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CHAPTER 1

Introduction and Summary of Recommendations

The procurement of commercial products involves all levels of the Federal Government and comprises the greatest arena of procurement interaction between the public and private sectors of the economy. The volume of day-to-day transactions, in and out of Government, affects the lives of nearly everyone in the United States.

For purposes of this study, commercial products include:

• Equipment, materials, supplies, parts, components, and accessories produced and sold to the general public directly or through an established commercial distribution system • Products generally equivalent to those offered to the general public but modified to meet Federal and military specifications • Combinations of products having one or more elements that require special ordering but not special design or significant research and development • Products or services of utilities, transportation systems, communications media, and other regulated industries serving the general public • Products of Federally supported or operated industries, such as blind-made products and Federal Prison Industries, Inc. • Services specifically related to the products outlined above, including maintenance, operation, lease, and housekeeping services.

Commercial products acquisition represents a major portion of the nearly $57.5 billion spent on Federal procurement during fiscal 1972. The magnitude of procurement of commercial products required a study approach that concentrated on the areas of greatest potential improvement. The basic purpose of acquiring

commercial products is to satisfy user needs. Therefore, the study was structured to sample user opinion in order to determine the current and potential effectiveness of the commercial product procurement and distribution system. Management opinion was also solicited in the field, at central supply activities, and at agency headquarters. In addition to visits made to Government and industry activities and an extensive review of prior studies and other available data, 12 public meetings were held to allow all interested parties to submit their views. The basic data and findings from this extensive study effort form the basis for this part.

The study findings reveal many opportunities for improvement. The conclusions and recommendations indicate the need for a shift in fundamental philosophy relative to commercial product procurement and for the establishment of a continuous oversight function to review agency policies and procedures. Part A deals with the oversight function and recommends the establishment of an Office of Federal Procurement Policy. The fundamental change in policy involves a shift to one of considering total economic cost or landed cost in reaching decisions concerning the procurement and distribution of commercial products. Under current procurement and supply policy, undue emphasis is placed on purchase price. This has resulted in inadequate consideration of administrative, distribution, and user costs in the total cost of providing a product or service.

The recommendations in this part provide the means for implementing the policy of basing decisions on a consideration of total economic cost. They include:

• Providing for appropriate consideration of 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.

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

THE FEDERAL MARKET

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).

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

SIC

20

21

3.5

2.0

1.5

Shipments to the Product line classification

Government (90) Food and kindred products

1.9 Tobacco manufactures Textile mill products Lumber and wood products Furniture and fixtures Paper and allied products Chemicals and allied products Petroleum and coal products Rubber and misc. plastics products Leather and leather goods Stone, clay, and glass products Primary metal industries Fabricated metal products

3.2 Machinery except electrical

3.4 Electrical machinery and supplies

14.0 Transportation equipment

28.2 Instruments

11.1 Miscellaneous manufacturing

39

2.0 Source: Percentages calculated by the Commission from data in 1967 Census of Manufactures, Special Report, Distribution of Mannfacturers' 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

SIC

Sales to the Product line

code

Government (90) Dairy products

5043

7.8 Electronic parts and equipment

5065

5.7 Transportation equipment (excluding motor vehicles)

5088 Printing and writing (fine) paper

5096 Commercial machines and equipment

5081

3.3 Amusement and sporting goods

5099 Source: 1967 Census of Business. Wholesale Trade Sales by Class of Customer, Department of Commerce, Sept. 1970, table 1.

4.7

3.3

3.1

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.

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