Lawmaker Raps Pentagon for Shutting Out Commercial Suppliers

By Sandra I. Erwin

It's a common complaint of business executives outside the defense industry establishment that selling to the Pentagon is an epic struggle. The House Armed Services Committee shed light on the issue in a2012 report, which detailed the plight of commercial businesses that want to compete for Defense Department contracts but get jammed by the contracting system.

Rep. Derek Kilmer, a Democrat who represents aerospace companies in Washington state, including Boeing, is asking the Pentagon to make it easier for commercial vendors to win contracts.

"Throughout the past several months, I have been approached by representatives of industry who are concerned with their continuing ability to sell goods and services to the Defense Department,"

Kilmer writes in a March 7 letter to Shay Assad, the Pentagon's director of defense procurement and acquisition policy.

Kilmer's constituents aimed their frustration specifically at the Pentagon's method of deciding if a product is "commercial."

Procurement laws and regulations that encourage the military to purchase products and services from the commercial market have been in place since 1994. But the Pentagon over time shifted back to buying predominantly from defense-unique suppliers out of concern that it was overpaying for products from vendors it could not audit. 

In a commercial contract, the government pays market prices, just like any other buyer would. When the Defense Department is the only buyer of a product that is unique to the military, the government is entitled to the company’s internal cost data and business records to ensure that the price paid is fair. 

Commercial vendors are not challenging the law, but rather the way in which procurement officers interpret the rules when they decide whether a product is truly commercial.

“To my knowledge, industry is satisfied that the existing definition affords the Defense Department access to commercial products, technologies and services, but is concerned with recent changes in its implementation,” Kilmer says in the letter.

There are often disagreements between vendors and contracting officers on the definition of commercial technology. When it is not clear-cut, government officials might err on the side of caution and decide that the product is not commercial and should be subject to cost auditing and price negotiation. They want to avoid repeats of past procurement gaffes that have been exposed in congressional investigations. A House Armed Services Committee probe in 2011 found that the Navy had purchased a commercial refrigeration system for $40,000, and 18 months later bought precisely the same piece of equipment for $37,000. Lawmakers often have blasted the Pentagon acquisition bureaucracy for its poor pricing skills.

When the Pentagon buys from a company the same product that the vendor sells commercially, it should be a simple transaction, Kilmer says. When procurements are handled as “contracting by negotiation,” the regulatory burden effectively shuts out small businesses that lack the in-house expertise to navigate the complex contracting system, he argues. Another rub for commercial vendors is that, under defense-unique contracting, they are required to turn over to the government sensitive intellectual property.

“You are no doubt aware of what a contracting officer’s commerciality determination means to a company,” Kilmer says in the letter to Assad. “It may have long-ranging effects that impact the company’s interest in having private capital into innovation or participating in the government’s marketplace.”  

Kilmer calls on the Defense Department to make a “tradeoff between risk and reward when determining policy approaches on issues such as commercial item acquisition and demonstrating best value to the taxpayer.”

Industry groups for years have pushed for the Pentagon to increase commercial purchases. The Aerospace Industries Association, for instance, has sought to make the case that commercial suppliers can offer the Defense Department products and services at lower costs than traditional defense contractors.

AIA President and CEO Marion Blakey says commercial purchases help small businesses by “allowing them to consolidate operations into a single commercial/military enterprise, without having to waste resources setting up separate divisions or facilities required to fulfill government contracts.”

Since the 1994 passage of the Federal Acquisition Streamlining Act, Congress has directed the Defense Department to buy commercial items and to use a simplified acquisition process, Blakey says in a blog post. “Unfortunately, the department’s acquisition practices have a long way to go before the act’s goals are met. … Many contracts are still inconsistent with commercial practices. Contracts that could, and should, be categorized as commercial are instead being treated more as government-unique, with all the associated data requests and reporting provisions that can be prohibitive to commercial firms.”

The Defense Department’s top buyer, Undersecretary for Acquisition, Technology and Logistics Frank Kendall, has said one of his goals is to simplify the procurement process to help lower costs. He is working with Rep. Mac Thornberry, R-Texas, vice chairman of the House Armed Services Committee, to identify rules and regulations that warrant changes.

Members of Kilmer's staff met recently with Assad to air industry concerns. In the letter, he asks Assad to "continue the dialogue" until the issues are resolved.

Topics: Procurement, Acquisition Reform, Defense Department

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