Acquisition Reform: Military-Commercial Pilot Program Offers Benefits but
Faces Challenges (Letter Report, 06/28/96, GAO/NSIAD-96-53).

GAO provided information on the Department of Defense's Military
Products from Commercial Lines Pilot Program, focusing on the: (1)
program's potential for achieving benefits through acquisition reform;
and (2) barriers to achieving these benefits.

GAO found that: (1) the pilot program has demonstrated that redesigning
military components for commercial production is technically feasible;
(2) pilot program officials believe that if the use of commercial
practices and policies are permitted, military production costs could be
reduced by an average of 40 percent and the Air Forces's requirements
for the F-22 could be met; (3) other expected benefits from the pilot
program include accelerated assembly, a more technically advanced and
lighter weight product, and valuable lessons learned for future large
electronic procurements; (4) for the pilot program to be successful and
to encourage commercial participation, significant differences in
commercial and military business practices have to be overcome; (5)
although the pilot program has been successful in identifying
government-unique requirements that present barriers to the most
efficient use of commercial production lines, acquisition reform
measures have not removed these barriers; (6) DOD must also overcome an
acquisition culture that has historically resisted change and does not
provide any incentives for acquiring products outside of DOD production
lines; and (7) unless waivers are granted for many of the defense-unique
requirements or workarounds, the pilot program will be limited to
demonstrating that military items can be produced commercially at
substantially lower prices.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-53
     TITLE:  Acquisition Reform: Military-Commercial Pilot Program 
             Offers Benefits but Faces Challenges
      DATE:  06/28/96
   SUBJECT:  Defense procurement
             Electronic equipment
             Procurement policies
             Avionics
             Dual-use technologies
             Cooperative agreements
             Defense industry
             Defense conversion
             Defense cost control
             Commercial products
IDENTIFIER:  Air Force Material Command Manufacturing 2005 Strategy
             F-22 Aircraft
             DOD Single Process Initiative
             DOD Defense Acquisition Pilot Program
             DOD Military Products from Commercial Lines Pilot Program
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Committees

June 1996

ACQUISITION REFORM -
MILITARY-COMMERCIAL PILOT PROGRAM
OFFERS BENEFITS BUT FACES
CHALLENGES

GAO/NSIAD-96-53

Acquisition Reform

(705119)


Abbreviations
=============================================================== ABBREV

  CNI - communication, navigation and identification
  DFARS - /Defense Federal Acquisition Regulations
  DOD - Department of Defense
  FAR - Federal Acquisition Regulations

Letter
=============================================================== LETTER


B-271257

June 28, 1996

Congressional Committees

Faced with substantial funding reductions for defense procurement,
the Secretary of Defense made acquisition reform a top priority of
the Department of Defense (DOD).  The challenge for DOD is to
maintain technological superiority and ensure a strong national
industrial base while concurrently reducing acquisition costs.  The
need for reforming the defense acquisition system is well recognized;
however, acquisition reform has been an elusive goal for many years. 
DOD has initiated several major efforts to implement a
commercial-style procurement system that takes advantage of
commercial products and processes and, whenever possible, eliminates
military-unique contracting, technical, and accounting requirements. 
The Secretary of Defense said that acquisition reform initiatives
could cut costs 20 to 30 percent. 

This report discusses a pilot program\1 entitled "Military Products
from Commercial Lines," set up by the Air Force with one of its
contractors to make reform a reality.  We evaluated the pilot program
to determine (1) its potential for producing the benefits sought
through reform and (2) any barriers to achieving these benefits.  We
conducted our review under our basic legislative responsibilities. 
We are addressing this report to the committees involved in fostering
acquisition reform because it identifies problems and calls for
corrective action that the agency has indicated an unwillingness to
take. 


--------------------
\1 This pilot is not part of the Defense Acquisition Pilot Program
authorized by section 809 of the National Defense Authorization Act
for Fiscal Year 1991. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The pilot program was undertaken as part of the Air Force Materiel
Command's Manufacturing 2005 strategy, which envisions a future where
an integrated military-commercial industrial base will ensure the Air
Force access to superior technologies at dramatically reduced costs. 
As part of the strategy, the Air Force analyzed key military sectors,
including electronics.  It noted that electronic components are
pervasive throughout weapon systems, accounting for more than 40
percent of the cost of aircraft, 70 percent of air launched missiles,
and 80 percent of spacecraft.  Therefore, reducing the cost of
manufacturing electronics components through integrated production
would be a major factor in controlling the costs of all Air Force
systems. 

To move toward this vision, the Air Force's Wright Laboratory awarded
a 4-year, $21.5-million pilot research and development contract to
TRW's Avionics Systems (military) Division in May 1994.  The goals of
the TRW pilot are to (1) demonstrate that a military-unique product
can be technically redesigned for manufacture on a commercial
production line at lower cost and have equal or better quality; (2)
identify barriers currently in place that limit integrated
military-commercial efforts; and (3) transfer lessons learned in part
through a "model" contract for future collaborative electronics
production efforts.  The objective is to develop solutions that are
not "contract-specific" or "one-time waivers" but, rather, have broad
applicability to other DOD contracts. 

TRW military is scheduled to produce the Communication, Navigation,
and Identification (CNI) avionics components for the F-22 fighter
aircraft.  Similar components are used for the Comanche helicopter
program.  Under the pilot contract, TRW military has subcontracted a
demonstration production effort for the manufacture of two CNI
modules\2 to its sister division, TRW's Automotive Electronics Group
(commercial division).  While the TRW military division currently
assembles electronic modules by hand, commercial production takes
place on an automated assembly line.  Under the pilot arrangement,
the TRW military division will assume responsibility for some
government requirements that could interfere with its commercial
division's production practices.  According to the Pilot Program
Manager at Wright Laboratory, the savings achieved by the pilot will
depend partly on the efforts to modify the subcontract between the
two TRW divisions.  Greater savings are expected if commercial
practices are used in place of military practices. 

The pilot is now in the second of three phases and is scheduled to be
completed in May 1998.\3 Generally, the pilot's tasks are to (1)
compare and document military and commercial business practices as
well as recommend and demonstrate best business practices that are
acceptable to both government and commercial producers; (2) redesign
the modules for commercial automated production, while meeting the
needs of the F-22; and (3) demonstrate production of military modules
on a commercial line along with commercial products.  Thirty of each
module will be produced in late 1996 to validate the design.  Based
on the results of the test run, modifications will be made to the
modules' design and the production line.  An additional 60 of each
module will then be manufactured and available for F-22
qualifications testing. 


--------------------
\2 The CNI avionics consist of 38 modules.  The pilot includes two
types of modules--the front-end controller and the pulse narrowband
processor. 

\3 In phase I, business policies and practices were analyzed.  Phase
II tasks are to recommend changes to business practices, implement
manufacturing infrastructure changes, and validate the component's
design.  In phase III, production of the component will be validated
and results of the pilot transferred where appropriate. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

Midway through the TRW pilot, it appears technically feasible to
redesign military components for commercial production.  Pilot
officials are confident that if they are allowed to use commercial
practices and policies, they will save an average of 40 percent over
estimated military production costs while also demonstrating that
each of the redesigned modules will meet F-22 requirements.  Other
potential benefits include quicker assembly and a lighter weight
product.  For the long term, pilot officials envision that lessons
transferred from the pilot will help produce significant savings for
future weapon programs that have large electronic procurements. 

Although the pilot will not be completed until 1998, significant
lessons have already been learned.  Business practices and policies
under government and commercial contracting procedures have major
differences that must be reconciled to encourage commercial
participation.  The pilot has identified a number of
government-unique requirements that may present barriers to the most
efficient use of commercial production lines.  Existing acquisition
reform measures have not removed these government-unique
requirements.  Unless waivers or workarounds are granted for many of
them, the pilot will be limited in demonstrating that military items
can be produced at equal or better quality on commercial production
lines at substantially lower prices. 


   TRW PILOT HAS POTENTIAL TO
   DEMONSTRATE INTEGRATION
   BENEFITS
------------------------------------------------------------ Letter :3

At the end of phase I, the pilot had successfully completed the
conceptual redesign of the modules to allow integrated production. 
Integrated production is now possible through recent manufacturing
advances.  The low volume of military electronics purchases does not
provide sufficient economic incentives for commercial manufacturers. 
Recent advances such as flexible manufacturing allow integrated
production of small lots of military products with other production
lots, thus maintaining a high utilization rate for the line. 

The redesign of the components should comply with the more stringent
requirements for automated production rather than the manual
manufacturing process used by the military.  In redesigning the
modules, one of the most significant changes is the use of plastic
parts instead of the ceramic parts commonly used by the military. 
According to pilot officials, cumulative commercial experience with
plastic electronic components has proven them to be reliable in
nonmilitary applications.  The transition to plastic is consistent
with the need to design for manufacturing and incorporates more
cost-effective materials used by commercial producers.  Further, the
redesigned components are expected to be assembled more quickly and
to weigh 15 percent less than their military versions.  The next step
is to produce a sample of the modules to validate the redesign. 

The pilot modules will be tested to meet F-22 and Comanche
requirements, such as durability requirements of 20 plus years. 
Pilot officials claim the redesigned modules can meet all the same
functional requirements as the original design with the possible
exception of one condition--a temperature requirement.  However, they
believe that additional analyses and tests will show that this
condition can be successfully resolved.  If the pilot program
produces avionics modules on the commercial production line when
planned, the F-22 schedule allows for testing and integrating the
modules.  According to an F-22 Program Office official, if the
modules pass all ground test requirements, the office can instruct
Lockheed Martin to substitute the pilot components for those produced
by TRW military and actually perform validation and verification of
the pilot modules on an F-22 experimental aircraft. 


      POTENTIAL BENEFITS INCLUDE
      COST SAVINGS
---------------------------------------------------------- Letter :3.1

One of the primary benefits of encouraging commercial producers to
manufacture military products is that lower costs result from
spreading overhead over greater quantities and taking advantage of
other economies that come with large-scale manufacturing operations. 
For example, large volume discounts can be obtained when purchasing
some materials.  Pilot officials currently estimate that producing
the modules commercially will save about 40 percent compared to the
F-22 program cost estimates. 

About one-third of the estimated savings stems from reduced labor
costs.  TRW's commercial division assembles over 15,000 electronics
components per day, versus the few hundred per year that are manually
produced by the military group.  About 20 percent of the savings are
expected from using less expensive materials.\4 Another 20 percent of
the pilot savings are expected to come from reduced administrative
costs associated with statutory and regulatory compliance.  Savings
from eliminating military specifications and standards, such as for
testing and screening and other material compliance requirements,
make up the bulk of the remaining estimated savings.  The pilot
manager emphasized that the projected savings assumes the contract is
modified to remove certain government requirements, and the estimate
may change if requirements are not removed, or if material costs or
the F-22 estimates change. 


--------------------
\4 For example, the pilot estimated that material cost for one part
of the components dropped from $755 according to F-22 estimates to
$340 if commercially produced. 


      EXPECTED BENEFITS EXTEND
      BEYOND PILOT
---------------------------------------------------------- Letter :3.2

The most important benefit foreseen from the pilot is not from lower
costs for the specific pilot components, but from future electronics
procurement.  Even by saving 40 percent of the cost, the projected
savings will not match the $21-million cost of the pilot, nor was
this the pilot's intention.  The payoff will result from applying the
lessons learned from this pilot to future Air Force electronics
procurement.  According to the pilot manager, TRW has estimated $126
million in savings by applying pilot concepts to all F-22 CNI
modules.  After working through the multitude of requirements with a
profitable commercial company, pilot officials plan to develop
recommendations and a model subcontract that will serve DOD purposes
yet not impede commercial operations.  In turn, wider participation
by commercial entities in military production may reduce
military-unique production costs. 

In addition, pilot officials see other benefits from demonstrating
and promoting broader integration.  DOD may be better able to take
advantage of technological advances developed by commercial firms. 
For example, one pilot official noted that although military
contractors could also adopt advanced automated manufacturing
techniques, it might not be cost-effective, given the typically small
size of military orders.  However, since the investment in commercial
production is spread over a large quantity of products, it makes good
business sense for commercial companies to continuously incorporate
state-of-the-art manufacturing processes.  Other benefits that may
occur with integrated production include more timely production of
defense components, greater competition for defense business from a
larger base of commercial manufacturers, and a greater surge capacity
for defense items in the event of future conflict. 


   MANY CHALLENGES TO SUCCESS
   REMAIN
------------------------------------------------------------ Letter :4

Despite the climate of acquisition reform, this pilot program must
overcome many hurdles.  These hurdles have primarily resulted from
reconciling major differences in business practices and procedures
between the way the government operates and the way commercial
businesses operate.  Acquisition reform initiatives have not allowed
this pilot to capitalize on technological advances that allow a small
number of military items to be integrated with production at a
commercial manufacturing facility. 


      WIDE GAP BETWEEN COMMERCIAL
      AND MILITARY PRACTICES
---------------------------------------------------------- Letter :4.1

The pilot has identified large differences between the contracting
and operating procedures of TRW's commercial and military divisions. 
The pilot program offers a good opportunity for making such
comparisons.  Because the two divisions have the same corporate
parent, they could share business-sensitive and proprietary
information and, therefore, avoid some of the difficulties other
companies might experience in sharing information.  Based on their
findings, the pilot program aims to highlight areas in the defense
procurement system that can be streamlined to facilitate future
collaboration with commercial companies. 

Pilot teams, including both TRW divisions, reviewed two sets of
requirements that the commercial group found objectionable.  One set
of requirements includes Federal Acquisition Regulation (FAR) and
Defense FAR supplement clauses, and the other set contains technical
military specifications and standards for producing the items.  For
contractual requirements, the teams initially identified 55 clauses. 
(See app.  I.) Many of the requirements targeted by the pilot, such
as cost or pricing information, data rights, and quality standards
are the same ones that have been identified in several major
acquisition reform studies and that commercial firms claim deter them
from competing for government projects. 

After the pilot teams analyze the origin and purpose of the
requirements, they will then determine whether action should be taken
to alleviate the defense-unique requirements they impose.  This
effort is projected to be completed at the end of 1996.  This
analysis is also a critical component of the pilot since a key
objective is to develop a contract that allows TRW's commercial
division to maintain its normal business practices as much as
possible.  TRW's commercial division does not want this pilot to
adversely affect its highly successful commercial business.  Unless
waivers or workarounds are granted for many of these
government-unique requirements, the pilot will be limited in
demonstrating the benefits of commercial practices, including the
savings associated with high-volume material purchases. 

The difference between commercial and military practices, according
to a pilot report, is often not in the actual compliance with a
requirement, but in the level of documentation required.  For
example, TRW's commercial division agreed to the FAR clause on
affirmative action for Vietnam veterans because the clause is
consistent with standard commercial practices.  However, FAR clause
52.222-37, "Employment Reports on Special Disabled Veterans and
Veterans of the Vietnam Era," is not consistent with those practices. 
This clause requires an annual report on the number of disabled and
Vietnam veterans currently employed--by job category and location and
of the number of new hires by category.  TRW said that several
contract clauses repeat requirements imposed by other public laws,
although there is a wide gap between the detailed proof of compliance
the government requires and commercial enterprises' requirements. 

While analyzing the differences in requirements, pilot officials
found that barriers to commercial production are not created by the
Air Force alone.  In examining the Lockheed Martin F-22 subcontract
with TRW's military division, officials noted that the Air Force
originated 49 of the 204 contract requirements and Lockheed Martin
added the remainder.  For example, Lockheed Martin added part of
Military Specification 2000a regarding documentation of soldering. 
To meet the specification conditions, TRW is required to add a
reporting step for defects under the F-22 subcontract that it
believes is unnecessary and incompatible with commercial operations. 
DOD officials said they recognize contractors adding detailed
requirements can be a problem, but told us they can do little about
it.  One of the lessons of this pilot is that prime contractors need
to consider removing some of their requirements. 


      INTEGRATED PRODUCTION PILOT
      HAS NOT BENEFITED FROM
      ACQUISITION REFORM
---------------------------------------------------------- Letter :4.2

Although DOD has actively proposed and implemented acquisition reform
measures, key reform efforts have not helped move the pilot forward. 
For example, the revised commercial item definition, intended to
streamline government requirements, does not apply to the pilot
components.  DOD has reduced the use of military standards and allows
DOD contractors to use uniform government requirements across a
facility, but neither action benefits the pilot.  The Defense
Acquisition Pilot Program could provide some of the statutory relief
needed to demonstrate that military products can be manufactured on
commercial lines, but the pilot is not part of the program. 

After identifying an initial list of requirements not typically found
in commercial contracts, pilot officials studied removing some of
those requirements.  Rather than approaching each requirement
individually, pilot officials hoped that if the components could be
considered commercial items as defined by the Office of Federal
Procurement Policy Act as amended by the Federal Acquisition
Streamlining Act of 1994, a number of government-unique requirements
could be waived.  Pilot officials reasoned in part that since the
avionics components are being designed, developed, and produced on a
commercial assembly line, the components could be considered
"commercial items."

The Air Force concluded, and we agree, that the components do not
qualify as commercial items because the commercial item definition
does not apply to military-unique items.  Thus, integrated production
efforts such as the pilot do not benefit from the act's definition. 

Over the course of this pilot, several other reforms have been
instituted that may support integrated production in the long run,
but do not further the pilot's demonstration of integrated production
benefits.  For example, in June 1994, the Secretary of Defense
directed that commercial performance standards be used in place of
military specifications.  However, this directive does not cover all
government-unique requirements and focuses on new contracts.  Many
contracts for major weapons systems, such as the F-22, were awarded
before the directive became effective.  In December 1995, the
Secretary moved to streamline existing requirements with the Single
Process Initiative.  This initiative allows a "block change" approach
to modify contracts so that management and manufacturing processes
can be consolidated across all contracts at a single facility.  It
does not provide relief for the pilot because it is directed toward
defense contractor facilities. 

Congress enacted provisions under the National Defense Authorization
Acts of 1991 and 1996 to allow DOD to conduct pilots to test ways to
increase the efficiency and effectiveness of the acquisition process. 
The 1996 provisions allow DOD to designate two entire defense
facilities that would operate under the rules that apply to
commercial items.  Specific facilities have not yet been authorized. 
The 1991 provisions permit pilot programs to be conducted in
accordance with standard commercial, industrial practices, and
provides some waiver authority, with the specific programs to be
designated by law.  Five pilots were authorized in 1994 under the
1991 provisions.  The TRW pilot could show benefits of
military-commercial production under the 1991 DOD Acquisition Pilot
provisions, but it is not part of the program established under the
provisions. 


      NO LEEWAY IN REQUIREMENTS
      FOR PILOT
---------------------------------------------------------- Letter :4.3

Although the TRW pilot was developed as a result of the Air Force
Manufacturing 2005 initiative, the initiative provided no authority
to waive requirements.  From the beginning, the pilot has had to
undergo a lengthy and complex process just to get the contract
negotiated for the TRW divisions to work together.  Because of all
the defense-unique requirements that had to be addressed, pilot
program officials spent 3 months trying to negotiate contractual
terms and conditions acceptable to the commercial division.  To
finally get the subcontract negotiated, the military division agreed
to accept responsibility for complying with government requirements
related to purchasing materials. 

To fully demonstrate the benefits of producing military items on
commercial lines, the pilot subcontract must be modified.  Under the
existing agreement, the military group purchases materials to reduce
the number of the military requirements passed on to the commercial
group.  Yet to take full advantage of the price and quality benefits
from large volume discounts and long-standing supplier relationships,
the commercial division must purchase the materials.  The pilot must
use standard procedures to request deviations or waivers from the
military requirements in order to modify the subcontract so that the
commercial division can purchase materials.  The standard waiver
process requires a detailed analysis of the original intent for a
clause and a justification for the waiver.  Similarly, the new rules
for purchasing commercial items do not apply.  According to a Judge
Advocate General official, no policy exists that allows the pilot to
be considered anything but an ordinary procurement. 

To move the pilot forward with a streamlined subcontract, pilot
officials also have to contend with an acquisition culture that is
resistant to change.  The TRW pilot was initiated by working-level
engineers and others at Wright Laboratory who saw opportunities to
actually demonstrate the advantages of working with the commercial
sector.  While the Secretary of Defense's demonstration initiatives
have top DOD support and congressional waivers, the TRW pilot is a
"grassroots" effort.  Starting from the lower tiers, regulatory
relief is obtained only by asking successively higher tiers to take
responsibility for waivers to rules or for approving alternatives to
accepted ways of operating.  This is a time-consuming process and
involves some risk, yet provides little incentive for approving
deviations to traditional defense business procedures without
specific directions from the highest levels. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :5

This pilot represents a low-risk effort to demonstrate the potential
benefits of designing and producing a military component on a
commercial line.  Accordingly, we recommend that the Air Force, in
consultation with TRW, identify those government-unique requirements
that prevent the pilot from demonstrating that military items can be
produced at equal or better quality on commercial production lines at
substantially lower prices and then seek Secretary of Defense
waivers.  We recommend that the Secretary of Defense move quickly to
waive those requirements within his authority that pilot officials
believe impede the successful completion of the pilot.  Further, we
recommend that, where necessary, the Secretary seek legislative
relief from those impediments he cannot waive.  For example, the
Secretary could request approval for the TRW pilot to proceed as part
of the DOD Defense Acquisition Pilot Program. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :6

In commenting on a draft of this report, DOD indicated that it did
not concur with our recommendations, stating the pilot has not
identified any specific roadblock that the Secretary of Defense needs
to remove or that requires a waiver.  DOD indicated that (1)
providing a waiver for the pilot would not necessarily accomplish the
project's objective of demonstrating the feasibility of building
military products on commercial lines in the future and (2)
designating this pilot as a DOD acquisition pilot would be contrary
to one of the TRW pilot's objectives, which is to identify barriers
and then develop and demonstrate business practices to nullify those
barriers. 

We disagree that the pilot has not identified specific roadblocks
that need to be removed or that require a waiver.  The pilot team,
including both TRW divisions, has identified numerous government
unique requirements that TRW's commercial division found
objectionable.  Many of the requirements, such as cost or pricing
information, data rights, and quality standards, are the same ones
that have been identified in several major acquisition reform studies
and that commercial firms claim deter them from competing for
government projects.  Unless the pilot can get beyond these
requirements, the pilot will be limited in demonstrating the benefits
of commercial production, including the savings that the Air Force
recognizes are needed in order to control the costs of future weapons
systems. 

The intent behind our recommendations is to allow the pilot to move
beyond these well recognized and thoroughly studied barriers so that
it can demonstrate a better and cheaper way to procure electronic
components for the F-22 aircraft program. 

We believe the bottom-up approach taken by the pilot is an important
step in changing the prevailing culture found in defense acquisition. 
We believe implementation of our recommendation will enhance the
pilot's chances for successfully demonstrating that a military item
can be redesigned and produced on a commercial line at significant
cost savings--a theme that underlies the Secretary of Defense's
"Mandate for Change" and the Air Force Manufacturing 2005 study. 

DOD's comments in their entirety are reprinted in appendix II along
with our specific evaluation of them. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

We interviewed and obtained information from pilot project officials
at TRW, the Wright Patterson Pilot Program Manager, the TRW Program
Manager, Wright Patterson contracting officials, the Judge Advocate
General representative, an F-22 Program Office official, and the Air
Force Office of the Assistant Secretary for Acquisition.  We also
reviewed documents such as the pilot contract and phase I contract
reports and early recommendations, the Federal Acquisition
Streamlining Act, implementing regulations, the Defense Authorization
Acts from 1991 and 1996, and studies and reports related to
acquisition reform.  We observed manufacturing procedures at TRW's
military division. 

We conducted our review from September 1995 to January 1996 in
accordance with generally accepted government auditing standards.  We
did not independently verify pilot estimates of savings from using
commercial practices, nor did we verify that the clauses initially
targeted by the pilot for possible waiver are impediments. 

We are sending copies of this report to the Secretaries of Defense
and the Air Force; the Director, Office of Management and Budget; and
other interested congressional committees.  Copies will also be
available to others on request. 

Please contact me at (202) 512-4587 if you or your staff have any
questions concerning this report.  The contributors to this report
were Katherine Schinasi, Monica Kelly, Marguerite Mulhall, Gordon
Lusby, William Woods, and John Brosnan. 

David E.  Cooper
Associate Director
Defense Acquisitions Issues

List of Congressional Committees

The Honorable Ted Stevens
Chairman
The Honorable John Glenn
Ranking Minority Member
Committee on Governmental Affairs
United States Senate

The Honorable Strom Thurmond
Chairman
The Honorable Sam Nunn
Ranking Minority Member
Committee on Armed Services
United States Senate

The Honorable Christopher S.  Bond
Chairman
The Honorable Dale Bumpers
Ranking Minority Member
Committee on Small Business
United States Senate

The Honorable William F.  Clinger
Chairman
The Honorable Cardiss Collins
Ranking Minority Member
Committee on Government Reform and Oversight
House of Representatives

The Honorable Floyd Spence
Chairman
The Honorable Ronald Dellums
Ranking Minority Member
Committee on National Security
House of Representatives

The Honorable Jan Meyers
Chairwoman
The Honorable John J.  LaFalce
Ranking Minority Member
Committee on Small Business
House of Representatives


LIST OF CONTRACTUAL CLAUSES
TARGETED BY PILOT FOR REVIEW
=========================================================== Appendix I

Clause by category  Description
------------------  --------------------------------------------------
FAR 52.215-1        Examination of Records by Comptroller General

FAR 52.215-2        Audit -Negotiation

Cost or pricing

FAR 52.215-22       Price Reduction for Defective Cost or Pricing Data

FAR 52.215-24       Subcontractor Cost or Pricing Data

FAR 52.215-27       Termination of Defined Benefit Pension Plans

FAR 52.215-39       Revision or Adjustment of Plans for Postretirement
                    Benefits Other Than Pensions

FAR 52.230-2        Cost Accounting Standards

FAR 52.230-5        Administration of Cost Accounting Standards

DFARS 252.215.7000  Pricing Adjustments

DFARS 252.231.7000  Supplemental Cost Principles

DFARS 252.231.7001  Penalties for Unallowable Costs

DFARS 252.233.7000  Certification of Claims and Requests for
                    Adjustment or Relief

DFARS 252.242.7001  Certification of Indirect Costs

Delivery and
inspection

FAR 52.246-9        Inspection of Research and Development

DFARS 252.225-      Duty Free Entry -Qualifying Country End Products
7009                and Supplies

DFARS 252.247-      Transportation of Supplies by Sea
7023

Ethics

FAR 52.203-1        Officials Not to Benefit

FAR 52.203-5        Covenant Against Contingent Fees

FAR 52.203-6        Restrictions on Subcontractor Sales to the
                    Government

FAR 52.203-7        Anti-Kickback Procedures

FAR 52.203-9        Requirement for Certificate of Procurement
                    Integrity -Modification

FAR 52.203-12       Limitation on Payments to Influence Certain
                    Federal Transactions

FAR 52.209-6        Protecting the Government's Interest When
                    Subcontracting With Contractors Debarred,
                    Suspended or Proposed for Debarment

DFARS 252.209-      Acquisition From Subcontractors Subject to On-
7000                site Inspection Under the Intermediate Range
                    Nuclear Forces Treaty

Patent/data rights

FAR 52.227-1        Authorization and Consent

FAR 52.227-2        Notice and Assistance Regarding Patent and
                    Copyright Infringement

DFARS 252.227-      Rights in Technical Data and Computer Software
7013

DFARS 252.227-      Restrictive Markings on Technical Data
7018

DFARS 252.227-      Identification of Technical Data
7029

DFARS 252.227-      Validation of Restrictive Markings on Technical
7037                Data

Purchasing
restrictions

DFARS 252.225-      Preference for Domestic Specialty Metals
7014

DFARS 252.225-      Restriction on Acquisition of Carbon/Iron Powders
7023

DFARS 252.225-      Foreign Source Restrictions
7025

DFARS 252.225-      Reporting of Contracting Performance Outside the
7026                United States

DFARS 252.225-      Restriction on Acquisition of Carbon, Alloy and
7030                Armor Steel Plate

Socioeconomic

FAR 52.219-8        Utilization of Small Business Concerns and Small
                    Disadvantaged Business Concerns

FAR 52.219-9        Small Business and Small Disadvantaged Business
                    Subcontracting Plan

FAR 52.220-3        Utilization of Labor Surplus Area Concerns

FAR 52.220-4        Labor Surplus Area Subcontracting Program

FAR 52.222-1        Notice to the Government of Labor Disputes

FAR 52.222-20       Walsh-Healey Public Contracts Act

FAR 52.222-26       Equal Opportunity

FAR 52.222-35.      Affirmative Action for Special Disabled and
                    Vietnam Era Veterans

FAR 52.222-36       Affirmative Action for Handicapped Workers

FAR 52.222-37       Employment Reports on Special Disabled Veterans
                    and Veterans of the Vietnam Era

FAR 52.223-2        Clean Air and Water

FAR 52.225.11       Restrictions on Certain Foreign Purchases

DFARS 252.203-      Special Prohibition on Employment
7001

Warranty

FAR 52.246-23       Limitation of Liability

Miscellaneous

FAR 52.212-8        Defense Priority and Allocation Requirements

FAR 52.212-13       Stop-Work Order

FAR 52.252-2        Clauses Incorporated by Reference

DFARS 252.204-      Disclosure of Information
7000

DFARS 252.249-      Notification of Substantial Impact on Employment
7001

DFARS 252.249-      Notification of Proposed Program Termination
7002                Reduction
----------------------------------------------------------------------



(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)

See comment 2. 

See comment 3. 



(See figure in printed edition.)

See comment 4. 


The following are GAO's comments on the Department of Defense's (DOD)
letter dated April 10, 1996. 


   GAO COMMENTS
--------------------------------------------------------- Appendix I:1

1.  Numerous studies document current regulatory and statutory
barriers to military-commercial integration.  In fact, DOD is
pursuing a variety of initiatives, such as the single process
initiative and reinvention laboratories, based on the results of
those studies.  As it gains experience from its acquisition reform
efforts, DOD has learned that there is likely to be no one solution
to overcoming barriers.  However, we are not aware of any other
initiatives that address what we believe is unique about the TRW
pilot program, which is the production of a military-unique component
in a commercial facility.  We believe that pursuing the objective of
identifying barriers in the TRW pilot at the risk of missing the
schedule of producing and testing the F-22 module would represent a
lost opportunity. 

2.  DOD's comment does not address any information in the report. 

3.  According to pilot officials and program documents, the pilot is
identifying all possible barriers that were in place when the
contract was signed, regardless of their current status.  This is
also true, for example, for the military quality
standard--MIL-Q-9858A--which has been abrogated by the Secretary of
Defense. 

4.  We agree, and state in the report, that the commercial item
definition does not apply to military-unique components such as those
being produced in the TRW pilot. 

5.  This comment deals with minor modifications to a commercial item
for military use.  It is not relevant to the TRW pilot, which is
attempting to produce a military-unique item in a commercial
facility. 

6.  We agree.  DOD's comment supports our point that other DOD
acquisition reform initiatives do not provide relief for this pilot. 


*** End of document. ***