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Alternatives

Various types of service contracts are used throughout the Government to fulfill the needs of an agency or user. They include contracts for technical service, housekeeping, and maintenance or operation of equipment and facilities. Service contracts frequently eliminate the need for separate procurement of related supplies. For example, a contract for complete janitorial services eliminates the need for Government procurement of janitorial supplies. Service contracts can be written to provide for Government-furnished supplies or for the contractor to provide all or a part of the supply requirements. Decisions regarding the type of items to be furnished by the Government should be based on cost, availability, and responsibility for the end result. Obviously the total cost of supplies in the Government distribution system should be known in order to make effective decisions on the items of supply that will be furnished by the Government and those the contractor can furnish most economically.

Despite widespread use of service contracts throughout the Government, there is a lack of orderly consideration of alternatives. This is caused by limitations in the use of funds, mandatory sources of supply and service, and inadequate consideration of the real costs of the method used.

The number and complexity of problems in service contracting reported by using activities and industry were relatively small in comparison to those surrounding purchasing and maintaining supplies and equipment. The flexibility provided in the FPR and ASPR enables the agencies to resolve their problems internally. This adaptability is attributable to the need for having the contracting accomplished as close as possible to the place of performance. The only problems brought to the attention of the Commission by the field activities were mandatory use of regionwide service contracts that precluded field activities from obtaining better terms for their own requirements. Many of the areawide service contracts also are on a time and material basis which requires additional field activity effort to account for the services and supplies involved.

Leasing is sometimes an economical alter

native to outright purchase of equipment. Leasing is used extensively in the acquisition of computer capability, but the potential for savings via lease of heavy equipment and tools for short-term use has not been realized. In the construction equipment field, for example, operators obtain the lowest cost per equipment hour by renting or leasing the newest, most modern equipment from a local distributor for a short duration (time of need). Additional factors favoring leasing include:

• Parts and repair remain the responsibility of the local distributor.

• Equipment need not be moved long distances from one jobsite to another at great expense.

• The newest, most modern piece of equipment, designed to do specific jobs, is always available. The Government is not forced to use obsolete, oversized, or undersized equipment on projects because it is in stock.

• Local distributors maintain servicing facilities with trained specialists.

• Government funds normally earmarked for equipment purchase can be used for other purposes.

Conclusions

The choice of distribution systems or combinations of systems has a direct effect on the economy and efficiency of fulfilling user requirements.

Total costs are not considered in the establishment and operation of Government distribution systems and alternatives.

Industrial funding of interagency support activities would provide the cost visibility needed to optimize selection of procurement and distribution methods.

Service contracts and leasing offer substantial advantages in satisfying particular user requirements.

OVERSEAS SUPPORT SYSTEMS

Review of the economy and efficiency in

supporting Federal activities located overseas is of extreme importance in view of the scope of requirements, balance of payments, and other national objectives.

Recommendation 7. Require that consideration be given to the direct procurement of products made in the United States from sources available to overseas activities when such sources are cost-effective.

In fiscal 1972, DOD spent $2 billion for supplies and services outside the United States.24 Since DOD is the largest Government buyer and user of commercial products overseas, this section primarily deals with its procurement support systems and the Air Force Buy U.S. Here (BUSH) contract program that is available overseas to all Federal agencies.

Government activities overseas obtain or procure commercial products from a number of sources. The major sources are DSA and FSS. Each military department also operates a worldwide logistics network to provide supplies and services to its overseas units. They also have a number of overseas purchasing offices that provide direct support to the agency and other overseas Government activities. These offices range in size and dollar volume from a small office in an embassy, to a Navy ship operating in foreign waters, to large military buying centers in the Pacific or European Theater. Almost all military bases have local procurement offices which buy products and services in a similar manner to those in the continental United States.

Primary differences in procedures relate to consideration of Status of Force Agreements between the United States and host countries, customs requirements, and special operational considerations (such as differences in electric power and use of the metric system). Maintenance requirements for host country acquired facilities and equipment necessitate procurement of foreign-made parts and material. All overseas procurement is negotiated,25 and small purchase procedures generally are used up to $5,000. The most restrictive requirement in overseas procurement is the need for a balance-of-payments determination on

24 Military Prime Contract Awards, July 1971-June 1972, p. 44. (Figure rounded by the Commission.) 25 10 U.S.C. 2304 (a) (6) (1970).

all purchases of foreign-made products of $500

or more.

Facility maintenance and housekeeping services are procured at many overseas locations. Functions that may be included in these contracts are operation, maintenance, and repair of base or engineer facilities, food services operations, motor pool and motor vehicle maintenance, generator overhaul, operation of laundry and dry cleaning plants, and office. machine repair. These contracts involve a large amount of funds and play a vital role in support of overseas installations. Primary factors that determine whether these services will be performed in-house or by contract are economic considerations and Government-toGovernment agreements. For example, basemaintenance contracts for support of two U.S. Air Force bases in Greenland are awarded to Danish firms by the U.S. Air Force Europe (USAFE) Procurement Office, Copenhagen, Denmark. These contracts are based in part on economic factors and in part on Government-to-Government agreements.26

DOD Overseas Direct Delivery Contract Program

The U.S. Air Force operates the BUSH program for commercial products used by DOD and other Government activities overseas. Negotiation techniques used in this program were previously discussed under Indefinite Delivery and Indefinite Quantity Contracts. The program is intended to increase purchase by overseas activities of products made in the United States, thereby improving the U.S. international balance of payments (gold flow). Availability of contracts for U.S.-made items makes the use of these items preferable to the purchase of foreign-made items. Whenever possible, the contracts provide for payment to the parent U.S. company to minimize balance of payments loss.

Basic criteria for BUSH contracts are purchase of products from U.S. companies that have overseas distribution systems, or from

28 U.S. Air Force, Europe, Director of Procurement and Production, Europe Procurement Brochure, Oct. 1, 1966.

their distributors or subsidiaries, at lower costs and with faster overseas deliveries than would be obtained if the Government purchased similar goods in the United States and shipped them overseas. These indefinite delivery contracts provide for the delivery of only U.S.-made products at fixed prices for a period of time, usually a year. The contractor is then authorized to publish multiple copies of the BUSH "Authorized Price List" (APL) that contains all required Government ordering information plus delivered prices and technical data. This materially assists individual activities in identifying and ordering their specific needs. Overseas BUSH contractors provide warranties and service on the products they furnish. Warranty and maintenance service without return of equipment to the United States is an important cost factor.

All overseas U.S. Government agencies and their nonappropriated fund activities may order from a BUSH contractor's APL. Government contractors performing on costreimbursement contracts overseas are also authorized to use BUSH contracts. In its APL, the BUSH contractor may offer its complete commercial product line of U.S.-made goods.

Except for emergencies, DOD restricts use of BUSH contracts to items not centrally managed and stocked in the Government distribution system. Reluctance to change supply source coding in automated systems used to support overseas activities generally precludes consideration of local BUSH contract alternatives. A recent study of BUSH contract use 27 indicated that savings to the Government of from 17.3 percent to 27.9 percent of the purchase price for a select group of items would have been achieved by using the BUSH contracts in lieu of requisitioning the same item from U.S. depots.

Conclusions

Purchase of U.S.-made commercial products by overseas activities from U.S. firms or subsidiaries with overseas distribution systems provides a potential for savings over

U.S. Air Force, Data Systems Design Center, 1971 Study, Gunter AFB, Alabama.

shipment of these items by the U.S. Government from the United States.

Indefinite delivery contracts can be used to simplify procurement of U.S.-made products from overseas sources.

Overseas activities should not be required to order material from the United States without consideration of alternatives that may be more cost-effective.

GRANTEE USE OF FEDERAL SUPPLY SOURCES

Prior to November 14, 1972, agencies were authorized to allow their grantees to use Federal sources of supply and services under Federal Property Management Regulations (FPMR). This practice has been discontinued by a GSA amendment to the FPMR.28 Use of these sources by Federal grantees was opposed by potential commercial suppliers and was troublesome to many levels of Government. Notwithstanding the recent action taken to discontinue grantee use of Federal sources of supply and services, the Commission makes the following recommendations:*

Recommendation 8. Authorize primary grantees use of Federal sources of supply and services when:

(a) The purpose is to support a specific grant program for which Federal financing exceeds 60 percent,

(b) The use is optional on the grantee, the Government source, and, in the case of Federal schedules or other indefinite delivery contracts, on the supplying contractor, and (c) The Government is reimbursed all costs. Recommendation 9. Require that grantor agencies establish regulatory procedures for assuring appropriate use of the products or services and computation of total costs for Government reimbursement.

Recommendation 10. Assign responsibility for monitoring implementation of this pro

28 FPMR, ch. 101, as amended in Federal Register, Nov. 14, 1972, p. 24113.

*See Dissenting Position, infra.

Commissioner Sampson abstained from voting on these recommendations.

gram and its socioeconomic effects to the Office of Federal Procurement Policy.

Background

The policy of authorizing grantees to use Federal supply sources in fulfillment of grant programs originated in 1967. In 1970, use of Federal supply sources by grantees increased because of two actions: (1) GSA publicized the program and (2) the use of Federal grant funds expanded. The policy specifically inIcluded Government sources other than GSA, such as DSA and the Federal Prison Industries, as authorized supply and service sources for grantees.29 Available resources included calls against Government contracts, self-service stores, motor pools, and depot stocks. The policy also extended the authorization to subordinate activities of the prime grantee.

Grantee use of Government sources required the grantor's written authorization, a copy of which was sent to the Government activity on which requisitions would be made. To use Federal Supply Schedules, the grantee simply included a copy of the authorization with the order. Responsibility for assuring appropriate use of the supplies and services rested with the grantors.

During fiscal 1971, sales to grantees by GSA sources totaled about $5 million out of gross sales of $777 million to all agencies.30 The amount of grantee use of Federal Supply Schedules is unknown.

Several reasons were given for discontinuing the program. First, the business community and OMB expressed increasing concern over the expanded use of Federal sources by non-Federal activities. Second, the authorization was concluded to be inconsistent with the Administration's declared policy of reliance on private enterprise. Third, the burden of competing with Federal sources adversely affected small business throughout the country.

29 FPMR, ch. 101-33.

30 Letter from the General Services Administration to the Commission, Feb. 2, 1972; Federal Grantee Use of Federal Supply Sources, GSA Fact Sheet, May 2, 1972:

Fourth, to the extent the grantees were divisions of State and local governments, the authorization was inconsistent with congressional intent expressed in the Intergovernmental Cooperation Act of 1968.31

Considerations

Industry concerns regarding the expanded policy and efforts to promote the grantee use of Federal sources of supply were expressed in numerous letters and in public meetings. Most of the protests came from local distributors, dealers, and other small businesses that viewed the policy as unwarranted and as promoting unfair competition with private enterprise. Many distributors indicated they were being taxed to support Federal sources since Government operational costs are financed by direct appropriations not fully reflected in supply prices.

Proponents of the program contended that grant dollars-public funds-went further when Federal sources were used for supplies and services. Grantees were given access to sources of supply at item prices that they could not have obtained independently. They also benefited by avoiding the administrative expense of open market purchasing which would have been charged against grant funds.

Industry and local distributors, dealers, and small businessmen indicated that, if total agency and Federal administrative and operating costs, as well as the socioeconomic impact, were considered, the savings to the Government would be doubtful. This argument was based on the present policy of financing supply and service operations by direct appropriation. In addition, no State and local taxes. are paid on these sales, thus cutting into potential revenues of these governments. These critics also contended that there was no realistic way to prevent items purchased through Federal sources from being diverted to uses unrelated to the purposes of the grant.

31 Public Law 90-577, 82 Stat. 1098, 42 U.S.C. 4201-4344 (1970).

Conclusions

The growing use of Federal grants in education, health, transportation, law enforcement, and other fields increases the number of potential users of Federal supply and service sources. Policy regarding use of Government resources by grantees should take into account the effects of this use on ordinary business channels and on the national economy and should reflect an analysis of costs and benefits of a program of this magnitude.

Where a Government purpose is clearly accomplished by a grant (that is, when the Government's share is more than 60 percent of the program) and when the most economical way of meeting the equipment and supply needs would be through utilization of Federal supply sources, such sources should be available to the grantee on an optional basis.

Federal sources of supply and services, including indefinite delivery contracts, are established to provide Government agencies with economical or convenient ways to satisfy their requirements. The operation of these procurement and distribution systems is financed in ways that may or may not reflect the total cost to the Government in the charges made to the users. GSA and DSA operations are financed directly by annual appropriations, with the product charges to agencies covering purchase price, transportation, and some related incidental costs.

If grantee use of Federal sources of supply were reconsidered, the total computed cost should include the cost of the delivered product to the grantee, the agency's cost of authorizing and administering the use of the sources, and indirect effects on the national economy. A policy or program that authorizes grantee use of Federal sources should recognize all of these factors and establish workable implementing guidelines.

These guidelines should be practical and enforceable. Agency personnel responsible for authorizing access to Federal supply sources should determine that the likelihood of conformance by the grantee is high, that the means of insuring conformance exist, and that costs of surveillance are recognized in the prices charged to grantees.

Dissenting Position

A number of Commissioners* do not support the recommendations to authorize use of Federal sources by grantees except when absolutely necessary. They contend that:

'The procurement services which would be furnished grant recipients under the recommendations of the Commission majority would very nearly constitute a business activity that parallels those services already available to grantees from private distributors and retailers. Under those recommendations, GSA would purchase, warehouse, and make deliveries from its stocks to grantees in exactly the same way as private distributors do. GSA personnel would call on grantees in much the same manner as salesmen of private companies. They would provide grantees with printed catalogs and other material publicizing their services and price advantages and in some instances would conduct training courses for grantee personnel on how to place orders with GSA. This type of activity would clearly and effectively place the Federal Government in competition with commercial suppliers. This would be in direct conflict with the basic Commission recommendation of Part A, Chapter 6, which states, "it is the national policy to rely on private enterprise for needed goods and services to the maximum extent feasible."

Government efficiency in providing supplies to grantees is not superior to that available from the private sector. Consequently, the Government cannot provide such sources more economically, from a long-term national standpoint, than can private enterprise. While the Government has in the past provided grantees supply items at less than commercial prices, this was possible because the Government did not recover many of its costs. Instead, these were paid from appropriated funds which served as a hidden subsidy to the purchasing grantees.

There is no doubt that if all costs to the public are considered, including total economic cost factors, the administrative task of determining eligibility of grantees, the expense of enforcement, the burden of determining when purchase from Federal sources would be economically feasible, and the socioeconomic

*Commissioners Beamer, Chiles, Gurney, Horner, and Sanders.

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