Achieving Cost Efficiencies in Commercial Activities

Published by the Government Accountability Office on 1990-04-25.

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

                    United States General Accounting     Office

For Release         Achieving     Cost    Efficiencies        in
on Delivery         Commercial      Activities
Expected    at
10:00 a.m. EDT
April    25, 1990

                     Statement    of
                     L. Nye Stevens,       Director
                     Government     Business     Operations        Issues
                     General    Government     Division

                     Before   the
                     Subcommittee   on Legislation       and
                       National   Security
                     Government   Operations     Committee
                     House of Representatives

                          ACHIEVING COST EFFICIENCIES                 IN
                               COMMERCIAL ACTIVITIES
                              SUMMARY OF STATEMENT BY
                                   L. NYE STEVENS
                           DIRECTOR, GOVERNMENT BUSINESS
                                 OPERATIONS ISSUES

The Chairman      of the Subcommittee          on Legislation        and National
Security,     House Committee      on Government         Operations,       asked GAO to
summarize     key issues    from its     work on the Office            of Management
and Budget's      A-76 program     and to comment on how provisions                  of
H.R. 4015, the "Commercial          Activities         Contracting       Procedures      Act
of 1990,"     would address     them.      The A-76 program          is designed       to
achieve   efficiencies      by encouraging         competition       between     the
federal   workforce      and the private         sector    for providing       commercial
services    needed by government         agencies.

GAO believes      that   the A-76 program's        concept     of encouraging
competition     is a sensible       management     approach      that can contribute
to more efficient        and effective      government      operations.        However,
despite     its conceptual      appeal,   the   program     has    not  gained
governmentwide       acceptance     or met its     objectives.

Several     key obstacles        have hindered         implementation         of the A-76
program.       The cost-study        process     is burdensome          and time-
consuming.         The absence of workload             data and adequate           cost
accounting       systems has increased           the time it takes to do studies
and in some cases has contributed                  to increased         contract      costs.
The A-76 program         adversely      affects      federal     workers'      morale      and
reduces     individual      and organizational            productivity.          The accuracy
of savings       estimates     and the extent          to which savings          are realized
is open to question.             The lack of convincing              savings     data has
contributed        to increasing       congressional         concern     about whether
program     savings     exceed its costs         in disruption,          diversion       of
energy I and program and contract                administration.
Legislating         a commercial       activities          cost-study       program,    as
proposed        in H.R. 4015, would remove any doubt about the program's
priority        and should      increase       the level        of governmentwide        cost-
study     activity.        GAO believes          that    providing       the program     with    a
legislative         foundation       would result          in agencies       assigning     a
higher       level   of priority       and resources            to doing cost studies.
Also,      in theory,      requirements          for agencies         to collect      and report
activity        cost and savings         data should          result     in more accurate
cost studies         and more reliable             savings      estimates.
However,      GAO believes       that   legislation   by itself    may not
completely       dispel    several    key problem    areas that have
historically        hindered    A-76 implementation.        GAO points       out
several      such problems       for the Subcommittee's       consideration.
Mr.     Chairman          and Members             of    the     Subcommittee:

We are       pleased        to be here                today     to       discuss             our     work     involving               the
Office    ofManagement and Budget's         (OMB) Circular    A-76 as the
Committee   considers     H.R. 4015,  the "Commercial      Activities
Contracting    Procedures     Act of 1990."     We have done considerable
work on A-76 issues,       most of which pertains       to the Department                                                             of
Defense          (DOD),     which         has     been        the       most        active         agency         in
implementing              A-76.

The objective       of the A-76 program          is to achieve    efficiencies       by
encouraging       competition     between     the federal    workforce      and the
private     sector    for providing      quality    commercial     services     needed
by government       agencies.       H.R. 4015 would provide         a legislative
basis      for     this      long-standing                policy.

We believe    the A-76 program's    concept     of encouraging     competition
is a sensible    management   approach   that     can contribute     to more
efficient   and effective    government     operations.       However,  despite
its appeal     on a conceptual                           level, the program   has                           failed         to     gain
governmentwide     acceptance                          or to meet its objectives.

We have          found that DOD managers    generally     agree                                        with the A-76
concept          of government-private   sector    competition                                          and accept   its
objectives           of     seeking        efficiencies                  and        cost       savings.                However,
managers          also      say    that         the     program           is    time-consuming,                        difficult
 to implement,    disruptive,    and threatening   both to them and their
 employees.     Our work has also shown that      some agencies   were
 confused   about whether     the A-76 program   was strictly   a
contracting-out                  program         or     a program              to     gain         efficiencies              through

 Congress         also has not fully                     accepted     the              A-76 program and has
 excluded         certain activities                     or locations                  and imposed other
 restrictions             over     the     years.             Congressional                    concern         about            the
program        has been           exacerbated                 by    the     lack         of     convincing           data      that
real     savings          from        the     program   exceed                  its costs  in disruption,
diversion          of     energy,            and program    and                 contract  administration.

LEGISLATING              AN A-76-TYPE              PROGRAM

At the same time that   congressional     restrictions  and limitations
on A-76 have been increasing,      OMB has been sending   an entirely
different  message to agencies.       In November 1987, Executive       Order
12615 was issued,                     which      among         other         things,            significantly
increased agency                  annual         position             study         targets         and mandated               that
agency budgets        be reduced     at the beginning     of each                                            fiscal   year to
reflect    estimated     savings     from planned    A-76 studies.                                                We believe
that    the conflicting      signals     from Congress    and the                                            Executive
Branch        have       created            confusion          and        has      put        agencies       in    a difficult

As we have              said     in    the      past,         legislating                 a program          to    gain
efficiencies               in    commercial              activities                would        remove       doubt        about
the priority               and status of the program.                                     A legislated      program, as
defined     in          H.R. 4015, would also dispel                                     ambiguity     about such a
program's            intent,          which       is     to    achieve             efficiencies              in    the
government's               commercial            activities                by encouraging                  competition
between      the federal      workforce      and the private    sector.     In theory,
providing       a legislative        basis   for a commercial    activities    cost-
study     program    should    result      in an increased    number of cost
studies        and more consistent  governmentwide                                              implementation.
Because        agencies would be required    by law                                           to make inventories                  of
commercial    activities                      publicly             available              and conduct             cost
comparison    studies,                   agency heads would likely                                 assign  a higher
level   of resources                    and priority  to doing A-76                                work than they                 have
in     past    years           when they          routinely               failed          to    meet      study       goals.

However,        on the basis    of our experience,      I want                                           to point         out
several        key problem   areas that   have historically                                                hindered        A-76

implementation             that      legislation         by   itself          may not     completely


We have       reported        that      carrying        out A-76 studies   is a burdensome
and time-consuming              process.             For example,   we have found that    on
average,   it took            DOD about            2 years    to       complete       individual    cost
studies,  with  some studies   taking   8 years.                                  Recent information
from DOD shows that studies      may be taking                                even longer   to
complete.    As of January   1989, there   were                               940 cost studies
underway.         Of these,            411,    or    44 percent          of    the    studies,      were
started   in      fiscal
                     year 1983 or earlier,      representing                                     6 or   more
years  in process.    We see several    factors    contributing                                    to   the
time taken   to complete  cost studies.

First,   we have found that  in most agencies,    preparation    of the
performance   work statement   (PWS), which defines     the government's
requirements,    is done as a collateral   duty by employees      in the
function      being studied.     In addition                         to its being extra             work,
preparation       of a PWS involves    tasks                       these employees   are            often      not
skilled     in and may never do again.                             For   the most part,    these
employees        lack      the    analytical           expertise         needed to precisely
define    the standards   of performance                        and quantity              of current  and
future    workloads.    We believe   that                     the frequent              lack of staff
with    the    requisite          professional           skills        to lead cost studies                 has
contributed        to the         length    of       time it        takes   to do them.

Second,     the absence of workload        data and adequate       cost accounting
systems     has in some instances       extended     study  times and
contributed     to poorly     prepared    PWSs, which ultimately        resulted
in increased      contract    costs.    When such systems are lacking,           the
A-76 cost-study       process    is lengthened,      and those doing      the study
must do much more work to determine              what the activity      being
studied         actually         accomplishes.               For           example,         a 1984 study                by    the
Army      Inspector          General        identified               the      absence         of     management
information             systems   to collect               accurate workload   data as a
problem     in         PWS preparation.                  Past GAO audits   have shown that
tasks     omitted    from the PWS were later                                  added to the contract,
resulting       in increased   costs.     Contract                              cost increases   have
contributed       to a growing    congressional                                   concern      that           the    A-76
program         does       not   produce       savings.

Third,   we believe   that   some agencies     do not place a sufficiently
high priority     on making sure cost studies         move quickly     through
the various    points   of review,  especially      if those reviewers         are
outside   the A-76 office     or the studied     function.     For example,        a
study might    stay with an attorney       or a personnelist       for some
time,       while    their        attention          is     given            to    higher          priority          work      of
their       offices.

Legislating             an A-76-type           program             may help           solve         some of           these
problems.              As I mentioned   earlier,                       one possible benefit                          of a
legislatively             based program    would                     be the assignment    of                        a higher
priority    to the program by agencies.      Perhaps    one by-product                                                         of   a
higher   priority    would be greater  focus  by agency management                                                            on
the level     of resources  needed to produce    accurate   and timely
studies.           This change could      result   in the establishment       of a
cadre    of       experts     to lead the cost-study      process.    Such a cadre,
thoroughly           familiar    with management-engineering       techniques    and
other       management           analysis        methodologies,                      could         supervise           the
drafting          of    a PWS in       concert            with       employees              from       the      studied
function.           We believe  that    this approach                                 could result                  in more
accurate          PWSs and reduce    the burden   and                               time of doing                   cost

H.R.   4015 includes    a provision                          forcalculating        all  relevant    costs
of doing   a commercial    activity.                          We agree and believe           that
workload   data should    be kept                         on commercial     activities.         We have
reported         that      staff       involved             in     doing       cost      studies          have
experienced             difficulty            in     precisely             defining           the      standards                 of
performance     and quantity     of workload     that the government  is
providing    and expects     to provide.     The absence of workload      data
can lead to incomplete         and ambiguous     PWSs, which in turn can
result    in increased    costs    if the function    is contracted  out.      We
feel     that     agencies            should         begin         collecting            workload             data         for        a
function   to           be studied            at least             as soon as that study                         is
announced.              We believe            that  the            requirements  contained                            in    H.R.
4015 should             result   in agencies'                      having        more        factual          information,
rather  than            guessing   at workload                      data.


Because         employees            affected          by        an A-76        study        face      uncertain
employment          futures,            the     p-76        program          adversely              affects           federal
workers'         morale         and productivity.                        Our     work        has     shown       that
employee   anxiety    can begin     as                           soon as an A-76 study is announced.
Some affected      employees    begin                            to look for new jobs,     reducing
individual     and organizational                                productivity  and frequently
resulting    in the loss of good                                 employees.   As attrition     rates
increase,         managers            frequently     are required                        to     accomplish
essential         functions             with   fewer workers.                          The    lengthy          cost-study
process  further     compounds                       the         problems        for     employees             and
management    alike.

In a 1985 report                  on the           program's         impact  in DOD, we found that
the majority  of                federal            workers         whose jobs had been contracted
out    obtained           other       federal          employment.               We said that of 2,535                                    DOD
employees    we sampled who were in                                    functions    contracted    out in
fiscal   year 1983, 74 percent       had                               found other     government    jobs,
most often    at the same installation;                   7 percent     went to work for
the contractor;                 5 percent   were involuntarily        separated;    and most
of the remaining                 14 percent   resigned    or retired.        Of those who
obtained         other        government         positions,                  about      56 percent         received
lower      grades,         and about          44 percent               received          the      same or        higher
grades.       A follow-up      study   of the 5 percent       who were
involuntarily        separated     showed that      over half   were eventually
reemployed      with    the federal      government,     most at the same grade                                                        or

A senior        DOD official   has said                     that            one of      the problems             with   A-76
is that        "good employees    leave,                    while            others      worry about             keeping
their   jobs and do not do                       their    jobs."      He observed      that     the
private    sector     does not                 intimidate        employees     with possible        loss
of employment       if they do                   a good job.         The program's       effect     on
morale    and productivity                     is one of the areas that must be
addressed      if the program                    is to have wider          implementation.

H.R. 4015 would,      perhaps  for                       the        first       time,     emphasize             the
various  programs     designed   to                      help         employees    displaced  by cost
studies  find   jobs.     It would                       also         provide   for placement
assistance            in    the    private        sector.               These        provisions          could         give
employees          some       degree     of     relief          from         the     specter       of    losing         their
jobs      as   the       result     of   a cost          study.

H.R.      4015     also       expands         employee          opportunities                  to participate                     in
the      cost-study           program        by allowing                them       to   review,         comment             on,
and recommend changes to PWSs and provides   an opportunity    to
challenge  cost study decisions. While   we believe   that these
provisions            could       generally        reduce             employee          anxiety         about         the
cost-study            process,   employees                whose jobs are directly                           threatened
would still            be understandably                  concerned  about their                         future.

While   these provisions    may contribute                                     to some improvement                     in
employee    morale  and acceptance     of the                                  program, we believe                     that
the provisions     would also   increase    the time required       to do cost
studies.     For example,   H.R. 4015 provides      affected     employees   with
a new appeal    right.    Employees    would be given      at least   60 days in
which to           comment          on PWSs and recommend                        changes.              If     employees
were not           satisfied          with their  agencies'                       responses,                 they     would
have      an additional                  30 days to           appeal    to           the agency              review board.
In     addition,           under         H.R. 4015,           employees              would have              30 days to
appeal    the adequacy of a cost comparison            analysis.                                              This
provision       is similar    to current   A-76 policy,      in which a 15- to
30-day    period     is provided    for appealing    cost-comparison
determinations.          However,   one area of uncertainty        under H.R. 4015
is     the     length        of     time     that         appellate          bodies       would             have     to
adjudicate               appeals.           Current          OMB policy              provides          for      agencies              to
decide  employees'                      appeals   within              30 days of receiving                          them.        H.R.
4015 does not set                       time limitations                for these reviews.                            Taken
together,           these         appeal         periods         could       lengthen           the         cost-study


On the         basis        of    our      work      in    the    area,     we have eight    additional
points      we would like                   to     raise      with       you as you consider     this
legislation.        First,                  H.R.      4015       does      not       contain          standards           for
judging     agency performance                            and holding   agencies    accountable                                 for
their    activities.       Neither                        does it contain    enforcement
provisions.          Thus, it will                        be difficult    to determine     whether                               the
bill's          intent       has been             realized        and      to     take     corrective                action,               if

Second,   H.R.              4015 would             emphasize    the              importance            of      collecting
and reporting                information             on cost-study                 activities.              We believe
that         reporting           data      on cost-study                activities             is     a sound idea.                    To
comply with      these requirements,     agencies       will    need accurate     and
complete    information     on A-76 program     activities.          For example,
H.R. 4015 calls        for savings   to be reported         annually    to Congress.
We recently      reported   that   DOD's reported      ~-76 savings       are neither

complete             nor     accurate.l                   We said          that      as a result,                       OMB's         figures
do not accurately       reflect                            the extent   to                which economy in
government   operations         is                        being achieved.                   Reliable  information                                    '
does      not        exist   with which to assess    the soundness    of savings
estimates,              and neither    OMB nor DOD knows the extent     to which
expected             savings    are realized.   We recommended    changes that   would
provide    better                  data          on A-76       savings.

We believe          that collecting    complete    and accurate       A-76 data is a
significant           issue because   sound data would answer the
fundamental           A-76 question --does     the program    ultimately     save
money?           As I said earlier,    the current     absence of good d-ata is
part   of        the reason   for congressional,      managerial,       and employee
skepticism                 about       the        program.

Third,          the bill     also would require                                  agencies   to           periodically
survey          their    commercial   activities                                 in an effort             to use the                      most
economical                 method           of    providing        the service.                       Currently,                   once       a
commercial                 activity              has been       contracted      out,                  agencies                  rarely
consider             whether           it        is    more    economical                to    bring             it        back      in-house.
Thus,       little            is      known           about    the     expense             that       may             be involved               in
bringing          a function                  back in-house                     once it has been contracted.
Finding          employees                  to do the work                     and procuring necessary
equipment             may be difficult                        and     costly.

Fourth,          legislating                     an A-76       type            program        gives         it         a    status        and
emphasis             that       could            affect       agencies'             participation                          in     other
efficiency-related                           programs.               For        example,          besides                  A-76,      other
OMB programs--                  the Productivity                   Improvement Program and the
Privatization                   program-- also                 are aimed at gaining   efficiencies.
We recommended  in our May 1989                                       report  that agency managers                                        should
be allowed  to choose which mix                                       of these programs   they want                                       to use

1 OMB Circular     A-76:     DOD’s   Reported   Savings    Figures Are
Incomplete     and Inaccurate      (GAO/GGD-90-58,     Mar. 15, 1990).
to     achieve      efficiency         goals.

In our May 1989 report,    we also recommended     that   responsibility
for A-76 be moved from the Office     of Federal     Procurement       Policy
 (OFPP) and combined with other    OMB programs    designed    to achieve'
operational  efficiencies.    We made this    recommendation      because                                        we
believed  that managing   A-76 from                          OFPP gave the          appearance    that           A-
76 was exclusively   a contracting-out                           program.           OMB has recently
implemented          this        recommendation,             and it is too          early   to show
material        benefits           from this   reorganization.                    H.R.     4015    would
place       responsibility             for A-76 back with                OFPP.      We do not           think
this  organizational                placement             worked well     in      the past        and
recommend that       the           Committee            reconsider    this        provision.

Fifth,       H.R.     4015       provides        that     the   entire     term      of    a contract   for
commercial          activities    should   not exceed    3 years.                          As I mentioned
earlier,         it took DOD an average        of about   2 years                         to complete
individual          cost studies,     with  some studies     taking                         up to 8 years.
Under        the provisions            of H.R.          4015, and assuming a 2-year                     average
time       frame for cost            studies,           a new cost study would have                     to start
by the       beginning     of the second contract     year in                            order    to decide
whether       the activity     would remain   under contract                              or would be
brought       back in-house.       Under these conditions,                               agencies    could
find themselves              in almost           a perpetual    cost-study                cycle     for    the
same commercial              activity.           Until   a less burdensome                 and    time-
consuming           study    process        is    developed,         the   3-year         limit    may be too

Sixth,   the definition      of inherently         governmental       functions       is a
critical    threshold   issue     that    determines      what activities          can and
cannot   be considered     for contracting.            The definition         included     in
H.R. 4015 is generally         consistent       with   the definition         contained
in OMB Circular              A-76.    However,    recently,                some      agencies'
interpretations              of inherently     governmental                    functions     in      making
contract         awards      have     been       questioned.

The degree              of     contractor                 involvement           in the government's                           work           is
an important                  aspect    of            this     issue.          This bill  specifies,                          for
example,           that         the      management            and      direction              of     the     Armed        Services
is     a governmental                     function          which       should           not     be contracted                   out.
However,   the question                          is to what degree    is it                           proper
government    officials                         who have the responsibility                               for
                                                                                                          managing                           the
Armed Services                   to rely on the assistance                                of contractors.       Is                      it
sufficient   to                 have a government  official                               making the final
decisions              if     most        of the advice              and analysis                  leading   to             those
decisions              is     from        contractors?               We believe                 the question                of where
to     draw     the          line        between         contractors             and      government                 officials               is
closely         related               to defining             what      is      inherently                 governmental.

We are currently                       doing work for Senator   Pryor  to assess the
extent    to which                    government  agencies might be contracting       out
functions    which                    should  be performed by government   officials.
Part of         our           work involves               examining      the adequacy      of the current
definition                  of inherently                governmental       functions    to determine
whether           it        is sufficiently                 clear,    consistent,     and precise.      We
will       keep         the     Committee               informed        on our           progress.

Seventh,   the bill    extends                             coverage     to         the         U.S. Postal   Service.
The Postal    Reorganization                               Act,   enacted            in        1970, permits    the
Postal          Service    to             contract    under its                   own rules                and regulations,
which         differ    from              the uniform     rules                 that  apply                to most other
federal           entities.                The intent      of           the Postal                  Reorganization       Act
was      to    permit           the       Postal   Service              to operate                  more like     a private
business     when it is advantageous                                    to do so.     Because Congress   has
deliberately     excluded the Postal                                    Service   from federal  procurement
statutes               and because               of     potential            conflicts              with      its      collective
bargaining                  obligations,                 we believe   that  the Postal                              Service         should
not     be subject                  to    the         provisions    of H.R. 4015.

Eighth,           the         process           set     up by H.R.             4015      to     resolve             disputes
concerning         contracting           out    decisions           seems      conceptually       fair     and
equitable,         thus      we support         agencies           assuming      that    responsibility.
However,    we do think    that   section    12 of the bill,     which amends                                 31
U.S.C.,    Section  3551(2)     by providing    that    GAO's bid protest
procedures     are not applicable       "to conversions      to contract  or
conversions          to     in-house       performance,"              should     be clarified.

Protest      issues      that arise       out of the competition         among the
commercial        sources       do not directly     concern    either     the conversion
cost analyses          or the performance         work statement.         Protest  issues
involve      claimed       violations      of the procurement        laws and
regulations,         including        such subjects    as late     bids,
responsiveness,              and responsibility. Since the dispute        resolution
process         set up under H.R. 4015 deals     solely     with conversion       cost
analyses         and performance  work statement      issues,    we believe     that
it would be appropriate    for GAO to continue   to                                  resolve     protests
arising  out of the competition   among commercial                                     resources.        In
order      to    achieve      this      goal,    we are           providing       suggested      language
to   amend H.R.            4015      (See Appendix          I).

That concludes   my prepared  statement,                              Mr. Chairman.     My
colleagues   and I would be pleased      to                          respond  to questions.

                                                     APPENDIX             I

       Achieving              Cost      Efficiencies     in Commercial                        Activities

We suggest       that         section         12 of       H.R.         4015    be     amended     to    state:

      Section     3551(2)   of title                      31, United  States                  Code, is amended
      by striking      "and" at the                       end and inserting                   in lieu thereof
      the    following:

      "except          that      in     the     case        of    protests           concerning        the   cost
      comparison              analysis          or     the       performance           work     statement
      relating   to a conversion     to contract    or a conversion                                              to   in-
      house performance      by an agency under the Commercial
      Activities   Contracting    Procedures     Act of 1990;such                                            term
      does      not include--
                "(A) a commercial                      source;            or
                "(B)      an employee                of      an agency;         and"

The Committee           Report          would        thus        state:
      This      section          would        amend 31 U.S.C.,                  Section         3551(2)      by
      providing           that GAO bid protest       procedures    are not applicable
      to protests            concerning   the cost comparison       analysis   or the
      performance            work statement   relating      to conversions   to
      contract          out      or     conversions               to      in-house       performance.