Competitive Sourcing:

Health Benefits Cost Comparison Had Minimal Impact, but DOD Needs Uniform Implementation Process

GAO-06-72: Published: Dec 9, 2005. Publicly Released: Dec 9, 2005.

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Competitive sourcing is a management tool where federal agencies conduct competitions between federal employees and private companies to determine the best source to provide commercially available services. Concerns have been raised in the Congress that differences in the costs of federal and private health insurance benefits could disadvantage the federal workforce in public-private competitions. A health benefit cost comparability provision in the 2005 Defense Appropriations Act prohibited any advantage for private offerors that provide no health benefits or contribute less for them than the Department of Defense (DOD) contributes for its civilian employees. Legislation is pending to extend the provision for another year. GAO, in response to a mandate, determined (1) how DOD implemented the provision, and (2) what impact the provision had on DOD's fiscal year 2005 competitive sourcing program.

Most DOD components implemented the health benefit cost provision using a process designed to ensure that private sector proposals include an amount for employee health benefits at least equal to the amount that Office of Management and Budget Circular A-76 requires to be added to agency cost estimates to account for employee health benefits. Under Circular A-76, this amount is 5.5 percent of direct labor costs. The Defense Logistics Agency (DLA), however, used a different process designed to determine whether a private sector offeror's monthly health benefit premium contributions are at least equal to DOD's. While DOD's and DLA's processes are both reasonable approaches, the use of different processes could result in different competitive sourcing outcomes in some cases. The health benefit cost provision had minimal impact on DOD's fiscal year 2005 competitive sourcing program. Of the 54 public-private competitions we reviewed, the health benefit provision was applicable in only 12 sourcing decisions. In 7 of these 12 competitions, DOD collected health benefit cost data from private sector offerors and found that most of their health benefit costs exceeded 5.5 percent of direct labor costs. This is largely due to the requirements of the Service Contract Act--which mandates minimum wages and fringe benefits (which could include health insurance) for employees on government service contracts. Although the processes used by DOD and DLA resulted in increasing two private offerors' cost proposals, the adjustments did not alter the outcome of the competitions. Contracting officials and the private sector offerors told us that complying with the health benefit cost provision was not unduly burdensome.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: Since this report was issued, Congress extended the health benefit cost provision through fiscal year 2006 (section 8014 of the Defense appropriations act, Public Law 109-148). In May 2006, the Director for Defense Procurement and Acquisition Policy and the Deputy Undersecretary of Defense for Installations and Environment issued a competitive sourcing program policy memorandum that requires the use of a uniform process throughout DOD for evaluating health insurance costs in proposals from the private sector in public-private competitions. Effective immediately and consistent with GAO's recommendation, DOD components must comply with this policy and associated procedures when performing public-private competitions of commercial activities involving more than 10 DOD civilian employees. The procedures detailed in the new policy include provisions for soliciting required information from private sector offerors on employer-sponsored health insurance plans, computation of the ratio of the private sector offeror's health insurance contribution to its direct labor costs, and contract file documentation.

    Recommendation: To align DOD's competitive sourcing program more fully with governmentwide policy contained in Circular A-76 and the sourcing principles of the Commercial Activities Panel, if the health benefit cost provision is extended, the Secretary of Defense should direct the Deputy Under Secretary of Defense for Installations and Environment to require use of a uniform and consistent process for the DOD components in evaluating the health benefits costs of private sector offerors in public-private competitions.

    Agency Affected: Department of Defense


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