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CHAPTER 4

Acquisition

This chapter presents the results of our studies of the various procurement systems and methods as they interrelate to produce the most economical and efficient acquisition of commercial products. We believe improvements in work-force productivity, with reductions in personnel and other operating costs, can be achieved through a more effective evaluation and selection of alternative systems of procurement and distribution.

Many of the Commission's recommendations affect a broad range of procurement. For example, our recommendation in Part A, Chapter 3, to raise the small purchase limitation to $10,000 is particularly applicable to commercial products. Similarly, the need for a welltrained, effective procurement work force, as discussed in Part A, Chapter 5, is as necessary to the acquisition of commercial products as it is to other goods and services.

The chapter concludes with an analysis of the use of Federal sources of supply by grantees and other non-Federal agencies.

associations indicate concern over the complexity of procurement. Much of the criticism is directed at the sheer bulk of paperwork and procedural detail associated with Government procurement. Many small businessmen said that they do not seek Government business because they are afraid of missing some costly detail in the mass of paperwork.

Through the years, complexities slowly have been built into the procurement system. Many of the standard forms used in solicitation contain provisions expressly applicable to a range of purchases, but since they include all conceivable variables, they have become unduly complicated. For example, several food industry representatives noted that USDA's largevolume purchase bids contain fewer pages and are awarded faster than those of DSA. USDA and DSA endeavor to simplify their bid packages by incorporating standard provisions by reference. The most obvious difference is that USDA uses a letter form of solicitation that presents the procurement in a business-like package, while DSA uses a standard form that looks complicated and formidable because it covers every type of contract. Also, USDA's use of a computer to evaluate bids makes award within a few days standard practice.

PROCUREMENT METHODS AND OPERATIONAL EFFECTIVENESS

Small Purchases

Both ASPR and FPR outline several methods for the procurement of supplies and services, including indefinite delivery contracts and several small purchase procedures. When used with various pricing techniques and delivery systems, these alternatives provide extensive choices in tailoring contracts to respond to differing needs and conditions.

The results of Commission field visits, public meetings, and correspondence from industry

The value of Government purchases ranges from a few cents to several million dollars; however, most purchases are small. In fiscal 1972, 98.2 percent of DOD purchases were for less than $10,000. The percentages of pur

1 Military Prime Contract Awards and Subcontract Payments and Commitments. July 1971-June 1972, Sept. 1972, p. 38.

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chases under $10,000 in the civilian agencies are probably comparable, except for special activities such as the USDA food programs, but data to verify this could not be obtained.

The Armed Services Procurement Act of 1947 and the Federal Property and Administrative Services Act of 1949 both make exceptions to formal advertising for purchases under $1,000. This ceiling was raised to $2,500 in 1958 by legislation ? that established the basis for considering all Federal purchases of less than $2,500 as small purchases. ASPR and FPR prescribe simplified procedures for small purchases. In Part A, Chapter 3, we recommend that the statutory ceiling on procurements for which simplified procedures are authorized be raised to $10,000. This recommendation has special relevance to commercial products since they account for the greatest number of purchases under $10,000.

Small purchases can be made through imprest funds, blanket purchase agreements, purchase orders, or basic ordering agreements.? All small purchase techniques involve individual requisitioning, solicitation, price analysis, ordering, delivery, acceptance, and (except for blanket purchase orders) payment.

Figure 1 shows the proportion of purchases under $2,500 by the military departments, interagency depots, and the Veterans Administration (VA). The data reveals that the VA Marketing Center has the lowest percentage of small purchases. This is due to VA's policy of limiting depot stock to high-volume items. The most significant element of the chart is the high percentage of small purchases made by the other central agencies to satisfy individual field requirements, and of slow turnover items of low value. It raises the question of why so many centrally managed small purchases are necessary.

Recurring requirements for specific items or within a family of items (such as plumbing or electrical supplies used in maintenance) account for a major portion of small purchases. Difficulties in forecasting cumulative requirements for economical stock purchases or in

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establishing definitive call contracts generally result in satisfying each requirement as it occurs. The requirements of formal advertising for purchases over $2,500 inhibit the consolidation of individual purchases.

The $2,500 statutory ceiling on the use of small purchase procedures is regarded as unrealistic by virtually every agency and procuring activity. The most vocal critics are field activities that are limited in negotiation authority to the small purchase exception.

Comments from agencies and field activities indicate that if the ceiling were raised to an amount generally identified as $10,000, the Government would achieve large administrative savings. The arguments for this increase are that the value of the dollar has declined since the ceiling was established and that ex

? Public Law 85–800, 72 Stat. 966, 41 U.S.C. 252, 10 U.S.C. 2304 (1970).

'FPR 1-3.6; ASPR 3-600. Individual orders against indefinite quantity contracts also are considered to be small purchases, although the basic contract may have resulted from formal advertising,

Indefinite Quantity and Indefinite Delivery Contracts

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 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. Many variations of this type of contracting are currently in use, but the most common are requirements contracts and multiple-award contracts.

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 production 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.

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 l'ay 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.

* 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.)

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. 6. 1969.

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. • Individually negotiated purchases are drastically reduced, with a corresponding saving in administrative time and paperwork for industry and the Government. • The processing of emergency transactions is eliminated since any requirement within the family of items on the contract is already prepriced. Only a phone call is required to effect delivery. • Price analysis is more effective since it is performed on a total support basis for a sub

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 MULTIPLE-AWARD CONTRACTS

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. 14 The savings result from improved management of the work force.

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,

11 FPR 1-1.701-1.
12 See landed cost studies in Chapter 6.

11 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. Meyes to Logistics Personnel, Headquarters USAF, at the Pentagon, Oct. 1971.

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

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