department of defense agency financial report fiscal year 2012

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Department of Defense Agency Financial Report for FY 2012 services are performed, thus leaving the Department vulnerable to increased fraud, waste, abuse and misuse of taxpayer monies. The Department continues to face challenges in obtaining fair and reasonable prices for parts. Audits first started identifying problems with price-based acquisition and commercial pricing back in the late 1990's, and it was not until 2008 that legislative changes allowed contracting officers to request information on labor costs, material costs, and overhead rates for commercial items. More recently, the Department has moved to new performance-based logistics (PBL) or contractor logistics support (CLS) arrangements that have added a new challenge to obtaining fair and reasonable prices for parts, since the Services are now going back to the weapons systems contractors instead of other available sources to procure the parts. Normally, the Services would procure the parts from the Defense Logistics Agency which in turn would procure the parts from the original equipment manufacturer, not the weapons systems contractors. Paying excessive prices for parts procured from the weapons systems contractors that did not manufacture the items was reported back in the 1980's and resulted in the spare parts breakout initiative. Unfortunately, future budget constraints made breakout and cost/price analysis groups targets for workforce reductions. The Department also faces challenges in effectively using existing Government inventories of spare parts before procuring the same parts from private contractors through these PBL or CLS arrangements. 2-3B. Contract Management IG Assessment of Progress The Department continues to make efforts to strengthen contracting and has issued policy, procedures, and guidance addressing current contracting challenges. The Department began the Better Buying Power Initiative in 2010 and continues to implement this initiative to improve the way the Department acquires goods and services. In April 2011, the previous USD(AT&L) amplified the focus of the better buying power memorandum to maximize competition in situations where only one offer is received in a procurement utilizing competitive procedures. In his October 2011 initial guidance memorandum, the USD(AT&L) emphasized his commitment to improving efficiency through the Better Buying Power initiative, which he stated they will continue to refine and build upon to reduce costs and provide the highest possible value to the warfighter. The Department has also emphasized “affordability” in review of acquisition efforts and using peer review to improve quality of contracting processes across the Department. The USD(AT&L) required each Military Department and Defense Component to establish a senior manager for the acquisition of services, who would be responsible for the planning and execution of service contracts. The Department has also organized the procurement of services into six categories in order to make decisions, share lessons learned, and institutionalize strategic sourcing. In response to audits relating to PBL and CLS strategies, the USD(AT&L) for Logistics and Materiel Readiness issued guidance that created a standard practice of using existing on-hand and due-in government inventory. The guidance also stated that in these arrangements, stocking objectives should be adjusted accordingly when using commercial sources. Further, senior leadership directed that components should perform cost and price analysis on a sample of spare parts before exercising options. A-12 Addendum A
Department of Defense Agency Financial Report for FY 2012 The Department continues its work to improve contingency contracting. Some initiatives include: • Implementing corrective actions on findings from the Commission on Wartime Contracting. • Standardizing Contracting Officer Representative (COR) qualifications. • Providing tools such as the DoD Contingency COR and Contingency Contracting Officer Handbook. • Creating a 340-person reach-back center to award complex contracts and support contract closeout. 2-3C. Contract Management Department Response The Department agrees with the IG’s summary of challenges and assessment of progress and continues to work aggressively to resolve the long-standing material weaknesses in contract management. The Department continues to implement initiatives designed to improve contract management. These key initiatives include: • Continued use of “peer reviews” to improve the quality of contracting processes across the Department and facilitate cross-sharing of best practices and lessons learned. • The Director of Defense Pricing issued a memorandum on August 27, 2012, entitled “Taxonomy for the Acquisition of Services and Supplies & Equipment”. Based on a review of the existing taxonomy and supported by the Senior Service Managers, the Department established a Logistics Management Services Portfolio Group. The revised taxonomy supports the Department’s effort in fostering communication and strategic decisions. • On August 29, 2012, the Defense Federal Acquisition Regulations Supplement (DFARS) Procedures, Guidance, and Instruction 237.102-77, Automated Requirements Roadmap Tool, was changed to add a link to the tool that enables requiring activities to develop and organize Performance Work Statements and Quality Assurance Surveillance Plans using templates. • On June 29, 2012, the Defense Procurement and Acquisition Policy (DPAP) Directorate issued the final DFARS rule under the Better Buying Power initiative to promote more effective competition. This DFARS rule requires contracting officers to maximize competition when only one offer is received in competitive procurements. The DPAP Directorate has established a metric to monitor effective competition and is now reporting the data at quarterly competition advocates meetings. • The Director of DPAP issued a memorandum on July 11, 2012, entitled “Increasing Opportunities for Small Business Set-asides under the Simplified Acquisition Thresholds,” that reminds contracting officers of statutory requirements to set aside contracts for small businesses which play a vital role in contributing to the defense industrial base. • The Director of DPAP issued a memorandum on July 26, 2012, entitled “Maximizing Small Business Utilization on Multiple Award Contracts.” This memorandum reminds contracting activities to commit to using set-aside procedures, where appropriate, for all prospective new multiple award contracts with small businesses; to identify existing multiple award contracts with small businesses where orders may be appropriate; and to commit to using set asides. A-13 Addendum A
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