GAO Comments on the Defense Management Improvement Act

Published by the Government Accountability Office on 1990-05-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United States General Accounting Office   /L//3(7

                                                          I II I llll

For Release         GAO Comments on the Defense
on Delivery
Expected at         Management Improvement Act
2:00 p.m.
May 14, 1990

                    Statement of
                    Paul F. Math, Director
                    Research, Development, Acquisition,
                      and Procurement Issues
                    National Security and International
                      Affairs Division

                    Before the
                    Subcommittee on Defense Industry
                      and Technology
                    Committee on Armed Services
                    United States Senate

                                     /     I41357
                                                                       GAO   Form   180w/87)
Mr. Chairman    and Members of the       Subcommittee:

We appreciate     the opportunity     to comment on the Department          of
Defense's    (DOD's) legislative      proposal   entitled     the "Defense
Management Improvement Act."          The proposal      is the product    of the
legislative    task force established       by the Secretary       of Defense in
conjunction    with the Defense Management Report.              It is intended    to
bring about improvements         in defense management, particularly           in
defense acquisition     management.

My statement      today focuses primarily       on Title   II of the act which
contains     a number of provisions      designed to improve defense
acquisition.        I will  also discuss     the elements we believe    are
essential     for an effective    acquisition     process.


Problems with defense acquisition              have been known for a long time.
Over the past 20 years, numerous studies                 have identified     problems
in the way DOD acquires           its weapon systems and other goods and
services.      Unfortunately,        the problems that have plagued defense
acquisition     over that period--cost          growth,     schedule delays,     and
performance     shortfalls--still        exist    today.     Delivering  capable and
supportable     weapons to the user when and where they are needed and
at reasonable      cost has been the exception            in defense acquisition
rather    than the rule.

The unprecedented       peacetime  buildup    of defense during the past
decade, coupled with disclosures          of procurement      scandals and
revelations     of other fraud,    waste, and abuse has magnified           the
problems with the acquisition         system.    Unfortunately,       we have
reached a point where the public          and the Congress seriously
question     DOD's ability    to manage its acquisition         programs

Everyone --DOD, Congress, and industry--           agrees that improvements
are needed.       The next decade will      present    serious    challenges      for
DOD acquisitions.        In light   of federal     budget deficit       pressures,
the rapidly     changing threat     environment,     and the taxpayers         loss of
confidence    in the defense acquisition         process,      it is imperative
that real and effective        improvement be achieved.

The recent Defense Management Report is the latest                        attempt     to
resolve    defense acquisition           problems.       The initiatives        DOD
proposes     in its Defense Management Report are commendable in that
they offer       opportunities       to achieve significant           savings.      In fact,
we have recommended cost saving measures in many of the same areas
addressed      in the Defense Management Report--including
consolidating         depots and maintenance          facilities,      centralizing
payroll    functions,        reducing    supply system costs,          establishing
realistic      spares requirements,          streamlining         the acquisition
process,     and improving        the professionalism           of the acquisition
workforce.          Achieving      savings   in these areas will          require     a
sustained      effort    on the part of DOD management over several                     years.

Before commenting on the specific     proposals    included   in Title                        II,
I would like to discuss the elements      we believe     are essential                       to
bring about meaningful  improvements.


Today, we are releasing    a report 1 which discusses                    seven key
elements we believe   are necessary   for an effective                    acquisition
process.  The report    was prepared  at the request                   of Senator Nunn.

IDefense Acquisition:  Perspectives   on Key Elements                     for   Eff.ective
Management (GAO/NSIAD-90-90,    May 14, 1990).
If improvements  are going                to be made in defense        acquisition,           we
believe  there must be

      --   strong,  sustained             leadership   by the     Secretary       of

      --   a highly     qualified,          technically    competent         acquisition
           workforce     operating          together    as a team,

      --   a mirrored   organization    structure between                    the Office
           of the Secretary    of Defense and the military                     services,

      --   a free flow of current    and objective                 information         both
           up and down the organization,

      --   compliance     with   an effective          internal    control       system,

      --   a requirements       determinations           process that considers
           fiscal   constraints      right    from       the start,  and

      --   a strong link between DOD's weapon system decision
           process and its resource allocation process.

We are encouraged by the parallels         between the areas addressed     in
the Defense Management Report and those GAO believes           are necessary
to resolve    long-standing    acquisition   problems.  However, highly
publicized   initiatives    have come and gone without    effectively
addressing   the tough management issues surrounding        defense


Let me now turn to Title             II
                                      of the Defense Management Improvement
Act.    rTitle  II contains      a number of proposals    which, among other
things,     are intended    to   streamline  and simplify   the acquisition
process,  eliminate unnecessary           rules and regulations,     reduce the
number of government auditors            and inspectors  in contractor     plants,
and reduce costs.

We support these goals but are concerned about whether the
specific     DOD proposals     will achieve the goals.     We are
particularly      concerned    about DOD's proposals   for a pilot program
involving     six major weapon programs and the use of commercial
style    procurement    practices    because the proposals

      --   do not specifically         identify   which   laws   and regulations
           will  be relaxed,     and

      --   do not seem to recognize    the unique nature            of defense
           acquisition  and the corresponding       need for        strong controls
           to protect  the taxpayers'    interests.

We are also concerned because DOD has not demonstrated             that
existing   programs and initiatives          in these as well as other areas
will   not achieve the desired      results.       Let me briefly discuss some
of our concerns about the DOD proposals.

Pilot    program for six major weapon systems
According     to DOD officials,      the pilot      program will       allow DOD "to
create     a regulatory    environment      similar    to that facing most
businesses      in the private     sector."       DOD's proposal       would also
significantly       reduce government       audit and inspection          personnel  and
place more emphasis on having contractors                 "self-administer"

DOD, however, has not identified       which laws and regulations        will
be relaxed.     The DOD acquisition     environment    is unlike  that facing
most businesses    in the private    sector.     In the defense industry,
segments of many major contractors        depend heavily     on a single
customer--DOD--for    business.     There are also only a few Suppliers
in the defense industry            capable of producing        limited     quantities    of
highly    complex     and specialized,       one-of-a-kind       products.       In the
private     sector,     prices    are dictated    by the marketplace;          while the
prices of defense items are determined                 through    extensive
negotiations        which focus on what defense items              should cost.       In
addition,     government       procurement     is designed to be fair         to all
potential     sellers      and often has concomitant          social    and economic

Because of the absence of the private          sector marketplace     forces,
numerous laws and regulations         have evolved over the years to
protect  the taxpayers'    interest      and to protect against    fraud,
waste, and abuse.     While there has been a significant          number of
laws passed in recent years,        the Congress enacted each to deal
with a specific   problem.

The unusual nature of defense acquisition                        demands an effective
system    of checks and balances               to ensure the appropriate
expenditure         of the public's         funds.      Experience      in recent years
provides     little      comfort     that existing         laws and regulations          should
be relaxed.           Spare parts horror          stories     and the ILL WIND
procurement         scandal are well known.               However, there are other
equally     serious       problems with defense acquisition.                   For example,
the Defense Contract             Audit Agency finds that the prices                 in nearly
one of every two negotiated                contracts       it reviews are inflated
because contractors            do not comply with the Truth in Negotiations                       :
Act.     Today, there is approximately                  $2 billion      in outstanding
recommendations          to reduce inflated           contract     prices.      The DOD
Inspector       General testified           in March of this year that the efforts
of the Defense Criminal               Investigative        Service--an      organization
which concentrates            primarily       on procurement       fraud--resulted        in more
than 600 indictments,             500 convictions,           and $500 million       in monetary
 recoveries       in the past two years.

These facts are not encouraging.             Trust and confidence           in defense
acquisition     must be restored.        However, we do not believe              it can
be restored     through the overnight         relaxation      of laws and
regulations     and significant      reductions      in oversight       and,audit
resources.      DOD's Contractor      Risk Assessment Guide program is, we
believe,    a better    approach to restoring          trust    and confidence      and
reducing    government oversight.         The program,        established      in 1988,
is designed to encourage contractors              to develop more effective
internal    control    systems   and reduce DOD oversight             in areas where
contractors     demonstrate     adequate internal         control    systems.

GAO has long supported        the need for effective           internal      control
systems.     Accountability      for compliance      with applicable
procurement       statutes  and regulations      must start       with industry.
The first    line of defense in controlling           fraud,      waste, and abuse
is an adequate control        system    that is fully     supported        at all
levels    of a company.      We believe     broader   industry       participation     in
the Contractor        Risk Assessment Guide program and other self
governance     programs would go a long way toward restoring                    trust and
confidence      in defense acquisition        and result     in reduced oversight
and audit over time.

Continued     reports    of weapon systems which exceed cost estimates,
are delivered      late,    and do not perform as intended          also do not
support     DOD's request to relax existing           laws, regulations,        and
oversight.      DOD's track record for meeting cost,              schedule,     and
performance      goals is no better       for systems     where oversight       and
other requirements        have been reduced substantially           than for those
systems     where oversight       was not reduced.       For example, the B-1B
bomber program embodied a virtually            unprecedented       partnership
between the Congress and the Air Force.                 The Congress provided
early and consistent          support  for the program.        In return     for this
"hands-off"      policy    that avoided congressional         "micro-management,"
DOD an"d the Air Force promised an effective               manned penetrating

bomber that would be fielded               in record      time   and at targeted         cost.
As we all know, that did not               happen.

The same is true of DOD "black"           programs--those    programs requiring
special     access security    clearances.       we can not provide    any details
in this forum; however, our work has shown that while some such
programs have been subjected          to less scrutiny     and oversight,   they
nonetheless      encountered   many of the same (and sometimes worse)
cost,    schedule,   and performance       problems found in other defense

There are several           initiatives         underway in DOD to improve the
acquisition       process-- including            efforts    to streamline     the
acquisition       structure,         increase      program managers'       accountability
and responsibility,            and improve the acquisition              workforce.        In
addition,      the    National         Defense Authorization         Act for Fiscal         Year
1987 authorized         the Defense Enterprise              Program.     Among other
things,     the legislation            specified      that weapon systems programs
designated       as Defense Enterprise              Programs would have a streamlined
reporting      chain;     the program manager would have greater                   control
over his own staff;            funding       would be provided       for the entire         period
between two acquisition                milestones;       and the Secretary      of Defense
could waive any acquisition                  regulations      not required     by statute.
In passing the legislation,                  Congress expected the Defense
Enterprise       Programs to serve as models from which demonstrated
management improvements                could be applied        to all DOD acquisition
programs.        That expectation,            however, has not been realized.

The Defense Management Report acknowledges            that DOD "should    take
better    advantage of this special      authority    than it has to date."
Also, in its report      on the National     Defense Authorization     Act for
Fiscal Years 1990 and 1991, the Senate Committee on Armed Services
report    described  DOD's implementation        of Defense Enterprise
Progra'tns as "disappointing."


    We believe    that Defense Enterprise        Programs and the other Defense
    Management Report initiatives          offer   DOD an opportunity        to address
    many well-recognized       defense acquisition         problems.      Successful
    resolution   of those problems requires           stronger     DOD management
    emphasis and more effective          implementation       of existing    statutory
    authority,   not authority      ,for another    pilot     program.

    Commercial style acquisition        practices
    DOD proposes to improve defense acquisition             by placing     greater
    reliance   on commercial   products     and employing     *'streamlined
    commercial   style procurement     procedures."        We agree that DOD
    should buy commercial     products     where feasible.

    The fiscal      year 1987 and 1990 DOD Authorization          Acts contain       a
    number of provisions      which encourage DOD to make greater               use of
    commercial      products.   However, in 1989, we reported2            that DOD has
    not placed the management emphasis needed to ensure that full
    advantage     is taken of opportunities      available     within     the context
    of existing      laws to procure commercially       available      products.       We
    recommended that DOD expedite         guidance,    provide    training,      and
    collect    data on the extent    to which it buys commercial             items.

    While we support      the increased     use of commercial     products,     we are
    concerned    about DOD's proposal.         DOD contends   that existing      laws
    and regulations     make it difficult       to acquire   commercial     items in
    the same way as a commercial         buyer.    We would not be opposed to
    removing impediments       that may be preventing       DOD from buying more
    commercial    products.      However, as in the case of the pilot
    w-09-b      DOD does not identify       the specific    laws that impede its
    ability   to do so.      DOD needs to demonstrate       what is wrong with the
    existing    laws before the Congress can decide what legislative
    changes are needed.

    2ProcJrement:     DOD Efforts      Relating  to Nondevelopmental          Items
    (GAO/NSIAD-89-51,    February      7, 1989).   ---'
One aspect of DOD's proposal    is clear.     Under it, a bid protest             to
DOD would be the sole administrative      remedy available  to contest
the Department's contract    award decisions.

GAO has been involved   inbid    protests for many years.     Just 6
years ago, the Congress saw the need to strengthen       the protest
process by legislating    our role and creating    a new protest   venue
at the General Services    Board of Contract    Appeals.

The Congress was concerned that an effective,                 independent   forum be
available     for those parties      who believed      they have been treated
unfairly    in the course of a procurement.             DOD's proposal     appears to
move the process      in the opposite       direction.      If DOD believes     that
aspects of the existing        bid protest      process    impedes the efficient
procurement      of commercial    products,     we should explore       ways to
improve that process.

Award without     discussions
Section   204 of the act would authorize           DOD to evaluate      competitive
proposals   and award a contract        without    discussions     to the offeror
whose proposal      represents  the greatest       benefit    to the Government
based upon the evaluation       factors     set out in the solicitation.
According   to DOD officials,      this    proposal    would allow DOD to look
at a contractor's       quality and past performance,           not just its price.

I would like to make two points      about DOD's proposal.          First,
there is nothing   in law or regulation     that precludes       DOD from
placing  more emphasis on quality     and performance        and less on price.
In fact,  the Federal Acquisition     Regulation     clearly    recognizes  that
the "best valueā€¯   may not be the lowest      price.     It states:

      "While the    lowest price or lowest total     cost to the
      G'overnment    is properly  the deciding factor    in many source
      selections,      in certain acquisitions the Government may
       select   the source whose proposal     offers the greatest
       value   [underscoring    added] to the Government in terms                  of
       performance     and other factors.   . .'I

Second, under current          law, an award without       discussions       is
permitted     only when it can be demonstrated            clearly     that acceptance
of an initial       proposal     would result     in the lowest overall         cost to
the government.         The lowest overall        cost requirement       for awarding       a
contract    without     discussions      was introduced    by the Competition         in
Contracting     Act of 1984.        Prior   to the Act, such an award need only
have been at a fair         and reasonable      price.    Our post-Competition          in
Contracting      Act protest      decisions    have applied     the standard       enacted
by the Congress and have held that discussions                  must be conducted         in
negotiated     procurements       unless award is made at the lowest overall
cost, considering        only cost and cost-related          factors.

We would not be opposed to a change in the current         lowest overall
cost standard    if there is evidence to indicate    that the
requirement   is proving   to be detrimental   to the interests   of the
government.     We are not aware, however,   that such a problem

I want to emphasize that we do not think                    the Competition       in
Contracting      Act currently      requires      the Government to buy goods and
services    based solely       on lowest cost.          As we testified        last year
before this subcommittee,           we find nothing          in current     law that
requires    agencies to buy goods and services                  based on the lowest
cost, technically        acceptable     offer,      without     considering     quality    and
performance.        Current    law allows agencies            to use whatever       source
selection    criteria     they believe       strike     the appropriate        balance
between price and technical            factors.

Multi-year    procurement
DOD b6lieves     the requirement         that multi-year       contracts   must     have a
clearly    demonstrable   savings        of at least ten       percent   should     be
eliminated.        According to DOD, the "ten percent" threshold  is
arbitrary      and that the savings of under ten percent   on a multi-
billion     dollar   program can often be substantial.

We annually      assist    the appropriations      committees  in assessing
DOD's multi-year         candidates   and have found that many programs are
proposed by DOD--and approved by Congress --even though the savings
fall   below applicable        savings thresholds.       The Congressional     Budget
Office    reported     last year that 14 of the 35 candidates          submitted   by
DOD in fiscal       years 1986 to 1989 did not meet the savings
thresholds.        Nonetheless,     Congress approved 9 of those 14

Although     we are not aware of any DOD multi-year         contracts   which
have been disapproved          solely   on the basis of applicable    savings
thresholds,       we would not be opposed to DOD's proposal.          Our
longstanding       position    has been that multi-year    programs should be
evaluated     on a case-by-case       basis using existing    savings and
stability     criteria      as a guide.

Certified    Cost or Pricing    Data Threshold
DOD proposes raising     the threshold    for requiring      certification       of
cost or pricing     data under the Truth in Negotiations            Act from
$100,000   to $500,000.      The Deputy Secretary     believes      that raising
the threshold    would significantly     reduce the paperwork that
industry   finds a major impediment to doing business             with DOD.

We do not support DOD's proposal              to raise the threshold.        The
Truth in Negotiations           Act is the government's       key safeguard
against    inflated      contract    prices    in sole-source    situations.     As I
stated earlier,        the Defense Contract        Audit Agency finds that
negotiated      prices    are inflated      in one out of every two contracts
it audits.

    Increasing       the threshold     for cost or pricing         data would
    unnecessarily        raise the government's          risk to fraud,     waste, and
    abuse.       In fiscal    years 1986,      1987, and 1988, more than $17
    billion      in contract     awards fell between the $100,000 and $500,000
    range.         We are concerned      that raising       the threshold    would send a
    signal     to defense contractors         that the government         is no longer
    interested       in having lower dollar          value noncompetitive       contract
    estimates       supported    by accurate,      complete,    and current     data.
    In responding        to a requirement      3 that DOD assess the impact and
    cost effectiveness         of raising     the threshold,       DOD reported     in July
    1987 that

              .   .   there
                      .         is little     reason to increase        the current
          threshold        of $100,000 for the submission              and
          certification           of cost or pricing     data.        Maintaining    this
          threshold        encourages      contractors   to provide        accurate,
          complete        and current      data and entitles        the Government      to
          a price       reduction       if the data provided        by the contractor
          and relied         upon by the contracting         officer      are later
          found to be defective."

    We believe            that      is a more prudent         position     than      the   one proposed
    this year.

    Mr. Chairman,                that   completes my statement,   I will               be glad   to   answer
    any questions                you,   or the members, may have.

    380~s: Armed Services  Report No.                        99-718     required      DOD to report       on
    the impact and cost effectiveness                         of   raising     the    threshold.