oversight

Defense Acquisitions: Further Actions Needed to Improve Accountability for DOD's Inventory of Contracted Services

Published by the Government Accountability Office on 2012-04-06.

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

             United States Government Accountability Office

GAO          Report to Congressional Committees




April 2012
             DEFENSE
             ACQUISITIONS
             Further Actions
             Needed to Improve
             Accountability for
             DOD’s Inventory of
             Contracted Services




GAO-12-357
                                              April 2012

                                              DEFENSE ACQUISITIONS
                                              Further Actions Needed to Improve Accountability
                                              for DOD's Inventory of Contracted Services
Highlights of GAO-12-357, a report to
congressional committees




Why GAO Did This Study                        What GAO Found
DOD relies on contractors to perform          The Department of Defense (DOD) made a number of changes to improve the
many functions, which can offer               utility of the fiscal year 2010 inventory, such as centrally preparing contract data
benefits for DOD. GAO’s work has              to provide greater consistency among DOD components and increasing the level
shown that reliance on contractors to         of detail on the services provided. DOD, however, continued to rely primarily on
support core missions, however, can           the Federal Procurement Data System-Next Generation (FPDS-NG) for the
place DOD at risk of contractors              inventory for most defense components other than the Army. As such, DOD
performing inherently governmental            acknowledged a number of factors that limited the utility, accuracy, and
functions.                                    completeness of the inventory data. For example, FPDS-NG does not identify
In 2008, Congress required DOD to             more than one type of service purchased for each contract action, provide the
compile and review an annual                  number of contractor full-time equivalent personnel, or identify the requiring
inventory of contractors working under        activity. As before, the Army used its Contractor Manpower Reporting Application
contracts for services. The 2010              to compile its fiscal year 2010 inventory. This system collects data reported by
defense authorization act directed            contractors on services performed at the contract line item level, including
GAO to report for 3 years on these            information on labor hours and the function and mission performed. DOD officials
inventories. In January 2011, GAO             noted that the Army’s current process complies with legislative requirements. In
reported on limitations to DOD’s              January 2011, GAO recommended that DOD develop a plan with time frames
inventory approach. For this report,          and the necessary resources to facilitate its efforts to collect contractor
GAO assessed (1) DOD’s progress in            manpower data and address other limitations in its approach to meeting
addressing these limitations and              inventory requirements. DOD concurred with these recommendations. In
(2) the extent to which the military
                                              November 2011, DOD submitted to Congress a plan to collect contractor
departments addressed instances of
                                              manpower data. DOD officials noted that developing a common data system to
contractors performing functions
identified as inherently governmental         collect and house these data would be challenging given the different
during reviews of their fiscal year 2009      requirements from the military departments and components. Consequently,
inventories. GAO reviewed DOD                 DOD does not expect to fully collect contractor manpower data until fiscal year
guidance, interviewed acquisition and         2016. DOD’s plan, however, does not establish milestones or specify how it will
manpower officials, and assessed 12           meet the legislative requirement to identify the requiring activity and the function
instances from a nongeneralizable             and missions performed by the contractor.
sample in which the Air Force and
                                              Military departments’ required reviews of their fiscal year 2009 inventories of
Army determined that contractors had
                                              contracted services were incomplete. Navy headquarters officials had no
performed inherently governmental
functions.                                    assurance that their commands conducted the required reviews, and GAO found
                                              no evidence at the commands it contacted that the required reviews were
What GAO Recommends                           conducted. Army and Air Force inventory reviews identified 1,935 and 91
                                              instances, respectively, in which contractors were performing inherently
GAO recommends that the military              governmental functions, though this variation may reflect differences in the
departments and components develop
                                              departments’ approaches to conducting the reviews. In 8 of the 12 Army and Air
guidance that provides for clear lines of
                                              Force cases GAO reviewed, contractors continued to perform functions the
authority, responsibility, and
accountability for conducting an              military departments identified as inherently governmental. The absence of
inventory review and that the Army and        guidance that provided for clear lines of responsibility for conducting,
Air Force resolve known instances of          documenting, and addressing the results of the reviews contributed to these
contractors performing inherently             outcomes. Further, Army officials cited difficulty in hiring DOD civilians caused by
governmental functions. DOD largely           DOD’s decision to freeze civilian full-time equivalents at fiscal year 2010 levels.
agreed with GAO’s recommendations.            DOD issued guidance in December 2011 that will require the military
                                              departments and components to certify that they have conducted the required
                                              reviews. The guidance, however, does not clearly establish lines of accountability
View GAO-12-357. For more information,        and responsibility within the military departments and defense components for
contact John P. Hutton at (202) 512-4841 or   conducting the inventory reviews and addressing instances where contractors
huttonj@gao.gov or Cary B. Russell at (404)
679-1808 or russellc@gao.gov.
                                              are identified as performing inherently governmental functions.
                                                                                       United States Government Accountability Office
Contents


Letter                                                                                       1
               Background                                                                    5
               DOD Has Made Limited Progress in Addressing Limitations to Its
                 Inventory Approach                                                          9
               Reviews of the Fiscal Year 2009 Inventories Were Incomplete and
                 Did Not Fully Address Issues with Contractors Performing
                 Inherently Governmental Functions                                         17
               Conclusions                                                                 26
               Recommendations for Executive Action                                        27
               Agency Comments and Our Evaluation                                          28

Appendix I     Scope and Methodology                                                       32



Appendix II    Comments from the Department of Defense                                     36



Appendix III   GAO Contacts and Staff Acknowledgments                                      39



Tables
               Table 1: Fiscal Year 2009 Spending on Services and Number of
                        Instances and Types of Functions Where Contractors Were
                        Identified by Military Departments to Be Performing
                        Inherently Governmental Functions                                  18
               Table 2: Status of Inherently Governmental Functions Reviewed               22


Figure
               Figure 1: Relationship among the Inventory of Contracted Services,
                        In-sourcing, and Budget Documentation Requirements                   9




               Page i                           GAO-12-357 DOD Inventory of Contracted Services
Abbreviations

AT&L              Office of the Under Secretary of Defense for Acquisition,
                   Technology, and Logistics
CMRA              Contractor Manpower Reporting Application
DOD               Department of Defense
FPDS-NG           Federal Procurement Data System-Next Generation
FTE               full-time equivalent
P&R               Office of the Under Secretary of Defense for Personnel
                    and Readiness


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Page ii                                  GAO-12-357 DOD Inventory of Contracted Services
United States Government Accountability Office
Washington, DC 20548




                                   April 6, 2012

                                   Congressional Committees

                                   The Department of Defense (DOD), the federal government’s largest
                                   purchaser of contractor-provided services, reported $204 billion in
                                   obligations for service contracts in fiscal year 2010. DOD relies on
                                   contractors to perform functions as varied as professional and
                                   management support, information technology support, and weapon
                                   system and intelligence support. While there are benefits to using
                                   contractors to perform services for the government, our work has shown
                                   that reliance on contractors to support core missions can place the
                                   government at risk of becoming overly reliant on contractors to perform
                                   closely associated with inherently governmental functions or creating
                                   circumstances in which contractors perform functions deemed inherently
                                   governmental. 1 Over the past decade, our work has identified the need
                                   for DOD to obtain better data on its contracted services to enable it to
                                   make more strategic workforce decisions and ensure that it maintains
                                   appropriate control of government operations. 2 DOD has put a number of
                                   efforts in place to gain better insights into its acquisition of services, but
                                   its efforts have had mixed success to date.

                                   In recent years, Congress has enacted legislation to improve the
                                   department’s ability to manage its acquisitions of services; to make more
                                   strategic decisions about the right workforce mix of military, civilian, and
                                   contractor personnel; and to align resource needs better through the



                                   1
                                    Inherently governmental functions, as a matter of policy, are so intimately related to the
                                   public interest as to require performance by government employees and include functions
                                   that require discretion in applying government authority or value judgments in making
                                   decisions for the government. Federal Acquisition Regulation § 7.503(c) provides
                                   examples of such functions. In addition, closely associated with inherently governmental
                                   functions are those that while not inherently governmental, may approach the category
                                   because of the nature of the function, the manner in which the contractor performs the
                                   contract, or the manner in which the government administers performance under a
                                   contract. Federal Acquisition Regulation § 7.503(d) provides examples of such functions.
                                   2
                                    See, for example, GAO, Defense Management: DOD Needs to Reexamine Its Extensive
                                   Reliance on Contractors and Continue to Improve Management and Oversight,
                                   GAO-08-572T (Washington, D.C.: Mar. 11, 2008), and Defense Acquisitions: Tailored
                                   Approach Needed to Improve Service Acquisition Outcomes, GAO-07-20 (Washington,
                                   D.C.: Nov. 9, 2006).




                                   Page 1                                   GAO-12-357 DOD Inventory of Contracted Services
budget process to achieve that mix. For example, section 2330a of title 10
of the U.S. Code requires DOD to annually compile and review an
inventory of activities performed pursuant to contracts to help provide
better insights into the number of contractor full-time equivalents (FTE)
providing services to the department and the functions they are
performing. In addition, the inventories are to be used to identify, among
other things, whether contractors were performing inherently
governmental functions and to help inform workforce mix decisions. To
date, DOD has submitted annual inventories to Congress for fiscal years
2007, 2008, 2009, and 2010. The fiscal year 2010 inventory was
submitted on September 8, 2011.

Section 803(c) of the National Defense Authorization Act for Fiscal Year
2010 directs GAO to report for 3 years on the inventory of activities
performed pursuant to contracts for services that are to be submitted by
the Secretary of Defense, in 2010, 2011, and 2012, respectively. 3 Most
recently, in January 2011 we assessed the approaches used to compile
the fiscal year 2009 inventories and recommended that DOD develop a
plan of action to facilitate the department’s stated intent of collecting
contractor manpower data and to address other limitations in its approach
to meeting the statutory inventory requirements. 4 For example, in the
absence of a single department-wide data system that could provide the
data necessary to respond to the legislative reporting requirements, most
DOD components, other than the Army, relied on data from the Federal
Procurement Data System-Next Generation (FPDS-NG). DOD
acknowledged that using FPDS-NG as the main data source for the
inventories has a number of limitations. These limitations include that
FPDS-NG does not provide the number of contractor FTEs performing
each service, identify the requiring activity, or allow for the identification of
all services being procured. In contrast, the Army used its existing
process, which incorporated contractor-reported data, including direct
labor hours, from its Contractor Manpower Reporting Application (CMRA).
Further, we reported that the military departments differed both in their
approaches to reviewing the activities performed by contractors and the
extent to which they used the inventories to inform workforce decisions.



3
Pub. L. No. 111-84 (2009).
4
 GAO, Defense Acquisitions: Further Action Needed to Better Implement Requirements
for Conducting Inventory of Service Contract Activities, GAO-11-192 (Washington, D.C.:
Jan. 14, 2011).




Page 2                                  GAO-12-357 DOD Inventory of Contracted Services
For example, the Army implemented a centralized approach to identify
and assess the functions being performed by contractors and used such
assessments to inform workforce decisions. In contrast, the Air Force and
Navy used decentralized approaches that relied on major commands to
review their contracted activities, but made relatively limited use of the
inventories to inform their workforce decisions.

To satisfy the mandate for 2011, we assessed (1) the progress DOD has
made in addressing limitations when compiling the fiscal year 2010
inventory of contracted services and in developing a strategy to obtain
contractor manpower data and (2) the extent to which the military
departments addressed issues with contractors performing inherently
governmental functions identified during reviews of their fiscal year 2009
inventories.

To assess the progress DOD has made in addressing limitations when
compiling the fiscal year 2010 inventory and in developing a strategy to
obtain contractor manpower data, we reviewed relevant guidance related
to the inventory compilation processes used for fiscal year 2010 and
interviewed officials from the Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics (AT&L), Office of Defense
Procurement and Acquisition Policy; the Office of the Under Secretary of
Defense for Personnel and Readiness (P&R); and the departments of the
Army, Navy, and Air Force. We also reviewed plans submitted by the
military departments and defense components to obtain contractor
manpower data directly from contractors.

To assess the extent to which the military departments addressed
instances in which contractors were performing inherently governmental
functions, we used data from the fiscal year 2009 inventory reviews,
which was the most current review available at the time we began our
work. To do so, we reviewed a total of 12 instances in which contractors
were identified as performing inherently governmental functions. We
selected two Army commands and one Air Force component based in
part on the number of such instances they had identified. For the Army,
we randomly selected 2 instances at the Training and Doctrine Command
and 1 at the Acquisition Support Center. In addition, we reviewed 6
instances where contractors were performing the duties of Department of
the Army systems coordinators. The Army’s 2010 acquisition review
chartered by the Secretary of the Army determined these positions to be




Page 3                            GAO-12-357 DOD Inventory of Contracted Services
inherently governmental. 5 The Air Force provided data to us in September
2011 that summarized the results of its inventory review process,
including functions being performed by contractors that it identified as
inherently governmental. From these data, we determined that the Air
National Guard had the largest number of inherently governmental
functions being performed by contractors, and we randomly selected 3
instances for review. We reviewed the relevant contract files and
interviewed program and contracting officials responsible for the
performance of these functions to determine what steps the military
departments took once the review process identified the functions as
inherently governmental. We did not independently assess whether the
functions the military departments identified were in fact inherently
governmental. While these cases illustrate the extent to which DOD took
actions to resolve instances in which the military departments identified
that contractors had performed inherently governmental functions, the
results of our analysis are not generalizable to the more than 2,000
instances where contractors were performing inherently governmental
functions, as identified by the military departments.

At the time we initiated our work, Navy headquarters officials did not have
the results of their fiscal year 2009 inventory review process available and
subsequently acknowledged that they were uncertain whether their
commands conducted the required reviews. Consequently, we
considered DOD’s fiscal year 2010 in-sourcing data that were reported to
Congress in September 2011. From the Navy’s in-sourcing data, we
selected Fleet Forces Command and Space and Naval Warfare Systems
Command for further review based on the number of positions they
reported as in-sourced based on contractor performance of an inherently
governmental function. We did not review individual Navy contracts
because Space and Naval Warfare Systems Command officials told us
that it was not possible to track the positions to specific contracts. Also,
we found that the commands subsequently reported that the functions
were not inherently governmental and were in-sourced for other reasons,
such as to provide Navy personnel career progression opportunities. A
detailed description of our scope and methodology is included in
appendix I.




5
 Army Strong: Equipped, Trained and Ready: Final Report of the 2010 Army Acquisition
Review, John M. McHugh, Secretary of the Army (January 2011).




Page 4                                 GAO-12-357 DOD Inventory of Contracted Services
             We conducted this performance audit between July 2011 and April 2012
             in accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             In part to improve the availability of information on and management of
Background   DOD’s acquisition of services, Congress enacted section 2330a of title 10
             of the U.S. Code, which required the Secretary of Defense to establish a
             data collection system to provide management information on each
             purchase of services by a military department or defense agency. 6 The
             information to be collected includes, among other things, the total dollar
             amount of the purchase and the extent of competition provided in making
             the purchase. In 2008, Congress amended section 2330a to add a
             requirement for the Secretary of Defense to submit an annual inventory of
             the activities performed pursuant to contracts for services for or on behalf
             of DOD during the preceding fiscal year. 7 The inventory is to include a
             number of specific data elements for each identified activity, including

             •   the function and missions performed by the contractor;
             •   the contracting organization, the component of DOD administering the
                 contract, and the organization whose requirements are being met
                 through contractor performance of the function;
             •   the funding source for the contract by appropriation and operating
                 agency;
             •   the fiscal year the activity first appeared on an inventory;
             •   the number of full-time contractor employees (or its equivalent) paid
                 for performance of the activity;
             •   a determination of whether the contract pursuant to which the activity
                 is performed is a personal services contract; and
             •   a summary of the information required by section 2330a(a) of title 10
                 of the U.S. Code.




             6
              The National Defense Authorization Act for Fiscal Year 2002, Pub. L. No. 107-107,
             § 801(c) (2001).
             7
             The National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-81, § 807.




             Page 5                                  GAO-12-357 DOD Inventory of Contracted Services
As implemented by DOD, components are to compile annual inventories
of activities performed on their behalf by contractors and submit them to
AT&L, which is to formally submit a consolidated DOD inventory to
Congress no later than July 31. Once compiled, the inventory is to be
made public and within 90 days of the date on which the inventory is
submitted to Congress, the secretary of the military department or head of
the defense agency responsible for activities in the inventory is to review
the contracts and activities for which they are responsible and ensure that
any personal services contracts in the inventory were properly entered
into and are being performed appropriately; that the activities in the
inventory do not include inherently governmental functions; and to the
maximum extent practicable, that activities on the list do not include any
functions closely associated with inherently governmental functions. 8

In January 2011, Congress amended section 2330a(c) of title 10 of the
U.S. Code to specify that the Under Secretaries of Defense for Personnel
and Readiness; Acquisition, Technology and Logistics; and the Office of
the Comptroller are responsible for issuing guidance for compiling the
inventory. 9 Section 2330a(c) was also amended to state that DOD is to
use direct labor hours and associated cost data reported by contractors
as the basis for the number of contractor FTEs identified in the inventory,
though it provided that DOD may use estimates where such data are not
available and cannot reasonably be made available in a timely manner.

Further, in December 2011, section 936 of the National Defense
Authorization Act for Fiscal Year 2012 amended section 2330a of title 10
of the U.S. Code to clarify the types of contracted services to be
inventoried, including contracts for goods to the extent services are a
significant component of the contract. In addition, it addressed the
manner in which contractor FTEs are captured for inventory purposes.
This section also directed the secretary of the military department or head
of the defense agency responsible for activities in the inventory to
develop a plan, including an enforcement mechanism and approval
process, to




8
10 U.S.C. § 2330a(e).
9
 The Ike Skelton National Defense Authorization Act for Fiscal Year 2011, Pub. L. No.
111-383, § 321.




Page 6                                  GAO-12-357 DOD Inventory of Contracted Services
•     provide for the use of the inventory by the military department or
      defense agency to aid in the development of its annual personnel
      authorization requests to Congress and in carrying out personnel
      policies;
•     ensure that the inventory is used to inform strategic workforce
      planning;
•     facilitate the use of the inventory for budgetary purposes; and
•     provide for appropriate consideration of the conversion of activities to
      performance by government employees.

Section 931 of the National Defense Authorization Act for Fiscal Year
2012 also mandated that DOD use the inventories when making
determinations regarding the appropriate workforce mix necessary to
perform its mission. 10

In addition to the laws and guidance that govern the compilation of the
inventory and the inventory review processes, Congress also added
section 2463 to title 10 of the U.S. Code, which requires P&R to develop
guidelines and procedures to ensure that consideration is given to using
DOD civilian employees to perform functions that are currently performed
by a contractor—a process generally referred to as in-sourcing—and new
functions. In particular, these guidelines and procedures are to provide
special consideration for, among other things, in-sourcing functions
closely associated with inherently governmental functions that contractors
are currently performing, or having DOD civilian employees perform new
requirements that may be closely associated with inherently
governmental functions. Congress required the Secretary of Defense to
make use of the inventories created under section 2330a(c) of title10 of
the U.S. Code for the purpose of identifying functions that should be
considered for performance by DOD civilian employees under this
provision. DOD issued initial in-sourcing guidance in April 2008 and
additional guidance in May 2009 to assist DOD components in
implementing this legislative requirement. 11




10
    Pub. L. No. 112-81 (2011).
11
  The National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181
§ 324. We recently reported on DOD’s fiscal year 2010 in-sourcing efforts. See GAO,
Defense Workforce: DOD Needs to Better Oversee In-sourcing Data and Align In-sourcing
Efforts with Strategic Workforce Plans, GAO-12-319 (Washington, D.C.: Feb. 9, 2012).




Page 7                                GAO-12-357 DOD Inventory of Contracted Services
Further, the National Defense Authorization Act for Fiscal Year 2010
provided for a new section 115b in title 10 of the U.S. Code that requires
DOD to annually submit to the defense committees a strategic workforce
plan to shape and improve the civilian workforce. Among other
requirements, the plan is to include an assessment of the appropriate mix
of military, civilian, and contractor personnel capabilities. P&R is
responsible for developing and implementing the strategic plan in
consultation with AT&L. The act also added section 235 to title 10 of the
U.S. Code, which requires the Secretary of Defense to include
information in DOD’s annual budget justification materials regarding the
procurement of contracted services. Specifically, the legislation requires
for each budget account to identify clearly and separately (1) the amount
requested for the procurement of contract services for each DOD
component, installation, or activity and (2) the number of contractor FTEs
projected and justified for each DOD component, installation, or activity
based on the inventory and associated reviews. 12 DOD’s fiscal year 2013
budget guidance to DOD components requires the budget estimates to be
informed by the fiscal year 2010 inventory for contracted services.

Collectively, these statutory requirements mandate the use of the
inventory and the associated review process to help identify functions for
possible conversion from contractor performance to DOD civilian
performance, support the development of DOD’s annual strategic
workforce plan, and specify the number of contractor FTEs included in its
annual budget justification materials. Figure 1 illustrates the relationship
among the related statutory requirements.




12
  The National Defense Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84
§ 1108(a)(1) and 803 (a) (2009). We did not assess DOD’s implementation of this
requirement as part of this review.




Page 8                                  GAO-12-357 DOD Inventory of Contracted Services
Figure 1: Relationship among the Inventory of Contracted Services, In-sourcing, and Budget Documentation Requirements




                                       DOD made a number of changes to improve the consistency of the fiscal
DOD Has Made                           year 2010 inventory, but it continued to rely primarily on data collected in
Limited Progress in                    FPDS-NG for the inventory for all defense components other than the
                                       Army and the TRICARE Management Activity. As such, DOD
Addressing                             acknowledged that the factors that limited the utility, accuracy, and
Limitations to Its                     completeness of using FPDS-NG remained. In November 2011, DOD
Inventory Approach                     submitted to Congress a plan that included instructions to the military
                                       departments and DOD components to document contractor FTEs and
                                       begin the collection of contractor manpower data. DOD officials noted that
                                       developing a common data system to collect and house contractor
                                       manpower data would be challenging given the different requirements of
                                       the military departments and components. Consequently, DOD does not
                                       expect to be able to fully collect contractor-reported direct labor
                                       information until fiscal year 2016. Further, DOD has not established
                                       milestones or time frames for the development and implementation of the
                                       data system nor has it specified how it will obtain the remaining required



                                       Page 9                               GAO-12-357 DOD Inventory of Contracted Services
                          data, such as identifying the requiring activity and all functions and
                          missions performed by the contractor, to meet the legislative inventory
                          requirements.


Some Refinements Were     DOD’s approach to compiling its fiscal year 2010 inventory was similar to
Made to the Fiscal Year   what DOD used for its fiscal year 2009 inventory. AT&L officials noted,
2010 Inventory, but       however, that they had implemented several changes to improve the
                          fiscal year 2010 inventory’s utility. For example, AT&L did the following:
Previously Identified
Limitations with Using    •    Centrally prepared and provided each component with a list that
FPDS-NG Remain                 reflected the specific categories of services that were to be included in
                               the inventory to provide greater consistency among DOD
                               components. 13 In contrast, DOD components compiled their own
                               contract lists for the fiscal year 2009 inventories.

                          •    Increased the detail available on the services provided by using
                               product and service codes at the four-digit level rather than at the
                               broader, one-digit level used in the fiscal year 2009 inventory. 14 For
                               example, in the fiscal year 2009 inventory, contracts for dentistry
                               services were reported under the broader category of medical
                               services, which had an average cost of about $107,000 per FTE. 15 In
                               fiscal year 2010, dentistry services were reported separately from the
                               medical services category with an average cost of $89,000 per FTE.

                          •    Updated labor rates to account for changes in service costs. These
                               rates are based on costs, by product and service code, derived using
                               fiscal year 2010 information from the Army’s CMRA.


                          13
                            All categories of services identified in FPDS-NG were included in the inventory, except
                          services related to research and development (except program management), lease of
                          facilities and equipment, and construction.
                          14
                            Product and service codes describe the products, services, and research and
                          development purchased by the federal government. The codes indicate what was bought
                          for each contract action in FPDS-NG. However, users of FPDS-NG are directed to enter
                          only one product and service code for each contract action—for example, task order—into
                          FPDS-NG and, for those instances where more than one service was provided, they are
                          to enter the product and service codes that represent most of the value of the contract
                          action.
                          15
                            A contractor FTE is defined as a standard measure of labor that equates to 1 year of
                          full-time work (labor hours as defined by the Office of Management and Budget Circular A-
                          11 each year) to support a mission requirement.




                          Page 10                                  GAO-12-357 DOD Inventory of Contracted Services
In addition, DOD components were allowed to update or revise the
contract lists provided by AT&L as appropriate. For example, Air Force
officials stated that for the fiscal year 2010 inventory they used their
financial system to cross-walk the contractual, financial, and requiring
activity information with the information that was provided by AT&L. The
updated information, according to Air Force officials, allowed them to
include all Air Force-funded service contracts awarded by non-DOD
agencies, provided greater fidelity in the inventory and enabled the Air
Force to use the inventory to inform the development of budget
justification materials.

Further, AT&L in cooperation with DOD components aligned the product
and service code functions to missions by organizing their spending into
six portfolios developed by the Office of Defense Procurement and
Acquisition Policy. AT&L officials stated that this alignment was intended
to provide better organization and visibility into services being acquired
and what missions they support. AT&L also sought to identify the
“requiring activity” down to the major command level by using the “funding
office” as a surrogate measure. 16 AT&L officials, however, acknowledged
that the requiring activity does not always correspond to the funding
office. Collectively, according to AT&L officials, the additional level of
detail will provide more accurate costs associated with the services being
acquired and could potentially aid in better planning and budgeting for
service acquisitions.

In compiling DOD’s 2010 inventory, however, DOD officials continued to
rely primarily on data collected in FPDS-NG for all defense components
other than the Army and the TRICARE Management Activity. As such,
DOD officials acknowledged that the factors that limited the utility,
accuracy, and completeness of using FPDS-NG remained. These
limitations include not being able to identify and record more than one
type of service purchased for each contracting action entered into the
system, not being able to capture any services performed under contracts
that are predominantly for supplies, not capturing service contracts
awarded on behalf of DOD by non-DOD agencies, not being able to




16
  The requiring activity is the organization charged with fulfilling a mission for or on behalf
of DOD, and is responsible for delivering the service to satisfy the mission, even if the
effort is contracted to the private sector.




Page 11                                    GAO-12-357 DOD Inventory of Contracted Services
identify the requiring activity specifically, and not being able to determine
the number of contractor FTEs used to perform each service. 17

As with the fiscal year 2009 inventory, AT&L authorized the Army to
continue to use its CMRA data system. 18 CMRA is intended to capture
data directly reported by contractors on each service performed at the
contract line item level, including information on the direct labor dollars,
direct labor hours, total invoiced dollars, the functions and mission
performed, and the Army unit on whose behalf contractors are performing
the services. In instances where contractors are performing different
services under the same order, or are performing services at multiple
locations, they can enter additional records in CMRA to capture
information associated with each type of service or each location. Under
its approach, unlike the Air Force and the Navy, the Army included all
categories of research and development services in its inventory and
identified the services provided under contracts for goods. To report the
number of contractor FTEs, the Army indicated that it divided the number
of direct labor hours reported by a contractor in CMRA for each service
performed by 2,088, the number of labor hours in a federal employee
work year. For other data elements in its inventory, such as the funding
source and contracting organization, the Army relied on the Army
Contract Business Intelligence System and updates from resource
managers, contracting officer’s representatives, and other officials.

Overall, DOD reported that in fiscal year 2010, 23 components submitted
inventories and estimated that about 623,000 contractor FTEs provided
services to DOD under contracts with obligations totaling about


17
  For example, in January 2011, we reported that AT&L’s guidance instructed DOD
components to record in the inventory the category of service with the predominant
amount of dollars, although more than one category of service may be purchased under a
contract action. Further, we reported that DOD and military department officials expressed
concerns that the average direct labor rates and average ratios in AT&L’s approach to
estimate contractor FTEs did not reflect the services for which they contract, which may
cause significant variations, either over- or underreporting, for specific categories of
services and particular contracts. See GAO-11-192.
18
  The TRICARE Management Activity also used an alternate approach, which collected
manpower data directly from contractors, though its calculation of contractor FTEs was
estimated using a census. TRICARE Management Activity officials directed each
contractor associated with the fiscal year 2010 inventories to formulate a total number of
direct labor FTEs, both salaried and hourly. The TRICARE Management Activity’s count
reflects direct labor for the prime contract, excluding subcontract labor and clinical support
agreement employees.




Page 12                                    GAO-12-357 DOD Inventory of Contracted Services
                         $121 billion. In comparison, for fiscal year 2009, DOD reported that 22
                         components submitted inventories and estimated that about 767,000
                         contractor FTEs provided services to DOD under contracts with
                         obligations totaling about $155 billion. DOD officials cautioned against
                         comparing the number of contractor FTEs for fiscal year 2009 and fiscal
                         year 2010 given the differences in the estimating formula, the changes in
                         reporting for the research and development category, and other factors.


DOD Efforts to Collect   Over the past year, DOD initiated efforts to collect manpower data directly
Contractor Manpower      from contractors. These efforts were, in part, in response to
Data                     Congressional direction in section 8108 of the Fiscal Year 2011 Defense
                         Appropriations Act, which made $2,000,000 available to both the Air
                         Force and the Navy for leveraging the Army’s CMRA system to document
                         contractor FTEs and meet all the requirements of section 2330a(e) and
                         section 235 of title 10 of the U.S. Code. 19 It further required the military
                         departments and DOD components to submit their plans for reporting
                         contractor FTEs no later than June 15, 2011. DOD did not meet this
                         deadline, but it submitted an interim response to Congress in July 2011
                         detailing a time frame for DOD components to complete and submit their
                         individual plans.

                         In August 2011, the Navy and the Air Force submitted their plans to
                         leverage the Army’s CMRA data system. In their plans, the Navy and the
                         Air Force indicated that they would begin developing requirements for a
                         contractor manpower data collection system, but noted that
                         implementation would not begin until the end of fiscal year 2012 or later.
                         Navy and Air Force officials said they wanted to ensure that the data
                         collection system they implemented had the necessary capability to
                         inform other DOD workforce initiatives, such as in-sourcing, and to meet
                         the information technology requirements set by their military departments.
                         Subsequently, in September 2011, DOD components started submitting
                         their plans for reporting contractor FTEs. Some DOD components noted
                         that they would begin modifying existing and future contracts to require
                         the collection of manpower data directly from contractors starting as early
                         as October 2011 and that it would take about a year to modify all their
                         existing contracts. Components also indicated that after the contracts



                         19
                           Department of Defense and Full-Year Continuing Appropriations Act, 2011, Pub. L. No.
                         112-10, § 8108.




                         Page 13                                GAO-12-357 DOD Inventory of Contracted Services
were modified, they would begin collecting the data by conducting manual
data calls, implementing the Army’s CMRA system, or using other internal
processes. The Navy did not include a time frame for modifying contracts,
while the Air Force estimated that it would take approximately 5 years to
modify all its contracts. As of February 2012, 43 of the 44 DOD
components, including the Army, Navy, and Air Force, had submitted their
plans to Congress.

Subsequent to submitting these individual plans, DOD continued to revise
its approach, as both P&R and AT&L officials expressed concerns about
aspects of the timing and approach reflected in the components’ plans.
For example, P&R officials noted that the Navy’s August 2011 plan to
leverage the Army’s system to collect manpower data directly from
contractors “lacks clear and decisive actions and milestones to meet the
requirement.” Further, AT&L officials noted that requiring contractors to
provide contractor manpower data will require approval from the Office of
Management and Budget, as provided for under the Paperwork
Reduction Act. 20

In November 2011, DOD issued a department-wide plan intended to meet
the legislative inventory requirements, including those for collecting
contractor manpower data and documenting contractor FTEs. DOD plans
to establish a common data system to collect and house contractor
manpower data for the entire department and develop a comprehensive
instruction on the development, review, and use of the contracted
services inventories. To do so, the Office of the Deputy Chief
Management Officer, P&R, and other stakeholders formed a working
group to help develop and implement the data system and ensure that it
leverages existing solutions, such as the Army’s CMRA system. DOD’s
November 2011 plan noted that the Army currently has reporting
processes and an infrastructure in place to comply with section 2330a of
title 10 of the U.S. Code. The plan, however, indicates that DOD will not
have a common data system in place throughout the department until
fiscal year 2016. P&R officials indicated that although discussions among
the working group have begun, obtaining concurrence from military
departments and components on the capability of a common data system
may delay implementation.


20
  44 U.S.C. §§ 3501-3521. The Paperwork Reduction Act requires that agencies obtain
Office of Management and Budget approval before requesting most types of information
from the public.




Page 14                                GAO-12-357 DOD Inventory of Contracted Services
As part of these efforts, DOD submitted an emergency processing
request to the Office of Management and Budget on the Paperwork
Reduction Act on December 16, 2011. DOD officials subsequently were
informed that this request would likely not be approved. Consistent with
the requirements of the Paperwork Reduction Act, DOD posted a notice
in the Federal Register on February 7, 2012, seeking public comment on
its plans to begin collecting direct labor information and other data on
DOD contracts. DOD indicated that after it reviews the comments
received by the March 23 deadline, a number of other actions will need to
be taken before DOD can begin collecting such data. DOD officials further
indicated that they will need to assess the impact these events will have
on the actions and timeframes identified in their November 2011 plan.
The Army, which previously received approval from the Office of
Management and Budget to collect certain contract data from contractors
using its CMRA system, received a 3-year extension of this approval on
December 15, 2011.

P&R and AT&L issued guidance on the submission and review of the
fiscal year 2011 inventory on December 29, 2011. This guidance
indicates that for fiscal year 2011, the Office of Defense Procurement and
Acquisition Policy will provide a data set—at the four-digit product and
service code level derived from FPDS-NG—to each DOD component with
acquisition authority. Further, the guidance provides a different formula
for DOD components to use for estimating the number of contractor FTEs
paid for the performance of an activity based on the amount of direct
labor hours provided by a contractor under each product and service
code. Since the Navy, the Air Force, and most DOD components do not
collect direct labor hours directly from contractors, the guidance indicates
that DOD components may use the best available data or a variety of
methodologies, singularly or in combination, to estimate direct labor
hours. These methodologies include

•   collecting direct labor hour information from contractors,
•   collecting direct labor hours as reported by the contracting officer’s
    representative for the service during fiscal year 2011,
•   referencing the independent government cost estimate or contractor
    technical proposals to extrapolate hours for services provided in fiscal
    year 2011,
•   reporting information collected from contract invoices, or
•   calculating the number of contractor FTEs by using information
    extrapolated from the manpower data collected by the Army from its
    contractors.




Page 15                            GAO-12-357 DOD Inventory of Contracted Services
Under this plan, the Army will continue to use its CMRA system and other
established tools and processes for preparing and submitting its
inventory.

DOD officials noted that DOD intends to develop a comprehensive DOD
instruction for the development, review, and use of the service contract
inventories. This instruction, which DOD officials indicate will be issued to
inform the fiscal year 2013 inventory, is expected to shift primary
responsibility for the inventories from the acquisition community to the
manpower/personnel community at each DOD component. DOD officials
also indicated that the instruction will require that in compiling the
inventory of contracted services, all DOD activities are expected to report
all services provided in support of or to benefit a DOD component,
regardless of the source of the funding or acquisition agent. Additionally,
all DOD activities will include in new contracts, or task and delivery
orders, the requirement to collect manpower information directly from
contractors.

In our January 2011 report, we recommended that DOD develop a plan of
action, including anticipated time frames and necessary resources, to
facilitate the department’s intent of collecting manpower data and to
address other limitations in its current approach to meeting inventory
requirements. 21 DOD concurred with our recommendations. DOD’s
November 2011 plan and December 2011 guidance represent steps in
the right direction to meet the legislative requirements and implement our
recommendation, but neither document contains milestones or time
frames for the development and implementation of a common software
and hardware data system to collect and house contractor manpower
data. Further, while these efforts address the collection of contractor
manpower data, they do not specify how DOD will obtain the remaining
required data, such as identifying the requiring activity and all functions
and missions performed by the contractor, to meet the legislative
inventory requirements.




21
 GAO-11-192.




Page 16                            GAO-12-357 DOD Inventory of Contracted Services
                             Military departments’ required reviews of their fiscal year 2009 inventories
Reviews of the Fiscal        were incomplete. Navy headquarters officials had no assurance that their
Year 2009 Inventories        commands conducted the required reviews, and we found no evidence at
                             the Navy commands we contacted that the required reviews were
Were Incomplete and          conducted. Army and Air Force reviews of their contracted services
Did Not Fully Address        identified 2,026 instances in which contractors were performing inherently
Issues with                  governmental functions. We found that contractors continued to perform
                             functions that were identified as inherently governmental in 8 of the 12
Contractors                  Army and Air Force cases we reviewed. In some of these cases, the
Performing Inherently        Army took steps in response to the inventory review process, such as
                             transferring responsibility to military personnel. In contrast, we also found
Governmental                 that some contractors continued to perform inherently governmental
Functions                    functions. For example, Army officials cited difficulty in hiring DOD
                             civilians caused by DOD’s decision to freeze civilian FTE levels at the
                             fiscal year 2010 level as hindering their ability to resolve instances
                             identified during the inventory review process. Moreover, contracting and
                             program officials were unaware that the inventory review process had
                             identified functions under their contracts as inherently governmental. The
                             absence of guidance that provided for clear lines of responsibility and
                             accountability for conducting, documenting, and addressing the results of
                             the reviews contributed to these outcomes.


Military Departments’        The military departments’ reviews of the fiscal year 2009 inventories were
Reviews of the Fiscal Year   incomplete as the Navy did not conduct a review. The Army and Air Force
2009 Inventories Were        identified 1,935 and 91 instances, respectively, in which contractors were
                             performing inherently governmental functions. The variation in the
Incomplete                   number of cases reported by the Army and the Air Force may reflect
                             differences in their approaches to conducting the inventory reviews. Table
                             1 summarizes the number of inherently governmental functions identified
                             by the military departments through their fiscal year 2009 inventory
                             reviews.




                             Page 17                            GAO-12-357 DOD Inventory of Contracted Services
Table 1: Fiscal Year 2009 Spending on Services and Number of Instances and Types of Functions Where Contractors Were
Identified by Military Departments to Be Performing Inherently Governmental Functions

Dollars in billions
                                                                        Number of
                                                          instances of contractors
Military                  Fiscal year 2009                   performing inherently                        Examples of inherently governmental
department            spending on services                 governmental functions                         functions being performed by contractors
                                         a
Army                                $43.0                                               1,935             •     Engineering and technical services
Air Force                            $33.1                                                 91
                                                                                              b           •     Program management
                                                                                                          •     Professional, administrative, and
                                                                                                                management support services
Navy                                 $39.9             Did not conduct an inventory                             N/A
                                                                             review
                                            Sources: DOD June 2010 summary report to Congress on the fiscal year 2009 service contract inventory and GAO analysis of Army,
                                            Air Force, and Navy data.
                                            a
                                             Army data reflect invoiced dollar amounts reported in CMRA rather than obligations reported in
                                            FPDS-NG.
                                            b
                                             The Air Force’s fiscal year 2009 inventory review included service contracts with obligations through
                                            the end of August 2010.


                                            The Navy issued guidance in September 2010 requiring its commands to
                                            conduct a fiscal year 2009 inventory review. The commands were to
                                            provide a letter within 45 days that certified that they had completed a
                                            review, identified the number of contracts with inherently governmental
                                            functions, and provided a corrective action plan. We found no evidence at
                                            the commands we contacted that the required reviews were conducted.
                                            For example, Fleet Forces Command officials were not aware of a
                                            required inventory review and did not recall guidance being issued.
                                            Similarly, officials from the Navy’s Space and Naval Warfare Systems
                                            Command stated that they did not recall receiving guidance from Navy
                                            headquarters to conduct a review of the fiscal year 2009 inventory. Navy
                                            headquarters officials did not follow up to ensure that the required reviews




                                            Page 18                                                   GAO-12-357 DOD Inventory of Contracted Services
were completed and acknowledged that they could not verify whether
Navy commands completed the fiscal year 2009 inventory review. 22

The Army used a centralized approach that included a headquarters-level
review of all functions performed by contractors. The Army, for its
headquarters-level review, established the Panel for Documentation of
Contractors, which consists of officials from the Office of the Assistant
Secretary of the Army for Manpower and Reserve Affairs along with
headquarters officials from the acquisition and manpower planning
communities. Army guidance directs the commands to provide data to the
panel, including descriptions of the functions being performed by
contractors, the organizational unit for which each function is performed,
and an assessment of whether those functions are inherently
governmental. The panel reviews information provided by the commands
and makes an independent determination to assess whether the functions
are inherently governmental. According to panel officials, function
descriptions do not always provide insight into the day-to-day activities of
contractors, sometimes making it difficult to accurately distinguish
inherently governmental functions from those that are closely associated
with inherently governmental functions. In instances where there was a
difference of opinion on the appropriate assessment of a function,
however, panel and command officials reported that they engaged in
further discussion in order to reach agreement.

Additionally, the Army’s final 2010 acquisition review chartered by the
Secretary of the Army identified the Army’s systems coordinator function
as inherently governmental. 23 The systems coordinator responsibilities
include representing program managers at the Pentagon, acting as a
liaison with Congress, preparing principal staff officers for systems
reviews, writing background papers for military staff, and representing


22
  DOD’s September 2011 in-sourcing report to Congress noted that the two Navy
commands in our review had in-sourced almost 500 positions to address concerns that
contractors were performing inherently governmental functions. In February 2012, we
reported that some of the commands, including those we reviewed, made errors in
reporting in-sourcing data. For example, 348 of 354 new in-sourcing authorizations by the
Navy’s Fleet Forces Command were categorized as inherently governmental when they
should have been categorized as exempt from private sector performance for continuity of
infrastructure operations. See GAO-12-319. Command officials told us that regardless of
the appropriate categorization of the in-sourcing decisions, they did not use the
inventories to inform their decisions.
23
 Army Strong: Equipped, Trained, and Ready.




Page 19                                 GAO-12-357 DOD Inventory of Contracted Services
system program managers on integrated product teams. We found that
the panel reviewed 19 of the 26 instances identified by the Army during
the 2009 inventory review where contractors were performing the
systems coordinator function. An Army manpower official stated that the
panel process did not identify the remaining 7 instances.

In contrast, we found that the Air Force used a decentralized inventory
review approach, which delegated primary responsibility for the review of
its inventory to its major commands and components. In January 2010,
the Secretary of the Air Force issued guidance instructing its major
commands and components to conduct an initial review of its fiscal years
2008 and 2009 inventories of contracted services. According to an Air
Force inventory official, a headquarters review of the initial information
submitted by the commands found that approximately 40 percent of the
fiscal year 2009 contracts included for review did not contain adequate
responses to the required review elements. Because of challenges
experienced during the initial review, the Secretary of the Air Force issued
additional guidance in October 2010 requiring major commands to
complete the review of fiscal year 2009 service contracts that may have
been missed. To do so, the Air Force headquarters-level acquisition office
provided each major command and component with a spreadsheet to
review that contained its portion of the department’s service contracts
from the beginning of fiscal year 2009 through August 2010. This
guidance instructed the organizations to determine, among other things,
whether the activity performed under the contract was an inherently
governmental function. In addition to the inventory review, however, this
effort was to help implement the Secretary of Defense’s direction to
reduce service support contractors, and inform budget justification
initiatives as they pertained to contractor employees.

As a result of this process, the Air Force identified 91 instances of
contractors performing inherently governmental functions, the majority of
those instances for work performed for the Air National Guard and the Air
Force Space Command. Financial management and contracting officials
responsible for conducting the reviews at the Air National Guard and Air
Force Space Command, however, cited concerns with the accuracy and
completeness of the inventory review data. For example, at the Air
National Guard, the inventory review efforts were conducted by
individuals within the financial management office. During the course of
the inventory reviews, however, at least one staff member responsible for
the inventory review had left the organization. When we spoke to an Air
National Guard official in December 2011, she noted that when she
received the spreadsheet from Air Force headquarters, 37 functions on


Page 20                           GAO-12-357 DOD Inventory of Contracted Services
                            the list were already identified as inherently governmental. Air Force
                            officials, however, provided us with documentation to indicate that other
                            individuals within the Air National Guard had made the determinations in
                            earlier reviews of the inventory data, but these determinations were not
                            communicated to the official. Further, officials at both commands stated
                            that the time Air Force headquarters allowed for the review was not
                            sufficient to review each contract and make an informed determination.


Army and Air Force Did      By reviewing their inventories of contracted services, the Departments of
Not Ensure That Functions   the Army and Air Force identified instances in which contractors were
They Identified as          performing inherently governmental functions, but the departments did
                            not ensure that corrective actions were fully implemented. Several options
Inherently Governmental     are available to DOD when contractors are in fact performing such
Were Resolved               functions, including modifying the statement of work to ensure that the
                            work performed is not inherently governmental, assigning responsibility
                            for that work to government personnel, or divesting or discontinuing the
                            work. In 8 of the 12 cases we reviewed at the Army and the Air Force,
                            however, contractors continued to perform functions that the military
                            departments had identified as inherently governmental during the fiscal
                            year 2009 inventory reviews (see table 2).




                            Page 21                           GAO-12-357 DOD Inventory of Contracted Services
Table 2: Status of Inherently Governmental Functions Reviewed

                                                                                                                      Inherently
                                                                                                            governmental functions still
                                                                                                             performed by contractors
                                                                                                             at the time of our review?
Military department/command      Contract number/task order                    Function description             Yes             No
Army
Acquisition Support Center       W15P7T-06-D-E402/0007                         Systems coordinator               √
Acquisition Support Center       W15P7T-06-D-E402/0060                         Systems coordinator               √
                                                                   a
Acquisition Support Center       W15P7T-06-D-E406/0014                         Systems coordinator               √
                                                                   a
Acquisition Support Center       W15P7T-06-D-E406/0014                         Systems coordinator                               √
Acquisition Support Center       W15QKN-06-C-0234                              Engineering support               √
Acquisition Support Center       W31P4Q-05-A-0024/0036                         Systems coordinator               √
Acquisition Support Center       W91260-09-D-0003/1035                         Systems coordinator                               √
Training and Doctrine Command    W911S0-09-P-0090                              Information technology
                                                                                                                 √
                                                                               project manager
Training and Doctrine Command    W912SU-04-P-0067                              Warehouse supervisor                              √
Air Force
Air National Guard               W912JB-09-D-4000/4005                         Administrative support            √
Air National Guard               W9133L-06-C-0009                              Financial services                                √
Air National Guard               W9133L-06-C-0011                              Financial services                √
                                        Source: GAO analysis of Army and Air Force data.
                                        a
                                        This task order contained two systems coordinator functions.


                                        In 4 cases, contractors are no longer performing the functions that had
                                        been identified as inherently governmental. In 3 of these cases, according
                                        to officials, the Army took steps in response to the inventory review
                                        process, including ensuring that the work was performed by government
                                        personnel. In the fourth case, contracting and program officials were not
                                        aware that this function had been identified as inherently governmental
                                        during the review process, but noted that the function had already been
                                        in-sourced by the time they became aware of the determination.

                                        •     In 2 instances where contractors were performing the Department of
                                              the Army systems coordinator function under task orders, program
                                              officials reported that the Army transferred responsibilities for these
                                              functions to military personnel. In one of these cases, a contracting
                                              official noted that he had initially limited the period of performance on
                                              the task order to a 1-year base period with 6-month options because
                                              of concern at the time of award that this function was, at the very
                                              least, closely associated with inherently governmental functions and


                                        Page 22                                             GAO-12-357 DOD Inventory of Contracted Services
    because he was aware that the Army wanted to convert this function
    to a civilian position. A military officer replaced the contractor on
    October 31, 2011, when the first 6-month option expired.

•   In another case involving a $2.1 million warehouse support contract at
    Army’s Training and Doctrine Command, a command official clarified
    that the function performed by the contractor was not inherently
    governmental. She further explained that she believes the
    performance of this service was identified as such by the Panel for
    Documentation of Contractors because the function description
    included the term “warehouse supervisor”. The command official
    responsible for tracking resolutions determined that the function in
    question involved a contractor supervising his own employees not
    other government employees. She reported that it took 2 years
    working with panel officials to reach agreement and revise the panel’s
    determination.

•   The remaining case involved a contractor providing analytical support
    for planning, programming, and budgeting matters under a $470,000
    contract at the Air Force’s Air National Guard. In this case, we
    interviewed a program official and a contracting official in November
    2011 and December 2011, respectively, to determine if they were
    aware that the inventory review process had identified functions under
    this contract as inherently governmental. They stated that they were
    not aware of this determination, but noted that the contract had
    expired in September 2010. The program official further noted that Air
    National Guard had in-sourced all functions previously performed
    under this contract.

In 8 of the cases we reviewed, however, contractors were still performing
inherently governmental functions, as identified during the inventory
review process, at the time of our review, for a variety of reasons. For
example:

•   In 4 instances where it had been determined that contractors had
    been performing the Department of the Army systems coordinator
    function, contractor employees continued to perform these duties.
    According to an Acquisition Support Center official, in June 2011 the
    command requested authorization to replace the contractor
    employees with military personnel. He noted, however, that the
    command had not received authorization at the time of our review. He
    explained, the alternative is to in-source the function and fill the
    positions with civilian personnel. A function, however, may now only
    be in-sourced if the Secretary of the Army personally approves it. In


Page 23                           GAO-12-357 DOD Inventory of Contracted Services
    February 2011, the Secretary of the Army suspended all approved in-
    sourcing actions that had not yet been completed and instituted a new
    in-sourcing request and approval process. The command official
    reported that preparing the in-sourcing package, which includes a
    concept plan, a workload and funding profile analysis, a business
    case, and a contractor inventory review, is a lengthy process, but
    acknowledged that the command had not submitted this package as
    of January 2012.

•   In 2 other cases—1 at the Army’s Acquisition Support Center and 1 at
    the Air Force’s Air National Guard—contracting and program officials
    were unaware that the inventory review process had identified
    functions under their contracts as inherently governmental. One case
    involved a $1.1 million contract at Acquisition Support Center for
    engineering support in which the contractor employee provided
    technical expertise and coordination with program office staff, other
    military departments, Congress, and private companies, among other
    duties. The other case involved a $409,000 Air National Guard
    contract for financial analytical support. In both cases, program
    officials stated that even though the original contracts had expired,
    contractors continued to perform the same functions under
    subsequent contracts.

•   In another case at the Air National Guard, the inventory review
    process identified a function under a $120,000 task order to provide
    advice and advocacy on Air National Guard positions and programs to
    the Air Staff and other Air Force major commands as inherently
    governmental. In this case, the Director of the Contracting Division,
    with responsibility for this task order, stated that she first became
    aware that the function was identified as inherently governmental in
    October 2010 but disagreed with the determination. She was not
    aware of any process in the Air Force or Air National Guard to resolve
    the disagreement. When the task order expired in May 2011, she
    renewed the function under a separate task order.

•   In the remaining case, involving a $6.1 million information technology
    support contract at Army Training and Doctrine Command’s Defense
    Language Institute, a “project manager” function had been identified
    as inherently governmental. A command official noted that the
    contractor employee was no longer performing the function because
    the contract had expired in March 2010. When we reviewed contract
    documents, however, we found that the contract had been extended
    to March 2011. Further, the Defense Language Institute had entered
    into a memorandum of agreement with the Naval Postgraduate


Page 24                           GAO-12-357 DOD Inventory of Contracted Services
    School to provide the same technology support services. According to
    a program official, a contractor employee is still performing the same
    function under a Navy contract.

In addition to our case studies, Army Manpower and Reserve Affairs
officials acknowledged that they are aware of at least 1 instance, included
in the Panel for Documentation of Contractors review process, in which
contractors continue to perform functions that the Army identified as
inherently governmental. In this case, 47 contractors, including 2
investigators, make up the entirety of a police force at U.S. Army
Kwajalein Atoll in the Marshall Islands. These contractors perform all
duties expected from a police force, including patrolling, issuing citations,
making arrests, and investigating misdemeanors. According to Manpower
and Reserve Affairs officials, command officials disagreed with the
determination, but on February 22, 2010, the Army Deputy General
Counsel for Operations and Personnel issued a legal opinion that
concluded that certain functions performed by the contractors were
inherently governmental and could not be performed by a contractor.
According to Manpower and Reserve Affairs officials, contractors
continue to perform these inherently governmental functions. They also
noted that DOD’s decision to freeze civilian FTEs at fiscal year 2010
levels is an impediment to resolving the performance of these inherently
governmental functions by contractors.

To address compliance issues with the inventory review and provide
additional guidance on the process, the Acting Under Secretaries of
Defense for Acquisition, Technology, and Logistics and Personnel and
Readiness, jointly issued guidance for the fiscal year 2011 inventory
review on December 29, 2011. The guidance specifies that military
departments and defense components must review at a minimum 50
percent of all contracts, task orders, delivery orders, or interagency
acquisition agreements listed in the military departments’ and defense
components’ inventories for a given fiscal year. While conducting the
reviews of contracts, the guidance states that the military departments
and defense components should also review how the contracts are
performed and administered, as well as the organizational environment in
which they are being performed. After a review is complete, the military
departments and defense components will now be required to certify that
they have completed a review and submit a letter to P&R with the
following information:

•   an explanation of the methodology used to conduct the review and
    criteria for selection of contracts to review;


Page 25                            GAO-12-357 DOD Inventory of Contracted Services
              •   the results of the review, including identifying any inherently
                  governmental functions, closely associated with inherently
                  governmental functions, or unauthorized personal services contracts;
              •   a plan for divesting or realigning functions for contracts that were
                  identified as inherently governmental; and
              •   an explanation of the steps taken to ensure appropriate government
                  control and oversight for functions that were identified as closely
                  associated with inherently governmental.

              The guidance, however, does not clearly establish lines of accountability
              and responsibility within the military departments and defense
              components for conducting the inventory reviews and addressing
              instances where contractors are identified as performing inherently
              governmental functions.


              Congress has mandated that DOD use the inventory of contracted
Conclusions   services and the associated review process to help DOD ensure that
              contractors are performing work that is appropriate, to support
              development of DOD’s annual strategic workforce plan, and to specify the
              number of contractor FTEs included in DOD’s annual budget justification
              materials. As such, it is essential that the inventories contain
              comprehensive, accurate, and actionable data for each service
              performed.

              DOD, with the exception of the Army, has much further to go in
              addressing the requirements for compiling and reviewing the inventories
              of contracted services. DOD made incremental improvements to its
              process to address some of the previously identified limitations when it
              compiled its fiscal year 2010 inventory, but it has not resolved the
              fundamental issue of how to collect the required data to meet the
              legislative inventory requirements, including manpower data directly from
              contractors. DOD took a significant step in November 2011 to identify
              objectives for collecting contractor manpower data from contractors, but
              DOD indicates that implementation will not be complete until 2016. Given
              the potential value and importance of compiling a complete and accurate
              inventory, it would benefit DOD to move more expeditiously. DOD’s plan,
              however, does not specify time frames or milestones to measure its
              progress toward developing an enterprisewide data system to collect
              contractor manpower data, even though it acknowledged that reaching
              agreement on that approach would be challenging. We therefore reiterate
              our prior recommendation that DOD’s plans include milestones and time
              frames to gauge progress in meeting the inventory requirements.



              Page 26                           GAO-12-357 DOD Inventory of Contracted Services
                      The Army and Air Force conducted inventory reviews, but the wide
                      variation in the number of instances of contractors performing inherently
                      governmental functions raises the question as to how much of the
                      variation is due to the different approaches used to conduct the reviews.
                      Further, the Navy was unable to provide assurance that it actually
                      conducted the statutorily required review of its fiscal year 2009 inventory.
                      This underscores the need for greater accountability and management
                      attention. The absence of guidance, at all levels, providing clear lines of
                      responsibility for conducting, documenting, and addressing issues
                      identified during the fiscal year 2009 inventory review process contributed
                      to instances in which contractors continued to perform functions identified
                      as being inherently governmental in 8 of the 12 Army and Air Force cases
                      we reviewed. Army officials also cited challenges with DOD’s decision to
                      freeze civilian FTEs at fiscal year 2010 levels and the in-sourcing process
                      as complicating their efforts to resolve issues identified during their
                      inventory reviews, including those instances at Kwajalein Atoll. Such
                      challenges, however, do not justify the continued use of contractors to
                      perform inherently governmental functions, in several cases more than a
                      year after the issue was initially identified. DOD’s December 2011
                      guidance will require the military departments and defense components to
                      certify that they have conducted the required reviews, but the guidance
                      does not clearly establish lines of accountability and responsibility within
                      the military departments and defense components for doing so. DOD’s
                      experience in conducting the fiscal year 2009 review demonstrates the
                      importance of guidance that provides for clear lines of authority,
                      responsibility, and accountability if DOD is to use the inventories to help
                      identify and mitigate the risks posed by using contractors to perform
                      certain functions.


                      To address these issues we are making the following three
Recommendations for   recommendations:
Executive Action
                      To improve the execution and utility of the inventory review process, we
                      recommend that the Secretary of Defense ensure that the military
                      departments and defense components issue guidance to their commands
                      that provides clear lines of authority, responsibility, and accountability for
                      conducting an inventory review and resolving instances where functions
                      being performed by contractors are identified as inherently governmental
                      functions.

                      To ensure that the six instances we reviewed in which the Army identified
                      that contractors were still performing functions it deemed inherently


                      Page 27                            GAO-12-357 DOD Inventory of Contracted Services
                     governmental, as well as those at Kwajalein Atoll, have been properly
                     resolved, we recommend that the Secretary of the Army review these
                     functions, determine the status of actions to resolve the issues, and, as
                     appropriate, take necessary corrective actions.

                     To ensure that the two instances we reviewed where contractors were still
                     performing functions the Air Force had previously identified as inherently
                     governmental are properly resolved, we recommend that the Secretary of
                     the Air Force review these functions, determine the status of actions to
                     resolve the issues, and, as appropriate, take necessary corrective
                     actions.


                     DOD provided us with written comments on a draft of this report, stating
Agency Comments      that it largely agreed with our recommendations and is committed to
and Our Evaluation   continue to improve its accounting for contracts for services. More
                     specifically, DOD agreed with two recommendations and partially
                     concurred with one recommendation. DOD’s written response is reprinted
                     in appendix II. DOD also provided technical comments, which were
                     incorporated as appropriate.

                     DOD concurred with our recommendations to address instances we
                     reviewed in which the Army and Air Force identified that contractors were
                     still performing functions deemed inherently governmental. DOD noted
                     that it will work with the Army and Air Force to ensure corrective actions,
                     as appropriate and necessary, are taken.

                     DOD partially concurred with our recommendation that the Secretary of
                     Defense ensure that the military departments and defense components
                     issue guidance to their commands that provides for clear lines of
                     authority, responsibility, and accountability for conducting an inventory
                     review, and for resolving instances where functions being performed by
                     contractors are identified as inherently governmental. DOD agreed it was
                     imperative for the components to do so, but noted that its December 2011
                     guidance, while not prescribing individual management practices,
                     requires component heads to certify completion of and results from the
                     reviews. Further, DOD noted that as defense components vary in size
                     and mission, the need for individual components to have organization-
                     specific guidance should not be mandated but rather determined by each
                     component head.

                     Our recommendation does not intend that DOD prescribe individual
                     component management practices or mandate organization-specific



                     Page 28                           GAO-12-357 DOD Inventory of Contracted Services
guidance. We agree that each component should institute guidance that
fits its mission and needs and that the precise nature of each
component’s guidance may vary in scope and detail. Our work found,
however, that the absence of guidance at the military department-level
that provides for clear lines of authority, responsibility and accountability
contributed to the shortcomings and challenges encountered during the
military departments’ review of their fiscal year 2009 inventories. Given
these results, we continue to believe that it would be prudent for DOD to
obtain sufficient assurance that the military departments’ and
components’ guidance covers the areas—including those enumerated
above—that provide the foundation for conducting a meaningful review.
DOD’s December 2011 guidance, while a step in the right direction, does
not provide such assurances.

DOD also noted in its comments that the Office of Management and
Budget had indicated via e-mail that it would disapprove DOD’s request
for an emergency waiver to the Paperwork Reduction Act. Consequently,
consistent with the requirements of the Paperwork Reduction Act, DOD
posted a notice in the Federal Register in February 2012 seeking public
comment on its plans to begin collecting direct labor information and other
data on DOD contracts. DOD indicated that after it reviews the comments
received by the March 23 deadline, a number of other actions will need to
be taken before DOD can begin collecting such data. As a result, DOD
officials told us they will need to assess the impact these events will have
on the actions DOD identified in its November 2011 plan and, as such,
will not be able to develop additional milestones until this is done. We
modified the text in the report to reflect this updated information.


We are sending copies of this report to the Secretary of Defense,
Secretary of the Air Force, Secretary of the Army, and interested
congressional committees. In addition, the report is available at no charge
on the GAO website at http://www.gao.gov.




Page 29                            GAO-12-357 DOD Inventory of Contracted Services
If you or your staff have any questions about this report, please contact
us at (202) 512-4841 or huttonj@gao.gov or (404) 679-1808 or
russellc@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
GAO staff who made contributions to this report are listed in appendix III.




John P. Hutton
Director, Acquisition and Sourcing Management




Cary B. Russell
Acting Director, Defense Capabilities and Management




Page 30                           GAO-12-357 DOD Inventory of Contracted Services
List of Committees

The Honorable Carl Levin
Chairman
The Honorable John McCain
Ranking Member
Committee on Armed Services
United States Senate

The Honorable Howard P. McKeon
Chairman
The Honorable Adam Smith
Ranking Member
Committee on Armed Services
House of Representatives




Page 31                       GAO-12-357 DOD Inventory of Contracted Services
Appendix I: Scope and Methodology
             Appendix I: Scope and Methodology




             Section 803(c) of the National Defense Authorization Act for Fiscal Year
             2010 directs GAO to report for 3 years on the inventory of activities
             performed pursuant to contracts for services that are to be submitted by
             the Secretary of Defense, in 2010, 2011, and 2012, respectively. 1 To
             satisfy the mandate for 2011, we assessed (1) the progress the
             Department of Defense (DOD) has made in addressing limitations in its
             approach when compiling the fiscal year 2010 inventories on contracted
             services and in developing a strategy to obtain manpower data and
             (2) the extent to which the military departments addressed issues with
             contractors performing inherently governmental functions identified during
             reviews of their fiscal year 2009 inventories. As the military departments
             accounted for 83 percent of the reported obligations on service contracts
             and 92 percent of the reported number of contractor full-time equivalents
             (FTE) in the fiscal year 2009 inventories, we focused our efforts on the
             Army, Navy, and Air Force.

             To assess the progress DOD has made in addressing limitations in its
             previous approach when compiling the service contract inventories, we
             reviewed relevant guidance related to the inventory compilation
             processes and interviewed cognizant officials from the Office of the Under
             Secretary of Defense for Acquisition, Technology, and Logistics (AT&L),
             Office of Defense Procurement and Acquisition Policy; the Office of the
             Under Secretary of Defense for Personnel and Readiness; and the
             departments of the Army, Navy, and Air Force. We assessed changes
             made at the department level between the approaches for fiscal year
             2009 and fiscal year 2010, but we did not assess the extent to which the
             change in approach affected the estimated number of contractor FTEs
             reported in the inventories. For the fiscal year 2010 inventory, AT&L
             continued to rely on data from the Federal Procurement Data System-
             Next Generation (FPDS-NG) for most defense components other than the
             Army and the TRICARE Management Activity. As with the fiscal year
             2009 inventory, the Army continued to use its Contractor Manpower
             Reporting Application (CMRA) that reports manpower data collected
             directly from its contractors. We reviewed Army guidance, interviewed
             officials responsible for the inventory compilation, and reviewed our prior
             work to describe the Army’s inventory compilation process. We did not
             independently assess the accuracy or reliability of the underlying data
             supporting the Army’s, Navy’s, or Air Force’s fiscal year 2010 inventory.



             1
              Pub. L. No. 111-84, § 803 (c) (2009).




             Page 32                                  GAO-12-357 DOD Inventory of Contracted Services
Appendix I: Scope and Methodology




Our January 2011 report, however, identified limitations associated with
using FPDS-NG data as the basis for the inventory. 2 As such, we
reviewed our prior work to identify these limitations and discussed with
AT&L officials what steps, if any, they had taken to address these
limitations.

To assess DOD’s progress in developing a strategy to obtain manpower
data, we reviewed DOD’s efforts to respond to congressional direction
reflected in section 8108 of the 2011 Defense Appropriations Act, which
required the Navy and the Air Force to submit plans to leverage the
Army’s CMRA system and the military departments and components to
submit plans to Congress for reporting contractor FTEs no later than
June 15, 2011. We reviewed and assessed the 43 plans submitted by the
military departments and defense components as of February 2012 as
well as DOD’s November 2011 plan, which included instructions to the
military departments and DOD components to document contractor FTEs
and begin the collection of manpower data. We interviewed officials from
AT&L’s Office of Defense Procurement and Acquisition Policy, and the
Office of the Under Secretary of Defense for Personnel and Readiness to
obtain their views on the department’s plans to collect contractor
manpower data.

To assess the extent to which the military departments addressed
instances in which contractors were performing inherently governmental
functions, we used data from the fiscal year 2009 inventory reviews,
which was the most current review available at the time we began our
work. To do so, we reviewed a total of 12 instances in which contractors
were identified as performing inherently governmental functions. We
selected two Army commands and one Air Force component based in
part on the number of such instances they had identified. For the Army,
we randomly selected 3 instances from the Army’s inventory review data
at the Training and Doctrine Command and 3 instances at the Acquisition
Support Center. These data included determinations made by the Army’s
Panel for the Documentation of Contractors, which identified the functions
as being inherently governmental, closely associated with inherently
governmental, or unauthorized personal services, as well as the
commands’ determination of how each function was resolved. For the 6


2
 GAO, Defense Acquisitions: Further Action Needed to Better Implement Requirements
for Conducting Inventory of Service Contract Activities, GAO-11-192 (Washington, D.C.:
Jan. 14, 2011).




Page 33                                 GAO-12-357 DOD Inventory of Contracted Services
Appendix I: Scope and Methodology




Army cases we randomly selected, we reviewed the inventory review data
and interviewed officials responsible for the fiscal year 2009 inventory
review process. We subsequently eliminated 3 of the instances we
randomly selected because they were identified as closely associated
with inherently governmental functions or unauthorized personal services.
In addition, we reviewed 6 instances where contractors were performing
the duties of Department of the Army systems coordinators. Army’s 2010
acquisition review chartered by the Secretary of the Army determined that
these positions were inherently governmental. 3 For each of these cases,
we reviewed the contract files and interviewed program and contracting
officials responsible for these contracts to determine the extent to which
DOD took action to resolve instances of contractors performing inherently
governmental functions.

The Air Force provided data to us in September 2011 that summarized
the results of its fiscal year 2009 inventory review process, including
functions being performed by contractors that it identified as inherently
governmental. Pursuant to the Secretary of the Air Force’s October 2010
guidance, the inventory review was to include all contracts from the
beginning of fiscal year 2009 through August 2010. From these data, we
determined that the Air National Guard had the largest number of
instances in which the review process identified contractors as performing
inherently governmental functions, and randomly selected 3 instances the
Air Force had identified as including inherently governmental functions at
the Air National Guard. We also interviewed officials from the Air National
Guard and the Air Force Space Command about their inventory review
process. In November 2011, Air Force officials provided us a revised data
set that excluded contracts awarded from October 2009 through August
2010, including the contracts at the Air National Guard. Since these
contracts were reviewed as part of the Air Force’s fiscal year 2009
inventory review process as directed by the Secretary of the Air Force
and included functions identified as inherently governmental, we included
them in our review.

At the time we initiated our work, Navy headquarters officials did not have
the results of their fiscal year 2009 inventory review process available and
subsequently acknowledged that they were uncertain whether their
commands conducted the required reviews. Consequently, we


3
 Army Strong: Equipped, Trained and Ready: Final Report of the 2010 Army Acquisition
Review, John M. McHugh, Secretary of the Army (January 2011).




Page 34                                GAO-12-357 DOD Inventory of Contracted Services
Appendix I: Scope and Methodology




considered DOD’s fiscal year 2010 in-sourcing data that were reported to
Congress in September 2011. From the Navy’s in-sourcing data, we
selected Fleet Forces Command and Space and Naval Warfare Systems
Command for further review based on the number of positions they
reported as in-sourced based on contractor performance of an inherently
governmental function. We also contacted Naval Sea Systems
Command, the largest of five Navy systems commands, to discuss
whether the command had conducted an inventory review but were
informed that the command had not done so. We did not review individual
Navy contracts because Space and Naval Warfare Systems command
officials stated that it was not possible to track the positions to specific
contracts. Also, we found that the commands subsequently reported that
the functions were not inherently governmental and were in-sourced for
other reasons, such as to provide Navy personnel career progression
opportunities.

For the 12 cases we included in our review, we compared the information
that the Army and Air Force provided regarding the contracts they
reviewed with information in the contract files and found the data
sufficiently reliable for the purposes of our work. We did not, however,
independently assess whether the functions the military departments
identified were in fact inherently governmental. Further, the results of our
analysis are not generalizable to all instances where contractors were
performing inherently governmental functions identified by the military
departments.

We conducted this performance audit between July 2011 and April 2012
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




Page 35                             GAO-12-357 DOD Inventory of Contracted Services
Appendix II: Comments from the Department
             Appendix II: Comments from the Department
             of Defense



of Defense




             Page 36                                GAO-12-357 DOD Inventory of Contracted Services
Appendix II: Comments from the Department
of Defense




Page 37                                GAO-12-357 DOD Inventory of Contracted Services
Appendix II: Comments from the Department
of Defense




Page 38                                GAO-12-357 DOD Inventory of Contracted Services
Appendix III: GAO Contacts and Staff
                  Appendix III: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  John P. Hutton, (202) 512-4841 or huttonj@gao.gov
GAO Contacts
                  Cary B. Russell, (404) 679-1808 or russellc@gao.gov


                  In addition to the contacts named above, Timothy DiNapoli, Acting
Staff             Director; MacKenzie Cooper; Julia Kennon; John Krump; Angie Nichols-
Acknowledgments   Friedman; and Guisseli Reyes-Turnell made key contributions to this
                  report.




(121008)
                  Page 39                                GAO-12-357 DOD Inventory of Contracted Services
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