Activities of the United States General Accounting Office concerning Office of Management and Budget Circular A-76 and Its Implementation by the Department of Defense

Published by the Government Accountability Office on 1977-07-12.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME

02965   - [A1993066]

Activities of the United States General Accounting Office
concerning Office of Management and Budget Circular A-76 and Its
Implementation by the Department of Defense. Jujy 12, 1977. 14
pp. + enclosure (6 pp.).

Testimony before the Senate Committee on Armed Services:
Manpower and Personnel Subcommittee; by Elmer B. Staats,
Comptroller General.

Issue Area: Federal Procuremcqt of Goods and Services (1900).
Contact: Office of the Comptroller General.
Budget Function: General Government: Other General Gcvernment
Organization Concerned: Department of Defense.
Congressi-  1 Relevance: Senate Committee on Aimed Services:
    Manpc. . and Personnel Subcommittee.
Authority: OMB Circular A-76. Bureau of the Budget Bulletin

         There is a need for more effective implementation of
the OMB Circular A-76 policy, which is a general policy of
reliance on private sources for goods and services, by both the
Office of Management and Budget and the Department of Defense
(DOD). GAO reports have criticized DOD's A-76 program with
respect to: unsupported justifications for in-house work,
significant in-house functions that were not periodically
reviewed as to the possibility of contracting out, required
reviews that were behind schedule, areas of significant
potential savings that were not being reviewed, incomplete and
inaccurate identification of commercial or industrial activities
performed in-house, failure to repcrt new commercial or
industrial activities initiated in-house, and unreliable
contract cost estimates. POD has devoted considerable time aad
effort to implementing the A-76 policy, whereas some of the
civilian agencies have only recently established implementation
programs. Many of the problems and issues that have been
identified in the DOD's implementation of the A-76 policy remain
unresolved. The Government should continue to pursue its policy
of relying on the private sector and encouraging private
industry to compete with the executive departments in providing
needed commercial or industrial products and services. (SC)

                        .03        0
                        United States General Accounting Office
                                Washington, D.C.  20548

 pOn                           ·     --                  FOR RELEASE ON DELIVERY
                                   -0*     ·   ·         Expected at 9:00 a.m. EST
 C)            -                                         Tuesday, July 12, 1977

                                          Statement of

                                 Elmer B. Staats
                      Comptroller General of the United States

                                    Before the
                       Subcommittee on Manpower and Personnel
                         Senate Committee on Armed Services


             Activities of the United States General Accounting Office
             Concerning Office of Management and Budget Circular A-76
               and Its Implementation by the Department of Defense

       Mr. Chairman and Members of the Subcommittee:

            We are here today at the request of your Subcommittee to

       discuss activities of the U.S. General Accounting Office

       concerning Office of Management and Budget        (OMB) Circular

       A-76 and its implementation by the Department of Defense (DOD).

            Through Bureau of the Budget Bulletin 55-4, dated January

       1955, the executive branch issued a policy statement that, with

       certain exceptions,   the Federal Government should obtain needed

       goods and services from the private sector.        Although this

       bulletin has been revised four times and is presently identi-

       fied as OMB Circular A-76, the general policy of reliance on

       private sources has remained unchanged.
    The general thrust of this policy is that executive agencies

will not start or continue an existing commercial or industrial

activity to provide a product or service for their own use if

such product or service can be procured through the private

enterprise system.   Agencdes are authorized, however, to

provide needed products or services with their own resources

when it is in the national   ij-terest.   The national interest

is described as including instances in which (1) procurement
of a product or service from a commercial source would

disrupt or materially delay an agency's program, (2) the

Government needs to conduct a commercial or industrial activity

for purposes of combat support, retraining of military personnel

or to maintain or strengthen mobilization readiness, (3) a

satisfactory commercial source is not available and cannot

be developed in time to provide a product or service when

it is needed, (4) the product or service is available from

another Federal agency, or (5) procurement of a product or

service from a commercial source would result in higher costs
to the Government.

     GAO supports the general policy set forth in the OMB

circular and has a long history of working cooperatively

witl. OMB to clarify the policy statement and strengthen imple-

menting guidance.    Since January 1, 1972, we have issued 30

 reports which directly or indirectly concern OMB's and DOD's
 implementation of the A-76 policy.

     These reports are identified in the exhibit.        Four of these

reports were addressed to the Congress, 18 were addressed to

Subcommittee Chairmen or individual members of Congress, and 8

were addressed to the Director of OMB, the Secretary of Defense,

or ::he Secretary of the Navy.

     Many of these reports involve the performance of a specific

service or services at an individual military installation.

Others have much broader application.        Collectively, they cover

a wide range of types of support activities including the follow-

ing: custodial; supply; maintenance of construction equipment,

airTiaft, and family housing; airfield marking; ocean cargo

handling; and food service.      The reports generally demonstrate

a need for more effective implementation of the A-76 policy

by OMB and DOD.

     The reports, as you might expect, do not support a broad

conclusion that one method of performance (Government or private

sector) is always preferred over the other.        The circumstances of

each situation require individual analysis in light of the excep-

tions permitted in the circular.        Two of the reports are of special

significance because they represent fairly comprehensive reviews of

DOD's administration of the A-76 program.        These are titled "Better

Controls Needed in Reviewing Selection of In-House or Contract

Performance of Support Activities," B-158685, March 17, 1972, and

"How to Improve Procedures for Deciding Between Contractor and

In-House Military Base Support Services," LCD-76-347, March 28,

1977.     In these reports we criticized DOD's A-76 program

respect to:

        -- Unsupported justifications for   in-house work.

        -- Significant in-house functions that were

          periodically reviewed as to the possibility of

          contracting out, as required by A-76.

        --Required reviews that were behind schedule.

        --Areas of significant potential    savings that were not

          being reviewed.
                                                    of commercial or
        -- Incomplete and inaccurate identification

          industrial activities performed in-house.

        -- Failure to report new commercial or   industrial activities

          initiated in-house.

        --Unreliable contract cost estimates.
          We would like to point out, however, that DOD has

considerable time and effr;ti    over the years to implementing the

A-76 policy.      On the other hand, some of the civilian agencies
 have only recently established implementation programs.
                                                   but have
 have had programs in effect for a number of years
                                                    nor devoted
 neither promoted implementation of the A-76 policy

 adequate resources to implementing it.       We reported to the

                                                several civilian
 Congress in 1973 on the results of our work at

 agencies concerning implementation of A-76.        ("Better Management

 Needed    in Civil Agencies Over Selection of In-House or
                                               July 31, 1973)
 Performance of Support Activities," B-158685,
         Currently we have about 12 assignments in various
 of completion that relate to OMB's and DOD's implementation

the A-76 policy.    Most of these are being performed at congres-

sional request to investigate individual decisions to contract

out.   The remaining assignments represent part of our effort to

monitor executive agencies' performance in carrying out assigned

programs and responsibilities.     These assignments cover the

evaluation of specific types of services,    such as automatic data

processing.    I also have established a task force within GAO to

review the overall effectiveness of the executive agencies'

p licies and program for acquiring commercial or industrial

products and services for Government use.

        We plan to evaluate the guidance, procedures and management

controls of this program.     We will also examine the interpreta-

tion of guidelines by the executive branch and review their

practices and progress.     At present, we are initiating work at ten

major executive departments and plan to have a report to the

Congress early in 1978.

       While much attention has been given to the question of

contracting out versus performing work in-house, many of the

problems and issues that have been identified remain unresolved.

For example, the policy was studied by the Commission on Govern-

ment Procurement and its report of December 1972 recommended five

basic changes.     We fully support those recommendations,

which are as follows:

       1.   Provide through legislation that it is national
            policy to rely on private enterprise for needed goods
            and services, to the maximum extent feasible, within
            the framework of procurement at reasonable prices.

   2.    Revise Circular A-76 to provide that Federal
         agencies should rely on commercial sources for goods
         and services expected to cost less than $100,000 per
         year, without making cost comparisons, provided that
         adequate competition and reasonable prices can be

   3.    Base cost comparisons on (a) fully allocated
         costs if the work concerned represents a significant
         element in the total workload of the activity in
         question, or if discontinuance of an ongoing operation
         will result in a significant decrease in indirect
         costs or (b) an incremental basis if the work is not
         a significant portion of the total workload of an
         organization, or if it is a significant portion in which
         the Government has already provided a substantial

    4.   Increase the Circular A-76 threshold for new starts
         to $100,000 for either new capital investment or
         annual operating cost. These thresholds refer to the
         dollar size that new starts should be before a cost
         comparison would have to be made to support make-or-buy
         decisions. A new start is currently defined by Circular
         A-76   to mean either   (a) a new Government commercial or
         industrial activity involving additional capital invest-
         ment of $25,000 or more, or annual operating costs of
         $50,000 or more; or (b) an expansion or renovation of
         an existing facility witn dollar thresholds double the
         amounts for new activities. This recommendation reflected
         the majority view of the Commissioners.

    5.   Increase the minimum cost differential for new
         starts to justify performing work in-house from
         the 10 percent presently prescribed to a maximum
         of 25 percent. Of this figure, 10 percent would
         be a fixed margin in support of the gene:al policy
         of reliance on private enterprise and a flexible
         margin of up to 15 percent would be added to cover
         various elements of risk, uncertainty, etc.

    Although considerable time has passed since these

recommendations were made, OMB feels that it has not yet

developed enough information on agency implementation of A-76 to

set target dates for stating executive branch positions on them.

    Some of our more recent work has    identified four more issues

for consideration.

Cost comparisons

     On October 18, 1976, Circular A-76 was amended to include

the following policy guidance:

           ... the Circular does not require that a cost
     study be made in every case to support a decision in
     compliance with the policy preference for reliance on
     commercial sources.   A cost analysis is not needed in
     circumstances where  the  Government's economic interests
     would be protected,  such  as the existence of a competitive
     commercial market,  unless  the agency has some unique
     economic advantage which would enable it to supply the
     needed product or service at less than commercial cost.
     In determining whether a cost study should be undertaken,
     consideration should be given to the delay and expense
     involved in a study sufficiently detailed and comprehen-
     sive to provide valid results."

     In commenting on a draft of this guidance, we advised OMB

that this would lead agencies to make far fewer cost compari-

sons than in the past.    As a result, the risk of selecting an

uneconomical source would be greatly increased. We further

stated that such a step seems highly inadvisable without a

careful analysis of the costs of the studies that have been

rlade in the past as compared to potential savings disclosed.

While we support the policy of obtaining needed goods and ser-
 vices from commercial sources, we believe that obtaining

 goods and services at the lowest possible cost is also an impor-

 tant policy objective that must be given equal consideration.

 The effective   implementation of both policies requires that

 complete and accurate cost comparisons be made.

     In this regard, on November 14,      1974, we recommended to

OMB that cost comparison criteria be revised to require the

recognition of the time value of money and State and local

taxes forgone.    OMB,   however, has not implemented these recom-

mendations.     We believe that these recommendations should be

considered    in a new study to be made by OMB and DOD, as dis-

cussed later    in this statement.

Retirement benefit costs

     Another    issue is estimating the full annual accrual of

retirement benefits earned by employees in both the public

and private sectors.

     Effective October 18, 1976, OMB announced that the retirement

cost of Government employees would be estimated on the basis of

24.7 percent of base pay.      We generally concurred with the use of

this rate in our November 5, 1976, reports to Representatives Dodd

and Udall    (PSAD-77-6 and PSAD-77-7). On June 13, 1977, this rate

was reduced to 14.1 percent through the issuance of Transmittal

Memorandum No. 3 to Circular A-76.        On this same date OMB also

publicly announced its proposed review of A-76 and its       imple-


     Further,    as you know, the Department of Defense

Appropriation Authorization Bill, 1978,       as reported out of

the conference committee, would suspend use of any such rate put

into effect after June 30, 1976, by prohibiting conversion of

in-house commercial or     induistrial functions to performance by

private contractors unless such conversion would have been made

under policies and regulations in effect before June 30,       1976.

This provision would remain in effect until March 15, 1978, or

until 90 days after the receipt of a required joint DOD/CMB com-

prehensive review of the criteria used in determining whether

commercial or industrial type functions at DOD installations

should be conducted by in-house personnel or be contracted out.

The Department of Defense Appropriation Bill, 1978, as passed by

the House, would prevent funding for fiscal year 1978, with

certain exceptions, of base operating support functions which

were converted to commercial contract between the date of

enactment of the act and September 30, 1978.

     We believe that one of the most important factors that should

result from the review will be a clear decision on whether cmployee

retirement costs used in determining both in-house and contractor

costs should be computed on a dynamic basis.   In actuarial termi-

nology, the value of benefit rights earned annually by employees

covered under a retirement system is referred to as normal cost.

Normal cost can be calculated on either a static or dynamic

basis.   Under the static basis, no consideration is given to

future general pay increases or cost-of-living annuity adjust-
ments while under the dynamic basis consideration is given to

such increases.   We have strongly supported computing both Govern-

ment and contractor retirement costs on a dynamic basis. We believe

 that it is sound procedure to consider the total cost, as well as

 it can be determined, of various courses of action to provide a
 basis for informed judgments.

      Retirement costs for civil service employees had been taken

 into account on a dynamic basis when cost comparisons are made.
No similar   consideration was given, however,     to retirement

benefits for employees    in the private sector under the social

security system.

       OMB has taken the position that social security costs should

not be considered on a dynamic basis in estimating contract cost

because (1) benefits paid are financed by earmarked contributions

of employers and employees and (2) presently there are no legal

requirements for contributions to the social security trust

fund from the general fund of the Treasury.

       The Social Security Administration acknowledges that

contributions to the trust fund are not adequate to finance

future liability for benefits.       OMB has stated in response to

our November 1976 reports to Representatives Dodd and Udall that

if some levy is imposed on the general taxpayer by the Congress

to finance social security, CMB would reexamine the cost factors

used    in A-76.

       Because the necessity for Government subsidy of the social

security fund is a strong probability--and many believe it a moral

if not a legal obligation--we believe that estimates prepared

under A-76 of the cost of contracting should       include provision

for    this potential cost. Also, regardless of    the eventual source

of funding, we believe that the dynamic costs of social security

benefits being earned should be reflected        in A-76 type decisions.

       Another factor   in the   review required by the Department of

Defense Authorization Bill,      1978,   is the possible development

and use of more accurate factors applicable to civil service

retirement costs.    Rates used   to date represent a com:osite

computation applicable to the overall work force, including engi-

neers, secretaries, unskilled laborers,     etc.   In our N.vember 1976

reports to Representatives Dodd and Udall, we stated that se

believed OMB should give consideration to developing a series of

retirement rates tailored to major occupational categories that

are candidates for contracting out, such as guard services,

grounds maintenance, and food service.      It is improbable that

pension cost factors are the same for all occupations.

     In responding to this suggestion on December 20, 1976, OMB

stated that it would significantly increase the cost and com-

plexity of the administrative burden for the Civil Service

Commission, and that it is doubtful that clear distinctions

can be made,    in terms of retirement experfence,   among employees

in different occupations or activities.      OMB furthier stated:

     "*** efforts to develop different cost factors for various
     occupational groups would lead to many questions, problems,
     and perceived inequities, such as:

     Agencies and employees would probably object to
     making contributions at the present uniform rate if actual
     costs were shown to be different.

     Employees in similar occupations but different
     activities could be subject to different cost factors.

     Comparability studies with industry based on total
     compensation (salary plus fringe benefits) could be
     seriously distorted or made prohibitively complex."

     OMB concluded that if the Government should subsequently

establish different factors for different occupations, it will

consider their use; but that until such figures are provided,

it believes that use of the :omposite retirement cost factor

is justified.
    Since the issue will continue to be a sensitive one, we

believe that the development of differential series of retire-

ment rates along the lines suggested would   save time in the

long run.

Federal blue-collar waqe levels

     Another issue related to the making of cost comparisons is

the fact that blue-collar Federal wages are generally higher than

thobn in the private sector.

     In a June 1975 report to the Congress, we discussed legis-

lative provisions which were resulting in Federal blue-collar

pay being higher than local prevailing private sector

rates ("Improving the Pay Determination Process for Federal

Blue-Collar Employees,"   FPCD-75-122, June 3, 1975).   she

Federal Siage System was established pursuant to legislation

approved in 1972.   The law sets forth the policy that pay rates

for Federal blue-collar employees be fixed and adjusted from time

to time as nearly as is consistent with the public interest in

accordance with prevailing private sector rates.

     We found that this legislative pay principle of compara-
bility was not being obtained because of the application of

certain other provisions of the 1972 Federal Wage System
legislation.   These include the establishment of (1) a Federal

pay schedule that provides for five equal steps in each grade

through which employees' pay increases a total of 16 percent over
periods of time in service (the second Federal step is set at the

prevailing private sector average rate, but in July 1976, 4g percent.

of the Federal emplcyeees were    in the fifth step--12 percent more

than the local prevailing rates--and   14 percent were in the fourth

step--8 percent above market),   (2) conditions under which private

sector wage rates of other localities may be used in setting Federal

rates, and (3) night differential payments based on a percentage

of the employees' wage rates.    We suggested that the Congress recon-

sider these provisions.

       An illustration of the effects of this situation is set forth

in our June 20, 1977, report "Potential For Contracting Selected

Operations at the Air Force Academy Cadet Dining Hall"'(FPCD-77-

57).    We stated that the Academy's cost analysis, which we found

was generally performed in accordance with Circular A-76, indi-

cated that the cost for contracting the food service would be

34 percent less than in-house cost.    The indicated savings were

due primarily to lower wage rates paid by the contractor com-
pared to the rates paid to Federal employees-$3.27 per hour

versus $5.81 per hour.

       Wage rates for Federal employees at the Academy are determined

by DOD with concurrence by the Civil Service Commission as provided
for in 5 U.S.C. 5341, which established the Federal Wage System.

The minimum wage for contractor employees is determined by the

Department of Labor in accordance with the Service Contract Act

of 1965.    The differences between the minimum wages for contractor

employees and the wages for Federal employees varies substantially

according to industry, geographic areas, selected boundaries, and

timing of required wage surveys.

       To improve the Federal Wage System's pay determination

process we recommended that the Civil Service Commission obtain
wage information more representative of the types of services

     Because personnel costs are generally an important element

in comparing the cost of in-house versus contractor performance,

significantly higher Federal wages will increase the likelihood

that agencies will contract for needed goods and services.

     In summary, we believe that the Federal Government should

continue to pursue its policy of relying on the private sector

and encouraging private industry to compete with the executive

departments in providing needed commercial or industrial products

and services.

     This completes our formal statement, Mr. Chairman.   I will

be glad to respond to any questions regarding our comments.




                    IMPLEMENTATION OF THE A-76 POLICY

                                BY OMB AND DOD

                             (SINCE JANUARY 1, 1972)

                                 Addressee             Date        Number
                              House Subcommittee       1/25/72     B-171695
Cost of Using Civil                                                 (LCD)
  Service Versus Contract       on Manpower and
  Labor for Loading Con-        Civil Service,
  tainers at the Military       Committee on Post
  Ocean Terminal,               Office and Civil
  Bayonne, New Jersey           Service

                              Congress                 3/17/72     B-158685
Better Controls Needed                                               (FPCD)
  in Reviewing Selection
  of In-House or Contract
  Performance of Support
                              House Subcommittee       6/21/72     B-171695
Cost of Using Civil                                                  (LCD)
  Service Versus Contrac-       on Manpower and
  tor Labor for Loading         Civil Service,
  and Unloading the GTS         Committee on Post
  Admiral William M.            Office and Civil
  Callaghan at the              Service
  Military Ocean Terminal,
  Bayonne, New Jersey
                              Representative Broyhill 2/22/73      B-176496
Naval Training Command
  Decisions to Make
  Instead of Buy Certain
  Audio/Visual Projection

       Title                    Addressee                Date         Number

Study of Military            House Subcommittee         9/27/73      B-169926
   Temporary Lodging            on Small Business                      (LCD)
   Facilities and the           Problems in Smaller
   Availability of              Towns and Urban Areas
   Commercial Motels            of the Select Commit-
                                tee on Small Business

Transfer of Cargo            Representative Dellums     6/11/74       B-171695
   Operations at the                                                    (LCD)
   Military Ocean
   Oakland, California,
   fro.n Civil Service
   to Contract Labor

Contract for Food            Representative Gonzalez    10/04/74      B-180966
   Service Operations                                                   (LCD)
   at Lackland Air
   Force Base

The Air Force Should         Representative Forsythe    11/05/74      B-158685
   Review Contracting                                                  (FPCD)
   Out for Services at
   McGuire Air Force

Improvements Needed in       Director, OMB and          11/14/74      B-163762
   Criteria Used by Execu-      Administrator of                        (OP)
   tive Agencies in Making      General Services
   Cost Comparisons

Contracting for Base         Secretary of Defense       11/18/74      B-158685
   Operations at Army,                                                 (FPCD)
   Navy, and Air Force
   Training Installations

Comparing Costs of Mark-    Representative Andrews      12/13/74      LCD-74-331
   ing Airfields: Air Force
   Versus Contract

                               Addressee             Date          Number
                             Senazor Williams        1/07/75     FPCD-75-127
Reduction In Force
  Versus Contracting
  at Picatinny Arsenal
                             Congress                2/06/75     FPCD-75-117
Financial Operations
  of the Five Service
                             Representative Frey     5/08/75     LCD-75-438
Patrick Air Force
  Base Food Service
  Cost Comparison
                             Congress                6/03/75     FPCD-75-122
Improving the Pay
  Process for Federal
  Blue-Collar Employees
                             Senator Chiles          8/18/75     FPCD-76-5
Savings Available by
  Contracting for Supply           &
  Support Services at        Representative Frey
  the Eastern Test
                             Representative Dodd     11/04/75    FPCD-76-22
Reduction of Civilian
  Personnel at New London,
  Connecticut, Naval
                             Secretary of the Navy   11/24/75    LCD-76-419
Tugboat Operations in
  the Navy

         Title                Addressee               Date         Number

The Air Force Should          Senator Roth           1/20/76     FPCD-76-34
  Use Both Contract and
  In-House Services for
  Maintaining Military
  Family Housing at
  Dover Air Force Base

Using Government Versus       Secretary of Defense   1/28/76     LCD-76-210
  Commercial Facilities
  tor Storing Military
  Personnel Household

Reduction of Civilian         Senator Tunney         4/07/76     FPCD-76-52
  Personnel in Research
  Development, Test and
  Evaluaticn Programs in
  the Department of

Survey of Maintenance         Secretary of Defense   6/03,'76    LCD-76-446
  of Construction and
  Rail Equipment in the

Observations for Improv-      Secretary of Defense   6/07/76     LCD-76-432
  ing Depot-Level Mainte-
  nance Construction in
  the Department of Defense

Should Aircraft Depot         Secretary of Defense   10/20/76    FPCD-76-49
  Maintenance Be In-House
  or Contracted?  Controls
  and Revised Criteria

                               Addressee          Date         Number
                           Representative Dodd    11/05/76     PSAD-77-6
Letter Report Regard-
  ing the Action of OMB
  Designed to Greatly
  Expand the Amount of
  Contracting Out of
  Functions Now Per-
   formed In-House by
  Civil Service
                           Representative Udall   11/05/76     PSAD-77-7
Letter Report Regard-
  ing the Action ef OMB
  Designed to Greatly
 .Expand the Amount of
  Contracting Out of
  Functions Now Perform-
  ed In-House by Civil
  Service Employees
                           Representative Brown   2/i1/77      PSAD-77-79
Contracting Out of
  Functions Previously
  Perfor.mea In-House
                           Secretary of Defense   3/28/77      LCD-76-347
How to Improve Proce-
  dures for Deciding
  Between Contractor
  and In-House Mili-
  tary Base Support
                           Congress               6/02/77      FPCD-76-88
Personnel Ceilings--A
  Barrier to Effective
  Manpower Management

Potential for Contract-
                                                  6/20/77      FPCD-77-57
  ing Selected Operations Representative Evans
  at the Air Force Academy
  Cadet Dining Hiall