GSA Has Accumulated Adequate Funding for Transition to New Contracts but Needs Cost Estimation Policy

GAO-07-268: Published: Feb 23, 2007. Publicly Released: Mar 26, 2007.

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The General Services Administration (GSA) and its customer agencies are preparing to transition new governmentwide telecommunications contracts known as the Networx program. GSA estimated the costs for which it is responsible to be $151.5 million. This report addresses (1) the soundness of the analysis GSA used to derive the estimate of funding that would be required for the transition and (2) whether GSA will have accumulated adequate funding to pay for transition costs. In performing this work, GAO reviewed cost estimation best practices, analyzed relevant GSA documents, and performed an uncertainty analysis on GSA's estimate.

GSA did not use sound analysis when estimating the amount of funding needed to meet its transition-related commitments. Specifically, its analysis was not sufficiently accurate, comprehensive, documented, or validated. A primary weakness is that the estimate is largely based an assumption--known as the transition traffic factor--that 76 percent of the services provided under the current contracts would be moved to a different provider under the Networx contracts. However, according to program officials, this assumption is intentionally conservative and represents a worst-case scenario that is unlikely to occur. Additionally, GSA may have double-counted a cost and did not update its analysis to reflect a nearly 2-year delay. Finally, GSA did not document significant assumptions and data sources used in its analysis, or validate it. These weaknesses can be attributed in part to the lack of a cost estimation policy that reflects best practices. While GSA's intentionally conservative approach minimizes the risk that it would have inadequate funds to pay for committed transition costs, it increases the risk that GSA will retain excess funds that could be used for other purposes. GSA has accumulated adequate funding to support its anticipated transition costs. As of fiscal year-end 2006, GSA had approximately $142 million in a transition reserve. GAO analysis of the estimate indicates it is unlikely that GSA will need more than it has already accumulated to fund the transition. Specifically, the $142 million already retained will be adequate to cover anticipated costs 96 percent of the time. The recent merger of two GSA funds gives the agency additional flexibility that reduces its need to accumulate the entire $151.5 million it estimated would be needed. With Networx contracts scheduled to be awarded starting in March 2007, GSA will soon have the information necessary to reassess the main assumption underlying its estimate--the transition traffic factor--and address the weaknesses GAO identified. Once this has been accomplished, GSA can reevaluate the funding needed to meet anticipated commitments.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In June 2007, GSA released a new policy for its cost estimation efforts that establishes key principles and basic processes that must be applied to all cost estimates prepared in every GSA project, process or organization. The cost estimation policy is intended to ensure that all GSA cost estimates are accurate, comprehensive, well-documented, and validated.

    Recommendation: To improve GSA's program management and to ensure that future cost estimates are sound and can be used as a reliable basis for decisions, the GSA Administrator should establish a policy for cost estimation efforts at GSA. Specifically, this policy should reflect best practices by requiring that estimates are accurate (not overly conservative, based on an assessment of the most likely costs, and adjusted properly for inflation), comprehensive (their level of detail ensures that all pertinent costs are included and no costs are double-counted), well-documented (can be easily repeated or updated and can be traced to original sources through auditing), and validated (they have been cross-checked with an independent cost estimate and a level of uncertainty associated with the estimate has been identified).

    Agency Affected: General Services Administration

  2. Status: Closed - Implemented

    Comments: In its 60-day letter dated May 2007, GSA indicated that it would initiate adjustments to the cost estimating tool and recalculate the transition cost estimate and brief the Interagency Management Council (IMC) on the new estimate. GSA presented its revised transition estimate to the IMC in July 2008. This cost estimate reflects best practices contained in GSA's Cost Estimation Policy. For example, the cost estimate was updated using current contract pricing and addresses uncertainty by estimating costs using multiple scenarios. The estimate also includes a more precise transition traffic factor that is based on current information, is no longer based on an estimation of service growth, does not double-count non-recurring charges, and addresses the effect of inflation. Regarding the reallocation of any excess funds, GSA's revised cost estimate indicates that the full $151.5 million may be needed to reasonably support the transition effort. Once all transition costs have accrued, GSA may be able to reallocate any excess funds or return them to the Treasury.

    Recommendation: To improve GSA's program management and to ensure the most efficient use of federal funds, the GSA Administrator should revise the transition cost estimate following the award of contracts under the Networx program. Specifically, this revision should reflect best practices, include a more precise transition traffic factor, and address the overestimation of service growth, the possible double-counting of a nonrecurring charge, and the effects of inflation during the extended delay in making awards. If the results of this new estimate indicate that the full $151.5 million is not needed to reasonably support the transition effort, GSA should reallocate any excess funds for other purposes allowable within the Acquisition Services Fund or return them to the Treasury.

    Agency Affected: General Services Administration


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