Defense Acquisition Reform: Status and Current Issues

Order Code IB96022

CRS Issue Brief for Congress

Received through the CRS Web

Defense Acquisition Reform:

Status and Current Issues

Updated May 16, 2003

Valerie Bailey Grasso

Foreign Affairs, Defense, and Trade Division

Congressional Research Service ˜ The Library of Congress

CONTENTS

SUMMARY

MOST RECENT DEVELOPMENTS

BACKGROUND AND ANALYSIS

DOD Acquisition Strategy for the New Era

Path to Reform

DOD Promotes Reform

Potential Impact of Reform Actions

The Competitive Sourcing of DOD Functions

Oversight of Reform Initiatives

Issues in the 105th Congress

Review of Congressionally Mandated Reports

Assessments and Recommendations of Defense Panels

Changes in Federal Acquisition Legislation

Issues in the 106th Congress

Issues in the 107th Congress

107th Congress: Key Public Laws

106th Congress: Key Public Laws

FOR ADDITIONAL READING

CRS Reports

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Defense Acquisition Reform:

Status and Current Issues

SUMMARY

The end of the Cold War and its impact

on defense spending has created a strong need

to reform Department of Defense’s (DOD)

acquisition system. With procurement spending down, DOD expects to depend on savings

from acquisition reform to help finance future

force modernization. Policymakers believe

that DOD should use more commercial products because, in many instances, they cost less

and their quality is comparable to products

built according to DOD military specifications. Many such reform proposals are based

on recognition that DOD regulatory barriers

and a Cold War acquisition “culture” have

inhibited the introduction of commercial

products.

The need to encourage greater interaction

between the defense and commercial industries is considered vital to keeping U.S. military technology the best in the world — a

major objective of U.S. defense policy. Many

high-technology commercial products (e.g.,

electronics) are state-of-the-art and changing

so fast that DOD’s military specifications, or

“milspecs.” system cannot keep pace. Congress has passed several important reforms,

among them the Federal Acquisition Streamlining Act of 1994, Federal Acquisition Reform Act of 1996, Defense Reform Act of

1997, and the Federal Activities Inventory

Reform Act of 1998. DOD has lowered or

abolished regulatory barriers; experts agree,

however, that more work is required to make

the system responsive to U.S. defense needs.

Restructuring DOD’s Acquisition

Organization. Enacted reforms will mean

greater freedom to innovate, make quicker

decisions, and improve DOD program development — running DOD more like a private

Congressional Research Service

sector operation. At issue is just how to

change DOD personnel management policies,

and introduce DOD’s acquisition reform

initiatives to the private sector.

Privatizing DOD’s Functions Through

Outsourcing. Although DOD had begun

outsourcing some functions, expanding its use

has been a major goal. Success stories and

studies estimated that outsourcing could

reduce costs and increase efficiency. Basic

questions include (1) how much can be saved

over the long-term and how will savings be

measured; (2) can DOD’s structure effectively

manage the new outsourcing proposals; (3) do

outsourcing proposals go beyond the “proper”

limits of DOD’s mission to protect U.S. national security; and (4) can outsourcing harm

DOD’s military readiness or war-fighting

capability?

Oversight of Reform Initiatives. Congress will continue to exercise a strong oversight role because of its longtime interest in

streamlining DOD’s acquisition processes. Its

attention will be directed at several

congressionally mandated DOD reports on

acquisition reform issued in 1996. Important

topics will include how DOD is streamlining

and restructuring its acquisition processes,

practices and infrastructure; increasing

efficiencies in acquiring defense maintenance

and repair services; and outsourcing DOD

support functions that are considered

commercial in nature. Congress will rely on

the recommendations of several reports,

including the Task Force on Defense Reform,

Defense Science Board Task Force on Procurement Reform, and the Section 912 (c)

report on streamlining acquisition processes,

workforce and infrastructure.

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MOST RECENT DEVELOPMENTS

H.R. 1836, The Civil Service and National Security Personnel Improvement Act, was

introduced on April 29, approved by the House Government Reform Committee (voice vote)

on May 7, and approved by the House Armed Services Committee on May 15 (58-2). The

bill would provide a major overhaul of the civil service personnel system and give the

Secretary of Defense “sole and unreviewable discretion” to implement changes.

H.R. 1837, The Service Acquisition Reform Act (SARA), was introduced on April 29

and referred to the House Armed Services and Government Reform Committees. Its purpose

is to improve the federal acquisition workforce, processes, and services. Key provisions

include statutory changes in managing training, career accession, and career education.

The Department of Defense (DOD) has issued a revised DOD acquisition policy, to

replace the DOD 5000 series that was cancelled on October 30, 2002. The new policy

consists of two directives: 1) the DOD 5000.1, and 2) the DOD 5000.2. The DOD 5000.1,

The Defense Acquisition System, defines the policy of the defense acquisition system, while

the DOD 5000.2, Operation of the Defense Acquisition System, describes the operation.

OMB Circular A-76, Part 7c (3) notes that the Circular and its Supplement are not

applicable to DOD in times of a declared war or military mobilization. The Undersecretary

of Defense for Acquisition, Technology, and Logistics has issued a DOD policy

memorandum.

BACKGROUND AND ANALYSIS

Since the late 1980s, a number of important factors have converged to create a strong

need to reform DOD’s acquisition system, a system that has been periodically studied, and

altered, over the last 50 years. First, defense procurement spending has declined every year

since 1987. This decline has forced policymakers to examine how DOD buys military

equipment and look for ways to reduce costs in DOD’s acquisition system. Second, there

has been a realization that more commercial products should be used by DOD. These

products, in many cases, are now cheaper and of comparable quality to similar products

produced according to DOD’s military specifications (“milspecs”). Many high-technology

commercial products, particularly in the electronics industry, are state-of-the-art, and they

are changing so fast that DOD’s milspec system cannot keep pace with private sector

advancements. Third, it has become common knowledge that DOD’s regulatory barriers and

its acquisition culture have not only resulted in higher costs but also kept commercial

products from being used in the defense sector. As a result, policymakers are now seeking

to make DOD’s acquisition system more (1) cost effective; (2) interactive with commercial

industries; and (3) committed to procuring state-of-the-art technology for DOD weapon

systems on a timely basis.

Policymakers have faced difficulty revamping a DOD acquisition system; however, the

budgetary need to do so has become more and more apparent. Former Secretary of Defense

Perry had stated that DOD was depending on substantial savings from acquisition reform to

finance a significant portion of future force modernization. In this regard, he had expressed

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the importance of achieving greater integration of defense and commercial industries, as this

was the only way the United States can maintain its technological leadership — a major

element of U.S. defense policy.

Over the last 8 years, Congress has enacted a number of important reforms in the

acquisition process. DOD has taken steps of its own to reduce or eliminate regulatory

barriers, as well as to encourage use of commercial products in military systems. In the view

of many experts, however, a great deal more work will be needed in the future to achieve the

efficiency and responsiveness required of DOD’s acquisition process.

DOD Acquisition Strategy for the New Era

The end of the Cold War produced a significant decline in U.S. defense spending,

particularly in the acquisition of weapon systems. Procurement spending has declined 59%

in real terms from FY1987 to FY1997. The decline in DOD procurement spending during

the Bush Administration resulted in termination of some major weapon programs. It also

prompted development of a new acquisition policy, refined by the Clinton Administration,

that emphasized upgrading existing systems rather than initiating new ones. The new policy

also supported more spending for defense research and development (R&D) and less for

weapons production. The logic of the decision was that, although there would be a reduction

in the quantity of new weapons produced, the need to maintain technological superiority, (a

key combat multiplier), required increased efforts to develop new and innovative technology.

DOD also began altering the way it did business with the defense industry, looking for ways

to reduce costs. U.S. companies embarked on a variety of strategies to adjust to the new

spending environment and the inevitable consolidation of the defense industry.

Table 1 lists national defense budget outlays, FY1967-FY2007; the “CY$” in the first

column are current year dollars, and are based on the cost of goods and services in terms of

prices current at the time of purchase; constant dollars in the second column refer to the cost

of goods or services adjusted to eliminate the effect of inflation; in the third column, the

outlay deflators represent the inflation factor.

Another change in DOD procurement policy included increased interaction between the

defense industry and commercial, non-defense industries. Due to the plight of the defense

industry (increasingly affected by cutbacks), the 102nd Congress initiated a defense

economic adjustment program that included funding for commercializing military

technology. This program was designed to help U.S. defense companies diversify their

operations; firms were encouraged to produce so-called “dual-use” products that could also

be sold in the commercial sector. It also included incentives for DOD to form partnerships

with industry to develop cutting edge, dual-use technology that would be mutually beneficial.

In 1993, the Clinton Administration proposed additional initiatives; the 103rd Congress

supported and expanded them to help with the defense transition. These initiatives promoted

highly-skilled jobs in non-defense and dual-use technology areas, commercial-military

interaction, and conversion opportunities to invest in new civilian technology.

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Table 1. DOD Procurement, FY1967 - FY2007

Fiscal

Year

FY1967

FY1968

FY1969

FY1970

FY1971

FY1972

FY1973

FY1974

FY1975

FY1976

FY1977

FY1978

FY1979

FY1980

FY1981

FY1982

FY1983

FY1984

FY1985

FY1986

FY1987

FY1988

FY1989

FY1990

FY1991

FY1992

FY1993

FY1994

FY1995

FY1996

FY1997

FY1998

FY1999

FY2000

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

Outlays

(CY$ in Millions)

PROC.

19,012

23,283

23,988

21,584

18,858

17,131

15,654

15,241

16,042

15,964

18,178

19,976

25,404

29,021

34,819

42,993

53,652

61,879

70,381

76,517

80,744

77,166

81,620

80,972

82,028

74,881

69,936

61,758

54,984

48,912

47,691

48,214

48,824

51,697

54,991

58,903

61,955

67,090

71,684

76,378

83,588

RDT&E

7,160

7,747

7,457

7,166

7,303

7,881

8,157

8,582

8,866

8,923

9,795

10,508

11,152

13,127

15,278

17,729

20,554

23,117

27,103

32,283

33,596

34,792

37,002

37,458

34,589

34,632

36,968

34,786

34,710

36,561

37,026

37,423

37,362

37,609

40,462

44,912

50,824

54,414

57,986

58,970

57,920

Outlays

(Constant FY2003

$ In Millions)

PROC.

RDT&E

98,689

34,843

114,795

36,417

115,255

34,099

99,642

31,270

83,222

30,212

72,168

31,150

63,617

30,800

58,119

30,433

54,412

27,709

50,490

25,902

53,200

26,221

54,418

26,176

63,460

25,239

65,073

26,798

70,217

28,213

76,968

30,485

89,124

34,018

96,724

36,751

106,396

41,672

112,521

48,336

115,616

48,898

107,274

48,942

108,892

49,898

103,774

48,566

100,793

43,029

89,330

41,821

81,476

43,816

70,538

40,367

61,630

39,495

53,749

40,734

51,481

40,473

51,683

40,489

51,922

40,075

54,218

39,656

56,653

41,825

59,669

45,536

61,955

50,824

65,969

53,445

69,239

55,894

72,398

55,729

77,755

53,656

Outlays, Deflators

FY2003 Base

PROC.

0.1926

0.2028

0.2081

0.2166

0.2266

0.2374

0.2461

0.2622

0.2948

0.3162

0.3417

0.3671

0.4003

0.4460

0.4959

0.5586

0.6020

0.6397

0.6615

0.6800

0.6984

0.7193

0.7496

0.7803

0.8138

0.8383

0.8584

0.8755

0.8922

0.9100

0.9264

0.9329

0.9403

0.9535

0.9707

0.9872

1.0000

1.0170

1.0353

1.0550

1.0750

Source: Department of Defense, National Defense Budget Estimates for FY2003, March 2002.

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RDT&E

0.2055

0.2127

0.2187

0.2292

0.2417

0.2530

0.2648

0.2820

0.3200

0.3445

0.3736

0.4014

0.4419

0.4898

0.5415

0.5816

0.6042

0.6290

0.6504

0.6679

0.6871

0.7109

0.7416

0.7713

0.8039

0.8281

0.8437

0.8617

0.8788

0.8976

0.9148

0.9243

0.9323

0.9484

0.9674

0.9863

1.0000

1.0181

1.0374

1.0582

1.0795

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Path to Reform

As defense spending continued to decline and defense acquisition strategy evolved,

congressional policymakers directed DOD to undertake a comprehensive review and study

of its acquisition system, and present reform recommendations. Called the “Section 800”

report (after the pertinent section in the Defense Authorization Act of 1991, P.L. 101-510),

its purpose was not to replicate the work of previous studies, like the Packard Commission

Study (1986) and Defense Management Review (1989), but to take their findings and prepare

a workable set of recommended changes to acquisition laws. The study, once completed,

would serve as a major resource for the National Performance Review and the Clinton

Administration’s efforts to reinvent government, including the acquisition system.

The first package of congressional reforms, many of which were noncontroversial

recommendations of the “Section 800” report, was passed in the Federal Acquisition

Streamlining Act, or FASA, P.L. 103-355. The legislation revised more than 225 statutory

rules, encouraged federal agencies to buy commercial, off-the-shelf products, and simplified

government procedures for procuring those products. Key provisions included the following:

(1) raising from $25,000 to $100,000 the threshold for waiving many statutes governing

defense procurement; (2) streamlining the bid-protest process to prevent costly delays that

could result when contractors protest procurement contract awards; (3) raising to $500,000

the cap that would allow bidding defense contractors to bypass special accounting systems

requirements, and avoid providing lengthy cost and pricing data to the government; (4)

raising from $25,000 to $100,000 the value of contracts that could be reserved for small

business; and (5) creating unified federal procurement statutes for executive branch agencies.

This legislation promoted performance-based contracting in DOD, as well as the use

of acquisition reform “pilot” programs to test the effectiveness of some reform initiatives;

one such example is mission-oriented program management. Performance-based contracting

defines work to be performed in measurable, mission-related terms — in contrast to the

heretofore procedure of defining the work in broad, imprecise terms through a “statement of

work.” This approach was intended to reduce government costs and improve contractor

performance by encouraging more innovative and efficient approaches to government

contracts. Examples of such programs include joint direct-attack munitions (JDAM),

commercially-derived aircraft and engines, and a fire-support tactical trainer (see Oversight

of Reform Initiatives.)

A second package of reforms, called the Federal Acquisition Reform Act (FARA) of

1996, was passed as part of the FY1996 Defense Authorization Act. FARA made changes

in the acquisition process in the areas of competition, commercial items, certification

requirements and the Federal Acquisition Computer Network (FACNET). FASA II (called

FARA) was passed during the first session of the 104th Congress. It built upon the earlier

FASA legislation, and was included in the FY1996 DOD Authorization Act (P.L. 104-106).

The newest reform provisions sought to (1) simplify procedures to procure commercial

products and services, and at the same time preserve the concept of full and open

competition; (2) reduce barriers to acquiring commercial products by eliminating the

requirement for certified cost and pricing data for commercial products; and (3) streamline

the bid protest process by providing for all bid protests to be adjudicated by the General

Accounting Office (GAO). To reflect the projected efficiencies of acquisition reform and

the broader manpower reductions occurring at DOD, FASA directed DOD to reduce its

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acquisition workforce by 15,000 personnel during FY1996, and to report to Congress on how

to implement an overall 25% reduction during the next 5 years (from October 1, 1995). In

addition, the “procurement integrity” provision consolidates and clarifies the standards of

conduct for federal officials in the acquisition process, to ensure consistent treatment of such

personnel on a government-wide basis.

The FY1996 Defense Authorization Act changed federal procurement of information

technology through the establishment of the Information Technology Management Reform

Act of 1995 (ITMRA). First, it eliminated the central procurement authority of GSA,

making each federal agency responsible for its own information technology procurement and

investment. Second, it directed agencies to appoint a chief information officer whose

responsibilities would include ensuring that information technology expenditures conform

to budget and program management decisions. Third, it combined both protest processes for

information technology and federal procurement under GAO’s authority. (For a discussion

of current federal policies on information technology, see CRS Report 98-845, Federal

Government Information Technology Policy: Selected Issues, updated January 5, 1999.)

Revisions to Part 15 of the Federal Acquisition Regulations (FAR)1 went into effect on

September 30, 1997. Part 15 streamlines the source selection and negotiation requirements

to promote better communication between the government and potential contract bidders.

The new rules encourage early and open dialogue, narrow the range of competitive bidders

to those with a “reasonable chance” of winning the contract award, and promote “modular

contracting,” which allows large projects to be broken down into smaller, more manageable

parts, giving bidders a chance to focus on their particular expertise rather than take on the

entire project. The revised acquisition regulations was a factor in the Department of

Energy’s sale of Elks Hills Naval Petroleum Reserve for $3.65 billion, which represents the

largest divestiture of federal property.

DOD Promotes Reform

Former Secretary of Defense Perry and his deputies were active in introducing

acquisition reforms to foster greater efficiency, cost effectiveness, and military-civilian

industrial interaction. In 1994, DOD leadership began introducing and promoting a number

of new concepts, among them: 1) the single process initiative (SPI); 2) integrated product

teams (IPT) to develop and build weapons systems; and 3) “cost as an independent variable,”

a concept that would increase the priority of cost considerations in weapon system decisions.

Each of the military services had also introduced reforms to service-specific parts of DOD’s

acquisition system. DOD and the services are now in various stages of implementing these

concepts.

In June 1994, Secretary Perry introduced a major acquisition reform directive reversing

the traditional DOD preference for milspecs in favor of performance specifications and

commercial standards. The directive required preference changes in purchasing new systems

as well as modifications of existing systems. As a result, special waivers are now needed to

1

The Defense Federal Acquisition Regulation mirrors the Federal Acquisition Regulations, at

[http://www.arnet.gov/far/].

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use milspecs and will be granted in special cases only — a rule that used to apply to

performance specifications and commercial standards. The plan to implement this policy

directive was the SPI, which required U.S. companies to establish a common plant-wide

process and performance standard for new and existing defense contracts. It forced

contractors to consolidate, or eliminate, multiple processes, specifications, and standards for

a particular product whether it be for commercial or defense use within different services.

Over the next 12 to 18 months, DOD would modify all contracts at a given facility at the

same time, instead of on a contract-by-contract basis.

In another important policy decision, DOD decided in May 1995 that the IPT approach

would be used to develop and build weapon systems. The IPT concept, an increasingly

common practice in the commercial world, would link representatives of the weapon maker,

the military service purchaser, and the office of the defense secretary. Members of the team

stay in constant communication, addressing problems and negotiating changes to the

program’s development as they arise, rather than working at arm’s length through a formal

process (such as through the Defense Acquisition Board). The IPT concept was intended to

transform historically adversarial relationships, such as between headquarters staff

organizations and program office teams, into productive partnerships, and place renewed

emphasis on the importance of working as a cross functional team to maximize overall

performance. Success has been achieved by the IPT approach in a few new programs; one

example is the JDAM program (see next section). Encouraged by its results, DOD has begun

widening the IPT concept to many other programs, both new and existing; one such effort,

to review past performance in the source selection process, has resulted in policy and

procedural changes in federal acquisition policy (see “Issues in the 105th Congress”).

In one of the latest, potentially far-reaching decisions, DOD has begun a policy of

increasing the importance of “cost” as a factor in deciding on the acceptable performance

level of a weapon system. It is likely to force decision-makers to consider trading away some

system performance to achieve greater cost savings. The policy, called CAIV, would attempt

to move away from a major tenet in the Cold War culture of trying to achieve the best level

of weapon performance at almost any cost. With the goal of lower costs and shorter

schedules, the policy would require DOD program managers to examine the weapon

system’s entire life-cycle — including research and development, production, operation and

support — and its cost patterns and objectives (see Figure 1).

The program manager would have to think about cost-related factors such as budgetary

resources, unit costs of comparable or fielded systems, mission effectiveness, technology

trends, innovative manufacturing techniques, and commercial business practices. DOD

intends to give its program managers and contractors more freedom to make the trade-offs

and meet cost targets; however, a significant challenge to implementing CAIV will be to

persuade DOD and industry managers to become more innovative, accepting larger risks to

achieve breakthroughs in cost and performance. The objective is to not penalize failures that

might occur, despite management’s best efforts (see the section on restructuring DOD’s

acquisition organization).

One of the most controversial of the acquisition reform initiatives is called “best value.”

Best Value is a process used in competitive contracting to select the most advantageous offer

by evaluating and comparing several factors, including 1) technical competence; 2) proven

past performance; 3) management capability; 4) life cycle costs, not just the initial price; and

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5) quality. The “best value” may not be the lowest bid offered; in fact, a Navy contract

award based on “best value” resulted in the awarding of a $1.5 billion dollar contract (to

build three LPD-17 amphibious assault ships) to a bidder that was $100 million more

expensive than the lowest bidder.

Source: Defense Systems Management College

Potential Impact of Reform Actions

Perhaps the most often-asked question about acquisition reform is how much DOD will

save from the ongoing initiatives. Although many are hopeful, history shows that many past

DOD efforts have resulted in only minimal savings. Past disappointments included the

projected, but unrealized, savings associated with the 1989 Defense Management Review.

A chief obstacle has been a residual inertia on the part of the U.S. government, particularly

in DOD, a clinging to the culture of the Cold War. Some experts argue, however, that this

time will be different because the defense procurement budget has declined so dramatically

(see Table 1, DOD Procurement), and there is little hope of the budget increasing enough

in the foreseeable future to finance projected U.S. needs for modernizing its force structure.

Former Secretary Perry had made it clear that DOD was depending on “substantial” savings

from acquisition reform, as well as from base closings and privatization of some of DOD’s

functions, to help finance “critical” defense modernization.

It is difficult, at this point, to predict what DOD will achieve in the way of savings from

its acquisition reform effort. More time is needed to complete implementation of the new

initiatives, and to establish a system that accurately measures the savings. Fairly reliable

estimates, however, exist for a few of the ongoing individual efforts. For example, the SPI

could result in significant cost reductions. In 1995, a study by Coopers & Lybrand found that

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1.7% of the cost of DOD acquisitions resulted from milspecs and standards, and that

government-imposed material management and accounting systems added another 0.6% to

costs. DOD estimates that about half of those costs, or $400 million, could be saved through

reform. Experts also believe that by applying the IPT approach to program development and

the CAIV concept to spending on weapons performance, potential costs savings could be in

the billions of dollars, a preliminary estimate at this point.

The most definitive estimate of cost savings, when SPI, IPT, CAIV, and other such

acquisition initiatives are applied to DOD programs, was offered by Secretary Perry. In

introducing DOD’s budget request for FY1997, he cited three DOD programs. The first of

these was the “Smart T” program, the Army’s tactical communication terminal for

MILSTAR. After reexamining the costs of certain levels of performance and streamlining

the specification and data requirements, the original programs’ cost estimates were reduced

from $800 million to $250 million, for a net saving of $550 million. The second estimate

of costs savings cited was for the Air Force and Navy JDAM program. The Air Force has

reported that using the IPT approach has shortened the JDAM acquisition cycle by 4 years,

eliminated numerous complexities, and significantly reduced the program’s original cost

projections.

Using the accelerated acquisition plan, as well as off-the-shelf components and other

commercial practices, the original cost estimate would drop from $42,000 per unit to

$14,000, a 67% savings estimated at $2.9 billion. The third estimate of costs savings cited

by Secretary Perry was for the C-17 program. After instituting the IPT approach, rethinking

some performance requirements using CAIV, reducing reporting requirements some 3 years

ago, and reaching an agreement to a multi- year procurement plan, DOD has estimated that

it will save $5.3 billion over the life of the program. Furthermore, the Air Force has

identified $13 billion in potential savings, or cost “avoidances,” for 24 programs that include

the C-17 and JDAM programs.

The Competitive Sourcing of DOD Functions

For a long time, DOD has sought to competitively source its functions through publicprivate competitions through the OMB Circular A-76. U.S. policymakers will confront a

number of questions, the answers to which will help determine the success or failure of

outsourcing initiatives. First, does the initiative really reduce DOD costs over the long-term,

and how will DOD measure those savings? It is known that DOD has experienced problems

with its cost accounting and billing systems, important components in tracking cost savings.

Second, will DOD’s management structure be able to “manage” the initiative to make sure

its operation becomes more efficient? Experts point out that some private sector companies

have run into outsourcing problems because they failed to make necessary changes in their

management structure. Third, does the initiative fit into the current policy of encouraging

the closer integration of the U.S. defense and commercial industrial bases? Finally, does the

initiative go beyond the “proper” limits of privatization at DOD, whose first and foremost

mission is to protect U.S. national security, not to maximize savings? In other words, does

the initiative adversely impact DOD’s war-fighting capability?

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Oversight of Reform Initiatives

Congress has faced important oversight responsibilities because of changes taking place

in defense acquisition policy. The success or failure of these changes will be determined by

how quickly and effectively DOD acts to implement them. On March 15, 1996, DOD gave

final approval to a major revision of DOD Directive 5000.1 and DOD Regulation 5000.2-R,

both of which contained new policy changes and procedures based on FASA and FARA

legislation. The former 900-page set of regulations has been reduced to a 160- page volume

and is available via an on-line database. FASA has required the Comptroller General to

evaluate the effectiveness of implementing the final FASA regulations, and submit a report

to the Congress within eighteen months; FARA further broadened the scope.

The various congressionally mandated acquisition reform reports issued, and those to

be issued later, require attention and, perhaps, subsequent action. For example, and in

addition to the reports previously cited, the FY1996 DOD Authorization Act required another

report that would enable DOD to improve the performance of depot maintenance and repair

of U.S. weapon systems. On April 4, 1996, DOD issued its report, “Policy Regarding

Performance of Depot-Level Maintenance and Repair Workload.” It advocated reforming

the laws regulating how DOD allocates its maintenance workload between the public and

private sectors. It stated that such legal requirements prevented DOD from (1) taking full

advantage of lower cost opportunities through outsourcing to the private sector, and (2)

restructuring its public depots to provide the military only necessary “core” capabilities. The

report drew mixed congressional reactions, and the allocation of DOD’s maintenance

workload has become a subject of debate.

When the House passed the FY1997 DOD authorization bill (H.R. 3230), it voted to

maintain current DOD depot maintenance and repair policy (60% government, 40% private).

The Senate voted to increase the “private” share, from 40% to 50%. In the 1997 DOD

conference report, the House and Senate both receded; the conference report does not contain

any of these provisions. The conferees agreed not to take any action regarding these issues

that year; thus, the DOD depot maintenance and repair policy remained unchanged. The

FY1998 Defense Authorization (P.L. 105-85) establishes a new definition of what constitutes

“depot maintenance and repair;” it will require that DOD, in the course of conducting such

competitions, clearly satisfy a number of congressional requirements during the source

selection process, and requires that the Secretary of Defense provide an annual report to the

Congress, detailing the public/private percentages of depot maintenance and repair

workloads. This report would be reviewed by the Comptroller General to determine whether

DOD had complied with requirements of Section 2466 of the U.S. Code.

The Senate Armed Services Committee’s Subcommittee on Readiness recommended

a revision of the laws relating to the performance of DOD depot maintenance, including 1)

an increase in the private share to 50%; 2) adjusting the law so that work performed by

private companies at public depots will be counted as public sector depot maintenance, rather

than private sector depot maintenance; 3) requiring the efficient operations of the remaining

public Air Logistics Centers (ALC) prior to the implementation of any “privatization in

place” at former ALC locations; and 4) requiring DOD to preserve a core depot capability

that could maintain the types of weapons systems that have been identified as “mission

essential.” The effect of these provisions would have been to prohibit privatizing Air Force

maintenance work at McClellan ALC, Sacramento, California and Kelly ALC, San Antonio,

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Texas. By November 6, the House and Senate had both reached a compromise on the

FY1998 Defense Authorization conference report, adjusting the public/private depot

maintenance and repair workload from 60/40 to 50/50; however, a number of new provisions

were included, such as directing DOD to begin integrating public depot work. (See P.L. 106259, the FY2001 Defense Appropriations Bill.)

On March 2, 1999, in a hearing before the Subcommittee on Military Readiness, Deputy

Undersecretary of Defense (for Acquisition Reform) Stan Z. Soloway reported that DOD

acquisition reform initiatives had experienced measurable success within the Joint Air-toSurface Standoff Missile Program (JASSM), Joint Direct Attack Munition (JDAM) Program,

Fire Support Combined Arms Tactical Trainer (FSCATT) Program, Joint Primary Aircraft

Training System (JPATS), and the F-117 Tactical Air Program. Here are excerpts of his

March 2, 1999 testimony before the House Subcommittee on Military Readiness.

The Joint Air-to-Surface Standoff Missile, or JASSM, a next-generation air launched

cruise missile that will provide the Air Force and Navy a standoff capability greater than

currently exists, has made major gains from acquisition streamlining. Estimated program

costs have been reduced 44%. JASSM will also have a complete “bumper-to-bumper”

15-20 year warranty.

The Joint Direct Attack Munition, or JDAM, a strap-on guidance kit to enhance the

delivery accuracy of 1000 and 2000 pound bombs, employed acquisition reform to

achieve lower development and production costs, faster schedules, and lower unit costs.

The JDAM team reduced unit cost by approximately 60% below the estimated

requirement costs. Overall, cycle time for JDAM was reduced 35% with a 30% reduction

in program staffing. JDAM reduced projected O&M (Operation and Maintenance) Costs

by $49.4 million (86.8%) through the use of a 20-year warranty.

The Fire Support Combined Arms Tactical Trainer (FSCATT) program has achieved a

33% reduction in cycle time with a 13.5% reduction in estimated contract cost and 27%

reduction in program staffing.

Issues in the 105th Congress

Issues in the 105th Congress included 1) reviewing congressionally mandated reports,

the findings of which will aid Congress in identifying further cost cutting strategies for

reducing infrastructure costs savings in the Department of Defense; 2) integrating the

assessments and recommendations of various defense panels charged with assisting the

Secretary of Defense in changing the business culture within the Defense Department; and

3) assisting DOD in its implementation of acquisition workforce reductions as well as

refinements and other changes to federal acquisition regulations.

Review of Congressionally Mandated Reports

The continuing acquisition reform debate in the 105th Congress focused on a number

of congressionally mandated reports, the findings of past and current reports of the Defense

Science Board, and the changes that Secretary Cohen has announced as part of his Defense

Reform Initiatives. The first was a study of major defense acquisitions programs, called the

“Report of the Defense Science Board’s Task Force on Defense Acquisition Reform.”

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Phase II of the report was issued August 1994; Phase III was published in August 1996.

Under the requirements of FASA, DOD was asked to reduce the average time that it took to

field “emerging technologies,” starting from the baseline of October 13, 1994. At that time,

it would take over 16 years to field the next generation’s weapon system; one of the study’s

objectives was to reduce this by upwards of 50%. In the Secretary of Defense’s Annual

Report for FY1996, the average time was reduced to about 9 ½ years.

The second study was chartered to develop recommendations for DOD on how to

effectively use outsourcing to create a funding mechanism for future force modernization

needs. The Task Force issued a lengthy final report, stating:

...The Task Force believes that all DOD support functions would be contracted out to

private vendors except those functions which are inherently governmental, are directly

involved in war fighting, or for which no adequate private sector capability exists or can

be expected to be established...

The third study was chartered to develop ways to improve the organization of

acquisition processes and personnel. The goal of the panel is to help DOD define a new

acquisition system that can reduce weapons procurement, both costs and cycle time.

Assessments and Recommendations of Defense Panels

In keeping with his desire to change the way that the Pentagon conducts business, often

characterized in the press as a “revolution in business affairs,” Secretary Cohen announced

a number of Pentagon management and organizational reforms. These reforms were

recommended by the Task Force on Defense Reform, a public/private partnership which

studied ways to improve business practices within DOD. The “Tail-to-Tooth” Commission

and the Task Force on Defense Reform operated in parallel, and a number of their

recommendations were used by the Secretary to develop his Defense Reform Initiatives.

They include 1) reducing the size of the Office of the Secretary of Defense, the Joint Staff

and defense agencies, from 141,000 to 111,000 staff members; 2) realigning functions within

the Department of Defense, consolidating and eliminating duplicate functions; 3) increasing

public-private competitions to outsource non-core maintenance and support work; and 4)

establishment of a senior-level Defense Management Council to monitor compliance. Cohen

has also proposed base realignment and closure (BRAC) rounds for the years 2001 and 2005

to further reduce defense infrastructure.

Changes in Federal Acquisition Legislation

Another significant policy change that evolved in the 105th Congress was the

interpretation of the use of past performance in the source selection process. Dr. Paul

Kaminski, Dr. Gansler’s predecessor, instituted the Past Performance Integrated Product

Team (IPT) to take a look at the evaluation of the use of past performance within the defense

contract industry. As a result of the IPT’s recommendations, Dr. Gansler issued a new set

of guidelines on past performance in the source selection process, to become effective on

February 1, 1998. These guidelines changed federal acquisition regulations and the Defense

Acquisition Regulation (DAR) Supplement; all defense agencies are required to adopt them.

The purpose of the new guidelines was to establish consistency and standardization in how

DOD contracting officials define and collect information about defense contractors. Among

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defense contractors, the lack of consistency in the use of past performance information had

been an ongoing source of criticism; the new policy will help defense contractors to

understand the kind of information that will be evaluated, rather than be evaluated on factors

known only to DOD. The new policy guidelines are to spell out a common management

policy among the services (previously Army, Navy, and the Air Force each had unique

approaches for collecting and evaluating contractor past performance information), and the

unified policy will make it easier to evaluate and compare contractor performance. Past

performance information (PPI) will be automated and, along with other efficiencies, will

make the information more accessible. The information will be made available to the general

public, at some future time. DOD has implemented a pilot study; a status report is expected.

Issues in the 106th Congress

The 106th Congress had an important oversight role in defense acquisition reform,

especially in monitoring DOD reports to Congress on many of its acquisition reform

initiatives (such as progress in reducing the size of the acquisition workforce) or in defining

governmental activities subject to managed competition and outsourcing alternatives.

OMB published the proposed rules to implement the Federal Activities Inventory

Reform (FAIR) Act of 1998 (P.L. 105-270) through the use of OMB Circular A-76. The

OMB Circular A-76 policy was first issued in 1966. The policy, supplemental handbook,

and accompanying policy memoranda were revised and re-issued on June 14, 1999.

Authority for the OMB Circular A-76 originated in the Budgeting and Accounting Act of

1921 (31 U.S.C. 1 et seq.) and the Office of Federal Procurement Policy Act Amendments

of 1979 (41 U.S.C. 401 et seq.) Legal or procedural challenges to the policy or procedures

were discussed in the Supplemental Handbook. Copies of updated versions can be found on

the Internet at [http://www.whitehouse.gov/OMB/circulars/index-procure.html].

FAIR outlined a way for federal agencies to decide who was best to perform work

activities — whether the work should be performed in-house or contracted out (called

outsourcing) to another public or private group. FAIR included a definition of what was

generally considered an inherently governmental function, although agencies can argue for

inclusions/exclusions to the lists. Lists may be challenged by interested parties, as defined

in the legislation. Activities or functions not inherently governmental in nature are

considered commercial and may be subject to a managed, competitive outsourcing process;

however, the legislation did not require agencies to contract out commercial activities.

The FAIR Act required federal executive agencies to submit annual inventory lists of

government activities “not inherently governmental” in nature; ultimately, the lists would be

made available to Congress and the general public. In accordance with the FAIR Act, DOD

released its final 2000 inventory of federal jobs that could be performed by private sector

companies. Reportedly, out of some 452,807 civilian jobs that could be performed in the

private sector, approximately 39% of those jobs are likely candidates for outsourcing.2

2

Saldarini, Katy. “Final Round Of Outsourcing Lists Released.” Government Executive. February

12, 2001.

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Issues in the 107th Congress

The 105th and 106th Congresses passed a number of defense reform provisions that

supported, if not encouraged, DOD’s outsourcing and privatization initiatives. In the 107th

Congress, Congress may seek the answers to three important questions: (1) do DOD

outsourcing and privatization initiatives save money, in the long term? (2) do DOD

outsourcing and privatization initiatives produce a smarter, more efficient and more

accountable government? (3) if not outsourcing and privatization, then what other alternative

strategies may produce similar, if not better, costs savings? The answers to each question

will be critical; DOD is faced with the prospect that 50% of its defense acquisition workforce

may be eligible to retire by 2005. As a result, Congress and DOD will need to work together

to reshape and redefine the size and scope of the future workforce.

The 107th Congress will examine the results of three studies and one report, mandated

by the FY2001 Defense Authorization Bill (P.L. 106-398), and one report mandated by the

FY2000 Defense Authorization Bill (P.L. 106-65), which may provide statistical and other

data to determine whether certain efficiencies in defense operations have been achieved.

First, the Comptroller General is mandated to conduct two studies: 1) the use of “contract

bundling” in military construction contracts (report was due February 1, 2001) and 2) the

policies and procedures governing the transfer of federal commercial activities from the

public sector to the private sector (report due May 1, 2002). Second, the Secretary of

Defense is directed to conduct a study on the impact of purchasing military parts,

components, and materials from foreign sources (report was due October 30, 2001). Third,

Section 343 of P.L. 106-65 requires the Secretary of Defense to provide data on the (1)

number of contractors employed by DOD; (2) types of contractors; and (3) how (source of

appropriation) and where (DOD organizational element) contractors were funded (report was

due, March 1, 2001). Fourth, DOD continues to reform various aspects of its management

practices and business operations to become more efficient and cost-effective in building and

maintaining the nation’s military force.

DOD is trying to reduce its infrastructure costs to achieve savings that could help

finance future weapons and military equipment modernization. The new Undersecretary of

Defense for Acquisition, Technology, and Logistics has announced DOD’s four priorities for

acquisition reform: 1) improving the credibility and effectiveness of the acquisition and

support process by reducing the acquisition cycle time and costs (the time and cost of

building new weapons systems) and including the real acquisition costs in the defense

budget; 2) improving the quality and morale of the acquisition workforce through the use of

special hiring authorities, granted by Congress, to recruit acquisition experts; 3) aligning

weapon systems and infrastructure with a new strategy currently under development by the

new Secretary of Defense; and 4) advocating for next-generation technologies that will

ensure military dominance.

Competitive sourcing studies between public and private sectors through the OMB

Circular A-76 and the requirements of a closely-related initiative, the FAIR Act (P.L. 105270), are viewed as efforts to improve the efficiency of DOD business practices while

streamlining operational capabilities to produce budgetary savings. However, there is

conflicting evidence as to whether such competitions produce significant savings, in the long

term. The 107th Congress will likely face increased calls for continued debate and proposals

to study federal outsourcing efforts, as well as review legislation introduced during the 106th

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Congress that, if enacted, would ban future outsourcing initiatives unless savings could be

demonstrated. Another important development will be the recommendations of a

congressionally-mandated panel focused on federal competitive sourcing policy through

OMB Circular A-76. Section 832 of P.L. 106-398 mandated that GAO convene a panel to

study the policies and procedures governing the transfer of commercial federal activities

from government personnel to federal contractors. The Panel issued its report on April 30,

2002, recommending that OMB Circular A-76 be modified and included in the Federal

Acquisition Regulations (FAR) in an “integrated competition process.”

107th Congress: Key Public Laws

P.L. 107-248 (H.R. 5010). Making appropriations for the Department of Defense for

the fiscal year 2003, and for other purposes. Marked up and reported by the House

Appropriations Committee (H.Rept. 107-532), June 25, 2002. Considered by the House and

approved, as amended (413-18), June 27, 2002. Considered by the House and approved as

amended (413-18), June 27, 2002. Marked up and reported as amended by the Senate

Appropriations Committee (S.Rept. 107-213), July 18, 2002. Considered by the Senate July

31 and August 1, 2002. Approved by the Senate, as amended (95-3), August 1, 2002.

Conference report filed (H.Rept.107-732), October 9, 2002. Conference report agreed to in

the House (409-14), October 10, 2002. Signed into law October 23, 2002.

P.L. 107-314 (H.R. 4546). Authorizes appropriations for fiscal year 2003 for military

activities of the Department of Defense, for military construction, to prescribe military

personnel strengths for FY2003, and for other purposes. Referred to the House Committee

on Armed Services, April 23, 2002. Marked up and ordered to be reported to the House May

1, 2002. Report filed (H.Rept. 107-436) May 3, 2002. Considered by the House and

approved, with amendments (359-59), May 10, 2002. Laid before the Senate, Senate struck

all after the enacting clause and inserted the substitute language of S. 2514, and passed the

Senate by unanimous consent, June 27, 2003. Conference report agreed to in the House on

suspension of the rules by voice vote, November 12, 2002. Conference report agreed to in

the Senate by voice vote, November 13. Signed into law December 2, 2002.

106th Congress: Key Public Laws

P.L. 106-65 (S. 1059, H.R. 1401). Authorizes appropriations for FY2000 for military

activities of Department of Defense, for military construction, for defense activities of

Department of Energy, and for other purposes. Passed Senate, amended (92-3), May 27,

1999. Conference report passed House (375-45) September 15, 1999; passed Senate (93-5)

September 22, 1999. Signed into law October 5, 1999.

P.L. 106-79 (H.R. 2561, S. 1122). Makes appropriations for FY2000 for Department

of Defense and for other purposes. Passed House, amended (379-45), July 22, 1999. Passed

Senate by unanimous consent, amended, July 28, 1999. Conference report (H.Rept.106-371)

filed October 8, 1999. Conference report passed House (372-55) October 13, 1999; passed

Senate (87-11) October 14, 1999. Signed into law October 25, 1999.

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P.L. 106-259 (S. 2593, H.R. 4576). Makes appropriations for FY2001 for the

Department of Defense and for other purposes. Prohibits 1) the conversion of DOD

functions from government to contractor performance, unless a “Most Efficient

Organization” analysis is completed and certified to House and Senate Defense

Appropriations Committees, and 2) the purchase of welded shipboard anchor and certain

mooring chain, unless both are manufactured in the United States from components that are

substantially manufactured in the United States. Authorizes public-private competitions for

depot maintenance and repair work, under certain conditions, and exempts such competitions

from the requirements of OMB Circular A-76. Reported to House (H.Rept. 106-644) May

25, 2000. Passed House (367-58) June 7, 2000. Senate took up H.R. 4576 and substituted

the text of S. 2593 as reported by the Senate Appropriations Committee, June 8, 2000.

Passed Senate, amended (95-3), June 13, 2000. Conference report (H.Rept. 106-754) filed

July 17, 2000. Conference report passed House (367-58) July 19, 2000; passed Senate (91-9)

July 27, 2000. Signed into law August 8, 2000.

P.L. 106-398 (S. 2549, H.R. 4205). Authorizes appropriations for FY2001 for military

activities of the Department of Defense and for military construction, to prescribe military

personnel strengths for FY2001, and for other purposes. Reported to House (H.Rept.

106-616) May 12, 2000. Passed House (353-63) May 18, 2000. Senate took up H.R. 4205,

substituted the text of S. 2549, as amended, and passed H.R. 4205 (97-3) July 13, 2000.

Conference report (H.Rept.106-945) passed House (382-31) October 11, 2000; passed Senate

(90-3) October 12, 2000. Signed into law October 30, 2000.

FOR ADDITIONAL READING

U.S. Department of Defense. Commission on Roles and Missions of the Armed Forces.

Directions for Defense. May 1995.

CRS Reports

CRS Report RL31236. The Berry Amendment: Requiring Defense Procurement to Come

from Domestic Sources, by Valerie Bailey Grasso.

CRS Report RS20943. Contracting Out: Governmentwide Legislation in the 107th

Congress, by L. Elaine Halchin.

CRS Report RL31236. Defense Outsourcing: The OMB Circular A-76 Policy, by Valerie

Bailey Grasso.

CRS Report RL31686. The Demilitarization of Significant Military Equipment, by Valerie

Bailey Grasso.

CRS Report RL30392. The U.S. Defense Industrial Base: Trends and Current Issues, by

Daniel Else.

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