Proposed Revisions to OMB Circular A-76

Published by the Government Accountability Office on 2003-01-16.

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

                                                                                    Comptroller General
                                                                                    of the United States
United States General Accounting Office
Washington, DC 20548

          January 16, 2003

          The Honorable Mitchell E. Daniels, Jr.
          Director, Office of Management
           and Budget

          Subject: Proposed Revisions to OMB Circular A-76

          Dear Mr. Daniels:

          I want to recognize the considerable effort expended by you and your team on the
          proposed revision to Office of Management and Budget (OMB) Circular A-76, which
          prescribes policies and procedures agencies must use when considering the transfer
          of commercial activities between the public and private sectors. The proposed
          revision was issued for public comment on November 19, 2002, and I understand that
          OMB has received hundreds of comments on the proposal. As you consider these
          comments, I want to provide GAO’s assessment of the proposed changes, as well as
          our recommendations for how the proposal could be improved.

          The proposed revision in many ways is consistent with the sourcing principles and
          recommendations adopted by the Commercial Activities Panel, which I chaired, in its
          April 30, 2002, report. In particular, the proposal stresses the use of competition in
          making sourcing decisions and, through reliance on procedures contained in the
          Federal Acquisition Regulation (FAR), should result in a more transparent,
          expeditious, fair, and consistently applied competitive process. The proposal should
          promote sourcing decisions that reflect the best overall value to the agencies, rather
          than just the lowest cost. Importantly, the proposed revision also should result in
          greater accountability for performance, regardless of the service provider selected.

          There are several areas, however, where the proposed revisions to the Circular are
          not consistent with the principles or recommendations of the Commercial Activities
          Panel. Specifically, these include the absence of a link between sourcing policy and
          agency missions, unnecessarily complicated source selection procedures, certain
          unrealistic time frames, and insufficient guidance on calculating savings. Each of
          these areas is discussed in detail below, together with recommendations intended to
          align the proposal more fully with the views expressed by the Panel.

           Commercial Activities Panel, Improving the Sourcing Decisions of the Government (Washington,
          D.C.: April 30, 2002).

                                               GAO-03-391R Proposed Revisions to OMB Circular A-76
Emphasize Sourcing As a Strategic Issue

The first of the 10 sourcing principles unanimously adopted by the Panel is that
federal sourcing policy should support agency missions, goals, and objectives. In
other words, sourcing policy is not just about choosing among potential service
providers. Rather, an agency’s sourcing policy should be viewed as part of an overall
strategy for how best to accomplish the mission of the agency, including how it
conducts human capital planning. The current A-76 Revised Supplemental Handbook
reflects this idea by pointing out that in focusing on core mission competencies and
service requirements, agencies should consider a wide range of options, including
restructuring, privatization, devolution of activities to state and local governments, or
the termination of obsolete functions. To this list of options, the Panel recommended
adding high-performing organizations and public-private partnerships. The proposed
revision, however, does not list these or other options,2 nor does it otherwise stress
the importance of considering alternative approaches to accomplishing agency
missions. Given that many of these options can result in improved efficiency and
enhanced performance, we recommend that the Circular continue to encourage
agencies to consider these and other alternatives to A-76.

Source Selection Issues

The Panel recommended that public-private competitions be conducted using the
framework of the FAR, with appropriate changes to accommodate public-sector
proposals. For the most part, the proposed revised Circular would implement this
recommendation in a manner consistent with the Panel’s principles. We have
concerns, however, regarding the source selection evaluation approaches contained
in the proposal.

The proposed revised Circular provides for two different types of evaluation
approaches—“integrated” and “phased”—to address cases where an agency may wish
to make trade-offs between cost and higher performance levels in selecting a service
provider. The trade-off concept is fully consistent with the Panel’s call for a process
that considers both quality and cost factors and is used routinely throughout the
government in FAR-based acquisitions. In the proposed integrated approach,
however, the revised Circular would require that decisions to select other than the
lowest cost provider be supported by a “quantifiable rationale.” While it is certainly
reasonable to expect procurement officials to articulate the rationale for their
decisions—and the FAR requires that they do so—there is no requirement in the FAR
that the rationale be “quantifiable.” It is not clear what is intended by the use of the
term “quantifiable,” or what the agencies would need to do beyond what the FAR
currently requires to ensure that trade-off decisions are justified and adequately
explained. We recommend that the revised Circular include additional guidance
concerning any requirement that an agency’s trade-off decision be “quantifiable.”

In the phased evaluation approach, an agency would evaluate the technical merit of
tenders and offers in the first phase, adjust its required performance standards as
needed, and then select the lowest-cost provider in the second phase. This approach

 In fact, the proposed Circular discourages public-private partnerships by prohibiting agencies from
entering into new contracts when creating “most efficient organizations.”

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raises two issues. First, in the technical evaluation phase, the agency essentially
would conduct a cost-benefit analysis for each instance in which a proposed
performance standard differed from a solicitation requirement. This process, which
does not appear to be based on the FAR, likely would be quite burdensome both for
the offerors, who must assign specific dollar values to each differing level of
performance, and for the agencies in evaluating the costs and benefits of differing
performance levels for perhaps scores of discrete performance standards. Second,
should it decide that an offered performance standard is desirable, an agency would
be required to advise all competitors of its revised requirements and allow the
submission of revised proposals or tenders. Particularly for some of the more
complex requirements, this process could serve as a disincentive to innovation
should offerors become reluctant to propose improved ways to enhance contract
performance out of fear that their proposed approaches will be shared with their
competitors. We recommend that the phased evaluation approach be revised to
simplify the process and ensure the protection of certain proprietary and highly
competition-sensitive information.

Unrealistic Time Frames

In the course of its review, the Commercial Activities Panel repeatedly heard
complaints from all sides about the length of time required to conduct A-76 cost
comparisons, and there is an obvious effort in the proposed revision to expedite the
process. The proposal would establish a 12-month limit for completing the standard
competition process and, within that time frame, a 4-month limit for source selection.
In our view, however, the proposed required time frames are unrealistic. Over the
last 5 years, the average time to complete a cost comparison process in the
Department of Defense was 25 months (excluding appeals and protests). Source
selection alone averaged 7 months. While these averages demonstrate the need to
expedite the process, we question whether simply imposing aggressive, fixed
deadlines is the answer. Rather, additional training, technical resources, or other
support for agency officials in preparing for and participating in public-private
competitions may be needed. We recommend that the time frames be revised to be
more realistic (perhaps 15 to 18 months overall) and that OMB ensure that agencies
provide sufficient resources to comply with the new A-76 requirements.

Business Case Direct Conversions

The Commercial Activities Panel strongly supported continued emphasis on
competition in determining whether the public or the private sectors should perform
commercial services. In fact, the Panel said that direct conversions from one sector
to another without the benefit of competition generally should occur only where the
number of affected positions is de minimis (10 or fewer full-time equivalent [FTE]
positions). For the most part, the proposed revision of A-76 would maintain current
policy and permit direct conversions only in limited circumstances, such as for direct
research and development, for national defense or intelligence security with the prior
approval of OMB, or for “small activities” (i.e., 10 or fewer civilian employees). The
proposed revision would expand the list of permissible direct conversions, however,
to include activities performed by up to 50 employees based on a “business case
analysis.” This analysis, which is essentially the same as the streamlined cost
comparisons currently permitted for activities involving up to 65 positions, would

Page 3                           GAO-03-391R Proposed Revisions to OMB Circular A-76
compare the estimated cost of agency performance with the lowest-priced existing
contract for a similar workload to determine whether to directly convert the function.

We have two concerns about the proposed business case direct conversions. First,
changing the characterization of the process from a streamlined cost comparison to a
business case direct conversion sends an unfortunate signal that the administration is
attempting to increase the number of direct conversions. As you know, this is a
particularly sensitive matter for federal employees, whose trust in the objectivity and
fairness of the system will be critical to the success of the administration’s
competitive sourcing initiative. Second, the cost comparison would continue to be
based upon an agency’s current organization, with no opportunity for developing a
“most efficient organization” (MEO). We recommend that the proposed revision
require that any streamlined cost comparison be based on a reliable estimate of the
efficiencies likely to be realized through the creation of an in-house MEO. Should the
cost comparison indicate that continued agency performance of the function would
be more advantageous to the government than other alternatives, the agency should
be required to develop and implement the MEO.

Lack of Guidance on Calculating Savings

The Circular requires that agencies report the savings that accrue from A-76
competitions. The Circular does not provide any guidance, however, on how savings
are to be calculated. Our work examining the use of Circular A-76 in the Department
of Defense has shown a lack of consistency among and even within the military
services in how they calculate savings. While our analyses indicate that significant
savings are likely from many of these competitions, we have not been able to quantify
the precise level of savings because of the lack of good baseline data and other
limitations. Calculation of savings is an area that requires additional OMB guidance.

Implementation Is Key

Finally, the critical issue for all affected parties is how the government’s sourcing
policies are implemented. In this regard, one of the Panel’s sourcing principles was
that the government should avoid arbitrary numerical or FTE goals. This principle is
based on the concept that the success of government programs should be measured
by the results achieved in terms of providing value to the taxpayer, not the size of the
in-house or contractor workforce. Although the proposed revised Circular contains
no numerical targets or goals for competitive sourcing, this has been a controversial
area in the past. In our view, the administration needs to avoid arbitrary targets or
quotas, or any goal that is not based on considered research and analysis.

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With the changes specified above, the revised Circular A-76 would be more consistent
with the recommendations of the Commercial Activities Panel and with the sourcing
principles the Panel adopted. Please contact me at (202) 512-5500 or Bill Woods,
Director, Acquisition and Sourcing Management, if you would like further discussion
of these issues. Bill can be reached at (202) 512-8214 or at Woodsw@gao.gov.

Sincerely yours,

David M. Walker
Comptroller General
 of the United States

cc: Mark Everson
    Deputy Director for Management

    Angela Styles
    Administrator, Office of
    Federal Procurement Policy


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