oversight

Competitive Sourcing: Implementation Will Be Challenging for Federal Agencies

Published by the Government Accountability Office on 2003-07-24.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Oversight of
                            Government Management, the Federal Workforce,
                            and the District of Columbia, Committee on
                            Governmental Affairs, U.S. Senate
For Release on Delivery
Expected at 9:30 a.m. EDT
July 24, 2003               COMPETITIVE SOURCING
                            Implementation Will Be
                            Challenging for Federal
                            Agencies
                            Statement of David M. Walker
                            Comptroller General of the United States




GAO-03-1022T
                                                July 24, 2003


                                                COMPETITIVE SOURCING

                                                Implementation Will Be Challenging for
Highlights of GAO-03-1022T, a testimony         Federal Agencies
before the Subcommittee on Oversight of
Government Management, the Federal
Workforce, and the District of Columbia,
Committee on Governmental Affairs,
U.S. Senate




In May 2003, the Office of                      The revised Circular A-76 is generally consistent with the Commercial
Management and Budget (OMB)                     Activities Panel’s principles and recommendations, and should provide
released a revised Circular A-76,               an improved foundation for competitive sourcing decisions in the federal
which represents a comprehensive                government. In particular, the new Circular permits greater reliance on
set of changes to the rules                     procedures in the Federal Acquisition Regulation—which should result in a
governing competitive sourcing—
one of five governmentwide items
                                                more transparent and consistently applied competitive process—as well
in the President’s Management                   as source selection decisions based on trade-offs between technical factors
Agenda. Determining whether to                  and cost. The new Circular also suggests the potential use of alternatives
obtain services in-house or through             to the competitive sourcing process, such as public-private and public-public
commercial contracts is an                      partnerships.
important economic and strategic
decision for agencies, and the                  However, implementing the new Circular will likely be challenging for many
use of Circular A-76 is expected                agencies. Foremost among the challenges that agencies face is setting and
to grow throughout the federal                  meeting appropriate goals integrated with other priorities, as opposed to
government.                                     arbitrary quotas. Additionally, there are potential issues with the streamlined
                                                cost comparison process and protest rights. The revised streamlined process
In the past, however, the A-76
process has been difficult to
                                                lacks a number of key features designed to ensure that agency sourcing
implement, and the impact on the                decisions are sound, including the absence of an appeal process. Finally, the
morale of the federal workforce                 right of in-house competitors to file a bid protest at GAO challenging the
has been profound. Concerns in the              sourcing decisions in favor of the private sector remains an open question.
public and private sectors were
also raised about the timeliness                For many agencies, effective implementation will depend on their ability to
and fairness of the process for                 understand that their workforce is their most important organizational asset.
public-private competitions.                    Agencies will need to aid their workforce in transitioning to a competitive
                                                sourcing environment. For example, agencies will need a skilled workforce
It was against this backdrop that               and adequate infrastructure and funding to manage competitions; to prepare
the Congress enacted legislation                the in-house offer; and to oversee the cost, quality, and performance of
mandating a study of the A-76
process, which was carried out by
                                                whichever service provider is selected.
the Commercial Activities Panel,
chaired by the Comptroller General
of the United States.

This testimony focuses on how the
new Circular addresses the Panel’s
recommendations reported in
April 2002, the challenges agencies
may face in implementing the new
Circular A-76, and the need for
effective workforce practices to
help ensure the successful
implementation of competitive
sourcing in the federal government.
www.gao.gov/cgi-bin/getrpt?GAO-03-1022T.

To view the full product, including the scope
and methodology, click on the link above.
For more information, contact William T.
Woods at (202) 512-8214 or
woodsw@gao.gov.
Chairman Voinovich, Ranking Member Durbin, and Members of the
Subcommittee:

I am pleased to be here today to participate in the subcommittee’s hearing
on competitive sourcing, one of five governmentwide initiatives in the
President’s Management Agenda. The Office of Management and Budget
(OMB) recently released a new Circular A-76, which represents the most
comprehensive set of changes to the rules governing competitive sourcing
since the initial Circular A-76 was issued in 1966. As agencies implement
the revised Circular and the initiative outlined in the President’s
Management Agenda, they will need to develop strategies to address the
challenges they inevitably will face in implementing this significant change
in their operations.

Today’s hearing occurs at a critical and challenging time for federal
agencies. They operate in an environment in which new security threats,
demographic changes, rapidly evolving technologies, increased pressure
for demonstrable results, and serious and growing fiscal imbalances
demand that the federal government engage in a fundamental review,
reassessment, and reprioritization of its missions and operations.
Federal agencies are increasingly relying on enhanced technology and a
range of technical and support services to accomplish their missions.
Consequently, it is important for agencies to consider how best to acquire
and deliver such capabilities—including, in some cases, who the service
provider should be.

Determining whether to obtain services in-house, through contracts with
the private sector, or through a combination of the two—in other words,
through insourcing, outsourcing, or, in some cases, cosourcing—is an
important economic and strategic decision for agency managers. In the
past, however, the government’s competitive sourcing process—set forth
in OMB Circular A-76—has been difficult to implement. The impact of the
A-76 process on the morale of the federal workforce has been profound,
and there have been concerns in both the public and private sectors about
the timeliness and fairness of the process and the extent to which there is
a “level playing field” for conducting public-private competitions. While
Circular A-76 competitions historically have represented only a small
portion of the government’s service contracting dollars, competitive
sourcing is expected to grow throughout the federal government.




Page 1                                      GAO-03-1022T Competitive Sourcing
                       It was against this backdrop that the Congress enacted legislation
                       mandating a study of the government’s competitive sourcing process.1 This
                       study was carried out by the Commercial Activities Panel, which I chaired.
                       My comments today will focus on how the new Circular addresses the
                       Panel’s recommendations with regard to providing a better foundation for
                       competitive sourcing decisions and the challenges that agencies may face
                       in implementing the new Circular A-76. I will also highlight the need for
                       effective workforce practices to help ensure successful implementation of
                       competitive sourcing.


                       In April 2002, following a yearlong study, the Commercial Activities Panel
New Circular           reported its findings on competitive sourcing in the federal government.
Provides an Improved   The report lays out 10 sourcing principles and several recommendations,
                       which provide a road map for improving sourcing decisions across the
Foundation for         federal government. Overall, the new Circular is generally consistent with
Competitive Sourcing   these principles and recommendations.
Decisions              The Commercial Activities Panel held 11 meetings, including three public
                       hearings in Washington, D.C.; Indianapolis, Indiana; and San Antonio,
                       Texas. At these hearings, the Panel heard repeatedly about the importance
                       of competition and its central role in fostering economy, efficiency, and
                       continuous performance improvement. Panel members heard first-hand
                       about the current process—primarily the cost comparison process
                       conducted under OMB Circular A-76—as well as alternatives to that
                       process. Panel staff conducted extensive additional research, review, and
                       analysis to supplement and evaluate the public comments. Recognizing
                       that its mission was complex and controversial, the Panel agreed that a
                       supermajority of two-thirds of the Panel members would have to vote for
                       any finding or recommendation in order for it to be adopted. Importantly,
                       the Panel unanimously agreed upon a set of 10 principles it believed
                       should guide all administrative and legislative actions in competitive
                       sourcing. The Panel itself used these principles to assess the government’s
                       existing sourcing system and to develop additional recommendations.




                       1
                        Section 832, Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001,
                       P.L.106-398 (Oct. 30, 2000).



                       Page 2                                              GAO-03-1022T Competitive Sourcing
A supermajority of the Panel agreed on a package of additional
recommendations. Chief among these was a recommendation that
public-private competitions be conducted using the framework of the
Federal Acquisition Regulation (FAR). Although a minority of the Panel
did not support the package of additional recommendations, some of these
Panel members indicated that they supported one or more elements of
the package, such as the recommendation to encourage high-performing
organizations (HPO) throughout the government. Importantly, there
was a good faith effort to maximize agreement and minimize differences
between Panel members. In fact, changes were made to the Panel’s report
and recommendations even when it was clear that some Panel members
seeking changes were highly unlikely to vote for the supplemental package
of recommendations. As a result, on the basis of Panel meetings and my
personal discussions with Panel members at the end of our deliberative
process, I believe the major differences between Panel members were few
in number and philosophical in nature. Specifically, disagreement centered
primarily on (1) the recommendation related to the role of cost in the new
FAR-type process and (2) the number of times the Congress should be
required to act on the new FAR-type process, including whether the
Congress should authorize a pilot program to test that process for a
specific time period.



Page 3                                     GAO-03-1022T Competitive Sourcing
                           As I noted previously, the new Circular A-76 is generally consistent with
                           the Commercial Activities Panel’s sourcing principles and
                           recommendations and, as such, provides an improved foundation for
                           competitive sourcing decisions in the federal government. In particular,
                           the new Circular permits:

                       •   greater reliance on procedures contained in the FAR, which should
                           result in a more transparent, simpler, and consistently applied competitive
                           process, and
                       •   source selection decisions based on trade-offs between technical factors
                           and cost.

                           The new Circular also suggests the potential use of alternatives to the
                           competitive sourcing process, such as public-private and public-public
                           partnerships and high-performing organizations. It does not, however,
                           specifically address how and when these alternatives might be used.

                           If effectively implemented, the new Circular should result in increased
                           savings, improved performance, and greater accountability, regardless of
                           the service provider selected. However, this competitive sourcing initiative
                           is a major change in the way government agencies operate, and successful
                           implementation of the Circular’s provisions will require that adequate
                           support be made available to federal agencies and employees, especially if
                           the time frames called for in the new Circular are to be achieved.


                           Implementing the new Circular A-76 will likely be challenging for many
Challenges in              agencies. Our prior work on acquisition, human capital, and information
Implementing               technology management—in particular, our work on the Department of
                           Defense’s (DOD) efforts to implement competitive sourcing2—provides a
Competitive Sourcing       strong knowledge base from which to anticipate challenges as agencies
                           implement this initiative.




                           2
                            U.S. General Accounting Office, Best Practices: Taking a Strategic Approach Could
                           Improve DOD’s Acquisition of Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002);
                           U.S. General Accounting Office, Information Technology: DOD Needs to Leverage Lessons
                           Learned from Its Outsourcing Projects, GAO-03-37 (Washington, D.C.: Apr. 25, 2003);
                           U.S. General Accounting Office, A Model of Strategic Human Capital Management,
                           GAO-02-373SP (Washington, D.C.: Mar. 15, 2002); and U.S. General Accounting
                           Office, Acquisition Workforce: Status of Agency Efforts to Address Future Needs,
                           GAO-03-55 (Washington, D.C.: Dec. 18, 2002).



                           Page 4                                            GAO-03-1022T Competitive Sourcing
    Foremost among the challenges that agencies face is setting and meeting
    appropriate goals that are integrated with other priorities. Quotas and
    arbitrary goals are inappropriate. Sourcing goals and targets should
    contribute to mission requirements and improved performance and
    be based on considered research and sound analysis of past activities.
    Agencies will need to consider how competitive sourcing relates to
    the strategic management of human capital, improved financial
    performance, expanded reliance on electronic government, and budget
    and performance integration, consistent with the President’s Management
    Agenda. At the request of Senator Byrd and this subcommittee, we
    recently initiated work to look at how agencies are implementing their
    competitive sourcing programs. Our work is focused on goal setting and
    implementation strategies at several large agencies.

    DOD has been at the forefront of federal agencies in using the A-76
    process and, since the mid-to-late 1990s, we have tracked DOD’s progress
    in implementing its A-76 program. The challenges we have identified hold
    important lessons that civilian agencies should consider as they implement
    their own competitive sourcing initiatives.3 Notably:

•   competitions took longer than initially projected,
•   costs and resources required for the competitions were underestimated,
•   selecting and grouping functions to compete were problematic, and
•   determining and maintaining reliable estimates of savings were difficult.

    DOD’s experience also indicates that agencies will have difficulties in
    meeting the time frames set out in the new Circular for completing the
    standard competition process. Those time frames are intended to respond
    to complaints from all sides about the length of time taken to conduct A-76
    cost comparisons—complaints that the Panel repeatedly heard in the
    course of its review. The new Circular states that standard competitions
    shall not exceed 12 months from public announcement (start date) to
    performance decision (end date), with certain preliminary planning
    steps to be completed before a public announcement. Under certain
    conditions, there may be extensions of no more than 6 months. We
    welcome efforts to reduce the time required to complete these studies.
    Even so, our studies of DOD’s competitive sourcing have found that
    competitions can take much longer than the time frames outlined in the



    3
     U.S. General Accounting Office, Competitive Sourcing: Challenges in Expanding A-76
    Governmentwide, GAO-02-498T (Washington, D.C.: Mar. 6, 2002).



    Page 5                                            GAO-03-1022T Competitive Sourcing
                        new Circular. Specifically, DOD’s most recent data indicate that
                        competitions have taken, on average, 25 months. It is not clear, however,
                        how much of this time was needed for any planning that may now be
                        outside the revised Circular’s time frame. In commenting on OMB’s
                        November 2002 draft proposal, we recommended that the time frame be
                        extended to perhaps 15 to 18 months overall, and that OMB ensure that
                        agencies provide sufficient resources to comply with Circular A-76. In any
                        case, we believe that additional financial and technical support and
                        incentives will be needed for agencies as they attempt to meet these
                        ambitious time frames.

                        Finally, federal agencies and OMB will be challenged to effectively share
                        lessons learned and establish sufficient guidance to implement certain
                        A-76 requirements. For example, calculating savings that accrue from A-76
                        competitions, as required by the new Circular, will be difficult or may be
                        done inconsistently across agencies without additional guidance, which
                        will contribute to uncertainties over savings.


Potential Issues with   The prior version of Circular A-76 provided for a streamlined cost
Streamlined Cost        comparison process for activities with 65 or fewer full-time equivalent
Comparison Process      (FTE) employees. Although the revised Circular also provides for a
                        streamlined process at comparable FTE levels, the revised streamlined
                        process lacks a number of key features designed to ensure that agencies’
                        sourcing decisions are sound.

                        First, the prior version of the Circular contained an express prohibition
                        on dividing functions so as to come under the 65-FTE limit for using a
                        streamlined process. The revised Circular contains no such prohibition.
                        We are concerned that in the absence of an express prohibition, agencies
                        could arbitrarily split activities, entities, or functions to circumvent the
                        65-FTE ceiling applicable to the streamlined process. Second, the
                        10 percent conversion differential4 under the prior Circular has been
                        removed for streamlined cost comparisons. The Panel viewed this
                        differential as a reasonable way to account for the disruption and risk
                        entailed in converting between the public and private sectors. Third, the
                        streamlined process requires an agency to certify that its performance


                        4
                         The conversion differential is the lesser of 10 percent of the most efficient organization’s
                        personnel-related costs or $10 million over all the performance periods stated in the
                        solicitation. The conversion differential is added to the cost of performance by a
                        nonincumbent source.



                        Page 6                                                 GAO-03-1022T Competitive Sourcing
                 decision is cost-effective. It is not clear from the revised Circular,
                 however, whether the term “cost-effective” means the low-cost provider or
                 whether other factors may be taken into account (such as the disruption
                 and risk factors previously accounted for through the 10 percent
                 conversion differential).

                 Finally, the revised Circular has created an accountability gap by
                 prohibiting all challenges to streamlined cost comparisons. Under the
                 prior Circular, both the public and the private sectors had the right to file
                 appeals to ad hoc agency appeal boards. That right extended to all cost
                 comparisons, no matter how small or large (and to decisions to waive
                 the A-76 cost comparison process). The new Circular abolishes the ad hoc
                 appeal board process and instead relies on the FAR-based agency-level
                 protest process for challenges to standard competitions, which are
                 conducted under a FAR-based process. While we recognize that
                 streamlined cost comparisons are intended to be inexpensive, expeditious
                 processes for relatively small functions, we are nonetheless concerned
                 that the absence of an appeal process may result in less transparency
                 and accountability.


Protest Rights   Another accountability issue relates to the right of in-house competitors
                 to challenge sourcing decisions in favor of the private sector—an issue
                 that the Commercial Activities Panel addressed in its report. While both
                 the public and the private sectors could file appeals to the ad hoc agency
                 appeal boards under the prior Circular, only the private sector had the
                 right, if dissatisfied with the ruling of the agency appeal board, to file a
                 bid protest at GAO or in court. Under the previous version of the Circular,
                 both GAO and the Court of Appeals for the Federal Circuit held that
                 federal employees and their unions were not “interested parties” with the
                 standing to challenge the results of A-76 cost comparisons. The Panel
                 heard many complaints from federal employees and their representatives
                 about this inequality in protest rights. The Panel recommended that, in
                 the context of improving the federal government’s process for making
                 sourcing decisions, a way be found to level the playing field by allowing
                 in-house entities to file a protest at GAO, as private-sector competitors
                 have been allowed to do. The Panel noted, though, that if a decision
                 were made to permit the public-sector competitor to protest A–76
                 procurements, the question of who would have representational capacity
                 to file such a protest would need to be carefully considered.

                 An important legal question is whether the shift from the cost comparisons
                 under the prior Circular to the FAR-like standard competitions under the

                 Page 7                                       GAO-03-1022T Competitive Sourcing
                         new one means that the in-house most-efficient organization (MEO)
                         should now be found eligible to file a bid protest at GAO. If the MEO is
                         allowed to protest, there is a second question: Who will speak for the
                         MEO and protest in its name? To ensure that our legal analysis of these
                         questions benefits from input from everyone with a stake in this important
                         area, GAO posted a notice in the Federal Register on June 13, 2003,
                         seeking public comment on these and several related questions.
                         Responses were due July 16, and we are currently reviewing the more
                         than 50 responses that we received from private individuals, Members
                         of Congress, federal agencies, unions, and other organizations. We
                         intend to reach a conclusion on these important legal questions in the
                         coming weeks.


                         For many agencies, effective implementation of the new Circular will
Effective Human          depend on their ability to understand that their workforce is their most
Capital Practices Will   important organizational asset. Recognizing this, the Panel adopted a
                         principle stipulating that sourcing and related policies be consistent with
Be Key to Successful     human capital practices that are designed to attract, motivate, retain,
Implementation of        and reward a high-performing workforce. Conducting competitions as
                         fairly, effectively, and efficiently as possible requires sufficient agency
Competitive Sourcing     capacity—that is, a skilled workforce and adequate infrastructure
                         and funding.

                         Agencies will need to build and maintain capacity to manage competitions,
                         to prepare the in-house MEO, and to oversee the work—regardless of
                         whether the private sector or MEO is selected. Building this capacity is
                         important, particularly for agencies that have not been heavily invested
                         in competitive sourcing previously. Agencies must manage this effort
                         while addressing high-risk areas, such as human capital and contract
                         management. In this regard, GAO has listed contract management at DOD,
                         the National Aeronautics and Space Administration, the Department of
                         Housing and Urban Development, and the Department of Energy as an
                         area of high risk. With a likely increase in the number of public-private
                         competitions and the requirement to hold accountable whichever sector
                         wins, agencies will need to ensure that they have an acquisition workforce
                         sufficient in numbers and abilities to manage the cost, quality, and
                         performance of the service provider.

                         In our prior work—notably in studying the lessons that state and local
                         governments learned in conducting competitions and in private-sector
                         outsourcing of information technology services—we found that certain
                         strategies and practices can help ensure the success of workforce

                         Page 8                                       GAO-03-1022T Competitive Sourcing
    transitions when deciding who should provide the services they perform.5
    In general, these strategies recognized that the workforce defines an
    organization’s character, affects its capacity to perform, and represents its
    knowledge base. When an agency’s leadership is committed to effective
    human capital management, they view people as assets whose value can
    be enhanced through investments.

    Agencies can aid their workforce in transitioning to a competitive sourcing
    environment if they:

•   ensure employee involvement in the transition process; for example, by
    clearly communicating to employees what is going to happen and when it
    is going to happen;
•   provide skills training for either competing against the private sector or
    monitoring contractor performance;
•   create a safety net for displaced employees to bolster their support for the
    changes as well as to aid in the transition to a competitive environment,
    such as offering workers early retirement, severance pay, or a buyout;
•   facilitate the transition of staff to the private sector or reimbursable
    provider when that is their choice and assist employees who do not want
    to transfer to find other federal jobs; and
•   develop employee retention programs and offer bonuses to keep people
    where appropriate.

    Recognizing the workforce as an asset also requires agency officials to
    view competitive sourcing—whether it results in outsourcing, insourcing,
    or cosourcing—as a tool to help ensure we have the right people providing
    services in an effective and efficient manner. The Panel recommended
    that employees should receive technical and financial assistance, as
    appropriate, to structure the MEO, to conduct cost comparisons, and to
    create HPOs. However, it is unclear whether agencies will have adequate
    financial and technical resources to implement effective competitive
    sourcing programs or make needed improvements.

    The administration has proposed the creation of a governmentwide fund
    for performance-based compensation. However, most federal agencies
    lack modern, effective, credible, and validated performance management
    systems to effectively implement performance-based compensation


    5
     U.S. General Accounting Office, Privatization: Lessons Learned by State and Local
    Governments, GAO/GGD-97-48 (Washington, D.C. Mar. 14, 1997); GAO-02-230; and
    GAO-03-37.



    Page 9                                             GAO-03-1022T Competitive Sourcing
             approaches. Importantly, a clear need exists to provide assistance both to
             government employees to create MEOs that can compete effectively and
             to agencies to promote HPOs throughout the federal government,
             especially in connection with functions, activities, and entities that will
             never be subject to competitive sourcing. Assistance is also needed in
             helping to create the systems and structures needed to support the
             effective and equitable implementation of more performance-based
             compensation approaches. As a result, we believe consideration should be
             given to establishing a governmentwide fund that would be available to
             agencies, on the basis of a business case, to provide technical and
             financial assistance to federal employees to develop MEOs and for
             creating HPOs, including the creation of modern, effective, and credible
             performance management systems.


             While the new Circular provides an improved foundation for competitive
Conclusion   sourcing decisions, implementing this initiative will undoubtedly be a
             significant challenge for many federal agencies. The success of the
             competitive sourcing program will ultimately be measured by the results
             achieved in terms of providing value to the taxpayer, not the size of the
             in-house or contractor workforce or the number of positions competed to
             meet arbitrary quotas. Successful implementation will require adequate
             technical and financial resources, as well as sustained commitment by
             senior leadership to establish fact-based goals, make effective decisions,
             achieve continuous improvement based on lessons learned, and provide
             ongoing communication to ensure that federal workers know and believe
             that they will be viewed and treated as valuable assets.


             Mr. Chairman, this concludes my statement. I will be happy to answer any
             questions you or other Members of the subcommittee may have.




(120276)     Page 10                                     GAO-03-1022T Competitive Sourcing
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