Table Of Content

it -DFES SYA MAAte &ýOLG COMMERCIAL PRACTICES FOR DEFENSE ACQUISITION GUIDEBOOK 854 AD-A266 L ELECTE. JUL16 1993 a L '- iL (cid:127).a.,-. F 93-16059 / , N /liN/ .tt~'NiB!N /lll/ + / N./ COMMERCIAL PRA(TICES FOR DEFENSE ACQUISITION GUIDEBOOK Accesio-i For NTIS CRA&I DTIC TAB Unannounced Justification By Distribution I Availability Codes Avail and/or Dist Special DEFENSE SYSTEM-NS MANAGEMENT COLLEGE F1. BELVOIR. VIRGINIA 22060-5426 .1 N1 "-.- FOREWORD This guidebook was developed by ANSER organizations and contractor associations and Corporation, Suite 800, 1215 Jefferson groups. Their assistance and views were Davis Highway, Arlington. Virginia 22202 very helpful throughout the study. under Contract MDA)03-89-C-0260 directed by DSMC. The !ead researcher Whenever in this publication "man," "men," and principal author was Dean (Dusty) or their related proncuns appear, either as Rhoads. Major contributors wcrc Jennifer words or parts of words (other than with Breon, Ed Robinson, Janice Parsek, and obvious reference to named male Neal Kochman. individuals), they have been used for literary purposes and are meant in their generic A number of Government and industry sense. personnel provided assistance through interviews, background material, and The Defense Systems Management College consultation. Special mention is made of the is the controlling agency for this guidebook. following organizational representatives Comments and recommendations related to Iwho, with their associates, performed this guidebook's contents are solicited. detailed reviews of thie drafts of this guidebook: Greg Saunders (OSD), Sandy Rittenhouse (ARMY), and Charles Sanders (NAVY). The authors would like to thank all participants and the personnel and faculty of DSMC; especially Tom Withers, Frank Calvin Brown Meneely, and Norm McDaniel whose Professor of Engineering Management guidance and suggestions were most helpful. Defense Systems Managemen! College January 1992 Numerous studies, reports, and other references were consulted during the !t,'dy; and on a non-attribution basis, many spokespersons were interviewed individually and as representatives of Government TABLE OF CONTENTS EXECUTIVE SUMMARY es-i 2.6.1 Best Value 2-7 2.6.2 Supplier Relationships 2-7 CH.APTER 1 2.6.3 Contracting Practices 2-7 INTRODUCTION 2.6.4 Documentation and Specification 2-7 Practices 1.1 BACKGROUND 1-1 2.6.5 Inventory Management and 2-8 1.1.1 Definition of Commercial Practices 1-2 Commercial Distribution Systems ] 1.? Guidebook and Study Scope 1-2 2.6.6 Nondevelopmental Items 2 8 1.2 ADVANTAGES IN USING 1-4 2.7 REFERENCES AND SOURCES 2-8 COMMERCIAL PRACTICES 1.3 DISADVANTAGES IN USING 1-4 CHAPTER 3 COMMERCIAL PRACTICES BEST VALUE 1.4 APPENDICES 1-5 INTRODUCTION 3-1 CHAPTER 2 3.1 COMMERCIAL APPROACH 3-1 !ýI.RKET RESEARCH AND SURVEYS 3.2 GOVERNMENT APPROACH 3 2 3.3 PROS/CONS OF GOVERNMENT 3-4 2.1 COMMERCIAL APPROACH 2-1 ADOPTION OF THE COMMERCIAL 2. 1.1 Market Informatikn Sources 2-2 APPROACH 2.1.2 Market Research Objectives 2-2 3.4 INHIBITORS TO GOVERNMENT 34 2.2 GOVERNMENT APPROACH 2-3 ADOPTION OF THE COMMERCIAL 2.3 PROS/CONS OF GOVERNMENT 2-4 APPROACH AI)OPTION OF THE COMIMERCIAL 3.4.1 Inhibitors 34 APPROACH 3.4.2 Inhibitors-Commercial Practice 3-4 2.4 INHIBITORS TO GOVERNMENT 2-5 Relationships ADOPJIION OF THE COMMERCIAL 3.5 STRATEGY FOR ADOPTING THE 3-6 APPROACH COMMERCIAL APPROACH AND 2.4.1 Inhibitors 2-5 COPING WITH INHIBITORS •.2 Inhibitors-Commercial Practice 2-5 3.5.1 Technical Factors 3-? Relationships 3.5.2 Management Factors 3-7 2.- Si RATEGY FOR ADOPTING THE 2-6 3.5.3 Quality Factors 3-8 COMMER('IAL APPROACH AND 3.5.4 Logistics Factors 3-9 (',lIN - WITH INHIIIITORS 3.5.5 Industrial Base 'actors 3-9 2.6 RILATLI) t'RAClICES ,-, 3.5.6 Cost, Factors 3-9 Table of Contents 3.6 RFLATED PRACTICES 3-9 5.4.1 Inhibitors 5-3 3.6. I Market Research and Surveys 3-9 5.4.2 Inhibitors-Commercial Practice 5-3 3.6.2 Supplier Relationships 3-10 Relationships 3.6.3 Contracting Practices 3-10 5.5 STRATEGY FOR ADOPTING THE 5-5 3.6.4 Warranties 3-10 COMMERCIAL APPROACH AND 3.6.5 Inventory Management and 310 COPING WITH INHIBITORS Commercial Distribution Systems 5.6 RELATED PRACTICI-S 5-6 3.7 RIFFRENCES AND SOURCES 3-10 5.6.1 Market Research and Surveys 5-6 5.6.2 best Value 5-6 CHAPTER 4 5.6.3 Supplier Relationships 5-6 SUI'PI,IER REIATIONSIIIPS 5.6.4 Documentation and Specification 5-6 Practices 4.1 CONMMERCIAL APPROACH 4-1 5.6.5 Warranties 5-7 4.2 GOVZRNMENT APPROACH 4-2 5.6.6 Inventory Management and 5-7 4.3 PROS/CONS OF GOVERNMENT ,4-2 Commercial Distribution SysLems AI)OPTION 01: i HE COMMERCIAL 5.6.7 Programmatic Practices 5-7 APPROACH 5.7 REi.ERENCES AND SOURCES 5-7 4.4 INHIBITORS TO GOVERNMEN] 4-3 AI)OPTION 01- THE COMMERCIAL CHAPTER 6 A PPROACH I)OCUNFENTATION ANl) 4.4.1 inhibitorn, 4-3 SPECIFICATION IPRACTICES 4.4.2 Inhibitors-Commercial Practice 4-3 Relationships 6.1 COMMERCIAL APPROACH t,-! 4.5 STRATEGY FOR ADOPTING THE 4-5 6.2 GOVERNMENT APPROACH 6-2 COMMERCIAL APPROACH AND 6.3 PROS/CONS 01- GOVERNMENT 6-3 COPING WITH INHIBITORS ADOPTION OF THE COMMERCIAL 4.6 RELATED PRACTICES 4-6 APPROACH 4.6.1 Market Research and Surveys 4-6 6.4 INHIBITORS TO GOVERNMENT 6-4 4.6.2 Best Value 4-6 ADOPTION OF THE COMMERCIAL 4.(.3 Contracting Practices 4-6 APPROACH 4.6.4 Warranties 4-6 6.4.1 Inhibitors 64 4.6.5 Inventory Management and 4-6 6.4.2 Inhibitors-Commercial Practice 6-4 Commercial Distribution Systems Relationships 4.6.6 Nondevelopmental Items (NDI) 4-6 6.5 STRATEGY FOR AI)OPING THE 6-5 4.7 RlFERENCES AND SOURCES 4-6 COMME-RCIAL APPROACH AND COPING WITH INHIBITORS CHAPTER 5 6.6 RELATED PRACTICES 6-6 CONTRACTING PRACTICES 6.6.1 Market Research and Surveys 6 6 6.6.2 Contracting Prat tices 6-6 5.1 COMMERCIAL APPROACH 5-1 6.6.3 Nondevelopmcntal Items (NDIU) 6-6 5.2 GOVERNMENT APPROACH 5-1 6.6 4 Programmatic Practices 6-6 5.3 P)ROS,;CONS 01: GOVERNMENT 5-2 6.7 REFREI-RN('ES AND SOURCEIS 6-0 AI )OPTION OF THE ('OMMI-RCIAL Al'PROACH 5.4 INHIBITORS TO GOVERNMENT 5-3 AI)OPTION OF THE COMMERCI IAL- ii/ I APPROACH Table of' Contents LiIArFER 7 8.6.4 Contracting Practices 8-5 WARRANTIES 8.6.5 Nondevelopmental Items (NI)I 8-5 8.7 "INVENTORY MANAGEMENT: 8-5 7. I CMM.RCIAL_ AIROACH 7-I BENE-FICIAL PRACTICES FROM TIHE 7.2 G(WVERNM2N" APPROACH 7-1 PRIV\'AT SECTOR" 7.3 PROS."CONS OF GOVERNME.NT 7-2 8.8 REFERENCES AND SOURCES 8-5 D\i)OPTION 01: TUI; COINIERCI.A.L APPROACH CILUPTER 9 7.4 INHIBITORS TO GOVERNMENT 7-2 NON DEELOPNIENTAL ITEMS (N)I) AI)OPTION OF tHE COMMERCIAL. APPROACH INTRODUCTION 9-1 7.4.1 Inhibitors 7-2 91 COMMERCIAL APPROACH q-) ,.4.2 Inhibitors-Commercial Practice 7-2 9.2 GOVERNMENT APPROACH 9-2 Relationships 9.2.1 NDI Regulatory Environment 9-2 7.5 Si RAIE(iY FOR A))OPTIN(i T11W 7-3 9.2.2 NWI Acquisition Approach 9-2 CONIMENRCIAL APPR(OACH AND 9.3 PROS/CONS O -GOVELRNMENT 9-4 COPING WIH- INHIBITORS ADOPTION 01: THE COMMERCIAL 7.6 REI-ATED PRACTICES 7-3 APPROACH 7.6.1 Best Value 7-3 9.4 INH'BITORS TO GOVERNMENT 9-5 7.6.2 Supplier Relationships 7-3 ADOPTION OF THE COMMERCIAL 7 6.3 Contracting Practices 7-4 APPROACH 7.6.4 Nondevelopmnental Items (NI)I) 7-4 9.4.1 Inhibitors 9-5 7.7 REFERENCES AND SOURCES 74 9.4.2 I I-5 Relationships CIPTER 8 9.5 STRATEGY FOR ADOPTING THE 9-7 INVENTORY MANAGEMENT ANTD COMMERCIAL APPROACH AND CO.MMERCLUl. DISTRIBUTION COPING WITH INHIBITORS SYSTEMS 9.5.1 Policy 9-7 9.5.2 Training and EducA:t ion 4-7 8.1 CO(MMIERCIAL, APPROACH 8-i 9.5.3 Implemnentation 9-7 8.2 G0\VI-RNMENT APPROACH 8-2 9.6 RELATE'D PRACTICES 9-8 8.3 P(cid:127)OS'CONS OF (()VEI-RNMI-NT 8-2 9.6.1 Market Research and Surveys 9-8 AI)(PTION 01: TH- ('OMMERCIAL 9.6.2 Supplier Relationships 9-8 Al'PRO)A('H 9.6.3 Documentation and Specificat ion 9-8 8.4 INHIBITORS TO GOVE'RNMI-NTi 8-3 Practices AI)OPTITON 01: THE COMMEI-RCIAL 9.6.4 Warranties 9-8 AI'PROACH 9.6.5 Inventory Management and 9-8 8.4. 1 lid;ibitos 8-3 Couitimeicial Disiribtiiion Systems 8 4.2 Inhibitors-Commercial PIractice 8-3 9.7 NDI R,'GUJLATORY 9-9 I,,lationships ENVIRONMENT 8 5 ,1 RATI(jY [OR AI)OPTIN(j THF- 8-4 9 7.1 10 USC 2325 (Preference for NDI) 9-9 (OMI:ER(_I:AI APPRC\('H AN.N 9.7.2 41 USC 253h (Procurement of 9-9 (C()IPIN( WIITH INHIBITORS Commercial and Nondevelopmmital RR I11. .1.A'II11)I'RA(71I(FS 8-5 !temns) 8 I Market Research and Surveys 8-5 9.7.3 Nondeveiopmental Item Acquisition 9-9 8.6.2 Best Value 8-ý Act X 6.3 Supplier Relatilonships, 8-5 9.7.4 D)OD l)irecti\es (5000 Scries,) 9-9 III Table of Contents 9.7.5 I)epartmcat of Defense SD-2, 9-9 10.3.6 Top Management Involvement 10-9 "Buying Nondevelopmental Ite's' in Programs 9.7.6 Service Specific NDI Guidance 9-9 10.3.7 Program Management Authority 1t--9 9.7.7 NDI Course 9-10 and Control 9.8 REFERENCES AND SOURCES 9-10 10.4 INHIBITORS TO GOVERNMENFT I-, ADOPTION OF THE COMMERCIAL CIIAI'TER 10 APPROACH PROGRAMMATIC PRACTICES 10.4.1 Inhibitors 10-9 10.4.2 Inhibitors-Commercial Practice 10-0 INTRODUCTION 10-1 Relationships 10. I (OMMERCIAL APPROACH 10-1 10.5 STRATEGY FOR ADOPTING 10I0 10. 1.1 Commitment to Program Success 10-1 THE COMMERCIAL APPROACH AND Crosses Organizational Lines COPING WITH INHIBITORS 10. 1.2 Management Emphasis on 10-2 10.5.1 Planning, Budgeting and 10-10 Outcome Versus Process Enactment Practice. 10.1.3 Program Stability 10-2 10.5.2 DOD Acquisition Process 10-11 10.1.4 Change Management and 10-2 Practices Philosophy 10.6 RELATED PRACTICES 10-12 10. 1.5 Schedule is Paramount 10-3 10.6.1 Contracting Practices 10-12 10.1.6 Top Management Involvement 10-3 10.6.2 Documentation and Specification 10-12 in Programs Practices 10.1.7 Program Management Authority 10-3 10.7 REFERENCES AND SOURCES 10-12 and Contro! 10.2 GOVERNMENT APPROACH 10-4 10.2.1 Commitment to Program Success 10-4 APPENDICES Crosses Organizational Lines 10.2.2 Management Emphasis on 10-4 INHIBITORS DESCRIPTIONS A-] Outcome Versus Process REGULATORY BASIS FOR THE B-I 10.2.3 Program Stability 10-4 INHIBITORS 10.2.4 Change Management and 10-5 CROSS REFERENCES C-I Philosophy C.I Commercial Practice/lInhibitors C-2 10.2.5 Schedule is Paramount 10-6 Matrix 10.2.6 TFop Management Involvement 10-6 (.2 Commercial Practice/Commercial C- in Programs Practice Matrix 10.2.7 Program Management Authority 10-6 C.3 Inhibitors - Statutory/Regulatory C-4 and Control Bases Index 10.3 PROSICONS OF GOVERNMENT 10-7 ADOPTION OF TIlE IMPACTS cr- DFARS 211, )- I COMMERCIAL APPROACH CONTRACTING FOR COMMERCIAL 10 1 I Commitment to Program Success 10-7 ITEMS, ON DOD ADOPTION OF Crosses Organizational Lines C-OMMERCIAL PRACTIC-S 10.3.2 Management Emphasis on 10-7 Outcome Versus Process CASE STUDY: I)ESKTOP IV' 1.-1 10.3.3 Program Stability 10-7 TO BE I)EVELOPEI) 10.3.4 Change Management and 10-8 Philosophy 1I3I.3IOGRAiItY AND RI.I FF.RI N( I:1 10.3.5 Schedule is Paramount I.:. EXECUTIVE SUMMARY The notion that adoption of comn'ercial necessitated as a result of selling to the practices can improve defense acquisition is Federal Government since they would generally accepted. However, conise, probably not exist in the absence of readily available information and guidance, Government buying activities. Commercial specifically designed with the objective of practices are those activities for enabling DOD program managers to adopt accomplishing goals and objectives which commercial practices, is currently lacking. differentiate the commercial sector from the 'To help fill thils gap, the Defense Systems Federal Government sector. The following Management College (DSMC) initiated a working definition of commercial practices study of commercial practices with the goal was used for the study: of identifying practices that may be useful to DOD program managers. Documenting the Commercial practices are study resulted in this guidebook. No major techniques, methods, customs, revelations in the commercial practices and processes, rules, guides, and inhibitors were identified during the study. standards normally used by Individual practices are generally known in business, but either applied the acquisition community and are practiced differently ( not used by the in various forms and to differing degrees. Federal Government. However, uniform widespread adoption and use of commercial practices in DOD does A number of commercial practices and not exist since there is no readily available inhibitors are described in this guidebook. reference source of information for them or It contains a discussion of them and of other publicity about them and their inhibitors, aspects of the study, such as the effects of a specific inhibitor on a commercial practice Usual commercial acquisition practices, or traceability of inhibitors to sources in proce~lure., and contracts differ from those regulations andior public law. The used by the Government and in many guidebook is intended to be used in DSMC instances differ from those used by courses to help educate DOD program comn-,crcial businesses to sell to the managers in adopting commercial practices, Government. For this study, commerc;a! however, the entire acquisition community practices do not include those practices may benefit from using it. Prudent adoption Executi'e SummarN of some or all of the practices discussed in Appendix A contaiv, t general description thiS guidebook has the potential of realizing of cacti inhibitor. Many of the inhibitors cost and schedule savings on acquisition identified during the development of the prognrms throughout the Government. guidebook are, in fact, being reduced or Publ]iction of this guidebook will provide a eliminated through recent legislative and readil,, accessible collection of information regulatory reforms prompted by advisory on commercial practices and their inhibitors panels and acquisition iniiatives in applicable to DOD acquisition which can be Congress, the Federai Government, and used and updated through experience. It may DOD. Efforts now need to be focused on be a catalst for identifying additional educating the acquisition work force on the commercial practices for Government use new policies and practices. and for promoting broader acceptance and adoptio., The inhibitors to commercial practices discussed in this guidebook are: The commercial practices identified during this study and discussed in this guidebook 1. Competition Practices fall into the following areas: 2. Formality of the Government Acquisition Process I. .larket Research and Surveys A. Contracting 2. Best Value B. Planning and Budgeting 3. Supplier Relationships C. Acquisition Managemenm 4. Contracting Practices 3. Contract Clauses 5. Documentation and Specification A. Government-Unique Clauses P, dcticcs B. IMlultitudinous Clauses 6. \Warranties C. Flow Down of Contract Terms 7. Inventory Management and and Conditions Commercial Distribution Systems 4. Specification Practices Si Nondevelopmnental Items (NDI) 5. Paperwork Requirements 9. Programmatic Practices A. C tif1i1c ltiUs B. Reporting Adoption of a number of the identified C. Records Retention commercial practices are inhibited by 6. Data Rights corresponding DOD/Government practice, 7. Data Deliverables i.e., the Govemlent's normal "business" 8. Favored Customer Status practi<cs are themselves inhibitors to 9. Cost Based Buy Decisions adopting commercial-like "business" 10. Protest System/Process practices, For example, the Government's 11. Audit Rights traditional specification practices inhibit the 12. Quality Assurance, Quality Control, commercial practice of functionally and Inspections specifying requirements. 13. Warranties 14. Delays in Prompt Payment The appropriate inhibitors are discussed in 15. Preference for New Development each chapter as they relate to the suhJect Versus Nondevelop"(cid:127)i"t-l Items chapter commercial practice, while 16. Inadequate Acquisition Training I~I CHAPTER 1 INTRODUCTION 1.1 BACKGROLU'D Standard commercial acquisition practices, procedures, and contracts differ from those The I )S6 Packard Commission Final Report used by the Government and, in many and tie Defense Science Board 1986 instances, differ from those used by SummiC Study concluded that the use ol commercial businesses to sell to the commercial pr-d(cid:127),lIcs in the DOD acquisition Government. Different goals a;.d objectives process had a potential foi saving vast are an under!ying cause for thle differences amounts of money. ITie 1986 Defense in practices between the commercial and Science Board said. "The Program Manager Government sectors. For example, in the should have discretionary authority to use private sector prices are estabiisned by commercial practices and products when competitive demand in the open market, not approlriatc." (64:62) by cost analysis as is often done when the Government is the buyer. [NOTE: The footnote convention used in this guidebook is a two-part Another difference is the Go\. nrment identifier. The numnber preceding the procurement process is usually stimulated by colon refers to the number of the Government solicitations to buy rather than reference listed in the Appendix F by a ve'ndor's offers to sell. The Bibliography. The alpha-numeric' Is Government says, "This is what I want to following the colon is/are the pageis of buy." Sellers say, "This is what I have to the citation. When there is no colon, sell." Botlh approaches require an the ieference is for an cntire work an. understanding of customer needs and both the number is the item number In the exist in the commercial sector. However, Bibliography.] the "buy model" overwhcilingly dominates I-I