We recognize that there are diverse views on multi-year contracting, as well as legislative impediments to utilizing this technique on large acquisitions. Indeed, there appears to be little or no meaningful experience base on which to draw conclusions as to the merits of using multi-year contracts for acquisition of major systems. Our assessment is that the government may be in a position of paying premium prices as a result of its current short term budgetary and acquisition practices. While multi-year procurement as currently described in the Defense Acquisition Regulation may not be the optimal solution to this problem, we believe that there is substantial evidence that the government is rapidly becoming a less desirable customer to many lower tier segments of the nation's industrial base. This is particularly the case with those suppliers who have one or more options for redirecting their marketing and investment opportunities. What is urgently needed is a comprehensive policy on budgeting for and acquiring major systems which will alleviate the uncertainty and frustrations associated with government business. Whether this is multi-year contracting, or some alternative which will achieve substantially the same goal, is a matter for further consideration. B. Aquisition of Long Lead Material Items Many of the systems we reviewed contained provisions for the funding of long lead material items one year in advance of the end item procurement. An assessment of long lead funding/procurement policies is complicated by the fact that there are at least three distinct scenarios which may be encountered. are: These Items ordered with no termination liability or Items ordered with termination liability, but no Items ordered with both termination liability and These scenarios raise questions of both termination liability protection and advance funding requirements for prime contractors. Clearly, increases in lead times for certain material items have exacerbated problems associated with long lead funding. The contractors we interviewed felt long lead contracts were useful and, where properly utilized, would tend to decrease costs and stabilize production schedules. This is particularly true for the procurement of certain critical material items, since overall schedule (material procurement plus production) times may be reduced accordingly. As noted in Section III-E, lengthening lead times were observed in many categories of material. Contractors responded to this situation by placing orders at company risk and with company funds to maintain production schedules. While we did not observe any significant material cost increases attributable to lengthening lead times per se in the specific systems we reviewed, we did note the increased cost exposure that contractors were experiencing. Clearly, if one contractor experiences a significant loss which is not indemnified by the government as a result of this practice, there could be an industry reaction which would significantly affect production schedules. Accordingly, DOD may desire to consider the need for acquisition policies which provide for the identification of critical material items early in a program and which provide measures to assure funding of these items, even if they must be funded more than one year in advance of production. Additionally, DOD may desire to examine the merit of providing additional funding or termination protection in those instances where contractor risks and resource requirements are beyond those which might normally be expected. An analysis of the systems reviewed indicates that an Economic Price Adjustment (EPA) clause was used only in a few cases. The specific systems which have contracts containing an EPA clause are indicated in Table II-2. The objective of EPA clauses in fixed price type contracts is to protect the contractor as well as the government against significant economic fluctuations in labor or material costs. Both upward and downward revisions of contract prices upon the occurrence of specified contingencies cited in the contract are possible with properly structured EPA clauses. If an EPA clause is not used, the alternative to the contractor, when production covers several years, is to include contingencies in billing prices. Hence, the limited use of the EPA clause noted in our review may be an indication to DOD that a more structured policy on the use of EPA clauses may be in order. A number of the contractors we interviewed stated that the use of EPA clauses varied widely among the military departments and even within buying offices within a department. It would appear, as a minimum, that some additional criteria might be developed by DOD which mandate the use of EPA clauses in certain circumstances, such as production over three or more years; contract value in excess of $50 million; or a key weapon system. The Defense Acquisition Regulation (DAR) 3-404.3 sets forth the DOD policy on fixed price contracts with Economic Price Adjustment. Application of this policy is optional at the discretion of the contracting officer, however. Moreover, Defense Acquisition Circular (DAC) 76-18 contains language which tends to discourage the use of EPA clauses on the premise that they are inflationary. The DOD may desire to re-examine its policies in this area to insure more consistency among the military departments as well as to establish specific circumstances which would dictate the use of EPA clauses. APPENDIX A WEAPON SYSTEMS PRICE INCREASES QUESTIONNAIRE INTRODUCTION This is the more recent of two versions of the questionnaire we sent to various defense contractors. The only differences between the two versions are that additional questions were added to Parts 1 and 5 in the revised version. We note that, for contractors receiving the original questionnaire, we asked these additional questions either during our followup interview with contractor personnel or in a subsequent written request for further information. Hence, the same body of information was requested of all contractors in our survey. |