Pricing and Contract Integration: Procurement Essay

Procurement: Pricing and Contract Integration

Federal procurement contracting has over the last few years been a subject of increased public and congressional interest, particularly because of the growing concern that noncompetitive procurement practices may be on the rise in the assignment of government contracts. The rising number of cases and public reports implicating federal agencies in alleged misconduct involving non-competitive contracts has drawn the attention of both Congress and the Executive arm of government. President Obama, in his 2009 memorandum on federal contracting, emphasized the need to use competition in the award of federal procurement tenders. The Competition in Contracting Act (CICA) of 1984 was enacted to keep federal agencies in check by ensuring that they i) develop their procurement procedures as expressly required by statute and ii) use full and open competition in the issuance of procurement contracts (Manuel, 2011). There, however, are exceptional circumstances under which the full and open competition requirement does not apply and agencies are permitted to use noncompetitive procedures. These include i) when there is a single source for the supply of a required commodity, ii) when the procurement faces compelling and unusual urgency, iii) when the agency is seeking to maintain its industrial base, iv) when international agreements permit anticompetitive procedures, v) when the acquisition involves a brand-name meant for resale, vi) when the acquisition is a matter of national security, and vii) when the contract or acquisition is necessitated by public interest (Manuel, 2011).

The Department of Defense (DoD) accounts for over 70% of annual federal procurement spending, and is also one of the greatest users of noncompetitive procedures, conducting a bulk of its contract actions on a sole-source basis. As a result of this overreliance on noncompetitive procurement procedures, the department has seen its acquisition costs rise steadily over the last few years (Harrison, 2012). Its supply chain management system has also come under intense criticism for inefficient inventory management, inaccurate demand forecasting, and the maintenance of "high levels of inventory beyond what is needed to support requirements" (GAO, 2010, p. 1). This text uses the case study of the SPM400-02-D-9407 and SPM4A1-09-G-0004 sole-source contracts awarded to Boeing Inc. By the Defense Logistics Agency (DLA) for the supply of spare parts to demonstrate the weaknesses inherent in sole-source arrangements. It uses game theory to show how the acquisition costs differ when competition and sole-source procedures are used to acquire goods and services. Harrison (2012), however, cautions against overvaluing the aspect of competition in procurement. He argues that in as much as competition can reduce costs and serve as an incentive for improving contractor performance; it ought not to be seen as a cure-all solution to the supply chain problems that plague the DoD. In his view, competition would only achieve positive outcomes if it is structured in such a way that the competitive pressure sufficiently balances the additional costs of having multiple contractors. In this regard, this text will also focus on showing how competition needs to be structured to improve federal procurement spending in the DoD.

Definitions of Terms

Before embarking on the main discussion, it would be prudent to provide a concise definition of the various key terms that I will be making use of in this text. Well, the terms may have been defined differently by different researchers; however, for purposes of this text, the definitions presented below will be adopted.

Procurement: the process by which government agencies obtain from private vendors goods and services that they do not provide or produce for themselves (Manuel, 2011).

Sole-Source Procurement: a form of procurement where purchases are made from only one vendor either because they are the only one capable of providing the same, or because the agency is tied to that particular vendor by specific, justifiable reasons. The latter case is more specifically referred to as single-source procurement. The main feature of sole-source procurement agreements is that there is no possibility of obtaining competitive bids (Manuel, 2011).

Competitive Procurement: a form of procurement where an agency determines whom to contract with and whom to purchase from by soliciting offers from multiple vendors, subjecting them to critical evaluation, and then selecting the option with the highest relative value (Manuel, 2011).

The aim of this research paper is to show that i) despite the inherent benefits of competition, sole-source procurement is still the most cost-effective mode of acquisition in the defense industry; and ii) that the effectiveness of competition in the defense industry (should the option be considered) depends on how it (the competition) is structured.

Case Study: The DLA's Sole-Source Spare Part Procurement from Boeing

Contract SP0400-02-D-9407: The DLA (Defense Logistics Agency) is the DoD's largest support agency. It purchases and stores spare part supplies in large quantities as a means of ensuring that the country's military forces have access to the right equipment and the right items whenever need arises (GAO, 2010). In May 2002, the DLA awarded, on a sole-source basis, contract SP0400-02-D-9407 for the supply of aviation spare parts to Boeing Inc. This was a requirements-type contract in which Boeing was to supply the DLA with spare parts purchase requirements with the option of extending the contract to May, 2014 (The DoD, 2013). The contract initially included fifty-seven spare parts (both stock parts ad direct vendor delivery parts); and the two parties established a price for each in the initial phase. These very prices were used in the subsequent phase of the contract; and by June, 2006, DLA had procured approximately 2,300 spare parts valued at $205.4 million (The DoD, 2013).

Contract SPM4A1-09-G-0004: In March, 2009 DLA awarded another contract SPM4A1-09-G-0004 to Boeing for the supply of subassemblies, assemblies, components, and spare parts to support multiple missile programs (The DoD, 2013). This was a basic-ordering contract agreement, which provided an option for extension until March 2015 (The DoD, 2013). A basic ordering agreement was signed indicating that the clauses as well as the terms and conditions agreed upon in the initial contract would apply to all future orders (The DoD, 2013). Orders were treated independently and as such, the DLA was required to handle each order as a separate contract. Under the contract, Boeing would quote its price and DLA would carry out a stand-alone price-determination to determine its viability (The DoD, 2013). By June, 2012, about 3,400 spare parts valued at $142 million had been procured on the contract (The DoD, 2013).

The Audit: In June, 2013, the Office of the Inspector General conducted an audit to determine whether the DLA's contract with Boeing for the two procurements above had been fair and reasonable (The DoD, 2013). More specifically, the audit sought to determine whether the price paid for the orders on the contracts was fair and reasonable, and whether the agency had obtained the best value. The costs of 60 spare parts drawn from the two contracts and valued at approximately $81.1 million were reviewed in the audit (The DoD, 2013).

The Findings: it was found that the contracting officers at DLA had not negotiated reasonable and fair prices on approximately three-quarter of the 2,600 delivery orders that were subjected to audit review (The DoD, 2013). As a result, the agency had not obtained fair and reasonable value from the two contracts. Further, the contracting officers were found not to have conducted a reasonable and fair price analysis before accepting Boeing's quotation for either of the two contracts (The DoD, 2013). This was in part because the DLA procurement guidelines did not oblige contracting officers to i) review older histories of contractor purchases in their determination of reasonable and fair prices, and ii) complete subsequent pricing reviews if the nature of the contract allowed for extension (The DoD, 2013). The audit further revealed that the contracting officers had failed to conduct efficient contract oversight, and this had essentially opened up avenues for Boeing not to maintain complete cost and pricing data for their delivery orders (The DoD, 2013).

As a result, the DLA was found to have "paid approximately $13.7 million in excess of fair and reasonable prices for 1,469 delivery orders" (The DoD, 2013, p. i). It was further established that if prices were not reviewed, the agency would continue to overpay for future orders on the two contracts (The DoD, 2013).

Well, this situation would obviously have been avoided had the agency employed competitive procedures; why so? To begin with, the contracting officers would have multiple vendors to choose from, which basically means that they would have the ability to evaluate the price options of several vendors through the process of price analysis and eventually choose the option that provides the best relative benefits (Harrison, 2012). This would have enabled the agency to obtain fair and reasonable value for orders in either contract. Moreover, presented with multiple vendor options, the contracting officers would have had the opportunity to compare the product capabilities of different vendors and the respective price differences, and they would then be able to make value judgments on the option…