Factors Influencing DOD Decisions To Convert Activities From In-House to Contractor Performance

PLRD-81-19: Published: Apr 22, 1981. Publicly Released: Apr 27, 1981.

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GAO reviewed the Department of Defense's (DOD) implementation of Office of Management and Budget (OMB) Circular A-76 to find out how much contracting out is taking place because of: (1) personnel ceilings; (2) wage differentials between Federal blue-collar and contractor employees; and (3) other significant influences.

GAO found that: (1) the most significant influence on decisions to contract out was a cost comparison showing lower costs for contractor performance; (2) estimated cost savings were generally attributable to the contractors' plans to use fewer employees and to pay lower wages; (3) the military services recognize that the Commercial and Industrial-Type Activities program is a valuable means of reducing their civilian personnel work force; (4) there was no evidence that the desire to circumvent personnel ceilings led to contracting-out decisions; (5) the Army disregarded serious shortcomings in the contractor's proposal in making its cost comparison; (6) required reviews were not made in 5 of the 12 cases to ensure that the in-house cost estimates were based on the most efficient and cost effective organization and staffing; (7) in one case, an incomplete statement of work in a solicitation for bids significantly overstated the estimated cost comparison savings from contracting out; (8) in one case, the contract price was understated because the most current Service Contract Act wage rates were not used; and (9) six of the 12 cost comparisons included contract administration cost estimates which were lower than the actual costs that could be expected.

Recommendations for Executive Action

  1. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Secretary of Defense and the Director of OMB should jointly conduct a complete review of the standard 4 percent factor required by Circular A-76. The review should include (1) an evaluation of the basis of the factor; (2) an assessment of its applicability to all functions, regardless of their complexity; (3) the possible development of a more accurate costing method for application where the factor is not considered appropriate, such as individual estimates of actual expected cost or a series of rates to apply to the various types of functions that are candidates for contracting out; and (4) an analysis of the feasibility and practicability of establishing controls to limit the funding of contract administration costs, except as otherwise justified in unusual circumstances, to a level consistent with the results of the overall review. The purpose of the limitation would be to discourage agencies from funding contract administration costs in excess of the amount otherwise considered appropriate for the cost comparison.

    Agency Affected: Department of Defense

  2. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Secretary of Defense and the Director of OMB should jointly conduct a complete review of the standard 4 percent factor required by Circular A-76. The review should include (1) an evaluation of the basis of the factor; (2) an assessment of its applicability to all functions, regardless of their complexity; (3) the possible development of a more accurate costing method for application where the factor is not considered appropriate, such as individual estimates of actual expected cost or a series of rates to apply to the various types of functions that are candidates for contracting out; and (4) an analysis of the feasibility and practicability of establishing controls to limit the funding of contract administration costs, except as otherwise justified in unusual circumstances, to a level consistent with the results of the overall review. The purpose of the limitation would be to discourage agencies from funding contract administration costs in excess of the amount otherwise considered appropriate for the cost comparison.

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

  3. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Director of OMB should assess the need to modify the Circular A-76 guidelines for costing out (1) unoccupied in-house positions; and (2) inflation of personnel costs for in-house employees.

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

  4. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Secretary of Defense should direct the Secretaries of the Army, Navy, and Air Force to bring the following matters to the attention of their major commands and activities (1) statements of work should be complete and in-house cost estimates should be based on the same statements of work that are used in contract solicitations; (2) contractors' cost proposals that are determined to be unrealistically low should be adjusted upward by procuring contracting officers before the contract prices are entered on the cost comparisons; and (3) solicitations for bids or proposals should include current Service Contract Act wage rates.

    Agency Affected: Department of Defense

  5. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Secretary of the Army should reevaluate the decision to contract out installation support functions at the Hawthorne Army Ammunition Plant in Nevada. The reevaluation should consider the matters discussed in this report, and include potential contract termination costs.

    Agency Affected: Department of Defense: Department of the Army

  6. Status: Closed

    Comments: GAO has no information on the actions taken in response to this recommendation.

    Recommendation: The Secretary of Defense should issue more detailed policies, procedures, and regulations which will require (1) reviews to be performed; and (2) that those reviews be based on the same statements of work that are used in contract solicitations.

    Agency Affected: Department of Defense

 

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