Appendix C:

The Federal Procurement and Contracting System

The Army Research Laboratory spends millions of dollars on procuring supplies and services and contracting out research. The problems associated with the procurement of supplies and services are as numerous and as bureaucratic as the federal personnel system described in Appendix B). Additionally, if the Army chooses either the GOCO or ARL Multicenter (with GOCO or federally funded research and development [FFRDC] centers) options, it will have to follow certain regulations and requirements associated with establishing FFRDCs. GOCOs are considered to be subsets of FFRDCs.

THE PROCUREMENT SYSTEM: MORE BUREAUCRACY THAN BUYING

The federal contracting and procurement system relies heavily on rigid rules and procedures, extensive paperwork, detailed design specifications, and multiple inspections and audits. Like the personnel system, it was originally designed with the best of intentions. However, numerous attempts to prevent profiteering and fraud through the creation of a centralized management system and the writing of additional rules and regulations, have produced an unwieldy system.

Contracting efforts in the government are governed by Executive Order 12352 and controlled by the Federal Acquisition Regulation which has about 1,600 pages, and about 2,900 more pages of agency-specific supplements. As Vice President Al Gore discussed in his report on Creating a Government that Works Better and Costs Less, these rules support an “overly centralized purchasing system which takes decisions away from managers who know what they need, and allows strangers—often thousands of miles away—to make purchasing decisions. The frequent result: Procurement officers, who make their own decisions about what to buy and how soon to buy it, purchase low-quality items, or even the wrong ones, that arrive too late” (National Performance Review, 1993a).



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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options Appendix C: The Federal Procurement and Contracting System The Army Research Laboratory spends millions of dollars on procuring supplies and services and contracting out research. The problems associated with the procurement of supplies and services are as numerous and as bureaucratic as the federal personnel system described in Appendix B). Additionally, if the Army chooses either the GOCO or ARL Multicenter (with GOCO or federally funded research and development [FFRDC] centers) options, it will have to follow certain regulations and requirements associated with establishing FFRDCs. GOCOs are considered to be subsets of FFRDCs. THE PROCUREMENT SYSTEM: MORE BUREAUCRACY THAN BUYING The federal contracting and procurement system relies heavily on rigid rules and procedures, extensive paperwork, detailed design specifications, and multiple inspections and audits. Like the personnel system, it was originally designed with the best of intentions. However, numerous attempts to prevent profiteering and fraud through the creation of a centralized management system and the writing of additional rules and regulations, have produced an unwieldy system. Contracting efforts in the government are governed by Executive Order 12352 and controlled by the Federal Acquisition Regulation which has about 1,600 pages, and about 2,900 more pages of agency-specific supplements. As Vice President Al Gore discussed in his report on Creating a Government that Works Better and Costs Less, these rules support an “overly centralized purchasing system which takes decisions away from managers who know what they need, and allows strangers—often thousands of miles away—to make purchasing decisions. The frequent result: Procurement officers, who make their own decisions about what to buy and how soon to buy it, purchase low-quality items, or even the wrong ones, that arrive too late” (National Performance Review, 1993a).

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options As with the federal personnel system, Vice President Al Gore has also pushed federal procurement problems into the national limelight with his report. The report reinforces what most federal workers and many taxpayers already know: the federal procurement system is an extraordinary example of bureaucratic red tape (National Performance Review, 1993a). UNNECESSARY EXPENDITURES OF TIME AND MONEY When discussing government procurement, horror stories are plentiful. Stories abound about $100 hammers, waiting more than a year to buy a personal computer, and requirements for numerous people, unaffiliated with the purchase, to sign-off on every procurement, large or small. Stories like these were documented by the Office of Federal Procurement Policy (OFPP) and the U.S. Merit Systems Protection Board in January 1993. These two agencies collaborated in conducting a survey of more than 1,000 federal managers. The findings of the survey were that the federal procurement system is not giving its customer's what they want, it pays prices often higher than necessary, and it assumes that line managers cannot be trusted (National Performance Review, 1993a). A study by the Center for Strategic and International Studies added several other conclusions. These conclusions are not a surprise to managers and researchers at ARL. The study concluded that the procurement system adds costs without adding value; it impedes government's access to state-of-the-art commercial technology; and added red tape forces businesses to alter standard procedures and raise prices when dealing with the government (National Performance Review, 1993a). WHY ARE THERE PROBLEMS? The Federal Acquisition Regulation contains too many rules. According to a Merit Systems Protection Board survey, rules are changed too often and are so process-oriented that they minimize discretion and stifle innovation (National Performance Review, 1993b). In addition to the Federal Acquisition Regulation, there are numerous other requirements that impact procurement. Here are just a few: The procurement of computers and software is stifled by Congress ' Brooks Act of 1965 and Congress' expansion of the same Act in 1986. This act directed the General Services Administration to centrally purchase computers and software in order to save money for the

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options government. This approach made sense for the large flame computers of the 1960s and 1970s but not for the personal computers and software of the 1990s. This centrally controlled procurement system does not keep up with rapid advances in the personal computer world. Due to rapid advances in personal computer technology, the government often buys computers that are state-of-the-art when the purchase process begins and when prices are negotiated, but which are almost obsolete when the computers are delivered. Thus it looks like the government is paying the price of the most advanced personal computer for those which may be two generations old. ARL must buy test tubes and many other items through a system called the Multiple Award Schedule program. Under this program, the General Services Administration negotiates and awards contracts for multiple vendors of comparable products and services, at varying prices. In many cases, ARL is forced to buy through the General Services Administration while at the same time complying with the Federal Acquisition Regulation. Under current law, agencies are only allowed to make purchases of less than $25,000 on their own, using simple procurement procedures (National Performance Review, 1993a). As discussed in Chapter 3, one method of exercising this freedom is through the use of credit cards. However, credit card limits in the Army are normally about $2,500, which are not enough when buying one-of-a-kind, state-of-the-art research and automation equipment. These are just a few of the limitations which are placed on ARL when it attempts to procure supplies and services. These limitations cause delays in procurement of an item, and may cause the purchasing of a generic item which does not meet the exact specifications of a research project. Recent studies, such as Vice President Gore's Report, show that the savings that were originally envisioned in the government 's centrally-managed, highly-controlled procurement system do not exist today. In fact, the system may create additional salary, facilities, and opportunity costs when a researcher has to wait days, weeks, or even months for an item needed to continue a research project. CURRENT STREAMLINING EFFORTS Section 800 of the fiscal year 1991 National Defense Authorization Act (Public Law 101-510) directed the establishment of an advisory panel to identify and simplify acquisition law. Subsequently, the Under Secretary of Defense for Acquisition and Technology appointed a panel of recognized public and private sector experts in acquisition law and

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options procurement policy to review the applicable laws and regulations and make recommendations for change. On January 12, 1993, the Acquisition Law Advisory Panel issued an 1,800 page report entitled Streamlining Defense Acquisition Law. The report recommends significant changes to the defense procurement system, to include amending, deleting, consolidating, or rescinding 300 of the 600 statutes reviewed by the committee. It was delivered to Congress, and incorporated into Vice President Gore's National Performance Review. These recommendations could pave the way to an improved procurement system within DOD by streamlining statutes, improving access to commercial technologies, and simplifying the acquisition process. The Advisory Panel believes that, once implemented, significant savings will be made in lead time and acquisition costs. For example, one of the recommended changes is a simplified acquisition threshold that also improves small purchases by exempting most socioeconomic requirements and corresponding contract clauses and raising the threshold from $25,000 to $100,000. This would streamline over 50 percent of the contract actions over $25,000 while only affecting 5 percent of all contract dollars (Sullivan, 1994). CONTRACTING RESEARCH If ARL is to contract out research or be totally contracted out as a GOCO organization, it must follow U.S. Code Title 10 and numerous other rules and procedures. According to Section 2462, U.S. Code Title 10, the Department of Defense can procure supplies and services from sources in the private sector only if such sources can provide them at a lower cost than available within the government. This requirement is also described in the regulations concerning the Commercial Activities Program, which include Office of Management and Budget Circular A-76, DOD Directive 4100.15, DOD Instruction 4100.33, and Army Regulation 5-20. These authorities describe procedures to conduct cost studies to establish the relative costs of in-house performance versus contract performance for existing or proposed commercial activities. In particular, Paragraph 4-1.b.(1), Army Regulation 5-20, requires that a cost study be performed when considering the conversion of an in-house activity to a contractor activity. However, for research and development, the requirements are not very clear. Paragraph 1-6.i, Army Regulation 5-20, exempts research, development, test and evaluation functions from the requirements of the Commercial Activities Program to inventory, review, and cost study commercial activities. At the same time, this exemption does not override

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options the statutory requirements of Section 2461, U.S. Code Title 10, which makes no exception for R&D. This statute requires that before a commercial function of DOD, being performed by Department of Defense civilians as of October 1, 1980, can be converted to a contractor operation, Congress must be provided: notice of any decision to study such function for possible contract performance; detailed summary of the cost comparison which demonstrates that going to a contractor will result in cost savings and a certification that the entire cost comparison is available; certification that the government cost is based on the most efficient and cost effective organization; and a report containing information specified in the statute. These requirements should not be difficult to achieve (Gamboa, 1993). ESTABLISHING A GOCO ORGANIZATION Since, the Army would want ARL to have the special relationship with the government that is described in OFPP Policy Letter 84-1, the establishment of ARL as a GOCO organization, or as a center of excellence within the Multicenter option, must follow the rules for establishing a GOCO and the rules for establishing an FFRDC. The following regulations and procedures describe what the Army would have to do to establish an FFRDC (GOCO). Background FFRDCs are privately operated, but publicly funded under a long-term contract with a federal sponsoring agency. FFRDCs are operated, managed, or administered by either a university or consortium of universities, other not-for-profit or nonprofit organization, or an industrial firm, as an autonomous organization or as an identifiable separate operating unit of a parent organization (Federal Acquisition Regulation 35.017-2). They are intended by their sponsors to have an intimate, flexible, and relatively informal or special working relationship with them, which non-FFRDCs do not have. FFRDCs are organizations exclusively or substantially financed by the federal government on a relatively long-term basis. They are intended to conduct (1) basic and applied research; (2)

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options development; or (3) management of research or development at the request of the federal government. Authority The establishment, continuation and dissolution of FFRDCs is governed by OFPP Policy Letter 84-1, dated April 4, 1984. This policy letter is implemented by Federal Acquisition Regulation Part 35, Title 48 of the Code of Federal Regulations 35.017. The use of FFRDCs is limited by Section 2367, U.S. Code Title 10. The management of DOD FFRDCs is regulated by the DOD FFRDC Management Plan issued August 14, 1992, by the Director of Defense Research and Engineering. Establishment As prescribed by OFPP Policy Letter 84-1, in order to establish an FFRDC, the sponsoring agency must ensure that the following guidelines are met. Existing alternative sources for satisfying agency requirements cannot effectively meet the special R&D needs. At least three notices are placed over a 90-day period in the Commerce Business Daily and the Federal Register indicating the agency's intention to sponsor an FFRDC and the scope and nature of the effort. There is sufficient government expertise available to adequately and objectively evaluate the work to be performed by the FFRDC. Controls are established to ensure that the costs of the services being provided the government are reasonable. The responsibility for capitalization of the FFRDC has been defined in such a manner that ownership of assets may be readily and equitably determined upon termination of the FFRDC relationship with its sponsor. The purpose, mission, and general scope of effort of the FFRDC is stated clearly enough to enable differentiation between work that should be performed by the FFRDC and that should be performed by a non-FFRDC.

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options Additional Requirements Additionally, Federal Acquisition Regulation Part 35 directs that: The Executive Office of the President, Office of Science and Technology Policy is notified. A reasonable continuity in the level of support to the FFRDC is maintained, consistent with the agency's need for the FFRDC and the terms of the sponsoring agreement. Office of Management and Budget Circular A-120 is complied with when applicable, and quantity production or manufacturing is not performed unless authorized by legislation. Approval must be received from the head of the sponsoring agency. FFRDCs must meet a special long-term R&D need which cannot be met as effectively by existing in-house or contractor resources. They generally have access beyond that which is common to the normal contractual relationship, to government and supplier data, including sensitive and proprietary data, and to employees and facilities. They are required to operate in the public interest, and to be free from organizational conflicts of interest, and to have full disclosure of its affairs to its sponsoring agency. They should not compete with the private sector. They may perform work for other than the sponsoring agency under the economy act, or other applicable legislation, when the work is not otherwise available for the private sector. CURRENT LIMITATIONS ON FFRDCS U.S. Code Title 10, Section 2367, states, “the head of an agency may not obligate or expend amounts appropriated to DOD for the purposes of operating an FFRDC that was not in existence before June 2, 1986, until: the head of the agency submits to Congress a report with respect to such center that describes the purpose, mission, and general scope of effort of the center; and a period of 60 days beginning on the date such report is received by Congress has elapsed. Congress has periodically expressed concern about the growth of FFRDCs and has set a ceiling on total defense FFRDC spending:

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options Public Law 102-172, Section 8106, reduced FFRDC funding by $133,300,000 and mandated conflict of interest policies. Public Law 102-190, Section 256, limited the number of man-years for each FFRDC. Public Law 102-396, Section 9090, reduced funding by another $300,000,000 and disallowed the establishment of any new FFRDCs with fiscal year 1993 money. The DOD FFRDC management plan directed reduction of the total amount of funds available to pay costs to DOD FFRDCs by 12 percent for a three-year period beginning in fiscal year 1992.

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THE ARMY RESEARCH LABORATORY: Alternative Organizational and Management Options REFERENCES Gamboa, A. 1993. Briefing to the GOCO ARL option panel, Committee on Alternative Futures for the Army Research Laboratory, at its meeting, Washington, D.C., June 28–30. National Performance Review. 1993a. Creating a Government that Works Better and Costs Less. Washington, D.C.: U.S. Government Printing Office. September 7. National Performance Review. 1993b. Reinventing Federal Procurements, “PROC08: Reform Information Technology Procurements.” Washington, D.C.: U.S. Government Printing Office, September. Sullivan, B.E. 1994. The Section 800 Report . . . Streamlining Defense Acquisition Law. Army RD&A Bulletin. January–February.