Staff Paper Prepared for the President's Commission to Study Capital Budgeting
June 19, 1998
 
DEPARTMENT OF DEFENSE ACQUISITION PROCESSES

Scope of the Department of Defense Acquisition System
DoD is the largest single consumer in the world of purchased equipment. Even at its current low (relative to the mid-1980s), the Department buys about $45-90 billion (depending on what you count) worth of equipment and R&D services per year--purchasing or developing everything from aircraft, ships, tanks and missiles down to radios, night vision devices, voltmeters, parachutes and knives. Not only is the dollar volume of these purchases large, the number and variety of items is staggering. At any given time, hundreds of R&D programs are in the works, with many thousands of different items being procured in a given year.

The magnitude of these purchases is important to understand, as the DoD acquisition system must be able, one way or another, to accommodate purchases of all of the materials required to equip and sustain the nation's defense establishment in peacetime and in wartime.

Almost all of DoD's inventory is purchased from the private sector, often from the same companies that developed the items (at DoD expense) and that will maintain much of the equipment (also at DoD expense). As a result, DoD's interactions with industry are multitudinous and complex.

The complexity is driven not only by the need for an acquisition system that can purchase all of the items and prescribe all of necessary acquisition steps, but also by government's need to avoid acquisition problems--cost overruns, delivery delays, operational failure and, inevitably, bad press. Thus, the Department has come to rely on the highly formalized and structured rules of the Federal Acquisition Regulation (FAR) and military service regulations to prescribe all of the needed and most of the allowed acquisition steps. Ultimately, however, DoD's system relies on individuals to carry out the rules, and DoD's acquisition personnel (178,000 to 260,000 in number, again depending on what you count) reflect the variety of talents present in society at large. Thus, just as the successes are sometimes stunning (spy planes that set still-unbroken world records 35 years ago, aircraft that are undetectable by radars, missiles that fly 1500 miles and strike with near pinpoint accuracy), the failures are sometimes equally attention-getting (toilet seats and nuts and bolts that, by some measurement standards, are grossly overpriced).

Use of Competition Almost all DoD systems are competed at some stage in the acquisition system (we would guess that less than 10% of acquisition programs do not go through a competitive process at least once in their acquisition cycle). Generally, the sequence is:

This cycle repeats itself one or more times during system development and one or more times during procurement (purchase of a major end item previously developed or available commercially). For large systems, procurement follows a highly demanding DoD-funded development process and the prime manufacturer, almost by necessity, is the developer. In such cases, the competitive steps for a given phase of the acquisition process (listed above) would not be repeated during the procurement phase.

In many programs, several developers are funded through various stages of development. As systems mature and vendors approach stable designs, with ever-improving cost and performance estimates at each stage, fewer developers are chosen to continue to receive funding support through remaining phases. At the end, only one vendor receives a contract to finish product development. (Even after only one developer is left, competition may still be present, as other weapon systems can be substituted or alternative programs can be started.)

The lack of a commercial market for many defense systems, such as complex spy satellites, stealth fighters, warships or state of the art sonars means that there are no pre-established competitive prices for those types of products. For this reason, and because DoD often is either the only or the first purchaser of the developed product, the Department relies heavily on enforceable representations, paper trails and audits (or the potential for audits) in addition to institutional knowledge (including educated negotiators, use of parametric cost models, and knowledge of historical costs) to ensure that the product cost is reasonable. Most developmental programs are structured as cost-plus-fee contracts, while procurement contracts may be market-determined, cost-plus-fee, cost-plus-incentive-fee, fixed-price or a number of variations on any of the forgoing. DoD prefers fixed-price contracts as a matter of principle, but the degree of risk and the sometimes low quantities of units to be bought (satellites or ships, for example, may be bought a few at a time) makes suppliers wary of fixed-price contracts until they have the first few learning curve data points under their belts.

DoD acquisition practices also must be tailored to the structure of the underlying industrial base. As a result of the decline in DoD procurement following the collapse of the Soviet Union, the highly complex nature of DoD weapons, the high unit cost of those weapons and the complexities of the government procurement system, the DoD industrial base has shrunk in some cases to a few, highly capable, design-develop-manufacture-support companies. For example, Boeing now includes what used to be Boeing, Rockwell International, McDonnell-Douglas, United Technologies and Litton Precision Gear, all of which used to be major DoD suppliers. Not only is this consolidation a fact of life for DoD systems, the same types of pressures make it a reality for some sectors of the commercial world--Boeing being one of only two major airliner manufacturers in the world. Moreover, only one supplier exists for a few important DoD weapon systems--most notably, aircraft carriers.

Management
Overseeing major DoD weapon systems acquisition programs is the Defense Acquisition Board (DAB), a committee made up of senior DoD procurement, test and financial officials (roughly at the Assistant Secretary level). The DAB acts as gatekeeper for those programs as they pass through the four milestones of any successful full cradle-to-grave program. It approves or denies entry of each major program into the following stages:

For example, a new fighter aircraft program must seek DAB approval before being allowed to spend significant funds to determine the feasibility of a projected aircraft and define its performance parameters (Concept Exploration). Once the program has received this approval, it normally proceeds through the Concept Exploration phase without further DAB review, but must seek separate approval to proceed into the next phase. For each such major system, program managers are required to produce a highly-specific, highly-structured report, called a Selected Acquisition Report (SAR), that follows the system through development and into procurement. The SAR states the operational requirements (for example, the speed, range, payload capacity, takeoff distance, etc. for a fighter aircraft), as well as cost and schedule expectations. Each year, the SAR must be updated and significant changes must be approved by the DAB. Thus, that document serves as the definitive set of requirements for the system's successful development--and the program manager understands that those standards are on display for all overseers to scrutinize.

Each of these stages can last several years. For example, the F-22 fighter aircraft Engineering and Manufacturing Development phase will span about 12 years (and cost $19 billion). A Concept Exploration phase, by contrast, may last between a few months and two years.

Special mention should be made of the formally-structured Concept Exploration stage. In this phase, the projected capability of existing or planned systems is compared against the projected future threat to yield a documented "need." If such a need cannot be satisfied by a change of tactics, for example, consideration of new hardware may be allowed. Once alternatives to satisfy the mission need are studied and a system concept is selected, a formal document is prepared to describe the system solution (in more or less general terms), which may involve a new weapon. The key is that the bureaucracy must generate a formally-agreed need and a proposed solution to that need before development can continue. This formal requirement whittles down the number of potential development programs ("new starts") greatly.

During this and later phases, tools such as computer network simulations are increasingly used. Thus, for example, during consideration of a new reconnaissance helicopter, the helicopter's performance may be modeled and nationwide, networked, computer simulations might be run in which perhaps twenty simulated helicopters are "flown" against 1000 enemy tanks, a number of enemy command posts and several enemy vehicles that "fire" missiles against helicopters. Dozens of people may be controlling the various virtual weapons from simulators in a half dozen DoD and contractor sites while computers may control hundreds of other virtual weapons. By use of such simulations, tradeoffs in performance and cost and configuration can be approximated more quickly and more cheaply than through multi-billion dollar development programs followed by field tests.

In addition, DoD maintains various analytic organizations such as its internal Program Analysis and Evaluation office and quasi-governmental institutions such as Federally Funded Research and Development Centers (FFRDCs--like the Mitre Corporation or Lincoln Labs) which help sort through tradeoffs (including cost-effectiveness studies) during various stages of the development cycle. These organizations retain difficult-to-maintain expertise in arcane DoD systems, in part, to help analyze and experiment with different DoD weapons concepts.

The Resource Allocation Process (Budget Process)
Relentlessly progressing behind the scenes is the budget process. Funds must be made available for the program, the program's progress must be compared to the needs of other programs, and resources have to be shifted to maximize the output of the Department as a whole. Most of this process is shared by the other Executive Branch departments. Aspects of DoD's programs that make it somewhat unique are:

A few words about the second point: DoD not only plans its program for a given budget, but maintains a formal document, called the Future Years Defense Plan (FYDP), which lays out in detail the budget for all DoD programs five to six years in advance. The total costs of all programs in each year are constrained to equal the amount the President has projected to be available to the Department. In addition, DoD maintains a Defense Program Projection (DPP), which extrapolates the FYDP another 10 years into the future, although with less detail.

Although there is movement of funds from program to program within even the nearest-term years of the FYDP as the defense environment changes or as programs change, these two documents form an invaluable function in displaying whether or not there is enough anticipated funding to pay for all planned programs. Thus, the manager for a new program will have to make a strong case to senior department officials as to why that new program should be allowed to squeeze out funding planned for other programs. (Of course, the costs of individual programs must be reasonably estimated in order for the FYDP and DPP to do their jobs.) Thus, the FYDP and DPP are two of DoD's keys to ensure that its plans will be affordable and timely. These documents do not make for an error-free process in sizing DoD plans to available funds, but do serve to bring potential mis-matches into the realm of the fixable.

One final matter on the resource allocation process: DoD long has required that procurements be fully-funded. That is to say that if DoD plans to purchase aircraft or ships or radios, the budgeted funds must purchase a whole number of items--they can't buy half of an aircraft. The purchase in any given year must be a usable product, not a product that requires more funding the following year to be whole. This ensures, for example, that the full cost of items is known or that if management or Congressional support for a system dries up, the Department doesn't wind up with half of an item in its inventory. An exception to this standard is allowed in the case of materials or subsystems that take an exceptionally long time to acquire or manufacture and for which the specification is unlikely to change. This allows final procurement of the larger item to proceed rapidly once the production decision is made. These "long-lead" items typically are a minor fraction of the total cost of the item.

Development, by contrast, is funded on an annual basis. This is highly useful as R&D is a greatly uncertain process, with learning taking place daily, and development changes being made frequently. With the high degree of interconnectedness of development programs, the annual budget cycle is used to keep programs and development budgets in sync. Without such incremental funding, the spikes for programs such as the F-22 fighter aircraft development ($19 billion in one phase alone ), would be untenable. Also, this would reduce the opportunity for oversight and prospects to adapt funding to reflect the status of the development effort.

Problems or Inadequacies
Many problems have arisen in implementing the DoD acquisition process in the last five decades: the time required to solicit bids, review proposals and follow through on all required procedures can be daunting. False steps can lead to bid protests. The complexity of the work and documentation demanded of the contractors aggravates many potential problems: costs can be difficult to control or can be greater than those from analogous systems in the private sector, quality sometimes suffers, the development process can be excessively long. There is a constant effort by some to simplify acquisition processes at the same time as others are elaborating on the process, usually in order to avoid repeats of the latest perceived problems (e.g., lack of competition). Consequently, DoD, OMB, the Congress, and outside review panels all have made various recommendations for process reform. These reforms can be divided into two general categories, both of which have some potential for helping to improve the system:

These are discussed in turn:

Simplification
Federal Acquisition Streamlining Act The Federal Acquisition Streamlining act of 1994 (FASA) refined existing statutes and implemented a host of initiatives to take advantage of current commercial business practices and to improve the method by which the Government purchases its supplies and services. These initiatives and refinements affected such wide-ranging areas as contract formation, competition requirements, truth in negotiations, bid protests, contract administration, service-specific statutes, simplified acquisition procedures, micro-purchase procedures using the Government credit card, performance-based contracting, small business and other socioeconomic laws, procedures for the acquisition of commercial items, and electronic contracting over the Internet.

Simplification of the FAR The Federal Acquisition Regulation (FAR) governs the manner in which most executive agencies purchase supplies and services. Vice President Al Gore's National Partnership for Reinventing Government (NPR) recommended in its 1993 report that the Government should move to guiding principles and away from rigid rules. To accomplish this goal, the NPR recommended that the Government "reframe acquisition policy to reduce the 1,600 pages of the FAR and 2,900 pages of agency supplements." Since publication of the report, DoD and the Office of Federal Procurement Policy, working with the FAR Council, have continuously reviewed the FAR with an eye toward eliminating or revising outdated provisions.

Simplifying the Specifications to Which a System Must Be Designed DoD is increasing its reliance on contractor-developed solutions to fulfill open Government requirements. This approach enables the Government to move from design-based specifications towards performance-based specifications which, in turn, shifts responsibility and risk to the contractor.

Design specifications set forth precise measurements, tolerances, materials, in-process and finished-product tests, quality control, inspection requirements, and other specific information. Under this type of specification, the Government is responsible for design and related omissions, errors, and deficiencies in the specifications and drawings.

Performance specifications set forth operational characteristics desired for the item. In such specifications, design, measurements, and other specific details are not stated nor considered important so long as the performance requirement is met. Where an item is purchased under a performance specification, the contractor accepts general responsibility for design, engineering and achievement of the stated performance requirements.

Increased Use of Technologies Applicable to Both the Commercial and Military Sectors. DoD development used to drive much technological advancement in the commercial world. Although military and commercial technological advancements still are significantly symbiotic, advancements in the commercial sector often outstrip improvements in DoD weapon systems. DoD believes that if it can use technologies that also can be used by the commercial sector ("dual-use" technologies), its products can be manufactured on some of the same manufacturing lines as commercial products. This would allow the reductions in prices that result from high quantity (and high quality) commercial manufacturing to be applicable to DoD systems as well. This is the basis for DoD's Dual Use Applications Program (which develops new technologies applicable to both DoD and the commercial markets) and the Commercial Operations and Support Savings Initiative (which incorporates existing commercial technologies in DoD systems).

Increased Use of Commercial Standards DoD leadership believes that use of commercial standards is one of the keys to successful integration of commercial and military product manufacturing and, therefore, to improved program performance/cost savings. One recent example: Rockwell Collins re-engineered a program for the production of the ARC-210 radio to capture significant efficiencies. Successful steps included: (a) reducing the number of specifications from 78 to 35; (b) reducing the number of data deliverables (data packages) from 56 to 20; and (c) increasing the system reliability by 120%. These changes resulted in a system cost reduction of 25% and an overall savings of $41 million over 5 years.

In short, relying on commercial standards and capabilities enables the Government to obtain: market-tested quality; competitive prices; on-time delivery; the flexibility to modify commercial products for Government uses; and, perhaps most importantly, new technology with little or no Government investment.

Experiments with Substitution of Alternate Processes
Advanced Concept Technology Demonstrations (ACTDs): Starting in about 1994, certain experiments, called ACTDs, have proceeded in which, following approval of the operational need document produced by the Concept Exploration, a prototype system can be quickly cobbled together from mature technologies and tested in a real field test. Operational units must be involved in the test, costs are kept low, and the time span from inception to finish of the field test must not exceed four years. As a result, a great deal of knowledge about a potential use of technology can be gained cheaply and quickly. Following the experiment, the prototype system can be left with the operators (the Army, Navy or AF personnel in the field) for a period of up to two years. If successful, the system can be procured as is, or with minimal additional development or through a more lengthy and thorough development process, thus potentially skipping any combination of the last three stages of the development and procurement process. About 60 ACTDs have been undertaken or are proposed to date and DoD, GAO, OMB and others are in the process of evaluating the results of work to date.

Section 845 procedures. Section 845 of the National Defense Authorization Act for FY 1994 allows prototyping of certain systems during the development phase, with relief from the FAR. As part of a procurement experiment, DoD is considering requesting authority from Congress to carry those Sec. 845 development systems through procurement, also with relief from the FAR requirements.

Greater Emphasis on Simulation in Planning. As computer and networks become more capable, simulation is being used more and more frequently for development cycle decisions. We anticipate that this trend will continue and models will become ever more capable. We may soon see the use of models become mandatory in certain types of systems development.

Buying Commercial Products. In tandem with its drive to simplify the specifications to which items must comply, the Government realizes that it can meet its needs "faster, better, cheaper" with commercially available technology and products. To maximize the potential savings from purchasing commercial items in the commercial market place, the Government is moving toward using simplified purchasing procedures. The authority provided by FASA to use simplified procedures for commercial items valued up to $5 million expires in 1999. Thereafter, the simplified procedures will only apply to purchases up to $100,000.

Federal Acquisition Regulation (FAR) Part 12, promulgated in response to FASA, provides the framework on which the Government purchases commercial items. Most notably, FAR Part 12 mandates streamlined procedures for the evaluation and solicitation of commercial items and limits the applicability of certain federal laws to the procurement.

It should be noted that whatever improvements are made will be offset to some degree by as-yet-unanticipated problems requiring further process elaboration. The struggle to simplify acquisition is a never-ending process.

Conclusion
The DoD acquisition system is huge and complex. The procedures the Department uses form a rigorous, logical structure. However, due in large part to the scope of the acquisition system, the results can be mixed. One of the most important aspects that makes the DoD acquisition system work is the serious long-term resource allocation process that the Department uses to balance available funding with program hopes. To make the system work better, DoD is instituting a number of reform efforts aimed at simplifying the system and substituting alternate acquisition paths--if they can be proven to be more effective than existing procedures.


President's Commission to Study Capital Budgeting