Sole-Source vs. Competitive Procurement in Defense Contracts

Introduction to Federal Procurement and Competition

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 noncompetitive contracts has drawn the attention of both Congress and the Executive branch. 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 are, however, 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 item 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 large proportion 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 paper uses the case study of contracts SP0400-02-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 applies game theory to show how acquisition costs differ when competition and sole-source procedures are used to acquire goods and services. Harrison (2012), however, cautions against overvaluing the role of competition in procurement. He argues that while 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 achieves positive outcomes only if it is structured in such a way that competitive pressure sufficiently balances the additional costs of having multiple contractors. Accordingly, this paper also examines how competition needs to be structured to improve federal procurement spending in the DoD.

Definitions of Terms

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 that vendor is the only one capable of providing the required item, 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 defining 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 those offers to critical evaluation, and then selecting the option with the highest relative value (Manuel, 2011).

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