Defense Outsourcing:

Better Data Is Needed to Support Overhead Rates for A-76 Studies

NSIAD-98-62: Published: Feb 27, 1998. Publicly Released: Feb 27, 1998.

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Pursuant to a congressional request, GAO reviewed three provisions associated with a revision to the Office of Management and Budget (OMB) Circular A-76 supplemental handbook, focusing on: (1) the basis for OMB's new requirement that a standardized 12-percent overhead rate be applied to in-house cost estimates, regardless of the type of commercial activity or where in the country the activity is to be performed; (2) whether the Department of Defense (DOD) has developed a separate overhead rate for military personnel and, if so, the basis for that rate; and (3) how best-value criteria are expected to be used in A-76 competitions.

GAO noted that: (1) because actual cost data in government agencies have historically been unavailable and unreliable, OMB told GAO it lacked meaningful information on which to develop a standard overhead rate or to differentiate between particular types of activities or regions of the country; (2) absent this data, OMB selected a single overhead rate of 12 percent, a rate that was near the midpoint of overhead rates suggested by government agencies and private sector groups; (3) most government and private-sector groups GAO contacted agreed that reasonable levels of overhead should be included in A-76 cost estimates and, absent anything better, the 12-percent rate is acceptable at this time; (4) in this respect, the revised handbook allows federal agencies to develop their own rates, but to date, none have done so; (5) while the 12-percent rate represents an appropriate move toward including overhead costs in government cost estimates, until actual overhead costs are captured, the magnitude of savings expected will be uncertain and the results of A-76 studies are apt to continue to be controversial; (6) recent legislation and federal management reforms emphasize the need for such actual cost data; (7) despite the requirement to develop a separate rate for military personnel included in government in-house estimates, DOD officials that manage commercial activity programs have no plans to develop such a rate; (8) they explained that, by definition, commercial activities under the A-76 program should not include any military-essential functions; (9) therefore, when they prepare an in-house estimate under the A-76 program, they assume that all military personnel currently working in the activity will be reassigned and the activity will be staffed with civilians, therefore no overhead costs for military personnel will be incurred; (10) the use of best-value procurement is an important development; (11) while not appropriate for use in all cases, best-value helps ensure that decisions to outsource are based on a number of important, performance-related factors, not just cost; (12) recently, only the Air Force has used best-value criteria, and only in 5 of its 15 competitions completed since March 1996; and (13) in the future, DOD officials expect to use best-value criteria for activities for which performance standards are particularly important, but not for more routine tasks often associated with base support activities.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: OMB does not plan to develop an interim overhead rate. OMB's position is that more accurate overhead rates can be developed and supported by DOD and civilian agencies after cost accounting systems that comply with federal cost accounting standards are in place. However, OMB recognizes that this is a long-term solution.

    Recommendation: The Director, OMB, and the Secretary of Defense should work together to develop a methodology that will determine an appropriate interim overhead rate or range of rates for DOD commercial activities. The methodology needs to have an analytical base and include appropriate indirect overhead costs as well as general and administrative costs identified in the A-76 supplemental handbook. The methodology also needs to consider the cost of military personnel that may be in the various categories of overhead costs and the unique nature of individual business activities being assessed. Once OMB and DOD agree on a methodology, OMB should consider its applicability to civilian agencies.

    Agency Affected: Executive Office of the President: Office of Management and Budget

  2. Status: Closed - Not Implemented

    Comments: DOD does not plan to take action on GAO's recommendation unless directed to do so by OMB. At this time, OMB does not plan to direct DOD to respond to the recommendation.

    Recommendation: The Director, OMB, and the Secretary of Defense should work together to develop a methodology that will determine an appropriate interim overhead rate or range of rates for DOD commercial activities. The methodology needs to have an analytical base and include appropriate indirect overhead costs as well as general and administrative costs identified in the A-76 supplemental handbook. The methodology also needs to consider the cost of military personnel that may be in the various categories of overhead costs and the unique nature of individual business activities being assessed. Once OMB and DOD agree on a methodology, OMB should consider its applicability to civilian agencies.

    Agency Affected: Department of Defense

 

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