10 U.S.C. § 2553: Government/Industry Partnering—Fitting a Square Peg into a Round Hole

10 U.S.C. §2553: Government/Industry Partnering—Fitting a Square Peg into a Round HoleAuthor(s): Roger HaagSource: Public Contract Law Journal, Vol. 30, No. 2 (Winter 2001), pp. 243-266Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/25754437 .

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10 U.S.C. ? 2553: Government/Industry Partnering?Fitting a Square Peg

into a Round Hole Roger Haag

I. Introduction 243 II. Using 10 U.S.C ? 2553 to Partner with Private Industry 248

A. Legislative History 249 B. The Department of Defense Implements 10 U.S.C. ? 2553 252

III. Significant Problems with 10 U.S.C ? 2553 253 A. The Unavailability Requirement 255 B. Indemnification Clause 260 C. Incidental Subcontracting Prohibition 261

IV. Recommendations 263 V. Conclusion 265

I. Introduction

Military agencies traditionally dictated the design, development, and life

cycle support for major weapons systems. This process is costly and time

consuming because major weapons systems regularly take between eight and twelve years to reach the fleet or field.1 System upgrades and various modi fications are necessary to produce a state-of-the-art weapons system, as tech

nology can change radically over an eight- to twelve-year development pe riod. This results in weapons systems that are not cost-effective or functional because the traditional acquisition process extends the delivery time of such

systems.

During the fifty years of the Cold War era, the acquisition process was

adequate for U.S. war-fighters because the political and economic environ ment of the Soviet Union, our main adversary, hindered Soviet development of major weapons systems. Also, technological advances occurred at a much

Roger Haag is a contracts specialist with the Space and Naval Warfare Systems Center, San

Diego, CaUfomia. Mr. Haag is also a recent graduate of the University of San Diego School of Law. The author wishes to thank Rena Fox, Jeff Mansfield, and John Roese for their assistance. The opinions reflected in this Article are those of the author and do not reflect the official policy or

position of the U.S. Navy, the Department of Defense, or the U.S. Government. 1. See Hunter Keeter, Buchanan: Discussion Needed Between Acquisition and Require

ments Communities, Defense Daily, Apr. 26, 2000, at 1 ("The traditional system of

technology acquisition,-which begins with an observation of a threat, a deduction of a

requirement from that threat, continues through a research and development program based on that requirement that leads to an acquisition that takes eight to 12 years... .")

24- 3



244 Public Contract Law Journal Vol. 30, No. 2 Winter 2001

slower rate. Today, traditional acquisition processes no longer hinder our ad versaries. The former Soviet bloc, as well as other nations, underutilize defense

manufacturing infrastructures due to decreased defense budgets. Thus, their defense industries are selling military products worldwide to support their defense-related business operations. Our adversaries can now purchase a weap ons system from these countries' defense industries rather than waiting for their own government to completely develop and produce a weapons system.

The acquisition processes of our potential adversaries are similar to the

purchasing system employed by the United States' commercial sector. These

potential adversaries buy weapons from other nations that sell products al

ready housed in their military stockpiles.2 If necessary, the selling government

generally will upgrade the product to meet the purchaser's needs. The benefits of this acquisition process include a reduction in the purchasing nation's

expenditure of large amounts of initial capital for design and development and a reduction in the acquisition time for state-of-the-art weapons systems from years to a matter of months. Consequently, if our potential adversaries

simply possess the resources, they quickly can acquire highly capable and

dangerous state-of-the-art weapons systems.

As a result, the Department of Defense (DoD) is encouraging U.S. military agencies to reform their acquisition processes.3 H. Lee Buchanan, Assistant

Secretary of the Navy for Research, Development, and Acquisition, stated that the task of acquisition reform is "to strip away anything and everything of the current process that gets in the way of meeting the new threat? whether that means the way we establish requirements, gather and evaluate new ideas, manage our programs, or maintain the fleet."4

A number of factors led the DoD to encourage the military services to reform their acquisition process to facilitate purchasing cost-effective, state of-the-art weapons systems with a shorter delivery time. The U.S. military is

facing more sophisticated, diverse adversaries and engaging in more human itarian efforts, with a smaller budget. U.S. adversaries increasingly have

sought advanced weapons systems.5 Today, the military must also confront

2. See Hearing Before the Subcomm. on Emerging Threats and Capabilities of the Senate Armed Services Comm., 106th Cong., 2d Sess. (Mar. 21, 2000) (statement of Jacques S. Gansler, Undersecretary of Defense, Acquisition, Technology and Logistics).

3. See Pete Stevens, The Silence of the Labs, Proceedings, June 2000, at 96 ("Acqui sition reform dictates that the government must offer 'minimized guidance' to develop

mental contractors instead of requirements. That guidance usually is stated in the form

of mission-success metrics. The government is not supposed to specify sensors or weapons; all we can do is state the broad guidance in such a way there may be no [existing system] capable of supporting the goal.").

4. Gibson LeBoeuf & Julianne Kreidel, PM Interviews H. Lee Buchanan, Navy Ac quisition Executive, "Competition Is the Best Way to Get Value," Program Manager, Mar.

Apr. 2000, at 3. 5. See Dennis Anderson, Threat Dictates What Air Force Needs to Acquire, Antelope

Valley Press, May 31, 2000, at 1 (quoting Lt. Gen. Stephen B. Plummer: "[t]here has



Section 2553 and Government/Industry Partnering

multiple and geographically diverse threats. During the early 1990s, the U.S.

military engaged in combat operations in the Middle East and currently con tinues to patrol the no-fly zone over Iraq.6 Recently, the United States and

NATO conducted combat air operations in Yugoslavia.7 Furthermore, the

military's role is not limited to combat operations. The United States par ticipates in humanitarian and peacekeeping missions in regions stretching from Africa to Eastern Europe.8 The military accomplished these missions while defense spending dropped from 20.7% of federal outlays in 1992 to

14.8% in 2000.9 The U.S. military agencies also have fewer options in selecting producers

of weapons systems. The consolidation of the U.S. defense industry during the 1990s, coupled with decreased spending on national defense, forced de fense manufacturers to merge or sell their defense businesses and concentrate their resources in the more profitable commercial technology market.10 This resulted in fewer defense firms and an eroding competitive environment within defense procurement.11 The Undersecretary of Defense for Acquisi tion, Logistics, and Technology recently stated:

[B]ecause of the end of the Cold War and the prospect of declining defense budgets, many firms that had previously operated in both the commercial and defense fields chose to sell off their defense businesses, thereby increasing the isolation of the defense sector from the rapid advances of commercial technology and the exploding market

growth of the commercial sector.12

The dwindling defense manufacturing base, the swift evolution of tech

nology, and the factors mentioned above prompted the DoD to revise its

acquisition process.13

been a recent historic proliferation of nations evolving air-to-air and ground-to-air ca

pabilities, with technologies that were once in the purview of this country, that are now

proliferating throughout the world."). 6. See Recmfirmation Hearing Before the Senate Armed Services Comm., 106th Cong.,

1st Sess. (Sept. 9, 1999) (statement of Gen. Henry H. Shelton, Chairman of the Joint Chiefs of Staff).

7. See id. 8. See Hearing Before the Senate Armed Services Comm., 105th Cong., 2d Sess. (Sept.

29, 1998) (statement of Gen. Henry H. Shelton, Chairman of the Joint Chiefs of Staff). 9. See Thomas E. Ricks & Roberto Suro, Joint Chiefs Aim Big Budget Request at Next

President, Washington Post, June 14, 2000, at Al. 10. See Gansler: Government Should Help Industry with "Enabling Environment" Aero

space Daily, Apr. 27, 2000. 11. See Jeff Cole & Anne Marie Squeo, Debate on Relieving Defense Sector May Lead to

Sharing Plum Project, Wall St. J., June 14, 2000, at Al. 12. Gansler, supra note 10.

13. See Keeter, supra note 1, at 1 ("The key is in recognizing that for the first time in

history, the time scale for technological evolution (18-24 months for computers and microelectronics) is much shorter than most other pertinent time scales....").




The DoD recognizes that partnering14 with private industry is a key initia tive in acquisition reform.15 Specifically, the Department of the Navy consis

tently notes that a new acquisition process involving partnering is necessary to rapidly deliver cost-effective weapons systems.16 Accordingly, various Navy laboratories such as the Space and Naval Warfare Systems Center and the Na val Sea Systems Command are currently reforming their acquisition process.17

The Department of the Navy emphasizes the use of 10 U.S.C. ? 2553 to enter into partnering arrangements with private industry.18 Section 2553 au

thorizes certain DoD facilities to sell unique articles and services to persons outside the DoD.19 Due to the statutory limitations of 10 U.S.C. ? 2553,

14. See General Accounting Office, Rep. No. GAO/NSIAD-98-91, Defense De pot Maintenance?Use of Public-Private Partnering Arrangements 1 (1998)

("Although there is generally no agreed upon definition of partnering, for purposes of this report, partnering arrangements include but are not limited to (1) use of public sector

facilities and employees to perform work or produce goods for the private sector; (2) private sector use of public depot equipment and facilities to perform work for either the public or private sector; and (3) work-sharing arrangements . .. .").

15. See Allen V. Burman, Directions for Defense, Govexec.Com 2, available at http://

www.governmentexecutive.com/procure/articles/0199mark.htm (Jan. 1999) ("The goal is to bring industry and government closer together, recognizing the need for partnership in accomplishing DoD's mission and adopting commercial practices where they make

sense."). 16. See Department of the Navy, Business Visions and Goals, 1999 (visited May 18,

2000), available at http://www.rba.hq.navy.mil/business/index.html; see also Office of the

Assistant Secretary of the Navy (Research, Development and Acquisition), The

Naval Research, Development and Acquisition Team 1999-2004 Strategic Plan

("The Naval Research, Development and Acquisition Team, in partnership with Industry, will continue to serve the Nation by developing, acquiring and supporting technologically superior and affordable systems .. .."); Department of the Navy, Business Process Goal:

Reduce Cost and Cycle Time for Delivering Equipment and Services; Partner with the War fighter, Stakeholders and Industry on a Weapons Systems Approach to Life Cycle Management (visited Feb. 3, 2000) <http://www.acq-ref.navy.mil>.

17. See Space and Naval Warfare Systems Center San Diego, Business Development, Sci ence & Technology Office Standard Operating Procedure No. I (visited Feb. 3, 2000) <http://iweb.spawar.navy.mil/resources/iteam>. The Standard Operating Procedure states:

"[t]he paradigm is shifting away from the traditional practice of the Government doing the conceptual and design work, obtaining funding from Government program sponsors and

then awarding contracts to Industry." Id. The Secretary of Defense and the Secretary of the

Navy are introducing and implementing new acquisition relationships between the Gov ernment and private industry. See id. The Standard Operating Procedure also states:

These new relationships with Industry are collaborative in nature and allow the Gov ernment to function in any one of a variety of roles ranging from full partner through subcontractor to industry. In this context, Industry has the primary responsibility for

doing the conceptual work and design of new ships, aircraft and other technology re

quired by the Fleet. Id.

18. See id.

19. See 10 U.S.C. ? 2553 (1999). Section 2553 reads as follows: ? 2553. Articles and services of industrial facilities: sale to persons outside the Depart

ment of Defense



Section 2553 and Government/Industry Partnering *2- ^X-~iT

however, true partnerships are still impossible. Therefore, various military agencies enter into hierarchical relationships with private industry, using 10

(a) Authority to sell outside DoD. (1) The Secretary of Defense may sell in accordance with this section to a person outside

the Department of Defense articles and services referred to in paragraph (2) that are not available from any United States commercial source.

(2) (A) Except as provided in subparagraph (B), articles and services referred to in paragraph (1) are articles and services that are manufactured or performed by any working-capital funded industrial facility of the armed forces.

(B) The authority in this section does not apply to sales of articles and services by a working-capital funded Army industrial facility (including a Department of the Army arsenal) that manufactures large caliber cannons, gun mounts, recoil

mechanisms, ammunition, munitions, or components thereof, which are gov erned by regulations required by section 4543 of this title.

(b) Designation of participating industrial facilities. The Secretary may designate facilities referred to in subsection (a) as the facilities from which articles and services manu

factured or performed by such facilities may be sold under this section.

(c) Conditions for Sales. (1) A sale of articles or services may be made under this section only if

-

(A) the Secretary of Defense determines that the articles or services are not avail

able from a commercial source in the United States;

(B) the purchaser agrees to hold harmless and indemnify the United States, except in any case of willful misconduct or gross negligence, from any claim for dam

ages or injury to any person or property arising out of the articles or services;

(C) the articles or services can be substantially manufactured or performed by the

industrial facility concerned with only incidental subcontracting; (D) it is in the public interest to manufacture the articles or perform the services;

(E) the Secretary determines that the sale of the articles or services will not in

terfere with the military mission of the industrial facility concerned; and

(F) the sale of the goods and services is made on the basis that it will not interfere with performance of work by the industrial facility concerned for the Depart ment of Defense.

(2) The Secretary of Defense may waive the condition in paragraph (1)(A) and sub section (a)(1) that an article or service must not be available from a United States

commercial source in the case of a particular sale if the Secretary determines that

the waiver is necessary for reasons of national security and notifies Congress re

garding the reasons for the waiver.

(d) Methods of sale. (1) The Secretary shall permit a purchaser of articles or services under this section to

use advance incremental funding to pay for the articles or services.

(2) In the sale of articles and services under this section, the Secretary shall (A) charge the purchaser, at a minimum, the variable costs, capital improvement

costs, and equipment depreciation costs that are associated with the articles or

services sold;

(B) enter into a firm, fixed-price contract or, if agreed by the purchaser, a cost

reimbursement contract for the sale; and

(C) develop and maintain (from sources other than appropriated funds) working capital to be available for paying design costs, planning costs, procurement

costs, and other costs associated with the articles or services sold.

(e) Deposit of proceeds. Proceeds from sales of articles and services under this section

shall be credited to the funds, including working capital funds and operation and maintenance funds, incurring the costs of manufacture or performance.




U.S.C. ? 2553 as authority, in an attempt to promote the DoD's partnering initiative.20 Congress passed 10 U.S.C. ? 2553 in 1994,21 allowing the DoD to sell commercially unavailable articles and services to private industry.22 Due to the statute's infancy, however, there is an absence of case law, legis lative history, or other public analysis explaining the application of 10 U.S.C.

? 2553. Furthermore, this lack of explanatory material and the statute's in

herent limitations resulted in defense agencies' and private industry's failure to fully embrace the type of hierarchical relationship that the statute appears to permit.23 Congress revised the statute in 1999 to address one of the many issues raised by the statute's limitations.24 As this article will show, however, there are many more issues that Congress still needs to address.

II. Using 10 U.S.C. ? 2553 to Partner with Private Industry The Department of the Navy's revised acquisition process is flexible and

is not limited to one procedure or method. Partnering is one initiative within the Navy's revised acquisition process that allows such flexibility in

acquisition.

(f) Relationship to Arms Export Control Act. Nothing in this section shall be construed to affect the application of the export controls provided for in section 38 of the Arms

Export Control Act (22 U.S.C. 2778) to items which incorporate or are produced through the use of an article sold under this section.

(g) Definitions. In this section:

(1) The term "advance incremental funding", with respect to a sale of articles or ser

vices, means a series of partial payments for the articles or services that includes?

(A) one or more partial payments before the commencement of work or the in

curring of costs in connection with the manufacture of the articles or the

performance of the services, as the case may be; and

(B) subsequent progress payments that result in full payment completed as the required work is being completed.

(2) The term "not available", with respect to an article or service proposed to be sold

under this section, means that the article or service is unavailable from a commercial source in the required quantity and quality or within the time required.

(3) The term "variable costs", with respect to sales of articles or services, means the costs that are expected to fluctuate directly with the volume of sales and (A) in the case of articles, the volume of production necessary to satisfy the sales

orders; or

(B) in the case of services, the extent of the services sold. 20. See Space and Naval Warfare Systems Center San Diego, supra note 17. 21. National Defense Authorization Act for Fiscal Year 1995, Pub. L. No. 103-337,

? 339, 108 Stat. 2663 (1994). 22. See General Accounting Office, supra note 14, at 3.

23. See id. 24. See National Defense Authorization Act for Fiscal Year 2000, Pub. L. No. 106

65, ?331, 113 Stat. 512 (1999).




One example of partnering is the Navy's current acquisition strategy for new DD-21 class destroyers.25 The Navy stated a need for a new type of ship, but unlike the traditional acquisition process, the Navy did not develop highly detailed military specifications.26 Instead, the Navy awarded a contract to two private industry teams to design the DD-21.27 The Navy issued gov ernment direction to the teams through an Operational Requirements Doc ument.28 The teams use their own resources to hire subcontractors with spe cific areas of expertise to develop, design, and manufacture the ship.29 Government laboratories are among those team members.30 The Navy will award a contract to the industry team that produces a design for DD-21 that best meets the Navy's needs.31

Section 2553 is a vital statute in this subcontracting environment because it permits military agencies to leverage their corporate knowledge and exist

ing infrastructure. Without this legislation various military agencies, includ

ing the Navy, would have significantly less input in early design stages and

corporate defense product development.

A. Legislative History In 1994, Senator Dianne Feinstein and Senator Barbara Boxer co

sponsored the initial version of 10 U.S.C. ? 2553.32 The senators clearly

25. See Department of the Navy, DD 21 Acquisition Strategy (visited Jan. 2000) <http://dd21.crane.navy.mil/dd21/acquisition/acqstrat.htm> ("Navy officials have insti

tuted a unique acquisition approach for the DD 21 that provides industry with an over

arching set of operational requirements and cost parameters instead of detailed design and

performance specifications."). 26. See id. 27. See Raymond Lisiewski & Edward C. Whitman, DD 21: A New Direction in Warship

Acquisition (visited Jan. 2000) <http://dd21.crane.navy.mil/dd21/Library/DD21Whitman. pdf>.

28. See id.

29. See id.

30. See id.

31. See id.

32. See S. Res. 2176, 103d Cong., 2d Sess. (1994). The proposed legislation reads as follows:

? 357. Sale of Articles and Services of Industrial Facilities of the Armed Forces

to Persons Outside the Department of Defense.

(a) Authority to Sell Outside DoD?The Secretary of Defense may sell in accordance

with this section to persons outside the Department of Defense articles and services

produced in working-capital funded industrial facilities of the Armed Forces that are not available from any United States commercial source.

(b) Designation of Participating Industrial Facilities?The Secretary may desig nate up to three facilities referred to in subsection (a) as the facilities from which articles and services produced in such facilities may be sold under this section.

(c) Conditions for Sales?A sale of articles or services may be made under this section

only if?

(1) the Secretary of Defense determines that the articles or services are not available

from a commercial source in the United States;



2 SO Public Contract Law Journal Vol. 30, No. 2 Winter 2001

intended to limit to depot maintenance facilities application of this proposed legislation,33 primarily to enhance commercialization of dual-use technolo

(2) the purchaser agrees to hold harmless and indemnify the United States, except in cases of willful misconduct or extreme negligence, from any claim for damages or

injury to any person or property arising out of the articles or services;

(3) the articles or services can be substantially performed by the industrial facility concerned with only incidental subcontracting and that performance is in the pub lic interest;

(4) the Secretary determines that the sale of the articles or services will not interfere with the military mission of the industrial facility concerned; and

(5) the sale of the goods and services is made on the basis that it will not interfere with performance of work by the industrial facility concerned for the Department of Defense.

(d) Methods of Sale?(1) The Secretary shall permit a purchaser of articles or services under this section to use advance incremental funding to pay for the articles or

services.

(2) In the sale of articles and services under this section, the Secretary shall (A) charge the purchaser, at a minimum, the variable costs, capital improvement

costs, and equipment depreciation costs that are associated with the articles or

services sold;

(B) enter into a firm, fixed-price contract or, if agreed by the purchaser, a cost

reimbursement contract for the sale; and

(C) develop and maintain (from sources other than appropriated funds) working capital to be available for paying design costs, planning costs, procurement costs, and other costs associated with the articles or services sold.

(e) Delegation of Authority?The Secretary may delegate the authority to sell articles

and services in accordance with this section to the commander of each industrial

facility designated pursuant to subsection (b) in accordance with regulations pre scribed by the Secretary.

(f) Deposit of Proceeds?Proceeds from sales of articles and services under this section

shall be credited to the funds, including working capital funds and operation and maintenance funds, incurring the costs of performance.

(g) Relationship to Arms Export Control Act?Nothing in this section shall be construed to affect the application of the export controls provided for in section 38 of the Arms Export Control Act (22 U.S.C. 2778) to items which incorporate or are produced through the use of an article sold under this section.

(h) Definitions?In this section?

(1) The term "advance incremental funding", with respect to a sale of articles or ser

vices, means a series of partial payments for the articles or services that includes?

(A) one or more partial payments before the commencement of work or the in

curring of costs in connection with the production of the articles or the per formance of the services, as the case may be; and

(B) subsequent progress payments that result in full payment being complete as the required work is being completed.

(2) The term "variable costs", with respect to sales of articles or services, means the costs that are expected to fluctuate directly with the volume of sales and?

(A) in the case of articles, the volume of production necessary to satisfy the sales orders; or

(B) in the case of services, the extent of the services sold. 33. See 140 Cong. Rec. 15,566-67 (1994). In introducing the amendment, Senator

Feinstein stated: "Mr. President, I rise today, an original cosponsor of this amendment, to

give depot maintenance facilities the authority to provide goods and services to non



Section 2553 and Government/Industry Partnering 251

gies. The original Senate bill permitted the secretary of defense to name only three working-capital34 industrial facilities that could benefit from 10 U.S.C.

? 2553.35 Between July and August of 1994, the legislation underwent a major re

vision in the House of Representatives.36 Representatives Mazzoli, Hoyer, and Fazio worked together to remove some of the initial Senate bill's limitations.37 The initial House version allowed the DoD to sell articles or services without

regard to their commercial availability.38 The House also removed the limi tation allowing sales agreements with only three DoD working-capital in dustrial facilities. Instead, the House version allowed "any" working-capital industrial facility to sell articles and services to persons outside the DoD.39

The House once again made changes to the legislation in committee and reinstated the requirement that an article or service be unavailable from any commercial source in order for the DoD to sell the article or service.40 Section 2553 became effective on April l, 1995, through ? 339 of the Defense Au thorization Act of 1995.41

In 1999, the conferees of the Defense Authorization Act of 1999 rec

ognized that military agencies were using ? 2553 to enter into subcontract

ing relationships with private industry.42 At that point, Congress could have curtailed the legislation's application. Instead, Congress implicitly approved expanded use of ? 2553, directing the secretary of defense to establish reg

Department of Defense customers." Id. Senator Boxer proceeded after Senator Feinstein

and stated: "Mr. President, it simply makes no sense to prohibit military depots from using their unique facilities to advance the public interest...." Id.

34. See General Accounting Office, supra note 14, at 2. A military command iden

tified as a "working-capital facility" operates through a working-capital fund. A working

capital fund "is used to finance a [facility's] cost of producing goods and services for its

customers. The fund is reimbursed through customer payments for the goods and services

provided and is to be self-sustaining and operate on a break-even basis over the long term." Id.

35. See 140 Cong. Rec. 15,566-67 (1994). 36. See H.R. Rep. No. 103-701, at 681 (1995), reprinted in 1994 U.S.C.C.A.N. 2262. 37. See id. 38. See id.

39. See id. 40. See id. 41. National Defense Authorization Act for Fiscal Year 1995, Pub. L. No. 103-337,

? 339, 108 Stat. 2663 (1994). "[Section 339] authorizes the Secretary to sell to persons outside DOD articles and services that are produced in working-capital funded industrial facilities of the armed forces and that are not available from any U.S. commercial source.

Authorizes the Secretary to designate facilities for such sales. Provides sale conditions and methods. Makes such authority effective as of April 1, 1995." H.R. Rep. No. 103-701, at 681 (1995), reprinted in 1994 U.S.C.C.A.N. 2262.

42. See 140 Cong. Rec. H7775 (daily ed. Aug. 5, 1999) ("The conferees recognize that the ability under this provision for public sector facilities to enter into a subcontractor

relationship with private sector contractors raises concerns over the nature of the con

tractual relationship-").



Public Contract Law Journal Vol. 30, No. 2 Winter 2001

illations addressing dispute resolution.43 With Congress's implicit approval, the DoD ultimately promulgated regulations expanding 10 U.S.C. ? 2553 from merely authorizing the sale of unique articles and services to allowing certain military commands and private industry to enter into subcontracting relationships.44

B. The Department of Defense Implements 10 U.S.C. ? 2553 In 1994, the Deputy Undersecretary of Defense for Logistics limited the

type of facilities authorized to sell to private industry articles and services.

Specifically, only DoD depot-level maintenance facilities could sell com

mercially unavailable articles or services to persons outside the DoD.45 This limited authority was consistent with the intent of Senator Boxer and Sen ator Feinstein to constrain the application of this legislation to depot-level facilities such as McClellan Air Force Base.46 This limitation, however, was inconsistent with the revisions proposed by Representatives Mazzoli, Fazio, and Hoyer. For example, Representative Mazzoli sought to expand the leg islation to working-capital facilities such as the Naval Surface Warfare Cen

ter, Crane Division in Martin County, Indiana.47 The Crane Division is a

naval laboratory under Naval Sea Systems Command.48 It is, thus, unclear

43. See id. ("The conferees direct the Secretary of Defense to establish regulations

regarding the manner in which disputes in such cases will be resolved."). 44. See H.R. Rep. No. 103-701, at 681 (1995), reprinted in 1994 U.S.C.C.A.N. 2262. 45. See Memorandum from James R. Kingh, Deputy Undersecretary of Defense (Lo

gistics), to Secretaries of the Military Departments & Directors of the Defense Agencies (Nov. 16, 1994) (on file with author) ("It shall be DoD policy that, consistent with the

CORE capabilities of any DoD depot-level maintenance activity and in consideration of

sizing such activities consistent with the CORE concept, such an activity may sell to

persons outside the DoD articles and services that are not available from any United

States commercial source."). The 1994 memorandum from the Undersecretary of Defense

also delegated to the secretaries of the military departments or heads of the defense agen cies the authority to certify that the articles or services were commercially unavailable in

the United States and that the agency met the other conditions of 10 U.S.C. ? 2553. See id. "Additionally, the Secretary of the Military Department or Head of Defense Agency

must certify that (1) the article or service is not available from a commercial source and

(2) the sale of the article or service meets the conditions for sale specified in Section 339 of the FY 1995 National Defense Authorization Act." Id. In 1995, the Secretary of the Navy delegated the authority to certify nonavailability and compliance with the statute to the Assistant Secretary of the Navy for Research, Development, and Acquisition. See

Memorandum from Secretary of the Navy John H. Dalton, Navy Activities Providing Goods and Services to Non-DoD Parties (Dec. 4, 1995) (on file with author).

46. See 140 Cong. Rec. 15,566-67 (1994) (Senator Boxer and Senator Feinstein stat ing that McClellan Air Force Base had underutilized depot maintenance facilities that

had dual-use capabilities). 47. See 140 Cong. Rec. 23,356 (1994) (statement of Rep. Mazzoli) ("The Crane,

Indiana, Site of the NSWC will now have the option of sharing its microelectronic technology, thus enhancing some vital dual use capabilities.").

48. See Naval Surface Warfare Center, History of Crane Division (visited May 15,2000) <http://www.crane.navy.mil/General/About/history.htm>.




why the Deputy Undersecretary of Defense (Logistics) initially limited au

thority to depot-level facilities, in light of the comments made by Represen tative Mazzoli and his colleagues. The Navy, however, recognized that the

Deputy Undersecretary of Defense (Logistics) was not fully implementing 10 U.S.C. ? 2553. In 1995, the Assistant Secretary of the Navy stated in a

memorandum, "the Department of Defense partially implemented Section 2553 by granting authority to any Department of Defense depot-level main tenance activity to sell to non-DoD customers provided certain conditions

were met."49

In April of 1996, the DoD broadened the authority to enter into sales

agreements with private industry. In a one-sentence statement, the Office of the Undersecretary of Defense for Acquisition and Technology granted the secretaries of the military departments and heads of the defense agencies the

authority to allow any working-capital industrial facility to enter into agree ments under 10 U.S.C. ? 2553.50 The Secretary of the Navy quickly imple mented this grant of authority. In June of 1996, two months after the Un

dersecretary of Defense expanded application of 10 U.S.C. ? 2553, the Assistant Secretary of the Navy for Research, Development, and Acquisition delegated to the Navy working-capital facilities the authority to enter into 10 U.S.C. ? 2553 agreements and encouraged using this legislative power to

the broadest extent possible.51

III. Significant Problems with 10 U.S.C. ? 2553

Today, the DoD, specifically the Department of the Navy, uses partnering to allow the Government access to private industry's corporate knowledge and business practices in order to quickly develop and deliver cost-effective, state-of-the-art weapons systems. In the Department of the Navy, the defi nition of partnering is flexible and is partly based on the Navy's level of involvement within the acquisition process.52 Assistant Secretary Buchanan

49. See Memorandum from John W. Douglas, Assistant Secretary of the Navy (Re

search, Development, and Acquisition), Navy Activities Providing Goods and Services

to Non-DoD Parties (Dec. 15, 1995) (on file with author). 50. See Memorandum from Paul G. Kaminski, Undersecretary of Defense, to Secretaries

of the Military Departments & Directors of the Defense Agencies (April 1, 1996) (on file with author) ("The Secretaries of the Military Departments and Directors of the Defense

Agencies are delegated the authority of the Secretary of Defense under Section 2553 of Title 10, United States Code.").

51. See Memorandum from John W. Douglas, Assistant Secretary of the Navy (Re

search, Development, and Acquisition), Navy Activities Providing Goods and Services

to Non-DoD Parties (June 13, 1996) (on file with author). 52. See LeBoeuf & Kreidel, supra note 4, at 6. Hon. Buchanan describes partnering

within three levels of weapons systems development: engineering, management, and sci

ence and technology. See id. At the engineering level, partnering "means that design becomes a collaborative, system-oriented enterprise with close coupling between the Navy user and the industrial producer?often a team of manufacturers." Id. At the management




stated that partnering ultimately refers to "a routine dialogue with industry and abolishment of the old Wer-the-wall' mentality of the Cold War era."53

With regard to science and technology (S&T), Assistant Secretary Buchanan

states, "[e]ven in S&T, traditionally one of the most segregated functions,

government and industry are finding that each does certain things better

than the other, and that competitive sharing is most often the best way to

stimulate innovation and creativity."54 Today, no legislation permits all agencies within the DoD to enter into

fundamentally equitable partnering arrangements with commercial entities,

relationships that would truly abolish the over-the-wall mentality of the Cold War era. Instead, the practical effect of 10 U.S.C. ? 2553 allows a subcon

tracting relationship between a military command and private industry. Pri vate industry becomes the customer and the military facility, the supplier.

Congress expressed its intent to allow depot-level maintenance facilities to enter into partnerships with private industry for limited purposes.55 The

National Defense Authorization Act of 1995, ? 336, encourages the secretary of defense to enter into partnerships with commercial firms, thus "demon

strating commercial uses of the depot-level activities that are related to the

principal mission of the depot-level activities."56 Section 336, a re-utilization initiative to explore commercial uses for depot-level facilities, authorizes the

secretary of defense to encourage partnerships between depot-level mainte nance facilities and private industry.

Clearly, through use of the unambiguous term "partnership" in ? 336,

Congress intended to encourage the DoD and private industry to enter into limited partnerships in certain circumstances.57 Likewise, Congress intended to allow the DoD to sell unique articles and services under 10 U.S.C. ? 2553

by using the unambiguous term "sell" in ? 339.58 Congress authorized both

types of relationships by approving ?? 336 and 339. Finally, the authorization to enter into partnerships and the authorization to sell articles and services

level, partnering is best exemplified in the larger contractors' use of Corporate Councils.

Corporate Councils are comprised of executives from a defense contractor and represen tatives from the Government. See id. The council "is charged with increasing the use of efficient, single processes on DoD contracts, which will result in more affordable weapons

systems." Id. Finally, Hon. Buchanan describes partnering at the science and technology level as competitive sharing in order to stimulate innovation and creativity. See id.

53. Id.

54. Id. 55. See General Accounting Office, supra note 14, at 3.

56. See H.R. Rep. No. 103-701, at 681 (1995), reprinted in 1994 U.S.C.CA.N. 2262. Section 337 of the National Defense Authorization Act for Fiscal Year 1995 authorizes the "Secretary of Defense to conduct activities to encourage commercial firms to enter

into partnerships with depot-level activities of the military departments." National De

fense Authorization Act for Fiscal Year 1995, Pub. L. No. 103-337, ? 337,108 Stat. 2663 (1994).

57. See National Defense Authorization Act for Fiscal Year 1995 ? 336. 58. See id. ? 339.




to private industry are separate provisions in the Operations and Mainte nance section of the Defense Authorization Act of 1995.59 These individual authorizations support the conclusion that Congress initially intended the DoD to obtain separate and specific congressional permission to enter into these types of relationships with private industry.

Ultimately, however, 10 U.S.C. ? 2553 does not create an equal collab orative partnering relationship between private industry and the DoD. Pri vate industry, as the purchaser, dictates the acquisition requirements and the

DoD, as the supplier, complies with the purchaser's directions. Congress must find a solution that balances private industry's concerns with the DoD's re vised acquisition process because the legislation's terms are ambiguous and somewhat onerous when applied to hierarchical relationships. This ambiguity increases the probability that agencies will waste time and money in litiga tion. Three issues impede entry into equal, collaborative partnering arrange

ments between military agencies and private industry during the design and

development phase of the revised acquisition process: (1) the unavailability requirement, (2) the indemnification clause, and (3) the incidental subcon

tracting prohibition.60

A. The Unavailability Requirement The unavailability requirement in 10 U.S.C. ? 255361 primarily protects

private industry from DoD competition in the commercial marketplace. The

legislation's original co-sponsors voiced concerns that the DoD might abuse its new authority and directly compete with private industry for business

opportunities.62

This concern for private industry is understandable. The DoD possesses vast resources underwritten by taxpayers. Congress appropriates a pre determined amount of funds for the DoD's operations. Generally, these ap propriations are final and unaffected by the commercial marketplace. Fur

thermore, the DoD possesses a global infrastructure and a dedicated labor

pool. With these resources, the DoD could produce products or services at an artificially lower price. Allowing the DoD to freely compete in the com

59. See H.R. Rep. No. 103-701, at 681 (1995), reprinted in 1994 U.S.C.C.A.N. 2262. 60. There are more than three issues in this legislation that affect the partnering en

vironment. For instance, the legislation is silent regarding how a military agency should protect intellectual property sensitive to competition that it develops for private industry. This article, however, will not address these issues.

61. See 10 U.S.C. ? 2553(a)(1) (1994) ("The Secretary of Defense may sell in accor dance with this section to a person outside the Department of Defense articles and services

referred to in paragraph (2) that are not available from any United States commercial source.").

62. See 140 Cong. Rec. 15,566-67 (1994) (statement of Sen. Feinstein) ("[t]he articles or services provided under the new authority cannot be available from a commercial source

in the United States?this will ensure that the depot facilities will not be competing with the private sector.").




mercial market would ultimately force private industry to subsidize their com

petitor, the U.S. Government, with private industry's own taxes. Therefore, limitations on the DoD's ability to sell articles and services in the commercial

marketplace are necessary.

The unavailability requirement, however, impedes the implementation of

partnering arrangements in the revised acquisition process. Military agencies face difficulty applying the unavailability requirement because there is un

certainty about the definition of "commercially unavailable."63 In the part nering environment, this requirement is unnecessarily burdensome and pro motes the appearance of conflicts of interest.

Under 10 U.S.C. ? 2553, the secretary of defense must certify that an article or service it sells is commercially unavailable.64 In 1999, Congress revised the legislation, permitting the secretary to consider quality, time, or

quantity standards in determining unavailability.65 The legislation, however, does not clearly state the requirements for an unavailability determination. The ambiguity and uncertainty of this unavailability standard will likely re

sult in wasted time and money in litigation or worse, limited use of the statute. Also, the use of subjective standards greatly reduces private industry's ability to accurately predict whether an article or service is unavailable. These

subjective factors do not consistently or accurately ensure that an article or service is commercially unavailable.

The subjective standards used by the secretary of defense to determine

unavailability effectively transfer the task of quality assurance from the pur chaser to the DoD. In commercial transactions of articles or services between two private entities, the purchaser traditionally determines the quality of the

product it wishes to purchase by performing some type of market research.

63. See General Accounting Office, Rep. No. GAO/NSIAD-99-147, Air Force Logistics: C-17 Plan Does Not Adequately Address Key Issues (1999). For example, the GAO submitted a report to Congress on the Air Force's management of the C-17

project. The Air Force had stated that they would use 10 U.S.C. ? 2553 to support a

portion of the depot-level work for the C-17 project. The Air Force had used cost, rather

than an assessment of commercial availability, to determine candidates for work using 10 U.S.C. ? 2553. This assessment conflicted with an assessment that the Air Force had made two years earlier in 1996, when the Air Force was attempting to justify its core capabilities in response to a base closure. See id. at 10. The GAO stated: "[t]o what extent capabilities to perform C-17 maintenance workloads are not available in the private sector is unclear given conflicting historical information available on this subject." Id. at 13. In

conclusion, the GAO stated: "We continue to believe it is unclear whether a determi nation of non-availability could be made for potential C-17 maintenance work the con tractor may wish to obtain from a government depot." Id. at 16.

64. The secretary of defense or delegated representative ultimately makes the final determination. Trie purchaser, however, must initially prove that the article or service is unavailable from the commercial marketplace. At the Space and Naval Warfare Systems Center, San Diego, California, the laboratory requires the purchaser to submit a noncom

petition statement. The purchaser certifies that they are not aware of a U.S. commercial

facility that is available to perform the service requested within statutory parameters. 65. See 10 U.S.C. ? 2553(g)(2) (1999).




Generally, outside of price, the supplier does not dictate the conditions for

selling an article or service. In 10 U.S.C. ? 2553 transactions, the secretary can use quality as a standard to determine unavailability.66 If the secretary does not agree with a purchaser's determination that the quality of an article or service is unavailable outside the DoD, the secretary will not approve the sale of the article or service. It is unfair for the Government to force private industry to accept the DoD's quality determinations.

It is in the best interest of the secretary of defense, however, to certify an article or service as unavailable rather than forgo the potential revenue. In an era of shrinking defense budgets and force structure reductions, the ad ditional revenues possible from using partnering agreements are hard to ig nore.67 The sale of an article or service also could increase the use of an otherwise underutilized asset and thereby lower an agency's operating costs.

Ultimately, for the secretary of defense, the unavailability requirement is a

double-edged sword. The secretary appears either to be overly accommodat

ing to the self-interests of military agencies68 or overly cautious in contra vention of congressional intent.69

Congress could promote partnering by eliminating the subjective stan dards that result in the uncertainty behind the commercially unavailable

requirement. For example, Congress could shift the burden of proof back on

the purchaser. Congress should require the purchaser, i.e., private industry, to submit a document similar to a Justification and Approval.70 A Justification and Approval, stating that the desired article or service is commercially un

available, is a requirement for traditional sole-source procurements.71 Pur chasers thus should include market research to support the justification doc ument. A purchaser also should be required to submit a certification stating that the purchaser based its conclusion on a good-faith belief that the article or service is commercially unavailable. Congress should permit the secretary of defense to rely on the purchaser's statement.

Shifting the burden of proof would have three effects. First, it would create a paper trail of the secretary's decision because the purchaser would have to

conduct extensive market research to determine commercial unavailability.

66. See id.

67. See General Accounting Office, supra note 14, at 11. The Department of the

Army, using 10 U.S.C. ? 4543 as authority to enter into partnering agreements, has

entered into partnering initiatives worth $5.4 million. See id. at 7. 68. See Hearing Before the Comm. on Governmental Affairs, 104th Cong., 2d Sess.

(Sept. 24, 1996) (statement of Marie Fath, Business Coalition for Fair Competition) ("However it [10 U.S.C. ? 2553] is now being abused as a sweeping door to entrepreneurial agencies eager to sell themselves in the commercial marketplace.").

69. An overly cautious official thus will be more likely to disapprove an unavailability certification rather than approve a certification and risk possible judicial scrutiny.

70. See FAR 6.303-2(a)(8) (discussing the contents of a justification for a sole-source contract; market research is one of the elements to a justification for a sole-source

procurement). 71. See FAR 6.303-1.




This would reduce the appearance that the DoD is intentionally competing with private industry. The purchaser maintains an interest in obtaining the best product or service and, therefore, is in a better position to determine the desired product's availability. Second, requiring the purchaser to justify com

mercial unavailability would promote competition. Requiring the purchaser to make a good-faith effort in conducting market research compels the pur chaser to look for sources outside the DoD, thus exposing the purchaser to

businesses of which it normally would not be aware. Finally, the purchaser is in the best position to determine its own specific requirements for an article or service. Compelling the purchaser to conduct market research would allow the purchaser to obtain an article or service that truly meets its requirements rather than surrendering to the DoD its purchasing decisions. The ultimate result is more competition, by exposing the purchaser to different suppliers and possibly new business relationships. Shifting the burden of proof ensures

that the purchased article or service satisfies the purchaser. Additionally, Congress should allow the secretary of defense to waive the

unavailability requirement under certain circumstances. Each military service

possesses an existing research and development infrastructure and extensive

corporate knowledge tailored specifically to its mission within the DoD. From

1994 to 1998, the DoD invested over $100 billion in military research and

development.72 Currently, the United States spends $38 billion annually on

military research and development.73 However, under this acquisition pro cess, military laboratories are unable to incorporate freely the developments made in their laboratories due to the unavailability requirement and the

acquisition reform restrictions. Congress should allow the secretary of defense to waive the unavailability requirement in cases where an article or service will support a DoD procurement.

Today, primarily large private entities engage in military manufacturing. "Acquisition reform tends to favor large corporations or consortia since the amount of in-house research required to interpret the broad guidance and

prepare a proposal often is beyond the means of a smaller entity."74 These firms primarily focused their efforts in the more profitable commercial mar ket. Many technologies developed for the commercial market also may have

military applications. The commercial availability of research services is par ticularly difficult to determine. In order to justify commercial unavailability, the secretary of defense may have to use subjective standards. For example, it is difficult to create objective standards to apply in determining whether the quality of one laboratory is better than the quality of another. The sec

retary of defense could use the subjective standards to circumvent the intent

72. See General Accounting Office, Reft. No. GAO/NSIAD-00-33, Using Sec tion 845 Agreements Could Be Improved 5 (2000).

73. See Ricks & Suro, supra note 9, at A3. 74. Stevens, supra note 3, at 96.




of Congress to prohibit public-private competition by inaccurately deter

mining that a service is commercially unavailable and enabling competition with private industry.

In the current DD-21 program, there is no requirement that contractors

incorporate the suggestions of the various military laboratories involved in the program because the relationship between the industry team and the

government laboratory is hierarchical, with the industry team as the lead and the government laboratory as a subcontractor.75 If this continues, the absence of such a requirement might discourage military agencies from using 10 U.S.C. ?2553 relationships or worse, aggressively engaging in research and

development. As one previous research and development project manager stated:

The Navy labs are inhibited from the development of materials, processes, and hard ware or software, since there is no guarantee or requirement that the contractors will

choose that approach to filling the broad mission statement. Research-and

development (R&D) expenditures by a Navy lab could end up being wasted.76

In order to increase the likelihood that a contractor incorporates a military laboratory's developments or suggestions, Congress must facilitate a more

collaborative environment between the military and private industry. Con

gress can do this by allowing military agencies, particularly government lab

oratories, to sell core articles and services to support military procurements. Allowing military laboratories to sell their articles or services to private in

dustry promotes a clear understanding of the military's needs in a particular procurement. Furthermore, private industry will have a better understanding of the laboratories' products by increased communication and the formation of product development partnerships. Waiving the unavailability require ment will allow military laboratories to leverage their existing research and

development infrastructure by facilitating collaborative relationships with

private industry to develop and incorporate new technologies. Allowing military laboratories to collaborate with private industry also

may increase competition. The defense industry has significantly decreased because smaller defense budgets have generally translated into fewer DoD

procurements. This causes competition to continually decrease and prices of future DoD procurements to rise. Waiving the unavailability requirement will allow military laboratories to enter into partnerships with small private firms

that have traditionally avoided competing in the defense industry. Military research and development facilities working with smaller private firms may

develop dual-use technologies, thereby promoting congressional intent and

exposing more private firms to the DoD's revised acquisition process. Waiving the unavailability requirement may increase competition and lower overall

procurement costs. Ultimately, waiving the unavailability requirement in cer

75. See Lisiewski & Whitman, supra note 27. 76. See Stevens, supra note 3.



2 50 Public Contract Law Journal Vol. 30, No. 2 Winter 2001

tain circumstances may create a more competitive, healthy, and technolog ically advanced defense industry.

B. Indemnification Clause

The purchaser must agree to an indemnification clause before the DoD can sell its article or service.77 The indemnification clause forces the pur chaser to assume practically all liability to third parties for the military article or service that it purchases.78 The DoD is liable only in cases of willful mis

conduct or gross negligence.79 This nonnegotiable clause is a substantial hur dle to partnering due to the infinite liability to which private industry is

exposed. In commercial transactions, it is not uncommon for parties to negotiate

an indemnification clause. Parties to a potential contract generally negotiate terms and conditions in order to maximize benefits and limit their exposure to damages. The parties also usually negotiate at arm's length. If the terms

of the contract are not favorable to a party, the disappointed party can either continue to negotiate or attempt to enter into negotiations with another

party.

In 10 U.S.C. ? 2553 agreements, however, the negotiation environment is very different. The nature of 10 U.S.C. ? 2553 agreements does not support this type of arm's-length negotiating. The purchaser must show that the ar

ticle or service that it wishes to acquire is commercially unavailable.80 In other words, the purchaser must show that only the DoD can meet its re

quirements. A purchaser cannot attempt to enter into negotiations with an

other party because one does not exist. If another source could provide the

purchaser with a product that is comparable in quality or could meet the

purchaser's quantity and time requirements, the DoD could not enter into discussions to sell its article or service. Therefore, in 10 U.S.C. ? 2553 agree ments, the DoD and the purchaser are not negotiating at arm's length.

Congress should not require an indemnification clause in every agreement entered into pursuant to ? 2553 because an indemnification clause is not

always appropriate. The DoD employs skilled, experienced contract negoti

77. See 10 U.S.C. ? 2553(c)(1)(B) (1999) ("the purchaser agrees to hold harmless and indemnify the United States, except in any case of willful misconduct or gross negligence, from any claim for damages or injury to any person or property arising out the articles or

services ...."). 78. See id. 79. See id. For example, Contractor A enters into a 10 U.S.C. ? 2553 agreement with

a military laboratory to purchase the services of a scientist. The scientist implements a

state-of-the-art guidance system on an intercontinental ballistic missile. The scientist

negligently assembles the system and incorporates it into the missile. Contractor A tests

the missile by firing it into the Pacific Ocean from Vandenburg Air Force Base. The guidance system malfunctions and the missile explodes in a suburb of Santa Barbara. In

this example, Contractor A would be liable for the negligence of the scientist. See id. 80. See supra Part III.A.




ators and attorneys. Congress should allow these individuals to negotiate terms that are in the Government's best interest. Rather than require an indemnification clause in every agreement, the DoD should negotiate indem nification clauses when appropriate. The likelihood of abuse by a purchaser is negligible. The purchaser has an interest in negotiating in good faith be cause it wishes to obtain an article or service that is available only from the DoD. Furthermore, in 10 U.S.C. ? 2553 agreements, the DoD is placing itself in a limited area of commerce, the sale of commercially unavailable articles and services. Congress should adopt commercial business practices that dis

courage needless terms and conditions in contracts and encourage the exer cise of sound business and legal judgment. This would increase the number and quality of agreements executed under 10 U.S.C. ? 2553, and thereby meet Congress's mandate.

C. Incidental Subcontracting Prohibition Section 2553 also limits the DoD's ability to enter into separate subcon

tracting relationships to support its sale of an article or service.81 The military agency must substantially manufacture or perform the article or service. If the article or service requires additional work to meet the purchaser's needs, the facility may only employ a subcontractor if the additional work is inci dental.82 The incidental subcontracting limitation is rigid and serves to hinder Congress's recent implicit approval of expanded use of ? 2553 allow

ing the DoD and private industry to enter into subcontracting relationships. "Incidental" is defined by one standard source as "[o]ccurring or apt to

occur as an unpredictable or minor concomitant to" or "[o]f a minor, casual, or subordinate nature."83 This narrow definition is difficult to apply in hier archical relationships. Additionally, limiting the DoD's authority to enter into subcontracting relationships does not promote Congress's initial intent that this legislation promote economic growth and create jobs. Finally, lim

iting the ability to subcontract in a sale of a unique article or service is inconsistent with the desire to ensure that the DoD is selling articles and services that are commercially unavailable.

It is unclear why Congress passed the incidental subcontracting clause. Senators Boxer and Feinstein used the McClellan Nuclear Radiation Center

(MNRC) to illustrate the necessity for 10 U.S.C. ? 2553.84 MNRC was lo cated at the former McClellan Air Force Base near Sacramento, California, and provided the Air Force with the capability to conduct real-time, non

destructive analysis of aircraft structures and components.85 This advanced

81. See 10 U.S.C. ? 2553(c)(1)(C) (1999) ("the articles or services can be substan tially manufactured or performed by the industrial facility concerned with only inci dental subcontracting....").

82. See id. 83. Webster's II New College Dictionary 560 (2d ed. 1995). 84. See 140 Cong. Rec. 15,566-67 (1994). 85. See id.




capability was unavailable through any other source in the commercial mar

ket in 1994.86 Shortly before Congress introduced 10 U.S.C. ? 2553, a com

mercial airline operator was unable to identify, on its own, a structural prob lem with aircraft in its fleet.87 Instead, the airline operator had to go to

MNRC to use its facilities to identify the problem. MNRC did identify the

problem.88 The commercial airline operator was so impressed by the facility that it offered to pay McClellan Air Force Base for the regular use of the

MNRC.89 Legislation, however, prohibited the Government from selling its services.90 This example does not demonstrate a need to prohibit incidental

subcontracting. At MNRC, incidental subcontracting was not an issue be cause only Air Force personnel operated the MNRC.91

The prohibition of all but incidental subcontracting is problematic for the hierarchical relationships that are created by private industry and the DoD.

Statutory compliance is especially difficult when the DoD attempts to apply the definition of substantial performance within the incidental subcontract

ing clause to service contracts. There is no consistent method to determine whether the subcontracting work is incidental. For example, suppose the DoD hires a military agency's research and development facility to develop a program to operate a special shipboard communications system. The facility would develop an algorithm for the communications system. The facility also would be responsible for translating the algorithm into a program. Program ming is generally a skill that is commercially available. Therefore, the facility should be allowed to hire a subcontractor to translate the algorithm into a

program. It is unclear, however, whether the programming effort is incidental.

Writing codes is tedious and labor-intensive. The cost of writing the program may be more than the cost of developing the algorithm. Yet, without the

algorithm, the agency facility cannot write the special program. Furthermore, the purchaser cannot use the algorithm unless it is written into the program. Both tasks are equally important; one task is not more casual, subordinate, or minor.

The military agency could choose to develop the algorithm and deliver it to the purchaser. Then the purchaser could choose a programmer to translate the algorithm. This would increase the delivery time, however, and may increase end-product cost.

The incidental subcontracting clause is also inconsistent with one of Con

gress's initial purposes for approving the legislation: promoting economic

86. See id. 87. See id. 88. See id. 89. See id. 90. See id. 91. See Telephone Interview with Dr. Wade J. Richards, Technical Director of the

McClellan Nuclear Radiation Center (May 17, 1999).



Section 2553 and Government/Industry Partnering 2?3

growth and creating jobs.92 In the incidental subcontracting example dis cussed above, the DoD is not competing with private industry when it retains a subcontractor. Rather, it assumes its traditional role as a purchaser of an article or service by purchasing private services. In this position, the DoD is

promoting economic growth by creating business opportunities that would otherwise be unavailable if the DoD had not sold its unique article or service to the purchaser under 10 U.S.C. ? 2553.

The apparent purpose of the subcontracting limitation is to ensure that the DoD is providing an article or service that is commercially unavailable. The policy of ensuring that the DoD does not compete with private industry and the allowance of incidental subcontracting are inconsistent. Allowing the DoD to enter into any subcontracting relationships under 10 U.S.C.

? 2553 weakens the DoD's position that it is selling an article or service that is commercially unavailable because it means that a product or service is available in the commercial marketplace that can satisfy, at least partially, the demand. Therefore, subcontracting indicates that the needed article or service may be available in the commercial marketplace.

The incidental subcontracting clause is not only troublesome, it is dupli cative. The statute's unavailability requirement already protects private in

dustry from government competition. Congress implicitly approved the DoD's use of 10 U.S.C. ? 2553 to enter into subcontracting relationships with private industry.93 The commercial unavailability requirement, includ

ing the proposed modification, ensures that the DoD only sells articles or

services that are commercially unavailable. Congress should remove the in cidental requirement clause and thereby provide military agencies the flexi

bility to enter into clearly established collaborative partnering relationships that support the agencies' acquisitions. Eliminating the clause would promote economic growth by creating derivative business opportunities that otherwise would be unavailable.

IV. Recommendations

Currently, there is no legislation that allows the DoD to enter into unen

cumbered collaborative partnering relationships with private industry and the

proposed changes do not create such a relationship. However, the proposed

changes reduce the administrative burden of the existing statute, eliminate

duplicative conditions, and create a partnership that is more consistent with

today's commercial business practices.

92. See 140 Cong. Rec. 15,566-67 (1994) (statement of Senator Feinstein) ("[t]he ability to provide such goods and services to non-DoD customers would achieve many

goals, including ... promote economic growth and create jobs. ...")

93. See 140 Cong. Rec. H7775 (daily ed. Aug. 5, 1999).




Congress should explore the possibility of affording the DoD's research and development laboratories the opportunity to enter into clearly defined

partnering relationships with private industry. Presently, 10 U.S.C. ? 2553 is the only approved legislation that broadly promotes the DoD's initiatives to enter into a limited type of partnering arrangement with private firms. This

legislation creates a hierarchical relationship where the DoD is the supplier and private industry is the purchaser. Congress should revise 10 U.S.C ? 2553 to facilitate equal, collaborative partnering arrangements. In the absence of such a statute, at a minimum, the existing statute should read as follows:

? 2553. Articles and services of industrial facilities: sale to persons outside the De

partment of Defense

(a) Authority to sell outside the DoD. (1) The Secretary of Defense may sell in accordance with this section, to a person

outside the Department of Defense, articles and services referred to in paragraph (2) that are unavailable from any United States commercial source.

(2) (A) Except as provided in subparagraph (B), articles and services referred to in paragraph (1) are articles and services that are manufactured or performed

by any working-capital funded industrial facility of the armed forces. (B) The authority in this section does not apply to sales of articles and services by a working-capital funded Army industrial facility (including a Department of the Army arsenal) that manufactures large caliber cannons, gun mounts, recoil mechanisms, ammunition, munitions, or components thereof, which are governed by regulations required by section 4543 of this title.

(b) Designation of participating industrial facilities. The Secretary may designate fa cilities referred to in subsection (a) as the facilities from which articles and services

manufactured or performed by such facilities may be sold under this section.

(c) Conditions for sales.

(1) A sale of articles or services may be made under this section only if?

(A) the purchaser is able to certify to the Secretary of Defense that the articles or services are not available from a commercial source in the United States;94

(B) it is in the public interest to manufacture the articles or perform the

services;

(C) the Secretary determines that the sale of the articles or services will not

interfere with the military mission of the industrial facility concerned; and

(D) the sale of the goods and services is made on the basis that it will not interfere with performance of work by the industrial facility concerned for the Department of Defense.

(2) The Secretary of Defense may waive the condition in paragraph (1)(A) and subsection (a)(1) that an article or service must be not available from a United States commercial source in the case of a particular sale if the Secretary deter mines that either the waiver is necessary for reasons of national security or the

article or service to be purchased will support an existing Department of Defense procurement, and in either case, notifies Congress regarding the reasons for the waiver.

(d) Methods of sale. (1) The Secretary shall permit a purchaser of articles or services under this section

to use advance incremental funding to pay for the articles or services.

94. Italics are used to display suggested areas of change. Note also that the suggested wording of the statute removes 10 U.S.C. ? 2553(c)(1)(B), (C).



Section 2553 and Government/Industry Partnering 2SS

(2) In the sale of articles and services under this section, the Secretary shall?

(A) charge the purchaser, at a minimum, the variable costs, capital improve ment costs, and equipment depreciation costs that are associated with the

articles or services sold;

(B) enter into a firm, fixed-price contract or, if agreed by the purchaser, a

cost reimbursement contract for the sale; and

(C) develop and maintain (from sources other than appropriated funds) work

ing capital to be available for paying design costs, planning costs, procurement costs, and other costs associated with the articles or services sold.

(e) Deposit of proceeds. Proceeds from sales of articles and services under this section

shall be credited to the funds, including working capital funds and operation and maintenance funds, incurring the costs of manufacture or performance.

(f) Relationship to Arms Export Control Act. Nothing in this section shall be con strued to affect the application of the export controls provided for in section 38 of the Arms Export Control Act (22 U.S.C. ? 2778) to items which incorporate or are produced through the use of an article sold under this section.

(g) Definitions. In this section: (1) The term "advance incremental funding," with respect to a sale of articles or

services, means a series of partial payments for the articles or services that

includes?

(A) one or more partial payments before the commencement of work or the

incurring of costs in connection with the manufacture of the articles or the

performance of the services, as the case may be; and

(B) subsequent progress payments that result in full payment being completed as the required work is being completed.

(2) The term "not available," with respect to an article or service proposed to be

sold under this section, means that the purchaser has made a good faith effort

to determine a supplier from a United States commercial source.

(3) The term "variable costs," with respect to sales of articles or services, means

the costs that are expected to fluctuate directly with the volume of sales and?

(A) in the case of articles, the volume of production necessary to satisfy the sales orders; or

(B) in the case of services, the extent of the services sold.

V. Conclusion

The DoD recognizes the need to revise its business and acquisition prac tices in order to rapidly deliver cost-effective, state-of-the-art weapons sys tems. Partnering is one initiative in the revised acquisition practice. Cur

rently, under the law, equal, collaborative partnering arrangements are not

permitted. Hierarchical relationships between private industry and the DoD,

however, can be entered into under 10 U.S.C. ? 2553. Congress initially intended 10 U.S.C ? 2553 to allow the DoD only to sell unique articles and services that were commercially unavailable. Congress did not initially intend

this statute to allow the DoD to enter into subcontracting relationships with

private industry. Therefore, the DoD has had difficulty applying the require ments of ? 2553 to subcontracting relationships. Recently, however, Congress

implicitly approved subcontracting relationships between the DoD and pri vate industry, under expanded use of this legislation.




The proposed changes discussed above address some of the obstacles this statute placed between the DoD and private industry with regard to subcon

tracting relationships. While these proposed changes will not create an equal partnering arrangement between the DoD and private industry, these changes will facilitate the DoD's goal of revising its business and acquisition practices. Thus, revised business and acquisition practices will enable the DoD to re

duce wasteful expenditures of time and money and to provide the military with quality defense products more rapidly.



Documents

10 U.S.C. § 2553: Government/Industry Partnering—Fitting a Square Peg into a Round Hole