Acquisition Reform Issues
from an Industrial Base Pilot

Contents
• Abstract
• Introduction
• Government Pricing
• Difficulty in Meeting Exceptions
• Problem Areas
• Commercial Objections
• How Does the Commercial Sector Handle Pricing?
• Barriers to Pricing Like the Private Sector
• A Need for Further Regulatory Relief
• Conclusion
• Endnotes
• Footnotes
• (page bottom)

With affordability becoming a critical issue in weapons system acquisition, the DoD has no choice but to turn to the commercial sector to meet its military requirements. Major initiatives in acquisition reform are making it relatively easy to take advantage of the commercial sector for commercial-off-the-shelf items. Problems arise, however, when the DoD turns to the commercial sector to meet its military-unique requirements. Contracting officers must contend with pricing regulations that discourage dual-use capable commercial firms from seeking defense work. While originally designed to protect the Government's interests, these regulations now serve to impede access to the advanced technologies and capabilities of the commercial sector.

There is increasing emphasis within the government to use more commercial items to meet defense requirements. This effort has been facilitated by the passage of the Federal Acquisition Streamlining Act (FASA) and the current preference for performance and commercial specifications over military specifications (MILSPECs). However, by the very nature of defense, there will always be military-unique requirements. With affordability becoming a very critical issue, dual-use capable commercial firms serve as an attractive alternative to the traditional defense industrial base. In addition, dual-use firms can provide the DoD with access to the advanced technologies and capabilities of the commercial sector. It is now more feasible to take advantage of dual-use firms as we enter a new era of flexible manufacturing. This makes it technically possible for commercial firms to economically produce military-unique products in small quantities.

While the government has become intent on taking advantage of the commercial sector, it still maintains a number of unique procurement practices. These practices are frequently at odds with those found in the commercial sector and serve to effectively discourage potential dual-use firms from seeking government work. One specific obstacle is pricing. In the absence of competition, the government procurement regulations require extensive cost and pricing data from those firms (defense or commercial) that make military-unique items. Herein lies the problem. While many commercial firms are dual-use capable, they are unwilling to comply with the DoD cost and pricing data disclosure requirements.

Although FASA was a major and positive change to the defense procurement regulations, it did not directly address the case of dual-use capable commercial firms. As the regulations currently read, a purely commercial firm producing a military-unique item will be subject to all of the government terms and conditions that are currently levied on defense contractors. Without further regulatory relief, dealing with purely commercial firms for military-unique items will be difficult. Many commercial firms will refuse DoD business if doing so comes with extensive reporting, compliance, and oversight requirements.

To expand the defense industrial base to include dual-use capable commercial firms, Congress must revisit the requirement for cost and pricing data as a precondition for government work. The primary issue is how do we reconcile the government's requirement for cost and pricing data with the commercial sector's reluctance to accommodate? The solution requires a pricing approach that both conforms to standard commercial practices and yet is sensitive to the fiscal responsibilities inherent in government procurement.

In the defense market, it is very difficult to define, let alone assure, fair and reasonable prices. Consequently, the DoD needs some alternative mechanism to control cost. Aside from competition, the government has two primary tools to address this problem. These are the cost and pricing data requirements established by the Truth in Negotiations Act (TINA) and the government Cost Accounting Standards (CAS). In essence, TINA and CAS serve as surrogate market forces for the defense sector.

TINA seeks to place the government on informational parity with the contractor in price negotiations. The objective is to realize "fair and reasonable prices" and to prevent excessive profits. TINA requires contractors to disclose all known facts (current, complete, and accurate) at the time of the negotiations.

The objective of the other tool, CAS, is to provide consistency in cost accounting practices and a method to equitably allocate costs. CAS establishes a standard accounting format for government contracts by providing guidance in such areas as: how to account for the cost of money, depreciation of capital assets, and the allocation of general overhead. Supporters of CAS claim that the establishment of a uniform set of accounting principles helps to ensure fair and consistent treatment for the DoD in the pricing and performance of defense contracts.[1] In contrast, the Center for Strategic and International Studies (CSIS) Steering Committee on Security and Technology concluded: "The cost accounting principles, standards, and reporting requirements pose a barrier both to DoD access to commercial state-of-the-art technology as well as the purchase of defense items produced in commercial facilities."[2]

FASA makes a number of changes to both TINA and CAS which alter the requirement for cost and pricing data. As long as there is adequate price competition (APC), for both commercial and military-unique items, there is no requirement for the contractor to substantiate its offered price on a firm-fixed price contract. However, some data can be requested by the contracting officer to determine price reasonableness or to assess cost realism. For this to occur, the contracting officer (CO) must conclude that there is insufficient data available to conduct price analysis. The decision to request cost and pricing data under APC conditions must be approved at a level above the CO.

Adequate price competition does not necessarily mean lowest price. An award based on best value is also exempt, so long as price was a substantial evaluation factor. In 1972, the Comptroller General ruled that the price ranking could be as low as 20 percent of the total award criteria.[3] APC also exists when there is a reasonable expectation that two or more offerors, competing independently, would submit priced offers, even though only one offer is received. This is sometimes called the "one bid rule." In the absence of direct competition, the CO can also rely on information from a recent price competition, so long as it was for the same or similar item (with comparable terms and conditions).

Pricing becomes a problem when we don't have the benefit of competition. The FASA implementing regulations to the FAR establish an order of preference for sources of pricing information with an emphasis on the least intrusive forms. If the price is not based on adequate price competition, the contracting officer is instructed to initially seek information other than cost or pricing data. The first source of information would be from within the Government. Next, in order of preference, would be from any source other than the offeror. The last (and least preferred) choice would be from the offeror.

The contracting officer should use every means available to ascertain a fair and reasonable price prior to requesting cost or pricing data.The contracting officer should not necessarily require the submission of cost or pricing data because this: 1. leads to increased proposal costs, 2. generally extends acquisition lead-time, and 3. wastes both contractor and Government resources.[4] If, however, the contracting officer is unable to establish a reasonable price, then cost or pricing data must be obtained.

Cost or pricing data is required for all non-competitively awarded defense and energy contracts in excess of $500,000. However, there are four recognized exceptions to the requirement for cost or pricing data. Prices are considered reasonable if they are based upon: 1. a catalog price, 2. a market price, 3. commercial item, a new category, or 4. the acquisition is an exceptional case and can qualify for a waiver. These exceptions are not automatic, but must be substantiated through price analysis. Price analysis is defined as the examination and evaluation of a proposed price without evaluating the separate cost elements and proposed profit (cost analysis).[5]

A simple declaration by a contractor that its product meets one of the exceptions is insufficient. The RFP will state that an offeror must specifically request one of the TINA exceptions. The new rules allow contractors to submit a "written request" in any form they choose or they can use the new Standard Form 1448. The TINA exception can then be granted by the contracting officer. However, the CO must first be able to determine that the offered price is reasonable. If this is not possible, then the two parties must negotiate a reasonable price. If they are unable to settle on a price, the contracting officer must request cost or pricing data. The contractor provides this information up to an agreed upon negotiation cut-off date using the format specified by the Standard Form 1411.

Unfortunately, the current revised FASA acquisition regulations fail to provide clear guidance when it comes to procuring military-unique products from dual-use capable commercial firms. It is true that the new regulations have made it much easier to qualify for an exception to the cost and pricing data requirements of TINA and CAS. However, it is frequently difficult to meet the criteria of adequate price competition or one of the TINA exceptions for state-of-the-art or military-unique products.

State-of-the-Art Products

For leading edge commercial items, meeting even the expanded conditions for adequate price competition may prove elusive. The market for leading edge commercial items is frequently dominated by monopolists or oligopolists. Commercial products, especially those that are state-of-the-art, will likely have features that products of competitors do not. Under these conditions, it is difficult to use a competitive solicitation process. Similarly, prices for leading edge commercial items are not likely to be supported by published catalog prices. This is especially true if the technology is changing rapidly as is the case in the electronics field.

Meeting the market price exemption will be difficult as well since the price information must come from sources independent of the offeror. Few state-of-the-art products have a history of sales to either the government or to private industry. As a result, there may not be any historical data to analyze. Under these conditions, it is difficult or impossible to obtain historical price information from any source other than the contractor.[6]

Military-Unique Products

A military-unique item made by a purely commercial firm has difficulty qualifying for the catalog price, market price, or commercial item exceptions. The problem centers on the item not being commercial. Consequently, such a procurement cannot benefit from the statutory reporting and compliance relief that comes with being designated a commercial item. This is true even if the item is produced using the same plant, equipment, and personnel as a bona fide commercial item.

This leaves the "exceptional case" exception which does not specifically require the item to be commercial. Unfortunately, the contracting officer has less discretion with this option. Like the other exceptions, a reasonable price must be established using other than cost and pricing data. However, there must be approval from the head of the contracting activity. This approval process could be both complicated and lengthy depending on who is designated as the head of the contracting activity.

Although the military acquisition budget is down 65 percent from its 1985 peak[7], the Department of Defense continues to have requirements for new systems, many of these being military-unique. While performance is still important, affordability issues are becoming paramount. By necessity, the DoD is turning to the commercial market to meet these requirements. In addition, the commercial sector has increasingly become the keeper of advanced state-of-the-art technology. As a result, we are seeing fewer technology "spin-offs" (military-to-commercial) and more technology "spin-ons" (commercial-to-military).[8]

A major tenet of recent acquisition reform initiatives is to use commercial-off-the-shelf products to the maximum extent possible in meeting military requirements. When the procured item is truly commercial, pricing is not a major issue. If the DoD requirement is for a commercial item, it is assumed that market forces will ensure a fair and reasonable price. The DoD benefits from a very competitive domestic and international market. Under these conditions, it makes little sense to require cost and pricing data. This is the rationale behind the new commercial item exception to TINA.

However, when the DoD turns to the commercial sector to meet its military-unique requirements, pricing becomes a major problem which severely complicates access to the commercial sector. FASA and the recently passed Federal Acquisition Reform Act (FARA), fail to adequately address this type of procurement. By default, the solution to this problem is to treat dual-use commercial firms as if they were defense contractors.

Consequently, these commercial firms must adhere to unique government contracting laws designed to promote fairness, discourage fraud, and further socioeconomic objectives. They are also required to provide extensive cost and pricing data to verify the fairness and the reasonableness of their offer. Imposing these requirements on dual-use capable commercial firms assumes that they, like defense firms, will comply with the cost and pricing data requirements of TINA and CAS.

As the single buyer in the defense market, the DoD had significant leverage over the defense industry. It now enters the commercial market where it is just one of many buyers. The DoD must now come to the humbling realization that in the commercial market, it deserves and will receive the same treatment as the other customers, no more and maybe even less. Under these conditions the DoD is no longer in a position to dictate terms and conditions.

For commercial firms, competitive markets are the driving force leading to efficient internal operations. It is rare for one buyer to dictate terms and conditions that change the internal operation of another firm. On occasion, suppliers will make special arrangements for preferred customers (i.e., those that show a significant long term commitment). However, few commercial firms put the DoD in this preferred category. With no guarantee for future work, the defense procurement system imposes requirements that are inconsistent with standard commercial practices and the Uniform Commercial Code (UCC).

While most commercial firms are willing to provide goods to the DoD on normal business terms, they are unwilling to change their internal operations to accommodate what may well be a small one-time customer. Findings from an Air Force Industrial Base Pilot show that dual-use capable commercial firms have serious problems with government cost and pricing disclosure requirements.

"The Military Products from Commercial Lines" pilot is a program managed by the Manufacturing Technology Directorate of Wright Laboratory, Wright-Patterson AFB, Ohio. This pilot seeks to demonstrate the production of military components on a commercial line at lower cost and comparable quality to those produced on a dedicated military line. A commercial automotive manufacturing line will produce demonstration electronic modules which meet the requirements of the F-22 Advanced Tactical Fighter.

TRW's commercial Automotive Electronics Group (AEG) currently tailor-makes electronic products for individual customers such as General Motors and Caterpillar. To TRW AEG, the Department of Defense requirement for electronic modules is similar to its other non-DoD customers. While the end-items are very different, the manufacturing processes and expertise used in each case are very similar.

The DoD performance and technical requirements for military-unique items does not present a major problem for TRW AEG. The real problem is the unique reporting and compliance requirements imposed by the government procurement system. TRW found the TINA and CAS requirements to be among the most objectionable. There are three main problem areas:

Different Accounting Systems - Because AEG is a commercial production firm, they have not had a previous business relationship with the government. Consequently, AEG, unlike a typical defense contractor, has never provided cost data that is compliant with CAS. As a commercial entity, AEG instead maintains an accounting system which is compliant with Generally Accepted Accounting Practices (GAAP). AEG's prices are as much a function of existing market conditions as the costs incurred. Unlike CAS, AEG's accounting data is collected at a more generalized level. Costs are not differentiated between "allowable" and "unallowable." They instead examine costs by product line or manufacturing unit. Their source documents meet the requirements of the Federal tax code and the practices of their specific market. Commercial accounting systems normally do not produce the detailed cost and pricing data required under TINA.

Additional Expense - If the accounting data is not accumulated pursuant to CAS, it may be either impossible to obtain or too expensive to reconstruct the data. Due to this additional cost, commercial companies will often forego doing business with DoD rather than implement a cost accounting system that would permit compliance with TINA and CAS. To become CAS compliant, AEG would have to incur substantial initial and ongoing costs. This would, in turn, lead to a significantly higher price for all of their products. Ironically, this increase would negate the attractiveness of AEG as a low cost source of F-22 electronic modules. AEG wishes to avoid any non value-added compliance, reporting or oversight activity that would have a negative impact on their competitiveness in the commercial market place.

Cultural Differences - While AEG is receptive to new practices that they view as beneficial or as an improvement, they do not see the DoD requirement for cost and pricing data in this light. Even if the DoD were willing to pay a premium for such data, TRW AEG would still be unwilling to change the way it conducts business. They consider cost and pricing information to be proprietary and critical to maintaining a competitive edge. TRW AEG found those clauses which would permit the government to audit books, records, documents, and other data to be intrusive and therefore unacceptable. Finally, commercial firms may have the information available, but are unwilling to risk the penalties that may result from errors in providing the data to the government. Under TINA, a failure to provide current, complete, and accurate data could result in legal action for defective pricing.

The DoD is very concerned with pricing because taxpayer money is involved. However, stockholders and senior management in the private sector are just as concerned that their companies obtain fair and reasonable prices, perhaps more so. If a firm has poor procurement practices, the market is unforgiving. Products that are overpriced could lead to bankruptcy proceedings.

On the surface, it seems that pricing in the commercial sector is rather straight forward when compared to the DoD's situation. Actually, the commercial sector pricing problem is quite complex. This occurs because the private sector is in reality a conglomeration of many market types. There are monopolies, oligopolies, and in some cases, the ideal free market. It may be difficult to find items that are the same or similar to assist in pricing. Also, as we see more and more flexible manufacturing, unique end items tailor made for specific customers are becoming common.

Commercial customers of one-of-a-kind product avoid unfair prices through negotiations and a thorough understanding of relative market values. Estimates of the value of a commercial product that does not yet have competitive pricing history are established using various price analysis methods. Part of the negotiation strategy is a willingness to forego certain purchases if the proposed price exceeds their estimated value.

Buyers in the private sector become very specialized in particular products and commodities. They use price analysis and market research extensively, not cost analysis, to verify price reasonableness. In fact, many commercial buyers feel that the suppliers cost are really irrelevant because the marketplace sets prices and ensures value. The commercial buyer's willingness to pay for a product is a function of not just price, but also of quality, customer service, performance and delivery. While the government sector is struggling with best value contracting, this is common practice within the private sector.

A commercial firm's end product must be competitive if it is to stay in business. Consequently, these firms will routinely assess their practices in an effort to minimize inefficiencies and remain competitive. All of the component parts must contribute to the final product's marketability. If a company finds that its end product is no longer competitive, it will take steps to reduce the product's price. There are five ways that the private sector establishes a price:

1. A request for quotes. This will help to establish a price if there is no other information available. This approach is somewhat limited to existing homogenous products made by multiple producers.

2. A customer works very closely with a supplier to design-to-cost or target price the required items. The customer and supplier firms jointly establish a more competitive price (target price) for an item. This may be accomplished using value analysis. Together, they take steps to achieve the lower price. A long term buyer-supplier relationship facilitates this process. Commercial buyers seek out suppliers of high-quality, low-priced products and then stay with them as long as the relationship remains mutually beneficial.

3. A customer goes to a supplier with the following requirement: To be competitive, the customer needs item "X" (quality and other factors included) at price $"Y" or below. If the supplier cannot meet this not-to-exceed price, the customer goes on to the next supplier until one is found that can meet the requirement at the required price.

4. A customer goes to an industry leader who offers the required item at what amounts to a "take-it-or-leave-it" price. This is the situation that we would find in the oligopoly or monopoly environment. In this situation, the price may be neither fair nor reasonable. It is simply the best available. The buyer accepts this price because: 1. there is no alternative, and 2. its competitors face the same dilemma.

5. A buyer begins with an established market or catalog price. This information is combined with any other available information to establish a generic base price. Using price analysis, the buyer then changes this base price up or down adjusting for technical differences (which we will assume can be priced or estimated).

Many of these commercial situations and approaches are similar to those found in the DoD. There is a major difference, however, in these two markets. The DoD minimizes its pricing problem by requiring cost and pricing data from its suppliers. The commercial sector does not have this luxury. For leading edge items, a commercial buyer will not expect to be given pricing information beyond that which is reasonably provided to other customers. In spite of this limitation, commercial firms are able to operate very efficiently without requiring cost and pricing data from their suppliers.

The pricing of military-unique products made by dual-use commercial firms is becoming less of a problem as we see more acquisition reform. A greater emphasis on "best value" contracting downplays the importance, and the obstacle, of pricing. In addition, many of the acquisition reform initiatives place significant emphasis on price analysis and market research over cost analysis. However, to further mitigate the pricing problem associated with dual-use firms, there are two areas that warrant attention. These are 1. cultural resistance, and 2. insufficient knowledge of price analysis and market research.

Cultural Resistance

A switch to price analysis and market research represents a significant change. Market research is time consuming and requires extensive technical understanding of products and industries. For those that base their career on a detailed knowledge of the government unique-procurement system, learning to buy (and price) like the commercial sector is a major undertaking.

Price analysis places more responsibility on the contracting officer relative to cost analysis. No longer will the supplier provide reams of data to justify its price. The onus for determining a fair and reasonable price now lies with the government buyer. Certified cost and pricing data will no longer be there to provide cover for the contracting officer's decision. In addition, price analysis is less concrete and more susceptible to second guessing when compared to cost analysis. This does not sit well with the risk averse government contracting community. Unlike the commercial sector, government buyers are subject to media attention and to DoD oversight agencies, the GAO, and by congressional inquiries.

Finally, price analysis is more difficult than cost analysis. This is especially true when you have little experience in performing market research, in using the tools of price analysis, or in conducting negotiations based solely on price analysis. This is the situation faced by the majority of the government buyers. Under these conditions it is not surprising that there is cultural resistance. One way to minimize this resistance is through training in price analysis and market research techniques.

A Lack Of Training

Unfortunately, the current government procurement system forces contracting personnel to know more about the regulations that they operate under, than about the actual products that they buy. In the commercial sector the opposite is true. Consequently, few DoD contracting personnel currently have the price analysis and market research skills necessary to procure military-unique items from dual-use firms. The private sector uses price analysis almost exclusively. This is true for mundane items, state-of-the-art items, and tailor-made unique items. The point to be made is that there are sufficient pricing tools available for the government to conduct the necessary price analysis of military unique items. A mastery of such tools would allow DoD contracting officers to procure from dual-use firms without having to fall back on the TINA requirement for certified cost and pricing data. The current inability to do this can be traced directly to insufficient training in the use of price analysis and market research techniques.

The majority of the existing government cost and pricing courses focus almost exclusively on cost analysis. When they do address price analysis, the discussions center around cost analysis plus profit analysis. This is not price analysis in the commercial context. Rectifying this training shortfall will be both costly and time consuming.

As a result of the massive push to certify the acquisition workforce, the people most in need of price analysis training, have already met all of their cost and "pricing" training requirements. Therefore, simply injecting a one or two hour block on price analysis into an existing course will not remedy the problem. The only people that will get the price analysis training will be those new to the profession, or those few who never met the original certification requirements.

In addition, such a response would simply be token, given the magnitude of the problem. If there is to truly be a cultural change, training covering commercial practices should be a stand alone course. In addition, this course should be as much about market research as it is about price analysis.

A Defense Systems Management College study of commercial practices for defense acquisition concluded that inadequate acquisition training is probably the single biggest inhibitor to government adoption of a commercial approach. "Acquisition personnel are not usually trained in how to conduct market research, surveys, and analyses..."[9] To be able to price dual-use products, government buyers will need to understand product life cycles, market trends, discount structures, and bench marking for a particular commodity or industry. A call for such training is neither new nor revolutionary.

It is unlikely that the DoD will be able to fully expand the defense industrial base into the commercial sector until it can exempt dual-use capable firms from the burdensome terms and conditions associated with defense procurement. Unless a change is made, the DoD must rely on a smaller pool of defense industry firms for its military-unique requirements. There are three options available to mitigate or eliminate the problem facing dual-use firms. The first is to expand the definition of a commercial item, the second is to make a new section in the Federal Acquisition Regulation to address dual-use firms, and the third is to simply clarify the existing regulations. A discussion of the definition option follows.

Many of the burdensome terms and conditions that face dual-use firms could be eliminated if the commercial item definition were simply expanded. The Section 800 Panel recommended five definitions for a commercial item. Unfortunately, FASA adopted only four of these. The omitted definition directly addresses dual-use capable commercial firms:

"An item may be considered to meet the definition of a commercial item even though it is produced in response to a government drawing or specification provided, that the item is purchased from a company or business unit which ordinarily uses customer drawings or specifications to produce similar items for the general public using the same workforce, plant, or equipment."[10]

The only problem with this 800 Panel definition is the phrase "government drawing or specification" which does not reflect the current emphasis on performance and commercial specifications. However, this could easily be remedied by replacing that obsolete phrase with "government performance requirements". This omitted definition is significant because it recognizes the revolutionary changes that have taken place in commercial manufacturing.[11]

By permitting the contracting officer to consider military-unique items produced under the same or similar production processes as the contractor's commercial items, consideration can thus be given to the actual operation of competitive market forces in the determination of a fair and reasonable price. Barring evidence to the contrary, the going price offered by the dual-use firm would be accepted as a baseline starting point for this determination.

As with other "commercial items" that are now exempt from TINA cost and pricing data requirements, the contracting officer is not absolved from the responsibility that the item is being offered at a fair and reasonable price. It is still incumbent upon the contracting officer to take steps to verify that the price offered is, in fact, fair and reasonable. Again, as with other commercial items that fall under the new TINA exemption, if the contracting officer cannot assure that the price is fair and reasonable, cost and pricing data may be requested or the two parties must negotiate one. If neither of these options are feasible, then the contracting officer always has the option of walking away from the offer.

The important point in a definition expansion is that the requirement for cost and pricing data is no longer an automatic precondition for doing work with the government. With this barrier removed, the likelihood of greater dual-use commercial firm participation is thereby increased. This change should also make the contracting officer's job easier. There will be one less government-imposed administrative hurdle in doing business with dual-use commercial firms.

Unfortunately, there is a reluctance to expand the definition of a commercial item beyond FASA. Many feel that the new definition is infinitely better than the pre-FASA definition. Others feel that the new definition provides sufficient latitude even though it does not directly address dual-use manufacturers. However, there remains sufficient ambiguity to warrant, if not an expansion, at least a clarification of the definition for products made by dual-use firms.[12]

The implementing regulations of FASA do provide some latitude in the commercial item designation. The contracting officer can subjectively call the procured item - commercial - by determining the modifications necessary to be 1. of a type customarily available in the commercial market place or 2. not of a type customarily available in the commercial market place, but the modifications are minor. The implementing regulations deliberately avoided mandating percentages for either parts or costs. However, what if 90 percent of the parts were commercial, yet the remaining 10 percent of the parts (which are military-unique) make up over 50 percent of the cost? Would this be a commercial or a military item? If the contracting officer were to make a commercial item determination, would this decision be subject to second guessing by JAG, the ACO, or by a government oversight agency? The DoD will not be able to benefit from the increase in latitude given to the contracting officer unless there is a perceived decrease in personal risk by individual contracting officers.

A very basic question needs to be asked: Why must we even have a commercial item definition in the first place? An Office of Technology Assessment study on Assessing the Potential for Civil-Military Integration suggests that the definition issue and the pricing issue are very much interrelated:

"A definition that is too narrow may result in policies that fail to fully capture the potential savings associated with increased commercial procurement. Conversely a definition that is too broad may promote policies that apply commercial buying practices to goods and services, that have no viable market other than the DoD, and therefore, are not commercial. Without a viable commercial market, the DoD may have difficulty assessing whether it is paying a fair price for an item.[13]

It appears that the commercial item definition is simply one more risk-averse tool, like TINA and CAS, intended to protect the interests of the government, no matter what the opportunity cost. If the DoD truly wants to switch from a risk-averse to a risk management procurement system, why even have a commercial item definition? As with all of the TINA exemptions, the contracting officer must first assure that the price being offered is fair and reasonable. This same logic should also apply to military-unique items made by dual-use capable commercial firms. If the contracting officer can determine that the item is offered at a fair and reasonable price, it should not matter if the item is commercial or military. This issue is increasingly relevant in the current era of flexible and lean manufacturing. Today, it is becoming harder to discriminate between tailor-made commercial products (for commercial customers) and military-unique products (made for the DoD).

In 1994, Secretary of Defense Perry took the initiative to replace MILSPECs with performance and commercial specifications. As justification for this change, the Perry Memo stated:

"To meet future needs, the Department of Defense must increase access to commercial state-of-the-art technology and must facilitate the adoption by its suppliers of business processes characteristic of world class suppliers. In addition, integration of commercial and military development and manufacturing facilitates the development of dual-use processes and products and contributes to an expanded industrial base that is capable of meeting defense needs at lower costs."[14]

The rationale used for the adoption of performance specifications and more recently for facility-wide common processes[15] should be extended to business practices such as accounting and pricing as well. The goal should be to integrate the production of both commercial and military-unique products into a single business unit without altering either their accounting systems or management practices.

To facilitate this process, there must be a change in the definition of a commercial item and in the way the DoD verifies a fair and reasonable price. Although the potential for fraud will always exist, (with or without TINA and CAS) the ability to benefit from the advanced capabilities of dual-use commercial firms will off-set this risk. A cultural change from a risk-averse to a risk-management procurement system will require management support at all levels and better training of the acquisition workforce in price analysis and market research.

The views expressed in this paper are those of the authors and do not reflect the official policy or position of the U.S. Air Force, the Department of Defense, or the U.S. Government.

[1] "The DoD Regulatory Cost Premium: A Quantitative Assessment," Prepared For Dr. William J. Perry, Secretary of Defense, Coopers & Lybrand and TASC, December, 1994. p. 26.

[2] Bingaman, Jeff, Jacques Gansler, and Robert Kupperman, Integrating Commercial and Military Technologies for National Security: An Agenda for Change, (Washington, DC: The Center for Strategic and International Studies, 1991), p. 32.

[3] Wall, Richard J., "Grading Commercial Pricing Reform: Safe Harbors at Last? " Federal Contracts Reports, Special Supplement, December 4, 1995, p. 8.

[4] Federal Acquisition Regulation (FAR) 15.802 (a) (3).

[5] Federal Acquisition Regulation (FAR) 15.801.

[6] Fry, Vicki A., "An Investigation of Problems in Analyzing Prices of State-of-the-Art Commercial Items," Master's Thesis, Air Force Institute of Technology, September 1995, pp. 117-120.

[7] Statement by Colleen Preston, Deputy Under Secretary of Defense (Acquisition Reform) before the Committee on Government Reform and Oversight, United States House of Representatives, February 21, 1995.

[8] Yazowski, Bob, Sheila Rollins, and Jim Nicholsen, "Transition from Government to the Commercial Marketplace," Contract Management, November, 1995. p. 5.

[9] Defense Systems Management College, Commercial Practices for Defense Acquisition Guidebook, (Washington, DC: U.S. Government Printing Office, 1992), p. 2-6.

[10] Streamlining Defense Acquisition Laws, Report of the DoD Acquisition Law Advisory Panel (Section 800 Panel); Chapter 8: Commercial Items, January 1993, p. 8-18.

[11] Heberling, Michael E., "The Missing Definition of a Commercial Item," Federal Acquisition Report, October 1995, p. 4.

[12] Heberling, Michael E. and Tracy J. Houpt, "What Is and What Is Not a Commercial Item," Contract Management, August 1995, pp. 10-15.

[13] U.S. Congress, Office of Technology Assessment, Assessing the Potential for Civil-Military Integration: Technologies Processes, and Practices, OTA-ISS-611 (Washington, DC: U.S. Government Printing Office, September, 1994), p. 71.

[14] The Perry Memo, "Specifications and Standards - A New Way of Doing Business," The Secretary of Defense, 29 June 1994.

[15] "Perry Memo on Single Process Initiative," Aerospace Daily, December 13 1995, p. 15.

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