Contract Management: Comments on Proposed Services Acquisition Reform Act

Published by the Government Accountability Office on 2003-04-30.

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

                             United States General Accounting Office

GAO                          Testimony
                             Before the Committee on Government
                             Reform, House of Representatives

For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, April 30, 2003    CONTRACT
                             Comments on Proposed
                             Services Acquisition
                             Reform Act
                             Statement of William T. Woods, Director
                             Acquisition and Sourcing Management

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                                               April 30, 2003

                                               CONTRACT MANAGEMENT

                                               Comments on Proposed Services
Highlights of GAO-03-716T, Committee on
Government Reform, House of                    Acquisition Reform Act

Since 1997, federal spending on                The growth in spending on service contracts, combined with decreases in
services has grown 11 percent and              the acquisition workforce and an increase in the number of high-dollar
now represents more than 60                    procurement actions, create a challenging acquisition environment. It is
percent of contract spending                   important that agencies have the authorities and tools they need to maximize
governmentwide. Several                        their performance in this new environment. The initiatives contained in the
significant changes in the                     Services Acquisition Reform Act (SARA) address a number of longstanding
government—including funding for               issues in contracting for services and should enable agencies to improve
homeland security—are expected                 their performance in this area. For example:
to further increase spending on
services. Adjusting to this new
                                                   Section 201: Chief Acquisition Officers. Appointing a Chief Acquisition
environment has proven difficult.
                                                   Officer would establish a clear line of authority, accountability, and
Agencies need to improve in a                      responsibility for acquisition decisionmaking.
number of areas: sustaining
executive leadership, strengthening                Section 103: Government-Industry Exchange Program. A professional
the acquisition workforce, and                     exchange program would allow federal agencies to gain from the
encouraging innovative contracting                 knowledge and expertise of the commercial acquisition workforce.
approaches. Improving these areas
is a key goal of SARA.                         At the same time, GAO is concerned about some provisions in SARA. For

GAO is not making                                  Section 211: Ensuring Efficient Payment. While GAO supports the intent
recommendations.                                   of this proposal to make payments to government contractors more
                                                   timely, GAO has reservations concerning its implementation. GAO’s
                                                   work shows that agencies have been hampered by problems such as high
                                                   payment volume, inadequate payment systems, and weak controls.

                                               GAO’s review of spending and workforce trends in federal procurement
                                               highlights the significance of services acquisitions. The table below shows
                                               the percent of contract dollars spent on services by federal agencies.

                                               Percent of Contract Dollars Spent on Services In Fiscal Year 2001


To view the full report, including the scope
and methodology, click on the link above.
For more information, contact William T.
Woods at (202) 512-4841 or
                       Mr. Chairman and Members of the Committee:

                       Thank you for inviting the General Accounting Office (GAO) to participate
                       in today’s hearing on the proposed Services Acquisition Reform Act of
                       2003 (SARA). Over the past several years, the federal acquisition
                       environment has changed dramatically. Spending for services has
                       increased significantly and now represents more than 60 percent of all
                       federal contract spending. At the same time, there has been a reduction in
                       the size of the acquisition workforce, and the use of alternative contracting
                       approaches has been growing. The purpose of SARA is to provide federal
                       agencies with additional tools for addressing these developments. We fully
                       support this objective, and look forward to continuing to work with this
                       Committee and others in finding ways to promote more efficient and
                       effective acquisitions.

                       In my testimony today, I will:

                   •   Summarize recent trends in contract spending and in the acquisition
                       workforce, and

                   •   Discuss our views on selected provisions of SARA based on relevant GAO

                       We recently issued several reports on acquisition spending and workforce
Contract Spending      trends. These reports show that spending on services acquisitions is
and Workforce Trends   increasing at a time when the acquisition workforce is decreasing.

Spending Trends        Our report on spending and workforce trends in federal procurement1
                       shows that federal agencies continue to buy far more services than goods.
                       Since 1997, spending on services has grown 11 percent. In fiscal year 2001,
                       over 60 percent of the more than $220 billion in goods and services
                       purchased by the federal government was for services.2 At six agencies,

                        Federal Procurement: Spending and Workforce Trends, GAO-03-443 (Washington, D.C.:
                       Apr. 30, 2003).
                        Federal agencies spent about $140 billion on services and about $81 billion on goods for
                       contracts valued at more than $25,000. The Federal Procurement Data System does not
                       provide similar information for contracts valued at $25,000 or less. However, the combined
                       total of purchases of goods and services for fiscal year 2001 was more than $235 billion.

                       Page 1                                                                      GAO-03-716T
                       procurement of services exceeded 75 percent of their total spending on
                       contracts; at one agency, the Department of Energy, nearly 100 percent of
                       total spending via contracts was for services (see fig. 1).

                       Figure 1: Percent of Contract Dollars Spent on Services in Fiscal Year 2001

                       Spending on services could increase even further, at least in the short
                       term, given the President’s recent request for additional funds for defense
                       and homeland security. The degree to which individual agencies are
                       currently contracting for services and the growth of services spending
                       underscore the importance of ensuring that service acquisitions are
                       managed properly.

Workforce Challenges   Industry and government experts alike recognize that the key to a
                       successful transformation toward a more effective acquisition system is
                       having the right people with the right skills. To increase the efficiency and
                       effectiveness of acquiring goods and services, the government is relying
                       more on judgment and initiative versus rigid rules to make purchasing

                       Agencies have to address governmentwide reductions in the acquisition
                       workforce. At the same time, government contract actions exceeding

                       Page 2                                                                GAO-03-716T
                                               $25,000 have increased significantly—by 26 percent between fiscal years
                                               1997 and 2001 (see table 1).

Table 1: Federal Acquisition Personnel and Workload

                                    Acquisition workforce                Changes in contract actions, fiscal years 1997 through 2001
                                                                                                                            Change in
                                                   Percent change in        Change in total Change in contract       contract actions
                                                     workforce since       contract actions actions exceeding          under $25,000
 Agency                        Total Sept. 2001      fiscal year 1997             (percent)    $25,000 (percent)             (percent)
Governmentwide                          103,053                     -5                    -6                    26                  -7
DOD                                      68,513                     -9                     5                    27                   4
USDA                                       5,703                    -6                   -79                    25                 -81
DOE                                        1,449                    10                     4                    19                  -3
GSA                                        2,743                    11                   -75                    68                 -82
HHS                                        2,490                     9                   -29                    44                 -31
DOJ                                        1,457                    -2                   -11                    26                 -13
NASA                                       1,246                    -4                   -38                   -12                 -50
DOT                                        1,514                    -7                   -37                    27                 -48
Treasury                                   2,561                     8                    12                    15                  11
VA                                         2,562                    -6                    29                   -12                  30
Sources: OPM, FPDS, and FAA.

                                               Over the past year, GAO issued four reports on the management and
                                               training of the government’s acquisition workforce.3 While the agencies4
                                               we reviewed are taking steps to address their future acquisition workforce
                                               needs, each is encountering challenges in their efforts. In particular,
                                               shifting priorities, missions, and budgets have made it difficult for agencies
                                               to predict, with certainty, the specific skills and competencies the
                                               acquisition workforce may need.

                                                Acquisition Workforce: Department of Defense’s Plans to Address Workforce Size and
                                               Structure Challenges, GAO-02-630 (Washington, D.C.: Apr. 30, 2002); Acquisition
                                               Workforce: Status of Agency Efforts to Address Future Needs, GAO-03-55 (Washington,
                                               D.C.: Dec. 18, 2002); Acquisition Workforce: Agencies Need to Better Define and Track the
                                               Training of Their Employees, GAO-02-737 (Washington, D.C.: Jul. 29, 2002); and
                                               Acquisition Management: Agencies Can Improve Training on New Initiatives,
                                               GAO-03-281 (Washington, D.C.: Jan. 15, 2003).
                                                Department of Defense (DOD), General Services Administration (GSA), National
                                               Aeronautics and Space Administration (NASA), the Department of Energy (DOE), the
                                               Department of Veterans Affairs (VA), the Department of the Treasury, and the Department
                                               of Health and Human Services (HHS).

                                               Page 3                                                                     GAO-03-716T
                                 Training is critical in ensuring that the acquisition workforce has the right
                                 skills. To deliver training effectively, leading organizations typically
                                 prioritize and set requirements for those in need of training to ensure their
                                 training reaches the right people. Agencies we reviewed5 had developed
                                 specific training requirements for their acquisition workforce and had
                                 efforts underway to make training available and raise awareness of major
                                 acquisition initiatives. However, they did not have processes for ensuring
                                 that training reaches all those who need it. And while agencies had also
                                 developed a variety of systems to track the training of their personnel,
                                 they experienced difficulties with these systems.

                                 We have issued a number of reports on key provisions of SARA. These
GAO Work Related to              reports address the areas of acquisition leadership, workforce, contract
SARA                             innovations, as well as other proposals.

Section 201: Chief Acquisition   Our discussions with officials from leading companies, which we reported
Officer                          on last year,6 indicate that a procurement executive or Chief Acquisition
                                 Officer plays a critical role in changing an organization’s culture and
                                 practices. In response to many of the same challenges faced by the federal
                                 government—such as a lack of tools to ensure they receive the best value
                                 over time—each of the companies we studied changed how they acquired
                                 services in significant ways. For example, each elevated or expanded the
                                 role of the company’s procurement organization; designated “commodity”
                                 managers to oversee key services; and/or made extensive use of cross-
                                 functional teams. Taking a strategic approach paid off. One official, for
                                 example, estimated that his company saved over $210 million over a recent
                                 5-year period by pursuing a more strategic approach.

                                 Bringing about these new ways of doing business, however, was
                                 challenging. To overcome these challenges, the companies found they

                                  The agencies we reviewed for the two reports on training included Department of Defense
                                 (DOD), General Services Administration (GSA), National Aeronautics and Space
                                 Administration (NASA), the Department of Energy (DOE), the Department of Veterans
                                 Affairs (VA), Department of the Treasury, the Department of Health and Human Services
                                 (HHS) and the Federal Aviation Administration (FAA).
                                  Best Practices: Taking a Strategic Approach Could Improve DOD’s Acquisition of
                                 Services, GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

                                 Page 4                                                                    GAO-03-716T
                            needed to have sustained commitment from their senior leadership—first,
                            to provide the initial impetus to change, and second, to keep up the

                            Section 201 of SARA would create a Chief Acquisition Officer (CAO)
                            within each civilian executive agency. We support this provision. By
                            granting the CAO clear lines of authority, accountability, and responsibility
                            for acquisition decision-making, SARA takes a similar approach as leading
                            companies in terms of the responsibility and decision-making authority of
                            these individuals.

Acquisition Workforce
Section 103: Government-    Comptroller General David Walker testified earlier this month7 that
Industry Exchange Program   strategic human capital management must be the centerpiece of any
                            serious government transformation effort and that federal workers can be
                            an important part of the solution to the overall transformation effort. In
                            July 2001,8 he recommended that Congress explore greater flexibilities to
                            allow federal agencies to enhance their skills mix by leveraging the
                            expertise of private sector employees through innovative fellowship

                            The acquisition professional exchange program proposed in section 103 of
                            SARA could enhance the ability of federal workers to successfully
                            transform the way the federal government acquires services. The program,
                            which is modeled after the Information Technology Exchange Program
                            included in the recently passed E-Government Act of 2002,9 would permit
                            the temporary exchange of high-performing acquisition professionals
                            between the federal government and participating private-sector entities.

                            We support this provision, which begins to address a key question we face
                            in the federal government: Do we have today, or will we have tomorrow,
                            the ability to manage the procurement of the increasingly sophisticated
                            services the government needs? Following a decade of downsizing and

                             Human Capital: Building on the Current Momentum to Address High-Risk Issues,
                            GAO-03-637T (Washington, D.C.: Apr. 8, 2003).
                             Human Capital: Building the Information Technology Workforce to Achieve Results,
                            GAO-01-1007T (Washington, D.C.: July 31, 2001).
                                Public Law 107-347, Section 209.

                            Page 5                                                                 GAO-03-716T
                           curtailed investments in human capital, federal agencies currently face
                           skills, knowledge, and experience imbalances that, without corrective
                           action, will worsen. The program established by section 103 would allow
                           federal agencies to gain from the knowledge and expertise of private-
                           sector professionals and entities.

Section 102: Acquisition   Section 102 of SARA would establish an acquisition workforce training
Workforce Training Fund    fund using five percent of the fees generated by governmentwide contract
                           programs. We recently completed a review of fees charged on
                           governmentwide contracts—covering all five designated executive
                           agencies for governmentwide acquisition contracts and the General
                           Services Administration’s Schedules program.10 The Office of Management
                           and Budget’s guidance directs agencies operating governmentwide
                           information technology contracts to transfer fees in excess of costs to the
                           miscellaneous receipts account of the U.S. Treasury’s General Fund.
                           Further, some of these contracts operate under revolving fund statutes
                           that limit the use of fees to the authorized purposes of the funds.

                           Quality training is important, and we recognize the need for adequate
                           funds for training. In our view, however, the procuring agencies should
                           ensure that adequate funding is available through the normal budgeting
                           process to provide the training the acquisition workforce needs. We are
                           concerned about relying on contract program fees–which can vary from
                           year to year and which are intended to cover other requirements–as a
                           source of funding for such an important priority as workforce training.

Innovative Contracting     Several sections of SARA would encourage the use of innovative contract
                           types that could provide savings to the government. For example,
                           performance-based contracts can offer significant benefits, such as
                           encouraging contractors to find cost-effective ways of delivering services.
                           Share-in-savings contracting, one type of performance-based contracting,
                           is an agreement in which a client compensates a contractor from the
                           financial benefits derived as a result of the contract performance.

                             Contract Management: Interagency Contract Program Fees Need More Oversight,
                           GAO-02-734 (Washington, D.C.: July 25, 2002). Our review showed that in some years
                           contract fees exceeded costs and in others the fees fell short of covering the costs
                           incurred. From fiscal year 1999 to 2001, the revenue generated by the GSA’s Schedules
                           program fees exceeded program costs by over 50 percent. We recommended that the fee be
                           adjusted. Based on our recommendation, GSA initiated action toward a 25-percent
                           reduction in the fee it charges for using the Schedules program.

                           Page 6                                                                  GAO-03-716T
Section 301: Share-in-Savings       Share-in-savings contracting can motivate contractors to generate savings
Initiatives                         and revenues for their clients. We issued a report earlier this year in
                                    response to your request that we determine how the commercial sector
                                    uses share-in-savings contracting.11 We examined four commercial share-
                                    in-savings contracts and identified common characteristics that made
                                    them successful.

                                    In the commercial share-in-savings contracts we reviewed, we found four
                                    conditions that facilitated success:

                                •   An expected outcome is clearly specified. By outcomes, we mean such
                                    things as generating savings by eliminating inefficient business practices
                                    or identifying new revenue centers. It is critical that a client and
                                    contractor have a clear understanding of what they are trying to achieve.

                                •   Incentives are defined. Both the client and contractor need to strike a
                                    balance between the level of risk and reward they are willing to pursue.

                                •   Performance measures are established. By its nature, share-in-savings
                                    cannot work without having a baseline and good performance measures to
                                    gauge exactly what savings or revenues are being achieved. Agreement
                                    must be reached on how metrics are linked to contractor intervention.

                                •   Top management commitment is secured. A client’s top executives
                                    need to provide contractors with the authority needed to carry out
                                    solutions, since change from the outside is often met with resistance. They
                                    also need to help sustain a partnership over time since relationships
                                    between the contractor and client can be tested in the face of changing
                                    market conditions and other barriers.

                                    The companies in our study found that successful arrangements have
                                    generated savings and revenues. In one case highlighted in our report,
                                    $980,000 was realized in annual energy savings.

                                    We have not found share-in-savings contracting to be widespread in the
                                    commercial sector or the federal government. Excluding the energy
                                    industry, we found limited references to companies or state agencies that
                                    use or have used the share-in-savings concept. In addition, there are few
                                    documented examples of share-in-savings contracting in the federal

                                      Contract Management: Commercial Use of Share-in-Savings Contracting, GAO-03-327
                                    (Washington, D.C.: Jan. 31, 2003).

                                    Page 7                                                               GAO-03-716T
                           government. Officials in federal agencies we spoke with noted that such
                           arrangements may be difficult to pursue given potential resistance and the
                           lack of good baseline performance data. In addition, in previous work,12
                           Department of Energy headquarters officials told us they believe such
                           contracts can be best used when federal funding is unavailable.

                           To achieve the potential benefits from the use of share-in-savings
                           contracting, it may be worthwhile to examine ways to overcome potential
                           issues. For example, in a letter to the Office of Federal Procurement Policy
                           in March of this year,13 we recognized that share-in-savings contracting
                           represents a significant change in the way the federal government acquires
                           services. To address this challenge, we underscored the need for the
                           Office of Federal Procurement Policy to develop guidance and policies
                           that could ensure that (1) appropriate data are collected and available to
                           meet mandated reporting requirements regarding the effective use of
                           share-in-savings contracting, and (2) members of the federal acquisition
                           workforce understand and appropriately apply this new authority.

Section 401: Additional    Section 401 authorizes agencies to treat a contract or task order as being
Incentives for Use of      for a commercial item if it is performance-based—that is, it describes each
Performance-Based          task in measurable, mission-related terms, and identifies the specific
Contracting for Services   outputs—and the contractor provides similar services and terms to the
                           public. This provision, which would only apply if the contract or task
                           order were valued at $5 million or less, would provide another tool to
                           promote greater use of performance-based contracting.

                           Our spending and workforce trends report shows that in fiscal year 2001,
                           agencies reported that 24 percent of their eligible service contracts, by
                           dollar value, were performance-based. However, there was wide variation
                           in the extent to which agencies used performance-based contracts. As
                           figure 2 shows, 3 of the 10 agencies in our review fell short of the Office of
                           Management and Budget’s goal that 10 percent of eligible service contracts
                           be performance-based.

                             Energy Conservation: Contractor’s Efforts at Federally Owned Sites, GAO/RCED-94-96
                           (Washington, D.C.: Apr. 29, 1994).
                             Contract Management: OFPP Policy Regarding Share-in-Savings Contracting
                           Pursuant to the E-Government Act of 2002, GAO-03-552R (Washington, D.C.: Mar. 24,

                           Page 8                                                                  GAO-03-716T
Figure 2: Percentage of Eligible Contracts Considered Performance Based

 DOE and VA officials stated that their internal data systems report a higher use of performance-
based contracting in fiscal year 2001 than the data in FPDS. For example, DOE officials believed
77 percent of their eligible contracts were performance based, while VA officials believed their
agency’s figure should be about 11 percent.
 Figure reflects data for DOT only; FAA could not provide performance-based service contracting
data because it was not an integral part of its management information systems.

In our September 2002 report,14 we recommended that the Administrator
of the Office of Federal Procurement Policy clarify existing guidance to
ensure that performance-based contracting is appropriately used,
particularly when acquiring more unique and complex services that
require strong government oversight. If section 401 is enacted, we believe
that clear guidance will be needed to ensure effective implementation. The
Office of Federal Procurement Policy might be assisted in developing and
updating meaningful guidance by establishing a center for excellence to
identify best practices in service contracting, as required by section 401. A
center for excellence may help federal agencies learn about successful
ways to implement performance-based contracting.

 Contract Management: Guidance Needed for Using Performance-Based Service
Contracting, GAO-02-1049 (Washington, D.C.: Sept., 23, 2002).

Page 9                                                                               GAO-03-716T
Section 501: Authority to Enter   Section 501 would authorize those civilian agencies approved by the Office
Into Certain Procurement-         of Management and Budget to use so-called “other transactions” for
Related Transactions and to       projects related to defense against or recovery from terrorism, or nuclear,
Carry Out Certain Prototype       biological, chemical, or radiological attacks. Other transactions are
Projects                          agreements that are not contracts, grants, or cooperative agreements. This
                                  authority would be similar to that currently available to the Departments
                                  of Homeland Security and Defense.

                                  Because statutes that apply only to procurement contracts do not apply to
                                  other transactions, this authority may be useful to agencies in attracting
                                  firms that traditionally decline to do business with the government. In fact,
                                  our work shows that the Department of Defense has had some success in
                                  using other transactions to attract nontraditional firms to do business with
                                  the government. Our work also has shown, however, that there is a critical
                                  need for guidance on when and how other transactions may best be used.
                                  The guidance developed by the Department of Defense may prove helpful
                                  to other agencies should the Congress decide to expand the availability of
                                  other transaction authority.

Additional Comments on
SARA Proposals

Section 211: Ensuring Efficient   Section 211 provides for a streamlined payment process under which
Payment                           service contractors could submit invoices for payment on a biweekly or a
                                  monthly basis. Biweekly invoices would be required to be submitted

                                  While we support the intent of this proposal—to make payments to
                                  government contractors more timely—implementation of this provision
                                  could result in increased improper payments and stress already weak
                                  systems and related internal controls. Agency efforts to address improper
                                  payment problems have been hampered by high payment volume, speed of
                                  service, inadequate payment systems and processes, internal control
                                  weaknesses, and downsizing in the acquisition and financial management
                                  community. Until federal agencies make significant progress in eliminating
                                  their payment problems, requirements to accelerate service contract
                                  payments would likely increase the risk of payment errors, backlogs, and
                                  late payment interest.

Section 213: Agency               Section 213 would provide for agency-level protests of acquisition
Acquisition Protests              decisions alleged to violate law or regulation. An agency would have

                                  Page 10                                                          GAO-03-716T
                                20 working days to issue a decision on a protest, during which time the
                                agency would be barred from awarding a contract or continuing with
                                performance if a contract already had been awarded. If an agency-level
                                protest were denied, a subsequent protest to GAO that raised the same
                                grounds and was filed within 5 days would trigger a further stay pending
                                resolution of that protest.

                                We believe that a protest process that is effective, expeditious, and
                                independent serves the interests of all those involved in or affected by the
                                procurement system. Section 213 appears to address each of these criteria.
                                First, although protests currently may be filed with the procuring agencies,
                                section 213 would provide for a more effective agency-level protest
                                process by requiring that an agency suspend, or “stay,” the procurement
                                until the protest is resolved. Second, the process would be relatively
                                expeditious because decisions would be required within 20 working days.
                                Having an expeditious process at the agency is especially important
                                because section 213 would provide for a stay both during the agency-level
                                protest and then during any subsequent GAO protest. It should be noted,
                                though, that 20 working days may not be adequate for a thorough review,
                                particularly in complex procurements. Finally, requiring protests to be
                                decided by the head of the agency may help to mitigate longstanding
                                concerns about a perceived lack of independence when decisions on
                                agency-level protests are issued by officials closely connected with the
                                decision being protested.

Section 402: Authorization of   Section 402 would provide for a change to the Federal Acquisition
Additional Commercial           Regulation to include the use of time-and-materials and labor-hour
Contract Types                  contracts for commercial services commonly sold to the general public.
                                This change would make it clear that such contracts are specifically
                                authorized for commercial services.

                                The Federal Acquisition Regulation states that a time-and-materials
                                contract may be used only when it is not possible to estimate accurately
                                the extent or duration of the work or to anticipate costs with any
                                reasonable degree of confidence. Therefore, adequate surveillance is
                                required to give reasonable assurance that the contractor is using efficient
                                methods and effective cost controls.

Section 404: Designation of     Section 404 would designate as a commercial item any product or service
Commercial Business Entities    sold by a commercial entity that over the past 3 years made 90 percent of
                                its sales to private sector entities. We are concerned that the provision
                                allows for products or services that had never been sold or offered for sale
                                in the commercial marketplace to be considered a commercial item. In

                                Page 11                                                         GAO-03-716T
             such cases, the government may not be able to rely on the assurances of
             the marketplace in terms of the quality and pricing of the product or

             The growth in spending on service contracts, combined with decreases in
Conclusion   the acquisition workforce and an increase in the number of high-dollar
             procurement actions, create a challenging acquisition environment. It is
             important that agencies have the authorities and tools they need to
             maximize their performance in this new environment. The initiatives
             contained in SARA address a number of longstanding issues in contracting
             for services, and should enable agencies to improve their performance in
             this area.

             Mr. Chairman, this concludes my statement. I will be happy to answer any
             questions you may have.

             Contact and Acknowledgments
             For further information, please contact William T. Woods at
             (202) 512-4841. Individuals making key contributions to this testimony
             include Blake Ainsworth, Christina Cromley, Timothy DiNapoli, Gayle
             Fischer, Paul Greeley, Oscar Mardis, and Karen Sloan.

             Page 12                                                        GAO-03-716T
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