What is the regulation or policy which guides alignment / location of the contracting shop within organizations?
We can look to FAR Subpart 1.6 (Career Development, Contracting Authority, and Responsibilities) for some guidance on how the FAR views organizational contracting authority and its placement. FAR 1.601(a) speaks of the Agency head delegating "...broad authority to manage the agency’s contracting functions to heads of such contracting activities..." FAR 1.601(b) suggests additional organizational flexibility, so FAR 1.601 generally communicates organizational flexibility with regard to the Contracting function. Of particular interest is 1.602-2 (Responsibilities), which mandates that contracting officers "Request and consider the advice of specialists..." Note that "provide advice" is not listed among the contracting officer’s responsibilities. The DFARS and Agency supplements don't provide much additional insight into the question, so regulatory guidance is lacking in regard to the Contracting function’s alignment in relation to a business advisory capacity. The contracting officer is identified in various DoD policy documents as "business advisor," but only in the context of the specific procurements he or she is working on. For example, section 18.104.22.168 of the DoD Source Selection Procedures specifically identifies the PCO as "the primary business advisor and principal guidance source for the entire source selection."
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In summary, there appears to be a lack of regulatory or policy guidance pertaining to exactly how organizational alignment relates to the Contracting function serving in a business advisory capacity in the command structure. That being said, the head of the Contracting function can be made a permanent member of high-level command staff meetings so that he or she may provide business and policy advice as appropriate. However, there is little guidance to support a formal role for Contracting as business advisor beyond specific procurements.