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maintenance and advancement of the technical base is highlighted,

including system technology and manufacturing technology. Emphasis is placed on the industry and university role in providing this technology. A technology assessment of the voids and risks entailed in the new system is specified for incorporation in the program's high level decision document, the Decision Coordinating Paper (DCP).

During demonstration and validation, the producibility

of the design concepts and the availability of manufacturing technologies will be carefully considered. Production engineering and planning and industrial preparedness planning will be conducted during full-scale engineering development. The goal is to reduce the cost of transitioning a program from development to production. The logistics side of the program has been emphasized to

require closer attention to logistics support planning. Consideration of alternative maintenance concepts and high priority for reliability and maintainability factors will be influential in the design.

Our

We are making every effort to minimize total system life cycle cost by emphasizing and translating the principles of design-tocost and life cycle cost management into our acquisition process. goal is to prioritize and evaluate cost on the same level as the system's technical requirements which are the cost drivers in any system acquisition program. Cost reduction tradeoffs made early in the development cycle offer high potential in cost avoidance during the system's procurement and support phase. Application of these principles to specific system programs is discussed under the Programs Section of this statement.

Additional flexibility is afforded the contractor in

responding to and fulfilling the DoD's stated needs. Military specifications and standards and data requirements must now be tailored specifically toward the requirements of the given system. We also have established policy requiring the use of commercial specifications and the incorporation of commercially available components wherever

practical.

The requirement that a system demonstrate its technical and operational sufficiency to meet the specified military need is reaffirmed in the revised directives. The program manager is given additional responsibility to evaluate tradeoffs in performance and schedule against the cost of the system.

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During the past five years the DoD has reported to the Congress on changes to the acquisition process proposed by the Commission on Government Procurement in 1972. The DoD has acted to implement many of the recommendations.

1. Defense Acquisition Regulatory System

We have established the new Defense Acquisition Regulatory System (DARS); a system of policies and procedures to guide managers in the conduct of Defense business. The DARS will focus on tasks at the operating levels and the Government's contractual actions in dealing with industry in the acquisition of goods and services. The policies and procedures issued within the DARS direct special attention to the unique demands of major system acquisitions.

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During the past year, we conducted a program to test a proposed Four-Step Source Selection process. This method of source selection

has potential for reducing or eliminating government levelling of contractor technical proposals, contractor program buy-ins, and government auctioning of contractor proposals. A total of 17 programs was selected to test the Four-Step procedures. These programs

represent various stages of the system development cycle and magnitudes of complexity and program costs.

Implementing procedures for the

Four-Step Source Selection process are currently being developed.

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The success of our changes to the acquisition process is dependent upon how well they are reflected in the thinking and philosophy of our managers at the operating level. Business judgements and business considerations must be an integral part of planning for the total program at the earliest point in the acquisition process. Our goal is to ensure that effective business management is accomplished DoD-wide. We have made important staff changes to give us the capability to pursue this facet of management and believe it will lead to major improvements in technical, cost and schedule performance and ultimately in the effectiveness of the equipment we field.

4. Contractor Incentive Initiatives

A continuing DoD policy is to encourage contractors to make their own investments in cost reducing capital assets. The Special

Termination Buy-back Technique is one of the most important initiatives we have taken to accomplish this goal. This technique recognizes that contractors are often reluctant to make large capital investments because some contracts (programs) may be curtailed much earlier than the period used in the investment decision calculations. If such curtai Iment occurs, the DoD, in very selective circumstances, will agree to buy back, at somewhat less than the unamortized cost, capical equipment bought specifically to support a contract (program).

Three other techniques which will help us meet our investment policy goals are multi-year contracts, value engineering and award fee incentives. Multi-year contracting provides a means to competitively contract for known requirements for the period of the Department of Defense Five Year Defense Program. Contractors are asked to provide a one-year bid response with nonrecurring or "start-up" costs lumped together and a multiyear bid response prorating these costs over the entire period of the contract. If the award is made on a multi-year basis, funds are obligated only for the first year's quantity, with succeeding years' contract quantities being funded annually thereafter. If funds for the succeeding years are not made available, cancellation occurs, and the contractor is reimbursed for the unrecovered nonrecurring costs included in prices for the cancelled items. cancellation charges are presently limited to $5 million. that this limitation be removed or raised to a more realistic level.

These

We propose

The Value Engineering incentive technique is appropriate

when an engineering change to the contract is required to permit the

use of a particular capital investment such as a newer or more modern

piece of equipment. The contractor and the Government share in resulting labor and material savings through the value engineering contractual provisions.

The third technique--award fee incentives--is used, for example, when it is desired to have the contractor begin to design for producibility during the development stage. The amount of fee awarded is based upon the quality of the planning for facilities, the extent of interaction between the design, facilities and manufacturing engineers during the design of the product and the determination of which production facilities to use. Payment of the maximum award fee may be contingent upon the eventual use of the capital equipment in the manufacture of the product.

5. Minority and Small Business Adjustments

In examining our organization we have concluded that Small Business and Minority Business Enterprise (MBE) business functions should be separated with both activities placed on the same level of reporting to the Deputy Under Secretary of Defense Research and Engineering (Acquisition Policy). Such realignment permits the DoD to place increased emphasis on MBE matters while concurrently supporting small business located in labor surplus areas. Minority businessmen and trade associations will now have a separately identified office from which to seek advice, counsel and support regarding procurement opportunities within the DoD.

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