Sole-Source vs. Competitive Procurement in DoD Contracting

Introduction

Federal procurement contracting has, over the last few years, been a subject of increased public and congressional interest, particularly because of 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 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 paper uses the case study of contracts 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 acquisition costs differ when competition and sole-source procedures are used to acquire goods and services. Harrison (2012), however, cautions against overvaluing 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 would only achieve positive outcomes if it is structured in such a way that competitive pressure sufficiently balances the additional costs of having multiple contractors. This paper will also focus on showing how competition needs to be structured to improve federal procurement spending in the DoD.

Before embarking on the main discussion, it is prudent to provide concise definitions of the key terms used throughout this paper. While these terms may have been defined differently by different researchers, the definitions presented below will be adopted for purposes of this paper.

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 goods or services, 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).

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

Competitive Procurement: a form of procurement where an agency determines whom to contract with and 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 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) the effectiveness of competition in the defense industry — should that option be considered — depends on how the competition is structured.

The DLA is the DoD's largest support agency. It purchases and stores spare part supplies in large quantities to ensure that the country's military forces have access to the right equipment whenever the 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's 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 and direct vendor delivery parts), and the two parties established a price for each in the initial phase. These prices were used in the subsequent phases of the contract; by June 2006, the DLA had procured approximately 2,300 spare parts valued at $205.4 million (The DoD, 2013).

In March 2009, the 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 agreement that provided an option for extension until March 2015 (The DoD, 2013). A basic ordering agreement was signed indicating that the clauses, terms, and conditions agreed upon in the initial contract would apply to all future orders (The DoD, 2013). Orders were treated independently; as such, the DLA was required to handle each order as a separate contract. Under the contract, Boeing would quote its price and the DLA would carry out a stand-alone price determination to assess its viability (The DoD, 2013). By June 2012, approximately 3,400 spare parts valued at $142 million had been procured under the contract (The DoD, 2013).

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

It was found that contracting officers at the DLA had not negotiated fair and reasonable prices on approximately three-quarters of the 2,600 delivery orders that were subject to audit review (The DoD, 2013). As a result, the agency had not obtained fair and reasonable value from the two contracts. Furthermore, contracting officers were found not to have conducted a fair and reasonable price analysis before accepting Boeing's quotations for either contract (The DoD, 2013). This was in part because the DLA's procurement guidelines did not require contracting officers to (i) review older histories of contractor purchases when determining fair and reasonable prices, or (ii) complete subsequent pricing reviews if the nature of the contract allowed for extension (The DoD, 2013). The audit further revealed that contracting officers had failed to conduct efficient contract oversight, which had essentially created avenues for Boeing to avoid maintaining 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).

This situation would likely have been avoided had the agency employed competitive procedures. Contracting officers would have had multiple vendors to choose from, enabling them to evaluate the price options of several vendors through price analysis and ultimately select the option providing the best relative benefits (Harrison, 2012). This would have enabled the agency to obtain fair and reasonable value for orders under either contract. Moreover, with multiple vendor options, contracting officers could have compared product capabilities and respective price differences, then made value judgments on the most reasonable option (Harrison, 2012). Alternatively, the agency could have quoted a fixed price it deemed fair and reasonable and then selected the vendor or vendors willing to accept those terms. Both approaches would go a long way toward incentivizing vendors to produce high-quality merchandise meeting the agency's minimum specifications — giving the agency substantial bargaining power and ensuring that taxpayer money is spent in a fair and reasonable manner on only the most viable contractors.

Conclusion

There is growing concern that noncompetitive procurement practices are on the rise in federal agencies. This has drawn the attention of Congress, which has called for the streamlining of federal acquisition procedures. Competitive procurement gives the government sufficient leverage to not only regulate vendors through patronage but also negotiate lower and more reasonable prices for its acquisitions. Despite its inherent benefits, however, competition has been found not to lead to cost reduction when used in the procurement of goods and services in the defense industry. For this reason, the DLA — the DoD's primary procurement hub — has repeatedly used sole-source procedures to acquire weapon systems. Research has nonetheless shown that if the defense industry were to introduce competition and structure it using the winner-takes-all approach, it could realize significant cost savings and increased value for taxpayers.