. Total requirements thus may be reduced below economical contracting minimums. Administration of these exceptions requires a screening of all items.

• Supply procedures discourage innovation that does not include channeling supplies through an established Government delivery system.

The system drastically reduces the number of individual purchase actions that many

agencies use as a standard for manning and management.

• Some items within the range of supplies may be available only from large manufacturers, thereby limiting small business set-asides."

We reviewed a functional support contract operation of the Air Force Strategic Air Command (SAC) at Castle Air Force Base, Merced, California. A requirements contract was executed by the base procurement officer with a local building supply company for all real property maintenance requirements except for mandatory GSA/DSA items over $50 in value. The $50 exemption was granted by DOD for test purposes. The formally advertised contract was priced by discount from nationally distributed commercial catalogs with special provisions for a contractor's store at the base maintenance shop area. We observed the issuance of stores on hand directly to workmen, the documentation by delivery ticket, the ability to audit each transaction, and the elimination of the need for Government stocking.

Administrative costs in ordering, receiving, and auditing each purchase made under a functional support contract have been estimated by SAC to be $1.55.13 The convenience of the system probably increases the number of transactions, but even at double the number, the savings through reduction of individual small purchases and Government inventory are significant.

Since total cost to the Government for material received from GSA and DSA is unknown, it was impossible to compare delivered cost of material obtained from the interagency system versus that obtained under the supply contract. The Strategic Air Command (SAC) Civil Engineer projected work-force productivity savings for the 30 SAC bases of more than 1.5 percent of total work-force cost per year. The savings result from improved management of the work force.

11 FPR 1-1.701-1.

12 See landed cost studies in Chapter 6.

13 U.S. Strategic Air Command, Impact of COCESS on Base Procurement Small Purchase Actions, July 28, 1972.

14 Briefing on "Contractor Operated Civil Engineering Supply Store," given by Brig. Gen. Archie S. Mayes to Logistics Personnel, Headquarters USAF, at the Pentagon, Oct. 1971.

MULTIPLE-AWARD CONTRACTS

If variable quantity contracts cannot be made with a single contractor for lack of definite specifications or because of a desire to contract for several brands of merchandise, multipleaward contracts are used. Multiple-award contracts usually provide for a minimum and a maximum amount to be purchased, either to satisfy legal requirements or to establish a base for unit pricing. Within this range the contracts are basically indefinite quantity pricing agreements; they are negotiated and may be written with several companies by brand-name for the same type of item. This type contract is used most frequently by GSA (some Federal Supply Schedules), DSA (Supply Bulletins), and Air Force (Buy U.S. Here [BUSH]).

GSA negotiates regional and national multiple-award Federal Supply Schedule contracts for brand-name products, such as office equipment. These contracts provide a prepriced arrangement that field activities use by placing delivery orders with the lowest priced contractor for a product that fills their needs. Field activities indicate that the main benefit of these contracts is the convenience and simplicity of obtaining supplies and services from a local distributor or manufacturer's representative, including all the benefits of normal customer services such as warranty and delivery to the

user.

A controversial aspect of multiple-award Federal Supply Schedules is the "benchmark" method of price negotiation.15 Under this technique, GSA establishes a discount goal generally equivalent to the largest discount offered by a significant supplier for a given category of products. Other companies are advised they must meet this "benchmark" in order to be awarded a Federal Supply Schedule contract. Since the ordering convenience of these contracts provides potential sales and the contracts for a product line are generally mandatory, a company's position in the Government market may depend on being a Federal Supply Schedule contractor. GAO reviewed the practice and found that, since it produces better prices and the Government is not bound by trade laws,

15 General Services Administration, Federal Supply Service, "Benchmark Discount Policy" Technique Used in Negotiating Multiple-Award Federal Supply Schedule Contracts, Aug. 2, 1971.

the practice benefits the Government. Because of its exemption from the Robinson-Patman Act, 16 the Government can use the "benchmark discount" technique.

DSA Supply Bulletins are mandatory multiple-award contracts for brand-name food products that provide for delivery direct to resale commissary stores of DOD activities. These contracts contain a price clause that ensures prices as favorable as those of the supplier's customers with comparable sales. The mandatory nature of these contracts assures system orderliness, but it precludes consideration by station purchasing offices of alternative techniques that may be more cost-effective. Brands of products not covered by Supply Bulletins may be procured locally to meet consumer pref

erence.

The Overseas Support Systems section of this report discusses BUSH contracts. These contracts are negotiated by the Air Force for overseas use by all Federal agencies for procurement of products made in the United States from overseas outlets of U.S. companies. Their use is optional, and they often parallel GSA Federal Supply Schedules in product and price. A basic goal of BUSH contract negotiations is to obtain prices for overseas delivery by the contractor that are lower than the price to the Government for purchase and delivery in the continental United States, plus the cost of further overseas delivery through the Government distribution systems.

Operational Effectiveness

Recommendation 5. Encourage agencies to use headquarters procurement staff personnel in the conduct of on-the-job training of field procurement personnel to (a) implement techniques adapted to specific field activity needs and (b) identify possibilities for procurement innovation and transfusion.

The overall effectiveness of a procurement system depends on having the appropriate office make the purchase, on placing procurement functions at their proper level in an organization, and on having qualified personnel do

16 15 U.S.C. 13 (1970); 38 Ops. Att'y Gen. 539 (1936).

the purchasing. The competence of an agency's principal procurement staff in evaluating and developing operational systems also contributes greatly to the effectiveness of the total function.

STATION-LEVEL SUPPORT

The availability of commercial sources at the location where requirements are generated and work is performed provides major opportunities for economical purchasing. This requires consideration of such procurement techniques as leasing and service contracting. Consideration of alternatives also requires a reasonable degree of comparative cost analysis. This use must not be overly constrained by mandatory interagency requirements, and the procurement staff must be qualified and authorized to implement the results of the analysis. If a competent procurement staff is not readily available to choose among alternatives, there is a tendency for either the user or a functional manager to direct an arbitrary course of action. that may not be the most effective.

The comments of a laboratory technician at the Bureau of Mines were typical of the dilemma of many users. He gave the example of equipment needed for mineral analysis. The technician knew the purpose for which he needed the instrument, but could not precisely describe or identify it. Before submitting a purchase request, he spent several months surveying the market for equipment that could perform the required function. The local contracting officer formally advertised for the instrument on a brand-name or equal basis. This action, which resulted in only one acceptable bid, further delayed the procurement and increased the administrative cost to the Government. Adequate negotiation authority and coordinated effort between the technician and the local contracting officer in solicitation and negotiation, on a performance specification basis, would have filled the need in one operation. This example is typical of station-level operations where negotiation authority is limited to small purchases. By limiting fieldactivity authority, agencies provide for central procurement of high-value requirements, but field activities can usually procure sporadic

commercially available requirements more effectively than a higher level purchasing office.

Automated supply management and accountability are essential for weapon system support. Commercial product requirements and resources may not be compatible with highly automated systems because a full consideration of alternatives is not possible. At some stations, prescribed use of automated systems prevents the use of blanket-delivery orders against requirement contracts.

One of the most effective procurement organizations noted in the Commission field studies was that of the five State hospitals of the University of California. Each hospital has its own purchase authority and is responsible for a portion of the combined support of all five hospitals. The headquarters staff exercises policy guidance that uses total cost as the primary basis for selecting methods of support for each function. The results of product-line studies by each of the hospitals strongly favored requirements-type contracts for a product line. Each hospital is able to provide more effective technical and procurement support for its assigned product than could be provided by an outside activity. This is primarily due to a clearer understanding and better communication of needs within the activity. Additionally, each hospital procurement staff competes with the others in performing its procurement assignment.

Station-level procurement staffs can also improve overall effectiveness by coordinating their operations with those of other agencies in the local area. The extent of this coordination and cooperation among station procurement offices varies widely. We noted that most procurement offices lack knowledge about the activity of other Federal procurement offices in the same community. Greater effectiveness could result from consolidation of local purchase offices in an area where several Government activities use the same sources of supply and service.17

The effectiveness of field procurement offices varies widely among agencies and even within agencies. The disparity is attributed to complexities of items and services, organization of the procurement function, delegations

17 Study Group 5 (Organization and Personnel), Final Report, Feb. 1972, vol. I, pp. 409-431.

of authority, and qualifications of personnel. The most notable variation at the station level is in the use of procurement techniques. Some activities rely primarily on imprest funds and blanket purchase orders and others develop functional-support requirements contracts to reduce individual small purchases. Generally, there appears to be a lack of consideration of the varying administrative costs among differing procurement techniques. The ability of field procurement personnel to analyze total support requirements and to develop innovative and effective procurement systems is limited but can be enhanced by the agency's central procurement staff.

AGENCY-LEVEL SUPPORT

AND MANAGEMENT

Procurement activity at agency level includes staff responsibilities in managing the agency's total procurement program. Generally it also includes operational support for the agency's depots and for agencywide variable quantity contracts and direct delivery programs. Some agencies also provide special supply or service support to other Federal agencies.

The effectiveness and economy of the total agency logistic operation for commercial products depends on the staff's knowledge of user requirements and the degree of its participation in consideration of agency-level alternatives through total economic cost analyses. Agency-level procurement staffs are in an ideal position to monitor the effectiveness of various purchasing methods and distribution systems; they should be authorized to challenge costly requirements or uneconomical distribution systems. They also are able to exchange concepts and philosophies with their peers in Government and industry. Most importantly, they understand the needs of the people they serve. This spirit enables them to communicate effectively in making and promulgating agency procurement policy. The procurement staff at agency headquarters is also in an ideal position to evaluate use of mandatory sources of supply and other interagency procurement arrangements. To accomplish these things most effectively, agency-level staffs should include procurement specialists with stationlevel experience.