DOD Contracting: Efforts Needed to Address Air Force Commercial  
Acquisition Risk (29-SEP-06, GAO-06-995).			 
                                                                 
The Department of Defense (DOD) has been urged by commissions,	 
legislation, and a panel to make increased use of commercial	 
acquisition to achieve certain benefits. To help ensure the	 
increased use of commercial acquisition, the Office of the	 
Secretary of Defense (OSD) established and the Air Force	 
implemented two commercial acquisition goals to be achieved by	 
the end of fiscal year 2005. In setting these goals, OSD expected
that the increased use of commercial acquisition would provide	 
DOD with greater access to commercial markets (products and	 
service types) with increased competition, better prices, and new
market entrants and/or technologies. The committee asked GAO to  
identify (1) the extent to which the Air Force has increased its 
use of commercial acquisition to obtain expected benefits and (2)
the risks that are associated with this use.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-995 					        
    ACCNO:   A61615						        
  TITLE:     DOD Contracting: Efforts Needed to Address Air Force     
Commercial Acquisition Risk					 
     DATE:   09/29/2006 
  SUBJECT:   Air Force procurement				 
	     Competition					 
	     Contracts						 
	     Policy evaluation					 
	     Procurement policy 				 
	     Procurement practices				 
	     Risk assessment					 
	     Source selection					 
	     C-130 Aircraft					 
	     C-130J Aircraft					 
	     F-16 Aircraft					 
	     Fighting Falcon Aircraft				 
	     Hercules Aircraft					 

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GAO-06-995

     

     * Results in Brief
     * Background
     * The Air Force Has Increased Commercial Acquisition Spending
          * Goals Measure Use of Commercial Acquisition
          * Benefits Expected from Commercial Acquisition Have Not Been
          * Traditional Contractors Still Performing Most Commercial Air
     * Air Force Use of Commercial Acquisition in Certain Situation
          * Challenges and Risks Using Commercial Acquisition
          * Commercial Contract Awards Made in a Sole- Source Environmen
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments and Our Evaluation
     * Expected Benefits to the Government
     * Expected Benefits to Contractors
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to the Subcommittee on Readiness and Management Support, Committee
on Armed Services, U.S. Senate

United States Government Accountability Office

GAO

September 2006

DOD CONTRACTING

Efforts Needed to Address Air Force Commercial Acquisition Risk

GAO-06-995

Contents

Letter 1

Results in Brief 2
Background 3
The Air Force Has Increased Commercial Acquisition Spending 7
Air Force Use of Commercial Acquisition in Certain Situations Increases
Risk 13
Conclusions 19
Recommendations for Executive Action 19
Agency Comments and Our Evaluation 20
Appendix I Scope and Methodology 22
Appendix II Additional Benefits Expected from Using Commercial Acquisition
25
Appendix III Traditional and Nontraditional Air Force Contractor Analysis,
Fiscal Years 1996-2004 27
Appendix IV Observations from Review of 20 Air Force Contracts Using
Commercial Acquisition 30
Appendix V Use of Commercial Acquisition in Air Force Major Acquisition
Programs 31
Appendix VI Citations for Commissions, Legislation, and Panel Shown in
Figure 1 34
Appendix VII Comments from the Department of Defense 35

Tables

Table 1: Listing of Traditional Air Force Contractors, Fiscal Years
2003-2004 28
Table 2: Nontraditional Air Force Contractors (New Market Entrants),
Fiscal Years 2003-2004, and Description of Contracted Item or Service 29
Table 3: Commercial Contract Actions in Air Force Major Acquisition
Programs, Fiscal Years 2004-2005 32

Figures

Figure 1: Overview of Commercial Acquisition Legislative History 5
Figure 2: Air Force Increases in Commercial Acquisition Spending, Fiscal
Years 2001-2005 8
Figure 3: Air Force Progress in Meeting Commercial Acquisition Dollar
Goal, Fiscal Years 2001-2005 9
Figure 4: Air Force Progress toward Commercial Acquisition Contract Award
Goal, Fiscal Years 2001-2005 10
Figure 5: Nontraditional and Traditional Air Force Commercial Acquisition
Contractors, Fiscal Years 2003-2004 12

Abbreviations

AFMC Air Force Materiel Command

DFARS Defense Federal Acquisition Regulation Supplement

DOD Department of Defense

FAA Federal Aviation Administration

FAR Federal Acquisition Regulation

IG Inspector General

OSD Office of the Secretary of Defense

RDT&E Research, Development, Test and Evaluation

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separately.

United States Government Accountability Office

Washington, DC 20548

September 29, 2006

The Honorable John Ensign Chairman The Honorable Daniel K. Akaka Ranking
Minority Member Subcommittee on Readiness and Management Support Committee
on Armed Services United States Senate

For decades, the Department of Defense (DOD) has been urged by
commissions, panels, and legislation to make increased use of commercial
acquisitions to take advantage of the efficiencies of the commercial
marketplace. To help ensure the increased use of commercial acquisition,1
the Office of the Secretary of Defense (OSD) established and the Air Force
implemented two commercial acquisition goals to be achieved by the end of
fiscal year 2005. These were to

           o  double the dollar value of commercial acquisition contract
           actions awarded in 1999 (for the Air Force this meant going from
           about $3 billion to about $6 billion) and

           o  strive to increase the number of commercial contract actions
           awarded to 50 percent of all Air Force contract actions.2

In setting these goals, OSD expected that the increased use of commercial
acquisition would provide DOD with greater access to commercial markets
(products and service types) with increased competition, better prices,
and new market entrants and/or technologies. You asked us to examine the
Air Force's efforts to meet these goals and identify any associated risks
in commercial acquisition practices. Specifically, we determined (1) the
extent to which the Air Force has increased its use of commercial
acquisition to obtain expected benefits and (2) the risks associated with
Air Force use of commercial acquisition.

1 We will use the term "commercial acquisition" throughout this report to
refer to commercial item acquisition using Federal Acquisition Regulation
Part 12-Acquisition of Commercial Items.

2 A "contract action" is defined as any new contract award and/or new
delivery order placed against a contract award with a value greater than
$25,000.

To conduct our work, we collected and reviewed information on Air Force
use of commercial acquisition from fiscal year 2001 through fiscal year
2005. We also reviewed all Air Force contracts awarded in fiscal year 2004
for products over $5 million using commercial acquisition.3 We reviewed
the files associated with these contracts at Air Force Materiel Command
(AFMC) locations including (1) Wright-Patterson Air Force Base, Ohio; (2)
Tinker Air Force Base, Oklahoma; (3) Robins Air Force Base, Georgia; and
(4) Hanscom Air Force Base, Massachusetts. We held discussions with
contracting officers and procurement management officials associated with
each of the selected contracts. We also met with representatives of OSD
and the Air Force to discuss various aspects of commercial acquisition
that included goals, progress toward achieving goals, benefits expected,
and associated risks. A more detailed discussion of our scope and
methodology is in appendix I. We conducted our review from July 2005 to
September 2006 in accordance with generally accepted government auditing
standards.

                                Results in Brief

The Air Force has increased its spending using commercial acquisition from
$4.8 billion to over $8 billion from fiscal year 2001 to fiscal year 2005.
This increase responds to OSD's emphasis to expand commercial acquisition
to provide the benefits of greater access to commercial markets so that
DOD can increase competition, obtain better prices, and attract new market
entrants (nontraditional contractors) and/or technologies. While the Air
Force more than doubled its spending on commercial acquisition, it has not
attempted to determine the extent that the increased use of commercial
acquisition has resulted in the benefits expected. Our analysis indicates
that for at least one of the expected benefits, attracting new market
entrants, the expected benefit has not materialized. For the most part the
Air Force's commercial acquisition was with traditional defense
contractors.

Our work, that of DOD's Inspector General, and that of others has shown
that government contracting officials face challenges in using commercial
acquisition. For example, improperly classifying an acquisition as a
commercial acquisition leaves the Air Force vulnerable to accepting prices
that may not be the best value for the department because under commercial
acquisition regulations the government is prohibited from requesting cost
or pricing data. A high-ranking DOD acquisition official recently
testified before the Federal Acquisition Advisory Panel that he is
concerned about items and services being identified as commercial that are
not sold in an existing marketplace because under these circumstances the
government lacks assurances that the price paid is reasonable. 4 Our
review of Air Force contract files showed that Air Force officials
disagreed about the classification of some acquisitions as commercial. The
Air Force's use of commercial acquisition has also been accompanied by an
increased amount of dollars being awarded sole-source. Similar to
misclassifying acquisitions as commercial, the lack of market-based
competition may result in the Air Force's acceptance of prices that may
not be the best value for the department. Some Air Force contracting
officials were concerned with whether they had sufficient data to ensure
they were negotiating good deals, especially in a sole-source situation.
OSD cites the general advantages of competition and in its policy urges
contracting officials to avoid sole-source situations because sometimes
contractors may attempt to exploit the lack of competitive markets and
demand unreasonable prices. While OSD acknowledges some sole-source
situations may be unavoidable, we found increasing sole-source spending on
Air Force commercial contracts over the last 6 years. Of the 20 new
commercial acquisition awards for products in fiscal year 2004, half were
awarded sole-source.

3 In fiscal year 2004, the Air Force awarded 20 commercial acquisition
contracts each with a value of $5 million or more.

We are making two recommendations to help ensure that the Air Force is
able to measure the benefits expected of commercial acquisition and
improve commercial acquisition by mitigating risks in certain
circumstances. DOD agreed with the recommendations, in principle, and
identified actions to address them.

                                   Background

The definition of commercial acquisition has evolved over the last decade
to mean the purchase of items customarily used by and sold (or offered) to
the general public, including items with minor modifications of a type not
customarily available in the commercial marketplace made to meet federal
government requirements, or services of a type offered and sold
competitively in substantial quantities in the commercial marketplace.5

4 This is a panel authorized by Section 1423 of the Services Acquisition
Reform Act of 2003 (Div. A, Title XIV, National Defense Authorization Act
for Fiscal Year 2004, Pub. L. No. 108-136, (2003)) with representation
from acquisition experts in government, private industry, and academia.

The idea of increasing the government's use of commercial acquisition is
not new. Figure 1 identifies key legislation and federal-level commissions
that emphasized the use of and expected benefits of commercial acquisition
over the last several decades.

5 See Federal Acquisition Regulation (FAR) 2.101. In part "Commercial
item" means

(1) Any item, other than real property, that is of a type customarily used
by the general public or by non-governmental entities for purposes other
than governmental purposes, and-

(i) Has been sold, leased, or licensed to the general public; or

(ii) Has been offered for sale, lease, or license to the general public;

(2) Any item that evolved from an item described in paragraph (1) of this
definition through advances in technology or performance and that is not
yet available in the commercial marketplace, but will be available in the
commercial marketplace in time to satisfy the delivery requirements under
a Government solicitation;

(3) Any item that would satisfy a criterion expressed in paragraphs (1) or
(2) of this definition, but for-

(i) Modifications of a type customarily available in the commercial
marketplace; or

(ii) Minor modifications of a type not customarily available in the
commercial marketplace made to meet Federal Government requirements. Minor
modifications means modifications that do not significantly alter the
nongovernmental function or essential physical characteristics of an item
or component, or change the purpose of a process. Factors to be considered
in determining whether a modification is minor include the value and size
of the modification and the comparative value and size of the final
product. Dollar values and percentages may be used as guideposts, but are
not conclusive evidence that a modification is minor;

(4) Any combination of items meeting the requirements of (1), (2) , (3) or
(5) of this definition that are of a type customarily combined and sold in
combination to the general public;

(5) Installation services, maintenance services, repair services, training
services, and other services in support of an item in (1) through (4) and
the source of such services provides similar services contemporaneously to
the general public under terms and conditions similar to those offered to
the federal government;

(6) Services of a type offered and sold competitively in substantial
quantities in the commercial marketplace based on established catalog or
market prices.

Figure 1: Overview of Commercial Acquisition Legislative History

Note: Citations for the Commissions, Legislation, and Panel shown in
figure 1 are listed in appendix VI.

The National Defense Authorization Act for Fiscal Year 1987 required DOD
to submit a report to Congress on its progress toward meeting the
requirement to acquire commercial items to the maximum extent practicable.
6 DOD's subsequent report to Congress in response to the act's requirement
identified several impediments to the use of commercial acquisition,
including a requirement that contractors provide cost or pricing data to
the government. Identification of providing the government cost or pricing
data as an impediment was in contrast to requirements in the Truth in
Negotiations Act of 1962. 7 This act generally requires contractors to
submit cost or pricing data to the government before the award of a
negotiated contract and certify that the data are accurate, complete, and
current as a way to provide information parity between the contractor and
the government. 8 Because a primary maxim in contracting is that
competition drives down prices, one of the purposes of the legislation was
to provide the government with all the facts on the cost or pricing data
the contractor used to prepare a proposal, including, as applicable here,
when there is no competition. In that way, the government believed it
would have the information necessary to protect itself from paying
excessive prices.

In the late 1980s and early 1990s, however, concerns about impediments
that might prevent commercial companies from doing business with the
government continued. The concern about requiring cost or pricing data in
commercial acquisition was a factor in passing several laws in the 1990s
designed to streamline acquisition in general, and commercial acquisition
specifically, by more broadly exempting commercial acquisitions from the
cost or pricing data requirement (see fig. 1).

Although commercial acquisition regulations now preclude the government
from obtaining cost or pricing data from contractors in commercial
acquisitions, the government is permitted to obtain pricing information
from sources other than the offering contractor. If this information
proves inadequate, the government can require the offering contractor to
provide additional information, known as information other than cost or
pricing data, although the government must, to the maximum extent
practicable, limit the scope of the request to include only information in
a form regularly maintained by the offering contractor.9

6 Defense Acquisition Improvement Act of 1986, contained in the National
Defense Authorization Act for Fiscal Year 1987, Pub. L. No. 99-661, Div.
A, Title IV, Section 907(b), (1986).

7 Pub. L. No. 87-653, Sept. 10, 1962.

8 The Truth in Negotiations Act (TINA) provided a limited exemption for
the submission of cost or pricing data when a negotiated price was based
on established catalog or market prices of commercial items sold in
substantial quantities to the general public, now known as
commercial-off-the-shelf.

In early 2001, OSD reemphasized to the military departments and defense
agencies that commercial acquisition should be used to the maximum extent
possible to effectively provide the technological advantages needed to win
future conflicts. OSD concluded that the military departments and agencies
must uniformly look first to the commercial marketplace before developing
new systems, upgrading legacy systems or procuring spare parts and support
services. To help ensure the increased use of commercial acquisition, OSD
established and the Air Force implemented two commercial acquisition goals
to be achieved by the end of fiscal year 2005. These were to

           o  double the dollar value of commercial acquisition contract
           actions awarded in 1999 (for the Air Force this meant going from
           about $3 billion to about $6 billion) and

           o  strive to increase the number of commercial contract actions
           awarded to 50 percent of all Air Force contract actions.10

           In setting these goals, OSD expected that the increased use of
           commercial acquisition would provide DOD with greater access to
           commercial markets (products and service types) with increased
           competition, better prices, and new market entrants and/or
           technologies. Additional expected benefits of commercial
           acquisition are listed in appendix II.

           The Air Force Has Increased Commercial Acquisition Spending
			  
			  As its overall spending has increased, the Air Force has increased
           spending using commercial acquisition, from $4.8 billion in fiscal
           year 2001 to over $8 billion in fiscal year 2005 (see fig. 2). The
           Air Force also has had some success in achieving commercial
           acquisition goals; for example, it has doubled the amount spent
           using commercial acquisition since fiscal year 1999 (see fig. 3).
           However, it has not achieved the goal of making 50 percent of all
           contract actions commercial (see fig. 4). Nonetheless, the Air
           Force did not establish measures nor did it collect information to
           determine if the benefits expected from commercial acquisition
           were being achieved. As a result, it is unclear if or how the Air
           Force has benefited from increased use of commercial acquisition.
           The Air Force has used commercial acquisition to buy a broad range
           of goods and services, including major systems. For example, the
           Air Force used commercial acquisition to buy the Joint Primary
           Aircraft Training System and a range of goods and services such as
           radio and communication equipment, aircraft components, and repair
           services. However, our analysis indicates that for at least one of
           the expected benefits, attracting new market entrants, the
           expected benefit has not materialized. The majority of Air Force
           commercial contracts in fiscal years 2003-2004 were made to
           traditional defense contractors.

           Figure 2: Air Force Increases in Commercial Acquisition Spending,
           Fiscal Years 2001-2005

           Goals Measure Use of Commercial Acquisition
			  
			  The Air Force was able to achieve its goal of doubling spending
           using commercial acquisition by the end of fiscal year 2003 and
           has exceeded that goal through fiscal year 2005 (see fig. 3).

           Figure 3: Air Force Progress in Meeting Commercial Acquisition
           Dollar Goal, Fiscal Years 2001-2005

           However, the Air Force did not increase commercial contract
           actions awarded to 50 percent of all awards (see fig. 4).

           Figure 4: Air Force Progress toward Commercial Acquisition
           Contract Award Goal, Fiscal Years 2001-2005

           These goals expired at the end of fiscal year 2005 and were not
           extended or renewed at the time this report was published. An
           Office of Under Secretary of Defense, Defense Procurement and
           Acquisition Policy, senior procurement analyst noted that he
           believed the goals have essentially been met and that the current
           law stating that nondevelopmental items (commercial items) are to
           be used to the maximum extent practicable11 is sufficient.

           Benefits Expected from Commercial Acquisition Have Not Been Measured
			  
			  OSD has indicated that the increased use of commercial acquisition
           should bring about the benefits of greater access to commercial
           markets, including increased competition, getting better prices,
           and access to new market entrants (contractors) and/or
           technologies. Although the Air Force has increased the use of
           commercial acquisition, neither OSD nor the Air Force has
           attempted to measure if the benefits expected from this increased
           use are being achieved. The Air Force has stated that the
           appropriateness of the application of the FAR commercial item
           definition determines its use of the authority, not whether any
           benefits would be gained.

           A study sponsored by the Air Force and conducted by the RAND
           Corporation, a nonprofit research organization, in 2005 looked at
           Air Force commercial acquisition and found that the data needed to
           determine if the expected benefits of commercial acquisition were
           being realized were not available. 12 The report concluded that
           this lack of data has made it difficult to measure whether this
           type of acquisition provides the benefits claimed or what
           challenges exist. With respect to anticipated cost and schedule
           savings, RAND reported that DOD provided no direction for tracking
           these expected benefits, and as a result, such data are not
           collected by either DOD or contractors. RAND also reported that
           DOD does not develop estimates of the benefits expected from using
           commercial acquisition versus other types of acquisitions prior to
           commencing contract award activities. RAND did not comment on the
           cost of quantifying commercial acquisition benefits.

           Traditional Contractors Still Performing Most Commercial Air Force
			  Contracts
			  
			  While the Air Force has used commercial acquisition to buy a broad
           range of goods and services, including major systems, it continues
           to do business mainly with traditional contractors. By increasing
           the use of commercial acquisition, OSD hoped the Air Force would
           be able to draw nontraditional contractors into defense
           contracting and gain greater access to new commercially developed
           technologies. Nontraditional contractors were expected to offer
           more efficient business practices and new technologies to meet
           government requirements. OSD commercial acquisition guidance
           emphasizes the need to incorporate commercial items into defense
           systems because the commercial sector often drives critical
           technologies. Even with this increased emphasis on commercial
           acquisition, the Air Force has primarily continued to award its
           commercial contracts to traditional defense contractors.

           To determine the extent to which the Air Force attracted
           nontraditional contractors using commercial acquisition, we
           reviewed acquisition data on the 98 contractors who received large
           (over $5 million) commercial contracts in fiscal years 2003 and
           2004. We found that 87 of the 98 contractors, or 89 percent, were
           included on DOD's Top 100 or Air Force Top 50 contractor lists13
           or had previously received contracts with DOD14 since fiscal year
           1996.15 Only 11 contractors had not previously received a contract
           or were not on either list (see fig. 5).

           Figure 5: Nontraditional and Traditional Air Force Commercial
           Acquisition Contractors, Fiscal Years 2003-2004

           Further, 7 of the 11 contractors that had not previously received
           large dollar contracts from DOD performed more routine services
           like transportation, housekeeping, or architect and engineering
           services. A list of the traditional and nontraditional contractors
           is included as appendix III.

           In a 2005 commercial acquisition study, RAND concluded that there
           is very little evidence that the use of commercial acquisition has
           encouraged greater numbers of civilian (non-DOD) commercial
           contractors to compete for DOD contracts for major military-unique
           items.16

           In general, we found that commercial acquisition was used to buy a
           variety of goods and services. These include but are not limited
           to aircraft engines and structural components, telecommunication
           services, maintenance and repair of equipment, program
           management/support services, and housekeeping services.

           We also found three major Air Force acquisition programs for which
           commercial actions constituted at least 75 percent of contract
           dollars obligated. The three major acquisition programs are

           o  the latest version of the Air Force C-130 cargo aircraft;

           o  the Joint Primary Aircraft Training System, including a new
           trainer aircraft, the ground-based training system, and a training
           management system; and

           o  the National Airspace System to modernize DOD air traffic
           control facilities in parallel with the Federal Aviation
           Administration (FAA) to ensure safe operation of aircraft in
           accordance with statutes and DOD/FAA agreements, according to an
           Air Force official.

           Air Force Use of Commercial Acquisition in Certain Situations
			  Increases Risk
			  
			  Our work, that of DOD's Inspector General, and that of others has
           shown that government contracting officials face challenges using
           commercial acquisition. For example, improperly classifying an
           acquisition as a commercial acquisition leaves the Air Force
           vulnerable to accepting prices that may not be the best value for
           the department because under commercial acquisition regulations,
           the government is precluded from requesting cost or pricing
           information. Our review of Air Force contract files and DOD
           Inspector General reports showed that Air Force officials
           disagreed about the designation of some acquisitions as
           commercial. Furthermore, the director of Defense Procurement and
           Acquisition Policy recently testified before the Federal
           Acquisition Advisory Panel that he is concerned about some items
           and services being identified as commercial that are not sold in
           an existing marketplace because there are no assurances that the
           price is reasonable. The Air Force use of commercial acquisition
           has been accompanied by an increased amount of dollars being
           awarded sole-source. Similar to misclassifying acquisitions as
           commercial, the lack of market-based competition may result in the
           Air Force's acceptance of prices that may not be the best value
           for the department. OSD cites the general advantages of
           competition and in its policy urges contracting officials to avoid
           sole-source situations because sometimes contractors may attempt
           to exploit the lack of competitive markets and demand unreasonable
           prices. While OSD acknowledges some sole-source situations may be
           unavoidable, we found increasing sole-source spending on Air Force
           commercial contracts over the last 6 years. Also, of the 20 new
           commercial awards for products over $5 million in fiscal year
           2004, half were awarded sole-source, with traditional contractors
           receiving most of those sole-source awards.

           Challenges and Risks Using Commercial Acquisition
			  
			  Misclassification of items as commercial can leave the Air Force
           vulnerable to accepting prices that are not the best value for the
           department. Our review of Air Force contract files included two
           cases where there were internal Air Force disagreements regarding
           determinations of commerciality. The items in question were a
           C-130E and a C-130H aircraft. During our review, some Air Force
           officials also expressed concern, especially in sole-source
           situations, about their ability to determine whether the prices
           being charged are reasonable. A major difference between a Federal
           Acquisition Regulation (FAR) Part 15 "Contracting by Negotiation"
           and Part 12 "Acquisition of Commercial Items" is that under Part
           12 the government is prohibited from obtaining cost or pricing
           data. Under FAR Part 15, the government is generally required to
           obtain cost or pricing data (unless certain exceptions apply) from
           contractors to help determine if it is getting a good price.

           DOD's Inspector General has recently issued reports asserting that
           three Air Force acquisitions were inappropriately designated as
           commercial.17 The Inspector General concluded that three Air Force
           acquisitions-the C-130J cargo aircraft, the KC-767A tanker
           aircraft, and F-16 simulator services-should not have been planned
           or purchased as commercial acquisitions because they were unique
           to the military. For example, the Inspector General reported in
           March 2006 that the Air Force had improperly used commercial
           acquisition to buy F-16 simulator services because contracting
           officials misinterpreted the definition of commercial services. As
           a result, the Air Force placed itself at a disadvantage,
           restricting its ability to determine whether the price charged was
           reasonable. By using commercial acquisition, the Air Force was
           precluded from requesting certified cost or pricing data for a
           service in which the department is the sole customer. On the basis
           of the Inspector General's report, the Air Force agreed, and has
           begun, to change its contracting approach from a commercial
           acquisition to a noncommercial acquisition.

           Other recent efforts to improve the government's use of commercial
           acquisition include efforts by a high-level panel to consider
           changes to potentially clarify the definition of commercial
           acquisition as well as efforts by Air Force officials seeking
           similar regulatory changes.

           The Federal Acquisition Advisory Panel is examining, among other
           things, commercial acquisition practices. The Acquisition Advisory
           Panel is also reviewing preliminary recommendations to modify the
           commercial item definition found in federal regulation. The panel
           noted, in a briefing on its Web page, that in the private sector,
           competition in efficient markets is a principle relied on to a
           great extent to assure price reasonableness. The panel cites three
           government commercial acquisition practices related to the
           commercial item definition that depart from private-sector
           practices: First, commercial acquisition procedures are used for
           sole-source contracts; second, items are acquired commercially
           even when the government is the predominant or only buyer; and
           third, the "commercial item" definition is broad enough to admit
           items for which an efficient market does not exist to ensure price
           reasonableness.

           DOD's Defense Procurement and Acquisition Policy Director recently
           addressed the Acquisition Advisory Panel and identified concerns
           that some acquisitions are being designated commercial that are
           not commercial.18 The Director expressed his view that a
           commercial item is one in which a marketplace exists, meaning the
           item has been sold to commercial companies (not just DOD). The
           Director stated that if someone is selling "to us (the government)
           and only to us, that's not a commercial price." In addition, the
           Director testified that DOD intends to create a tool, a decision
           matrix, that will enable contracting officials to identify the
           right contracting mechanism after completing their market
           research. The purpose is to have DOD and the military services use
           commercial acquisition effectively and correctly, in a consistent
           way.

           OSD guidance specifically states that commercial acquisition was
           not intended to allow military-unique items to be purchased
           commercially. Misclassification of items as commercial can leave
           the Air Force vulnerable to accepting prices that are not the best
           value for the department. When an item is designated as
           commercial, the Air Force should be able to determine if the price
           is reasonable on the basis of prices in the commercial market. If
           the Air Force designates an item as being commercial when it is
           not readily available in the commercial market, this limits its
           ability to assess the reasonableness of the contractor's price
           because it might, especially in sole-source situations, have less
           information on prices to make its decision.

           Restrictions on the use of commercial acquisition to procure
           military unique major weapons systems were recently established in
           the Fiscal Year 2006 DOD Authorization Act.19 The act requires
           that to use commercial acquisition procedures for major weapon
           systems, the Secretary of Defense must now (1) determine the
           procurement meets the definition of "commercial item," (2)
           determine that national security objectives necessitate the
           purchase of the system as a commercial item, and (3) give Congress
           at least 30 days notice before purchasing a major acquisition
           program using commercial acquisition. To implement this
           requirement, an interim Defense Federal Acquisition Regulation
           Supplement (DFARS) rule is pending publication.20 The Air Force
           intends to implement the DFARS rule by requiring requests for
           Secretary of Defense approval of major weapon systems to be
           purchased as commercial items, include a description of the
           benefits associated with increased competition, better prices, and
           new market entrants and/or technologies.

           When we discussed the purchase of major weapon systems using
           commercial acquisition with top DOD officials, they informed us
           there are plans to transition both the C-130J and the Joint
           Primary Aircraft Training System (JPATS) contracts, as well as a
           future contract for F-16 fighter aircraft simulator services, from
           commercial to noncommercial contracts. Further, a top DOD
           acquisition official said that in the future DOD will more
           carefully scrutinize the use of commercial acquisition, especially
           on major acquisition programs.

           Further, Air Force contracting officials have submitted proposals
           as cases to the Defense Acquisition Regulation Council and the
           Civilian Agency Acquisition Council seeking clarification of the
           definitions of "commercial item" and "cost or pricing data"
           related to commercial acquisition. While one case was closed, it
           highlights continued efforts to appropriately classify items as
           commercial. For example, the Air Force proposed a change to the
           DFARS,21 which was subsequently referred by Defense Acquisition
           Regulation Council as a case for the Federal Acquisition
           Regulation,22 to tighten the commercial item definition. The
           definition found in federal regulation states in part: "commercial
           item means any item, other than real property, that is of a type
           customarily used by the general public." In an attachment to the
           2001 memo instituting the commercial acquisition goals, OSD
           cautioned that the phrase "of a type" is not intended to allow the
           use of commercial acquisition to acquire sole-source,
           military-unique items that are not closely related to items
           already in the marketplace.

           A second FAR case attempts to address confusion about what
           qualifies as cost or pricing data in relation to commercial
           acquisition. 23 The case, if made final, will clarify that the
           government can ask contractors for cost or pricing data, just not
           certified cost or pricing data.

           Commercial Contract Awards Made in a Sole- Source Environment Can
			  Increase Risk
			  
			  OSD emphasis on increasing the use of commercial acquisition
           includes guidance on limiting use of commercial acquisition for
           sole-source procurements. This guidance advises contracting
           officials to avoid sole-source commercial acquisitions, in part
           because sometimes contractors may attempt to exploit the lack of
           competition and demand unreasonable prices. When such situations
           are unavoidable, OSD advocates use of other price analysis tools
           outlined in federal regulation to mitigate risk.

           The FAR provides that adequate price competition on contracts is
           generally sufficient to determine price reasonableness. Adequate
           price competition means (1) the government receiving at least two
           offers submitted by responsible offerors, competing independently,
           that satisfy the government requirement; (2) there was a
           reasonable expectation of competition; or (3) a proposed price is
           clearly reasonable based on price analysis.24 In the event price
           competition is not sufficient, the government can seek additional
           information beginning with government and additional sources other
           than the offeror, and last from the offeror if necessary.25

           There are circumstances when an acquisition, including one for
           commercial items, can be awarded without competition. These
           include instances in which (1) there is only one responsible
           source and there are no other supplies or services that will
           satisfy agency requirements, such as when a contractor has
           exclusive data rights and copyrights; (2) the government has an
           unusual and compelling urgent need for a product or service; or
           (3) the acquisition is required by statute or international
           agreement. Such awards, for other than full and open competition
           must be justified and approved in writing.26

           Despite guidance directing the Air Force to avoid sole-source
           situations, from fiscal years 2000 through 2005, sole-source
           spending on Air Force commercial acquisition contracts more than
           doubled. Specifically, sole-source dollars as a percentage of
           total commercial acquisition dollars for awards over $5 million
           have increased from 12 percent in fiscal year 2000 to 26 percent
           in fiscal year 2005. This recent trend appears inconsistent with
           OSD guidance to avoid sole-source commercial acquisition
           situations.

           Our review found that of all 20 fiscal year 2004 commercial
           product acquisition awards over $5 million, 10 of the Air Force's
           were made on a sole-source basis. Altogether, fiscal year 2004
           obligations on the 20 contracts totaled $329 million. Obligations
           on the 10 sole-source awards totaled $172 million, or 52 percent
           (additional observations from our review of the 20 contracts are
           found in app. IV).27 Furthermore, at least one of the expected
           benefits of commercial acquisition-attracting new market
           entrants-has not materialized through the Air Force's use of
           sole-source commercial acquisitions for products in fiscal year
           2004. Specifically, traditional defense contractors were used on 8
           of the 10 fiscal year 2004 sole-source product awards.

           Conclusions
			  
			  By establishing goals that only measure use and not the benefits
           expected, the Air Force is unable to determine if it has benefited
           from increased use of commercial acquisition. The benefits to the
           government of commercial acquisition have not been demonstrated.
           Little evidence has been collected on the claimed benefits such as
           cost savings, better pricing, increased access to commercial
           vendors, and greater numbers of commercial firms to compete for
           Air Force contracts.

           Not only is it unclear whether commercial acquisition is bringing
           benefits to the Air Force, the Air Force may be increasing risk
           without knowing if the added risk is balanced by progress toward
           achieving benefits that may have the potential to demonstrate
           considerable savings. While recognizing that the Air Force may
           need to make some sole-source purchases using commercial
           acquisition, the trend of increasing sole-source spending appears
           contradictory to OSD guidance to limit situations where
           contractors may attempt to exploit the lack of competitive markets
           and demand unreasonable prices. When sole-source situations are
           necessary, contracting officials should be able to identify the
           benefits of using commercial acquisition for individual
           procurements that would otherwise be unattainable.

           Recommendations for Executive Action
			  
			  To help ensure that the Air Force is able to measure the benefits
           expected from commercial acquisition, we recommend collecting
           information that would allow evaluating the extent of cost
           savings, increased access to commercial markets, and greater
           access to nontraditional contractors. For example, the Air Force
           could measure the number of nontraditional contractors it reaches
           using commercial acquisition.

           To help improve commercial acquisition and reduce the potential
           for risk by limiting situations where commercial acquisition
           contracts are being awarded sole-source, we also recommend that
           the Secretary of the Air Force strive to limit the acquisition of
           commercial products and services in sole-source environments in
           concert with OSD guidance. However, in the cases where it is
           necessary to award sole-source, the Secretary should collect the
           information necessary to evaluate the benefit(s) of awarding
           commercial verses a noncommercial contract.

           Agency Comments and Our Evaluation
			  
			  DOD provided written comments on a draft of this report. DOD
           agreed with the recommendations, in principle, and described the
           actions it will take to address our recommendations. The comments
           are discussed below and are reprinted in appendix VII.

           DOD partially agreed with our recommendation to measure the
           benefits expected from commercial acquisition by collecting
           information to evaluate the extent of cost savings, increased
           access to commercial markets, and greater access to nontraditional
           contractors. DOD stated that it agrees in principle it would be
           worthwhile to know whether the expected benefits from commercial
           acquisition are materializing and that it will examine ways to
           collect information on the number of nontraditional contractors it
           is reaching through commercial acquisition. However, DOD noted
           that the collection of information for the expected benefits would
           be expensive. We believe DOD is taking the first step necessary to
           evaluate whether it has benefited from the increased use of
           commercial acquisition. We encourage such efforts, and would
           expect that if DOD collects information on nontraditional
           contractors it reaches using commercial acquisition and it is
           still unable to evaluate whether significant benefits exist from
           using commercial acquisition, DOD will recognize the need to
           collect additional information.

           DOD's comments included an attachment reflecting the Air Force
           views on our draft report. We incorporated those views where
           appropriate.

           We will send copies of this report to the Secretary of Defense,
           the Secretary of the Air Force, appropriate congressional
           committees, and other interested parties. We will also make copies
           available to others on request. In addition, this report will be
           available at no charge on GAO's Web site at http://www.gao.gov .

           If you or your staff have any questions about this report, please
           contact me at (202) 512-4841 or by e-mail at [email protected] .
           Contact points for our Offices of Congressional Relations and
           Public Affairs may be found on the last page of the report. Other
           key contributors to this report were David E. Cooper, Director,
           Penny Berrier Augustine, Assistant Director, Lily Chin, Keith
           Hudson, Julia Kennon, Andrew Redd, Don Springman, Marie Ahearn,
           and Robert Swierczek.

           Katherine V. Schinasi, Managing Director

           Acquisition and Sourcing Management

           Appendix I: Scope and Methodology
			  
			  To conduct our work, we reviewed federal acquisition and
           commercial acquisition regulations, as well as the Office of
           Secretary of Defense (OSD), Air Force, and Air Force Materiel
           Command (AFMC) guidance pertaining to commercial acquisition. We
           also reviewed OSD and Air Force commercial acquisition goals since
           2001 as well as expected benefits and risks associated with
           commercial acquisition. We met or held discussions with
           representatives of OSD and the Air Force to discuss various
           aspects of commercial acquisition including goals, progress toward
           achieving goals, benefits expected, and associated risks. In
           addition we met with Department of Defense (DOD) Inspector General
           officials to discuss audit report findings related to commercial
           acquisition.

           To understand the more recent determinations of commercial
           acquisition, we reviewed all 20 large (over $5 million) Air Force
           commercial contracts awarded for products in fiscal year 2004. We
           reviewed the contract files associated with these contracts at
           locations of AFMC including (1) Wright-Patterson Air Force Base,
           Ohio; (2) Tinker Air Force Base, Oklahoma; (3) Robins Air Force
           Base, Georgia; and (4) Hanscom Air Force Base, Massachusetts. We
           also reviewed a commercial contract (including two major
           modifications) for a major acquisition program called the Joint
           Primary Aircraft Training System. We held discussions with
           contracting officers and procurement management officials
           associated with the selected contracts.

           To examine the extent that Air Force commercial contracts were
           awarded to new market entrants, we utilized data from DOD's
           procurement database (DD 350) for contract actions from fiscal
           year 1996 through fiscal year 2004, which was the last full year
           of data available at the time we performed our analysis. Query
           results were limited to contract actions greater than $5 million,
           as the Federal Acquisition Regulation (FAR) allowed actions below
           that threshold to employ simplified acquisition procedures.1

           To determine the Air Force new market entrant contractors,2 we
           took the contractors with contract actions in fiscal years 2003
           and 2004 and determined whether they had received any previous DOD
           military department contracts from fiscal year 1996 through fiscal
           year 2002. 3 We considered contractors who had not received
           contracts during this period new to DOD. We also examined Federal
           Supply/Service Class codes to determine the nature of work
           performed by Air Force contractors.

           To determine the extent to which the Air Force competed its
           commercial contracts, we reviewed data the Air Force provided
           summarizing its sole-source commercial acquisitions from fiscal
           year 2000 through fiscal year 2005. We defined "sole-source" as
           those actions either not competed or not available for
           competition, according to DOD classification codes. Again, the
           data were for acquisitions over $5 million.

           For our analysis of the use of commercial acquisition in Air Force
           major acquisition programs, we included the Major Defense
           Acquisition Programs listed on OSD's Selected Acquisition Report
           summary tables for fiscal years 2001 through 2005, except programs
           designated RDT&E (Research, Development, Test, and Evaluation). We
           also included joint programs from GAO's 2006 Assessment of
           Selected Major Weapon Programs for which the Air Force was
           mentioned as the lead buyer. We queried the DD 350 database to
           determine commercial and total contract obligations on these major
           acquisition programs over the period constituting fiscal year 2004
           through fiscal year 2005.

           We conducted our review from July 2005 to September 2006 in
           accordance with generally accepted government auditing standards.

           Appendix II: Additional Benefits Expected from Using Commercial
			  Acquisition
			  
			  Expected Benefits to the Government
			  
			  The government expected to benefit from the use of commercial
           acquisition instead of noncommercial acquisition. Several of the
           benefits expected include the government being able to

           o  rely on the contractor's quality assurance processes and
           warranties in lieu of government inspections,1

           o  decrease the amount of time it normally takes to award a
           contract,2

           o  employ a streamlined contract clause structure,3 and

           o  use simplified acquisition procedures on high dollar amount
           contracts in certain circumstances.4

           Expected Benefits to Contractors
			  
			  There are also several advantages to contractors of using
           commercial acquisition when doing business with the government.
           Generally contractors are

           o  not required to submit cost or pricing data to the government,5

           o  not required to adhere to cost accounting standards on firm
           fixed-price contracts,6

           o  not required to disclose more technical data to the government
           than they would customarily disclose to the public,7

           o  able to propose more than one product that will meet the
           government's need,8 and
           o  able to submit existing product literature in lieu of unique
           technical proposals.9

           Appendix III: Traditional and Nontraditional Air Force Contractor
			  Analysis, Fiscal Years 1996-2004
			  
			  To examine the extent that Air Force commercial contracts were
           awarded to nontraditional contractors or new market entrants, we
           used data from DOD's procurement database (DD 350) for contract
           actions from fiscal year 1996 through fiscal year 2004-the last
           full year of available data at the time of analysis. Query results
           were limited to Air Force contract actions greater than $5
           million.

           We identified 98 contractors who received commercial Air Force
           awards in either fiscal year 2003 or fiscal year 2004. Forty-six
           of those 98 contractors also received large-dollar commercial
           awards in prior years back through fiscal year 2000 or were
           included on DOD Top 100 or Air Force Top 50 contractor lists.1 We
           considered them traditional contractors. For the remaining 52
           contractors who did not receive large-dollar awards during that
           period (and who were not on DOD top 100 or Air Force top 50
           contractor lists), we used DOD's DD 350 procurement database to
           determine if they had performed any contracts above $25,000 for
           the Army, Navy, or Air Force military departments, from fiscal
           year 1996 through fiscal year 2002. Of the 52 contractors, 41 had
           received military department awards during this period and were
           therefore considered traditional contractors. We considered the 11
           contractors who did not perform military department contracts
           during this period to be new to DOD. Table 1 lists the 87 total
           traditional contractors and the 11 new contractors according to
    	     our analysis.

9 FAR 15.402 and 15.403-3.

10 A contract action being defined as any new contract award and/or new
delivery order placed against a contract awarded with a value greater than
$25,000.

11 Defense Acquisition Improvement Act of 1986, contained in the National
Defense Authorization Act for Fiscal Year 1987, Pub. L. No. 99-661, Div.
A, Title IV, Section 907(a), (1986).

12RAND, Price-Based Acquisition: Issues and Challenges for Defense
Department Procurement of Weapon Systems, (Santa Monica, California:
2005).

13 These lists, compiled by DOD's Statistical Information Analysis
Division, present summary data on the companies receiving the largest
dollar volume of DOD and Air Force prime contract awards. We used only
those lists describing contractors' standings for fiscal year 2004.

14 We limited our evaluation to contractors that had done business with
the Army, Navy, and Air Force.

15 Fiscal year 1996 marks the first year for which DOD's procurement
database (DD 350) utilized the commercial item designation.

16 RAND, Price-Based Acquisition: Issues and Challenges for Defense
Department Procurement of Weapon Systems, (Santa Monica, CA: 2005).

17 Inspector General, DOD, Acquisition: Contracting for and Performance of
the C-130J Aircraft, D-2004-102, July 23, 2004; Management Accountability
Review of the Boeing KC-767A Tanker Program, OIG-2004-171, May 13, 2005;
and Acquisition: Procurement Procedures Used for F-16 Mission Training
Center Simulator Services, D-2006-065, March 24, 2006, (Washington, D.C.).

18 Transcript of proceedings of a public meeting before the Acquisition
Advisory Panel, June 14, 2006.

19 National Defense Authorization Act for Fiscal Year 2006, Pub. L. No.
109-163 section 803 (2006).

20 DFARS Case 2006-D012, Procurement of Major Weapon Systems as Commercial
Items.

21 DFARS Case 2004-D019 was closed and proposed as FAR case 2005-043.

22 FAR Case 2005-043 closed with no further action because the Federal
Acquisition Regulation Civilian Agency Acquisition Council decided that
the proposed change was not necessary. The council concluded there was
insufficient rationale to adopt the DOD-proposed definition or otherwise
clarify the meaning "of a type" as it relates to commercial items.

23 FAR Case 2005-036.

24 FAR 15.403-1(c).

25 FAR 15.402.

26 FAR 6.303.

27 Including fiscal year 2005 obligations on those same contracts,
sole-source actions account for 39 percent of total obligated dollars.

1 FAR 13.500.

2 Contractors were identified and grouped by parent companies as of fiscal
year 2004. Parent companies were determined by matching Data Universal
Numbering System (DUNS) numbers or by matching company names in DOD's DD
350 procurement database. When possible, company names were matched with
names on DOD's Statistical Information Analysis Division fiscal year 2004
Top 100 DOD parent companies and subsidiaries list. In some cases where
subsidiary lists were not available, companies with the same DUNS number
but different names (and vice versa) were counted as one company. We
considered all companies with distinct names and DUNS numbers as separate
entities.

3 We did not consider as new any contractors appearing on DOD's
Statistical Information Analysis Division (SIAD) fiscal year 2004 DOD Top
100 and Air Force Top 50 contractor lists, but we did include them in our
total number of contractors receiving awards in fiscal years 2003 or 2004
if they received awards in either of those years. The DOD Top 100 and Air
Force Top 50 lists are compiled by DOD's Statistical Information Analysis
Division. The lists represent those contractors receiving the largest
dollar volume of DOD prime contract awards. We used only those lists
describing contractors' standings for fiscal year 2004.

1 Federal Acquisition Regulation (FAR) 12.208, 12.402 and 12.404(b).

2 FAR 12.204(b), 12.205(c).

3 FAR 12.301(d),(e) and (f) and 12.302

4 FAR 13.500(e).

5 FAR 15.403-1(b)(3).

6 FAR 12.214.

7 FAR 12.211.

8 FAR 12.205(b).

9 FAR 12.205(a).

1 These lists, compiled by DOD's Statistical Information Analysis
Division, present summary data on companies receiving the largest dollar
volume of DOD and Air Force prime contract awards. We used only those
lists describing contractors' standings for fiscal year 2004.

Table 1: Listing of Traditional Air Force Contractors, Fiscal Years
2003-2004

1  ABB Automation                    45 Intergraph                         
2  ACS Defense                       46 International Business Machine     
3  Adacel Systems                    47 ITT Industries ITT Gilfi           
4  Aeroflex Wichita                  48 Jacobs Engineering Group           
5  Aerovironment                     49 King Aerospace                     
6  AIL Systems                       50 Kovatch                            
7  Akima                             51 L3 Communications                  
8  Alaska Industrial Resources       52 Lockheed Martin                    
9  Alutiiq Security Technology       53 Logtec                             
10 American Management Systems       54 Lynden Air Cargo LLC               
11 ARINC                             55 Madison Research                   
12 ASAP Software                     56 Messier Bugatti                    
13 ATAP                              57 Motorola                           
14 BAE Systems Enterprise Systems    58 MRA Systems                        
15 Balance Industries                59 MTC Technologies                   
16 Beta Fluid Systems LLC            60 NMC Wollard                        
17 Booz Allen Hamilton               61 Northrop Grumman                   
18 California Industrial Facilities  62 Oklahoma Gas and Electric          
19 Cardio Theater Holdings           63 Point Blank Body Armor             
20 CDW Government                    64 Raytheon Company                   
21 CFM International                 65 Redcom Laboratories                
22 Channing Bete                     66 Rockwell Collins                   
23 Chugach Alaska                    67 Rohde Schwarz                      
24 CPI Aerostructures                68 Rollsroyce                         
25 Dell Computer                     69 Science Applications International 
26 Digicon                           70 Siemens Dematic                    
27 Digital Support                   71 Steelcase                          
28 Digitalnet Government Solution    72 Stinar                             
29 Dynamics Research                 73 Sytex                              
30 E. F. Johnson                     74 T Square Logistics Services        
31 Equipto Electronics               75 Telos                              
32 Evergreen Helicopters of Alaska   76 Teradyne                           
33 Fluke                             77 Texas Commission for the Blind     
34 FMC                               78 Boeing                             
35 General Dynamics                  79 The Carlyle Group                  
36 General Electric                  80 The Rendon Group                   
37 Global Ground Support             81 Titan                              
38 Goodrich                          82 TMP Worldwide Advertising          
39 Government Scientific Source      83 Tokyo Electric Power               
40 GTSI                              84 United Technologies                
41 Hillstrom, David M                85 Westover Consultants               
42 Honeywell International           86 Work Services                      
43 Industries for the Blind          87 XS International                   
44 Integrated Information Technology    

Source: GAO analysis of DOD data.

Table 2: Nontraditional Air Force Contractors (New Market Entrants),
Fiscal Years 2003-2004, and Description of Contracted Item or Service

Description of item or service              Contractor                     
Aircraft and airframe structural comps      Flight Refuelling Limited      
                                               Merlin Express, Inc. (Also M7  
                                               Aerospace)                     
Transportation of things                    Ukranian Avia Transport Co.    
Architect and Engineering-General           Geosierra, LLC                 
Maintenance, repair, and rebuilding of      KNI                            
equipment                                   
                                               Midwest Mechanical Contractors 
Housekeeping services                       AA Food Services, Inc.         
                                               Austin Associates              
                                               USProtect Corp.                
                                               Wasatch Energy LLC             
                                               Worldwide Security Services    

Source: GAO analysis of DOD data.

Appendix IV: Observations from Review of 20 Air Force Contracts Using
Commercial Acquisition

We reviewed 20 larger Air Force commercial contracts awarded in fiscal
year 2004. We reviewed the contract files associated with these contracts
at locations of the Air Force Materiel Command including (1)
Wright-Patterson Air Force Base, Ohio; (2) Tinker Air Force Base,
Oklahoma; (3) Robins Air Force Base, Georgia; and (4) Hanscom Air Force
Base, Massachusetts. We held discussions with contracting officers and
procurement management officials associated with most of the selected
contracts.

In three instances, parts for the C-5 military transport aircraft were
procured under a system in which contractors produced a prototype or
unique first article because these replacement parts did not already
exist. These first articles were then subject to successful testing before
the contractor was given approval to produce the remaining articles. As
part of each contract, the government paid for the manufacturers to
construct the unique first article and the various machine tooling they
needed to produce the articles.

In two other cases, there were internal Air Force disagreements regarding
determinations of commerciality. The items in question were C-130E and
C-130H aircraft procured by foreign governments from a sole-source
contractor, with the U.S. government (via the Air Force) acting as an
intermediary.

Appendix V: Use of Commercial Acquisition in Air Force Major Acquisition
Programs 

Overall, 9.5 percent ($2.6 billion) of all Air Force contract dollars to
major acquisitions were obligated under commercial acquisition from fiscal
year 2004 through fiscal year 2005.1 We considered programs listed on
OSD's Selected Acquisition Report summary tables from fiscal year 2001
through fiscal year 2005 (except research and development programs) to be
major acquisition programs. We also included joint programs from GAO's
2006 Defense Acquisitions: Assessments of Selected Major Weapon Programs (
GAO-06-391 )  for which the Air Force was listed as the lead buyer.2 We
found three major acquisitions with Air Force involvement for which
commercial actions constituted at least 75 percent of contract dollars
obligated, and these acquisitions are shaded in table 3.3 Excluding these
three acquisitions, commercial expenditures for the remaining 25 major
acquisition programs with Air Force involvement constituted less than 1
percent of total program dollars spent.

1 We identified 33 major acquisition programs, but DD 350 records or data
were available on only 28 of those programs.

2 Major acquisition programs were coded in the DD 350 database as Major
Defense Acquisition Programs (MDAPs) beginning in fiscal year 2004. Prior
to that, the DD 350 database did not distinguish some specific MDAPs such
as the B-2 RMP (Radar Modernization Program) from the overall weapon
system of which it is a part (i.e., the B-2 Spirit bomber). For this
reason, we limited our data to fiscal years 2004 and 2005.

3 Our determination that 75 percent of a program's contract dollars were
obligated under commercial acquisition is based solely on data for fiscal
years 2004 and 2005. In some cases a program may have dedicated a larger
percentage of its contract dollars to commercial acquisition in previous
years. For example, $685 million of the $690 million obligated in fiscal
years 2001-2003 for the Wideband Gapfiller was commercial. The DD 350
database does not, however, group contract data collected for these years
under the program name Wideband Gapfiller.

Table 3: Commercial Contract Actions in Air Force Major Acquisition
Programs, Fiscal Years 2004-2005

                                                           Commercial dollars 
                                        Total commercial   as a percentage of 
Major                               major acquisition          total major 
acquisition                           program dollars  acquisition program 
program         2004      2005              2004-2005    dollars 2004-2005 
AEHF            0m        0m                        0                 0.0% 
AMRAAM          0M        0M               $1,275,000                 0.2% 
AWACS RSIP      0M        0M                                               
(E-3)                                      $2,160,000                 5.5%
B1-B CMUP       0M        0M               $3,323,000                 1.8% 
B1-CMUP         No record No record                                        
Computer                                              
Upgrade                                     No record            No record
B-2 RMP         0m        0m                        0                 0.0% 
C-130 AMP       0m        0M               $1,083,000                 0.3% 
C-130J          /-        /-           $1,776,055,000                94.7% 
C-17A           0M        0M              $31,365,000                 0.4% 
C-5 RERP        0M        0M               $6,210,000                 0.9% 
EELV            0m        0m                        0                 0.0% 
F-22            0M        0M                 $179,000                 0.0% 
GBS             0m        0m                        0                 0.0% 
Global Hawk     0M        0M                 $581,000                 0.1% 
JASSM           0M        0M                  $72,000                 0.0% 
JDAM            0M        0m                 $118,000                 0.0% 
JPATS           /-        /-             $613,917,000                79.8% 
F-35 (JSF)      0m        0m                        0                 0.0% 
JSTARS          0M        0M              $16,884,000                 2.9% 
JTRS AMF        No record No record         No record            No record 
Minuteman III   0m        0m                                               
GRP                                                 0                 0.0%
Minuteman III   0M        0M                                               
PRP                                       $91,316,000                13.0%
NAS             0m        /-               $2,370,000                92.0% 
NAVSTAR GPS     0M        0M              $32,395,000                 2.8% 
NPOESS          0M        0m                  $90,000                 0.0% 
MP RTIP         0m        0m                        0                 0.0% 
MPS             No record No record         No record            No record 
MQ-9 Predator B No data   No data             No data              No data 
SBIRS (High)    0m        0m                        0                 0.0% 
SDB             0M        0M                 $546,000                 0.3% 
TITAN IV        0m        0m                        0                 0.0% 
TSAT            No record No record         No record            No record 
Wideband        0M        0M                                               
Gapfiller                                  $4,281,000                 6.8%

Source: GAO analysis of DOD and Air Force data.

Legend:

0m No commercial actions

0M Commercial actions

/- Commercial actions account for at least 75 percent of dollars obligated

Appendix VI: Citations for Commissions, Legislation, and Panel Shown in
Figure 1

1972-Commission on Government Procurement-See Report of the Commission on
Government Procurement, Vol. 3, Pt. D, "Acquisition of Commercial
Products," (Dec. 1972).

1984-Competition in Contracting Act of 1984-Pub. L. No. 98-369, Div. B,
Title VII.

1986-President's Blue Ribbon Commission on Defense Management (Packard
Commission)-A Quest for Excellence: Final Report to the President by the
President's Blue Ribbon Commission on Defense Management (June 1986),
60-64.

1986-National Defense Authorization Act for Fiscal Year 1987-Pub. L. No.
99-661, Div. A, Title IV, Sec. 907(a) (1986).

1993-Advisory Panel on Streamlining and Codifying Acquisition Laws (Sec.
800 Panel)-Established Pursuant to Section 800 of the National Defense
Authorization Act for Fiscal Year 1991, Pub. L. No. 101-510 (1990);
Streamlining Defense Acquisition Laws: Report of the Acquisition Law
Advisory Panel to the U.S. Congress, Intro. I-9 (1993).

1994-Federal Acquisition Streamlining Act-Pub. L. No. 103-355, Section
1202 and Title VIII (1994).

1996-Clinger-Cohen Act of 1996-Pub. L. No. 104-106, Div. D (1996),
formerly the Federal Acquisition Reform Act of 1996 and renamed in
Treasury, Postal Service and General Government Appropriations Act, 1997,
contained in Omnibus Consolidated Appropriations Act, 1997, Pub. L. No.
104-208, Section 808 (1996).

2003-Services Acquisition Reform Act of 2003-Pub. L. No. 108-136, Title
XIV, Section 1431, 1432 (2003).

Appendix VII: Comments from the Department of Defense

(120461)

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Highlights of GAO-06-995 , a report to Subcommittee on Readiness and
Management Support, Committee on Armed Services, U.S. Senate

September 2006

DOD CONTRACTING

Efforts Needed to Address Air Force Commercial Acquisition Risk

The Department of Defense (DOD) has been urged by commissions,
legislation, and a panel to make increased use of commercial acquisition
to achieve certain benefits. To help ensure the increased use of
commercial acquisition, the Office of the Secretary of Defense (OSD)
established and the Air Force implemented two commercial acquisition goals
to be achieved by the end of fiscal year 2005. In setting these goals, OSD
expected that the increased use of commercial acquisition would provide
DOD with greater access to commercial markets (products and service types)
with increased competition, better prices, and new market entrants and/or
technologies. The committee asked GAO to identify (1) the extent to which
the Air Force has increased its use of commercial acquisition to obtain
expected benefits and (2) the risks that are associated with this use.

What GAO Recommends

GAO recommends that the Air Force collect information to be able to
measure the benefits expected from commercial acquisition and, to reduce
the potential for risk, limit sole-source acquisition of commercial
products and services in concert with DOD guidance. In written comments,
DOD agreed with the recommendations, in principle, and identified actions
to address them.

From 2001 to 2005, the Air Force increased spending using commercial
acquisition from $4.8 billion to over $8 billion in an effort to provide
greater access to commercial markets to increase competition, obtain
better prices, and attract new market entrants (nontraditional
contractors) and/or technologies (see fig. below). Even though the Air
Force has significantly increased this spending, it has not measured the
extent to which this increased use resulted in the benefits that were
expected. For example, our analysis shows that for at least one of the
expected benefits, attracting new market entrants, the expected benefit
has not materialized. For the most part, traditional defense contractors
received these contracts.

Government contracting officials face risks in using commercial
acquisition. For example, improperly classifying an acquisition as a
commercial acquisition can leave the Air Force vulnerable to accepting
prices that may not be the best value for the department. A high-ranking
DOD acquisition official testified that he is concerned about items and
services being identified as commercial that are not sold in an existing
marketplace because under these circumstances, the government lacks
assurances that the price is reasonable. At times, Air Force officials
have disagreed about the classification of some acquisitions as
commercial. The Air Force's use of commercial acquisition has also been
accompanied by an increased amount of dollars being awarded for
sole-source contracts. Despite DOD policy to avoid sole-source commercial
acquisitions because of increased risk, sole-source commercial acquisition
dollars awarded by the Air Force have more than doubled from 2000 to 2005.
Further, of the 20 larger Air Force commercial product awards in 2004,
half were awarded as sole-source.

Air Force Increases in Commercial Acquisition Spending, Fiscal Years
2001-2005
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