CHARACTERISTICS OF THE GOVERNMENT MARKET

In procuring its needs, the federal government wears two hats. First, it acts in a contracting capacity and is expected to exercise good business judgment when determining requirements and purchasing a wide variety of goods and services from every sector of the economy. Second, the government also is the defender of the taxpayer’s interest and is expected to act even-handedly while implementing social and political policies.

The dollar value and number of purchases, i.e., $183.1 billion from 487,264,000 contractual transactions in fiscal year 1999, make the federal government by far the largest buyer of goods and services in the world.

Ten years ago approximately 50 percent of the total dollars spent by the federal government were for supplies and equipment, with other services, excluding R＆D, A＆E, and ADP services, totaling just over 25 percent. As Table 1-1 shows, expenditures for supplies and equipment in 1999 fell to around one-third of the total. The reduction in defense spending was a major factor in this decrease. On the other hand, the amount spent for services rose to 41 percent. This trend illustrates an increase in outsourcing service-related tasks to contractors in the private sector as well as the effect of government’s increased dependence on electronic data interchange.

In FY 1999 the Department of Defense spent $123.2 billion, or 67% of the total federal contract dollars spent in that fiscal year. The next five top government spenders were the Department of Energy ($15.6 billion), the National Aeronautics and Space Administration (NASA) ($10.9 billion), the General Services Administration (GSA) ($7.6 billion), the Department of Health and Human Resources ($4.1 billion), and the Department of Veterans Affairs ($4.0 billion). What is significant is that DoD expenditures exceed the other five by $82.4 billion. DoD procurement exceeded the amount purchased by the next four agencies by a factor of three. Consequently, its domination of government acquisition no doubt has a great deal of influence on the policies and procedures contained in the FAR.

Dr. J. Ronald Fox, former professor of business at Harvard and Assistant Secretary of the Army, in his book Arming of America: How the U.S. Buys Weapons, cites the 1962 study of the defense market by Merton J. Peck and Frederic M. Scherer of the RAND Corporation. They concluded that the defense market differs from the commercial market in that it is not determined by supply and demand. First Congress determines how much the DoD will spend and for what. This decision is influenced by political and economic conditions as well as international events and the interests of the members of Congress. A market system does not now exist in the weapon acquisition process . . . a market system in its entirety can never exist for the acquisition of weapons.

Table 1-1 Major Categories of Federal Government Purchases—1999

The government market as a whole is also described as being a monopsony, i.e., consisting of only one buyer. Writing in Contract Management magazine, W. Gregor Macfarlan states, “as a monopsony, the government inherently regulates the marketplace to its own ends through defined requirements and specified processes that satisfy those requirements. The more influential the monopsony, the fewer the opportunities for the marketplace to express its competitive dynamics.”

It is only when the government purchases off-the-shelf items on the commercial market that the true forces of supply and demand apply. A majority of goods and services in this category have traditionally been procured through the sealed bidding method. Sealed bid purchases, although high in the number of contracting actions, historically have represented a relatively low percentage of the total dollar value of purchases in any one fiscal year. Negotiated procurements have traditionally led in the number of solicitations and dollar amount. In 1990 solicitations for negotiated procurements equaled 85.4 percent of the total action and 93.1 percent of the total dollars.

Fair and open competition is the core philosophy of our supply-based economic system. It is widely believed that competition generates low prices and promotes efficiency, innovation, and quality. To realize these benefits, federal procurement policy is founded on giving every potential responsible supplier an equal opportunity to meet the government’s needs. For over 100 years procurement procedures also have been directed toward full and open competition, while government contracting officers have aspired to protect the “integrity of the acquisition system.” Separate studies by the RAND Corporation, the Battelle Memorial Institute, and the Office of the Secretary of Defense concluded that a reduction in contract price of 25 to 30 percent can be realized when genuine price competition exists. The perception that potential price reductions can best be realized from competition also is prevalent in Congress and has been a factor in the government’s efforts to launch such policies as dual-sourcing and leader-follower development contracts and to perform fact-finding and postaward as a replacement for competition.

When the criteria for classifying a procurement competitive were limited to goods and services purchased via advertised bidding, less than 50 percent of all procurements were judged to be competitive. Then in 1984, Congress passed the Competition in Contracting Act (CICA), in which it reemphasized the need for the government buyer to reap the benefits of competition. The act also states that negotiated procurements can be considered competitive when there is more than one prospective seller. The percentage of purchase actions classified as competitive increased from 44 percent in 1984 to 67 percent in 1990. Stanley Sherman, then Professor of Purchasing at George Washington University, points out that this occurred at the same time the broader private economy, especially manufacturers of commercial products, were experiencing an unmistakable trend toward fewer competitive purchases.

An agreement between the buyer and seller in the commercial sector is subject to the Uniform Commercial Code (UCC). On the other hand, purchases by the federal government are governed primarily by the FAR. Compared to the FAR, the UCC is broad and flexible. The FAR, which was codified on April 1, 1984, is “designed to prescribe, structure, and control the method and procedures by which is conducted in a defined segment of our economy—government procurement.” Further executive orders, regulations, rules, and procedures are frequently issued that are designed to provide additional detailed instructions to the operation agencies within the Executive Branch while:

• Ensuring fairness of contract award by affording all interested and responsible suppliers equal opportunity to obtain the contract

• Giving the government the right to change its mind and cancel a procurement, with reimbursement limited to cost incurred and profit limited to items delivered

• Requiring contractors to disclose their cost or pricing data in order to ensure the price is fair and reasonable

• Giving a share of contracts to small business, small disadvantaged business, contractors in labor surplus areas, and minority groups.

Sherman believes the greatest distinction between the public and private sectors is the absence of a profit-and-loss standard in the public sector. The bottom line provides a means to measure success. The commercial firm can purchase the stated requirement directly, without so much oversight, and is graded on its competitive position in the market and its profitability. The federal government does not have such a single standard for success. Instead it has multiple goals, including cost, schedule, and technical performance as well as the social and economic goals of the nation.