Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing (Letter Report, 03/11/97, GAO/NSIAD-97-86)
Pursuant to a congressional request, GAO reviewed the Department of
Defense's (DOD) outsourcing savings, focusing on: (1) the extent to
which DOD and the services emphasize the outsourcing of base support
services; (2) the factors that influence savings in the outsourcing
process; and (3) impediments to DOD's outsourcing.
GAO noted that: (1) DOD's efforts to outsource base support activities
were constrained by legislation and other factors in the past; (2)
because of the continuing budgetary and personnel limitations, the need
to fund weapons modernization, and the elimination of key legislative
constraints, DOD is now increasing its emphasis on outsourcing support
activities; (3) senior leadership within the Office of the Secretary of
Defense (OSD) and the services are strongly supporting renewed efforts
to outsource base support activities; (4) from October 1, 1995, to
January 15, 1997, the services announced plans to begin outsourcing
studies during fiscal years 1996 and 1997; (5) these studies will
involve over 34,000 positions, most of which were associated with base
support activities; (6) additional studies involving more than 100,000
positions will be started over the next 6 years; (7) although the
outsourcing studies have yet to be completed, some of the services have
programmed outsourcing savings projections into their budgets; (8) GAO
recognizes that outsourcing can be cost-effective because outsourcing
competitions generate savings, usually through a reduction in personnel,
whether competitions are won by the government or the private sector;
(9) however, GAO questions the magnitude of savings projections cited in
various DOD studies, as well as the services' current savings
projections; (10) these estimates are heavily premised on initial
savings estimates from previous outsourcing efforts, and such estimates
change as the scope of the work and wages change; (11) furthermore,
continuing budget and personnel reductions could make it difficult to
sustain the levels of previously projected savings; (12) thus, the
extent to which the services may achieve these savings is questionable;
(13) at the same time, two areas of outsourcing appear to offer the
potential for significant savings, but the extent to which the services
are exploring them is mixed; (14) they involve giving greater emphasis
to: (a) the use of omnibus contracts, rather than multiple contracts,
for support services; and (b) the conversion of military support
positions to civilian or contractor positions; (15) although guidance
for performing outsourcing studies has recently been changed to
streamline and improve the process, the extent to which the guidance
will lead to increased outsourcing remains to be seen; and (16) also, f*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-97-86
TITLE: Base Operations: Challenges Confronting DOD as It Renews
Emphasis on Outsourcing
DATE: 03/11/97
SUBJECT: Strategic planning
Defense procurement
Cost effectiveness analysis
Defense cost control
Projections
Privatization
Competition
Contracting procedures
Human resources utilization
Reductions in force
IDENTIFIER: OMB Circular A-76 Program
DOD Bottom-Up Review
National Performance Review
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Cover
================================================================ COVER
Report to the Chairman, Subcommittee on Military Readiness, Committee
on National Security
House of Representatives
March 1997
BASE OPERATIONS - CHALLENGES
CONFRONTING DOD AS IT RENEWS
EMPHASIS ON OUTSOURCING
GAO/NSIAD-97-86
Base Operations
(703156)
Abbreviations
=============================================================== ABBREV
CNA - Center for Naval Analyses
DFARS - Defense Federal Acquisition Regulation Supplement
DOD - Department of Defense
FAR - Federal Acquisition Regulation
GSA - General Services Administration
O&M - operations and maintenance
OMB - Office of Management and Budget
OSD - Office of the Secretary of Defense
Letter
=============================================================== LETTER
B-276213
March 11, 1997
The Honorable Herbert H. Bateman
Chairman, Subcommittee on Military Readiness
Committee on National Security
House of Representatives
Dear Mr. Chairman:
"Outsourcing," or contracting out, for commercial services is a
growing practice within the government to achieve cost savings,
management efficiencies, and operating flexibility. Recent studies
have noted that the Department of Defense (DOD) could save billions
of dollars by outsourcing support functions associated with operating
military bases. In response to your request, we have developed
information about outsourcing savings. This report examines (1) the
extent to which DOD and the services emphasize the outsourcing of
base support services, (2) the factors that influence savings in the
outsourcing process, and (3) impediments to DOD's outsourcing.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
DOD's efforts to outsource base support activities were constrained
by legislation and other factors in the past. Because of the
continuing budgetary and personnel limitations, the need to fund
weapons modernization, and the elimination of key legislative
constraints, DOD is now increasing its emphasis on outsourcing
support activities. Senior leadership within the Office of the
Secretary of Defense (OSD) and the services are strongly supporting
renewed efforts to outsource base support activities. From October
1, 1995, to January 15, 1997, the services announced plans to begin
outsourcing studies during fiscal years 1996 and 1997. These studies
will involve over 34,000 positions, most of which were associated
with base support activities. Additional studies involving more than
100,000 positions will be started over the next 6 years.
Although the outsourcing studies have yet to be completed, some of
the services have programmed outsourcing savings projections into
their budgets. We recognize that outsourcing can be cost-effective
because outsourcing competitions generate savings, usually through a
reduction in personnel, whether competitions are won by the
government or the private sector. However, we question the magnitude
of savings projections cited in various DOD studies, as well as the
services' current savings projections. These estimates are heavily
premised on initial savings estimates from previous outsourcing
efforts, and such estimates change as the scope of the work and wages
change. Furthermore, continuing budget and personnel reductions
could make it difficult to sustain the levels of previously projected
savings. Thus, the extent to which the services may achieve these
savings is questionable. At the same time, two areas of outsourcing
appear to offer the potential for significant savings, but the extent
to which the services are exploring them is mixed. They involve
giving greater emphasis to (1) the use of omnibus contracts, rather
than multiple contracts, for support services and (2) the conversion
of military support positions to civilian or contractor positions.
Despite DOD's renewed emphasis on outsourcing, impediments remain and
new challenges are emerging. Although guidance for performing
outsourcing studies has recently been changed to streamline and
improve the process, the extent to which the guidance will lead to
increased outsourcing remains to be seen. Also, federal contracting
law may affect some DOD efforts to outsource, and some services
preclude some activities from outsourcing because of military
requirements. Finally, the potential lack of resources to perform
outsourcing studies and funding to pay for outsourced activities is
of growing concern to some service officials.
BACKGROUND
------------------------------------------------------------ Letter :2
Since 1955, federal agencies have been encouraged to obtain goods and
services from the private sector through outsourcing. In 1966, the
Office of Management and Budget (OMB) issued Circular A-76, which
established the federal policy for the government's performance of
commercial activities. In a 1983 supplemental handbook, OMB
established procedures for determining whether commercial activities
should be outsourced.\1
Under A-76, DOD has historically outsourced functions to provide more
cost-effective services. However, several provisions of law have
inhibited DOD's outsourcing efforts. The first provision contained
in
the National Defense Authorization Act for Fiscal Years 1988-89
(P.L. 100-180) authorized installation commanders to determine
whether to study activities for potential outsourcing. Because of
disruptions to their workforce, the cost of conducting studies, and a
desire for more direct control of their workforce, various officials
told us that commanders often chose not to pursue outsourcing. This
law, which was known as the "Nichols Amendment" and codified at 10
U.S.C. 2468, was effective through September 30, 1995. Another
provision contained in the Department of Defense Appropriations Act
for Fiscal Year 1991
(P.L. 101-511) and subsequent DOD appropriations acts, prohibited
funding for lengthy A-76 studies. Finally, the National Defense
Authorization Acts for Fiscal Years 1993 and 1994 contained
provisions that prohibited DOD from entering into contracts resulting
from cost studies done under OMB Circular A-76, from October 23,
1992, to April 1, 1994. These prohibitions, along with the Nichols
Amendment, had the effect of limiting outsourcing in most services
until 1996. Since then, except for the Air Force, the services have
completed few A-76 studies. In 1996, OMB revised its supplemental
handbook in an effort to streamline and improve the outsourcing study
process. (See app. I for a summary of the changes.)
As of fiscal year 1996, DOD employed about 449,000 military and
civilian personnel to do support activities such as base support,
health services, and equipment repairs in-house (see fig. 1).\2
Figure 1: In-house DOD
Commercial Activities (fiscal
year 1996)
(See figure in printed
edition.)
Note: Percentages indicate the portion of the in-house workforce
involved in commercial activities.
\a Other includes research, development, test, and evaluation
support; automatic data processing; and products manufactured
in-house.
\b Nonmanufacturing includes functions such as storage and
warehousing, engineering, and administrative support services.
\c Equipment repair includes depot and intermediate maintenance.
Source: DOD's 1996 commercial activities inventory.
DOD estimates that base support activities such as facilities and
vehicle maintenance, food services, and local transportation will
cost more than $30 billion in fiscal year 1997. (App. II provides a
more detailed list of base support functions.) Several recent
studies--DOD's 1993 Bottom-Up Review, the 1993 National Performance
Review, DOD's 1995 report from the Commission on Roles and Missions
of the Armed Forces, and the 1996 report of the Defense Science Board
Task Force on Outsourcing and Privatization--concluded that DOD could
realize savings of upwards to between 20 and 40 percent by
outsourcing support activities. Some further concluded that DOD
could achieve the largest savings by using a single omnibus contract,
rather than several small contracts, to encompass multiple
activities.
Over the years, we have done many reviews of federal contracting,
addressing issues associated with outsourcing and questions regarding
cost savings. A list of related GAO products is presented at the end
of this report.
--------------------
\1 To compare costs associated with in-house versus industry
performance, the supplemental handbook requires the government to
conduct a management efficiency study. In this study, organizational
structure, staffing, and operating procedures are reviewed to
determine the most efficient and effective way of performing the
activity with in-house staff. The resulting "most efficient
organization" is used as the basis for the in-house cost. The
government also prepares a performance work statement describing the
work required, which serves as the basis for both contractor and
in-house offers. Each of the services maintains a database of all
A-76 studies. This database generally includes the function studied,
the cost of the in-house workforce and contract, and the outcome of
the competition.
\2 Other DOD-sponsored studies that take a broader view of
infrastructure and support activities indicate that the total number
of DOD military and civilian personnel involved in such activities
could be much higher. The services differ in how they (1) define
commercial activities and (2) determine which activities and
functions are inherently governmental, requiring that they be done
in-house.
DOD AND SERVICES HAVE RENEWED
EMPHASIS ON OUTSOURCING
------------------------------------------------------------ Letter :3
After a lull in outsourcing efforts due to administrative and
legislative constraints, in August 1995, the Deputy Secretary of
Defense directed the services to make outsourcing of support
activities a priority and chartered a Privatization Integrated Policy
Team to identify opportunities for outsourcing.\3 In doing so, he was
reacting to the reports recommending outsourcing of support
activities, increasing budget pressures, and the need to free up
funding for modernization. Consequently, DOD and the services
initiated a review of six support areas, including base support, to
determine where outsourcing could generate savings.\4
As of the beginning of fiscal year 1996, DOD officials estimated that
DOD had outsourced about 37 percent of its overall workforce
connected with commercial activities. Based on service definitions
of commercial activities, the Air Force estimated that it had
outsourced 64 percent of its workforce performing commercial
activities, and at the end of 1996, the Air Force had 126 A-76
studies underway--significantly more than the other services. The
Army and the Navy estimated they had outsourced 32 and 31 percent,
respectively.\5
The Air Force plans to study up to 60,000 positions for potential
outsourcing beginning in 1996 through 2003. Air Force officials
estimated that the majority of the positions are in base support
services. In January 1997, Air Force officials announced plans to
study about 14,400 positions. To organize its efforts, the Air Force
formed an outsourcing and privatization team and executive steering
group in January 1996 and a new outsourcing and privatization
division in January 1997. Also, an Air Force Center for Quality
Management Innovations is expected to facilitate Air Force-wide
outsourcing and privatization efforts.
The Army plans to study about 11,000 positions during fiscal year
1997 and about 15,000 positions during fiscal years 1998-2003 for
potential outsourcing. An Army official estimated that most of the
positions are in base support functions and that the majority are
civilian positions. As of January 1997, the Army had announced plans
to begin studying about 9,600 positions for potential outsourcing,
all of them in base support functions.
Navy officials told us that they plan to study about 80,000 positions
for potential outsourcing over the next several years. These
positions represent about 50,000 civilians and 30,000 military
members, and a portion of them are involved in base support
functions. In January 1997, the Navy formally announced plans to
study about 10,600 positions beginning in fiscal year 1997. Of the
10,600, about 8,400 involve civilian and 2,200 involve military
positions. In 1996, the Navy established an outsourcing support
office to contract with industry to conduct A-76 studies and develop
tools to streamline the study process. Further, the Navy established
a new outsourcing program division to identify outsourcing candidates
and fund A-76 studies. A Navy survey of commercial activities to
identify candidates for competition is underway.
The Marine Corps estimates it will study 5,000 positions for
outsourcing; however, it does not have a firm timetable for
initiating or completing its studies. In 1996, the Marine Corps
established a senior staff-level committee and working group to guide
the selection of candidate functions for outsourcing. The Marine
Corps is part of the Navy's survey of commercial activities. Marine
officials indicated that survey results are expected to be available
in the summer of 1997.
--------------------
\3 For DOD's purposes, outsourcing is the use of federal funds to pay
a private company to do defense work or provide a service for a
defense activity; privatization is the complete transfer of ownership
and management of a function to the private sector, but DOD pays for
the services associated with the function.
\4 The other five areas under review are materiel management, depot
maintenance, finance and accounting, education and training, and data
centers.
\5 Because each service differs in how it defines commercial
activities, the totals could be increased as the services reexamine
areas previously excluded.
HISTORY AND CURRENT ENVIRONMENT
SUGGEST THE NEED FOR CAUTION IN
PROJECTING SAVINGS FROM
OUTSOURCING
------------------------------------------------------------ Letter :4
DOD is expecting significant savings from its current and planned
outsourcing and privatization efforts. However, DOD's outsourcing
experience and the current operating environment suggest that
projected savings from current and planned outsourcing efforts may be
overstated. At the same time, opportunities exist for greater
savings through omnibus contracting and military-to-civilian
conversions, although they, too, have limitations.
DOD'S PROJECTED SAVINGS FROM
OUTSOURCING INITIATIVES
---------------------------------------------------------- Letter :4.1
A DOD official told us that the Department expects savings from
outsourcing and privatization to grow to at least $2.5 billion
annually by the end of the future years defense plan period (fiscal
year 2003); however, he could not tell us specific savings totals for
each year before 2003. According to OSD and service officials, DOD
has programmed the savings into its 6-year budget. In February 1996,
the Deputy Secretary of Defense directed the services to identify
targets for savings from outsourcing and privatization and to
transfer the anticipated savings from their operations and
maintenance accounts to their modernization accounts. Each of the
services has projected potential savings based on outsourcing
programs planned or underway. These savings projections are not as
large as some studies had suggested were possible from outsourcing;
still, caution is warranted concerning the magnitude of savings
likely to be achieved in the current operating environment.
The Air Force projects a 20-percent cost savings of up to $1.26
billion from outsourcing mostly base support functions between fiscal
year 1998 and 2003. Air Force officials told us that prior
outsourcing experience projected an average 29-percent savings; thus,
they considered their current savings projection to be conservative.
The Air Force projects that its studies will recommend outsourcing
about 12,000 positions. Air Force officials could not tell us what
portion of the 12,000 were military or civilian positions because
they had not identified specific functions to be outsourced.
Until recently, the Army was projecting a 10-percent savings from its
renewed outsourcing emphasis, and a key program official was
expressing concern about the program's ability to produce large-scale
savings. Now, while still expressing concern about the potential
savings, this official told us the Army was raising its savings
projection to 20 percent, which is more in line with savings
projections being cited by the other services.\6 He said that the
20-percent figure represented a conservative application of Center
for Naval Analyses (CNA) study data, which estimated the Army has
saved 27 percent from outsourcing studies.\7
The Marine Corps projects initial cost savings of about $10 million
per year beginning in fiscal year 1998, increasing to $110 million
per year by fiscal year 2004. Officials told us the Marine Corps
estimate was based on CNA study data. The CNA study data had
projected that the Marine Corps could save 34 percent through
outsourcing, based on prior years' savings projections.
The Navy projects a 30-percent net cost savings from outsourcing
commercial activities, beginning in fiscal year 2000, based on the
results of CNA study data. The Navy expects savings to begin
accruing in fiscal
year 2000 and increase to $1.3 billion per year by the end of fiscal
year 2003.
--------------------
\6 In neither case did Army officials provide us with a dollar amount
for projected savings.
\7 See DOD report to the Congress, March 1996, Improving the Combat
Edge Through Outsourcing, completed in response to section 357 of the
National Defense Authorization Act for Fiscal Year 1996.
COMPETITION GENERATES
SAVINGS, BUT THEY MAY BE
LESS THAN INITIALLY
PROJECTED
---------------------------------------------------------- Letter :4.2
Some recent studies recommending increased outsourcing within DOD
have projected cost savings of 20 to 40 percent and generally created
the impression that large savings occur only if contracts are awarded
to the private sector. Our work indicates that the magnitude of
savings from outsourcing over time is likely to be less than
projected from initial cost comparisons. Even so, competition is the
key to realizing some savings, whether the function is outsourced or
remains in-house.
According to DOD data on cost comparisons done between fiscal year
1978 and 1994, savings from competed functions occurred regardless of
whether the government or a private company was awarded the work.
DOD's data show the government won about half of the time and private
industry won the other half. DOD's savings achieved through the
competitive process were largely personnel savings, the result of
closely examining the work to be done and determining how to do it
with fewer personnel, whether in-house or outsourced. This lesson
was consistent with an April 1996 CNA report, which stated that the
Navy's cost estimates were lower than private industry about 40
percent of the time. CNA concluded that competition, not
outsourcing, was the key to savings because winners of competitions,
whether an in-house organization or a contractor, generally used
fewer people to do the work.
Although a number of recent studies cited the potential for
outsourcing to provide large savings, most studies we examined,
including those from CNA and the Defense Science Board, drew heavily
from the initial savings projections in DOD's commercial activities
database. This database, individually maintained by each of the
services, set forth operational savings that represent the difference
between the cost of the ongoing operation and the cost of the winning
offer. The services are required to track these savings for the
first 3 years. However, the services' databases do not generally
reflect savings actually attained beyond 3 years, which are subject
to change.
Service officials acknowledged that the cost of operations projected
at the time of an outsourcing competition may be subject to
modification for a variety of reasons, such as inadequate initial
statements of work, other changes to performance work statements
necessitated by new missions, and mandated increases to wages.
According to various headquarters and installation officials,
inadequately crafted statements of work have frequently necessitated
changes to contracts, which usually have resulted in cost
increases.\8 Likewise, headquarters and installation officials often
cited increases in federally established wage rates--larger at times
than wage increases received by federal employees--as a source of
increased contract costs. The Service Contract Act of 1965, as
amended (41 U.S.C. 351-358), requires federal contractors to pay
their service employees not less than the prevailing wage as
determined by the Department of Labor, based on the type of work and
the locale. When the prevailing wage increases, contracts must be
modified to reimburse contractors for the increased cost.
Although DOD's commercial activities database provides an initial
projection of savings from outsourcing competitions, few studies have
been done to determine actual savings realized over time. Various
headquarters and installation officials told us that such studies are
time-consuming and costly and are difficult to do, since a common
baseline for comparison is typically lost over time. Our 1990
evaluation of DOD savings data showed that neither DOD nor OMB had
reliable data on which to assess the soundness of savings estimates.
Also, DOD and OMB did not know the extent to which expected savings
were realized because DOD does not routinely collect and analyze cost
information to track savings after the first 3 years of a contract.\9
Furthermore, DOD does not capture what many service officials
consider to be the sizable costs associated with conducting A-76
studies.
Because post-contract reviews of activities outsourced have been
limited, we do not believe they provide a basis for projecting with
reliability the magnitude of savings achieved over time.
Nevertheless, they do suggest some potential for continuing savings,
since many of the reviews indicated that savings continued over the
life of the contracts. For example, a 1989 Army Audit Agency review
found that 9 of 10 large contracts audited were still saving money
after several years of operation. However, the scope of work on the
10th contract had changed so dramatically that comparative costs of
in-house and contract operation could not be identified. According
to a Navy official, Naval Audit Service reviews of selected contracts
during the mid-1980s found that savings were realized over the life
of the contracts, although not as much as initially projected.
Our prior reports have identified savings and cost increases over
time from outsourcing. For example, in 1985, we reported that from a
sample of 20 functions contracted out, savings were realized on 17
functions.\10 Savings were not realized on two functions, and we
could not determine whether savings were realized on the third
function. Even so, all but 1 of the 20 functions had contract cost
increases. Costs increased primarily because of added work and
mandated wage increases. Further, a 1995 DOD Inspector General audit
report found cost growth in 20 commercial activity contracts it
reviewed. The increases were related to changes in work requirements
and mandated wage increases associated with the Service Contract and
Davis-Bacon acts.\11 The report also noted that increased contract
requirements would have affected both in-house and contract costs but
that the increased contract work requirements could render the
original cost comparison invalid.\12
Many installation officials we met with suggested that a variety of
factors associated with the current operating environment could
lessen the future potential for savings, regardless of past savings.
They expressed concern that budget reductions and civilian personnel
downsizing of recent years had eliminated much of the potential for
additional personnel savings in new outsourcing studies.\13 Some said
that potential savings from outsourcing may be minimized by increases
in the scope of work. Such increases can occur, when funding becomes
available, to restore a level of service that had been reduced due to
resource constraints. For example, various officials expressed the
need or potential for increases in the work level to redress the
effects of postponing maintenance and repair activities, a common
base support-type function, due to reductions in funding.
Various installation officials told us that one way of achieving
across-the-board personnel reductions mandated by OSD is to
outsource, which would free remaining civilian authorizations for use
in other, critically understaffed activities. One senior command
official in the Army stated that the need to reduce civilian
positions is greater than the need to save money. This view was
reinforced by the DOD Inspector General's 1995 report on cost growth,
which noted that "the goal of downsizing the Federal workforce is
widely perceived as placing DOD in a position of having to contract
for services regardless of what is more desirable and cost
effective."
--------------------
\8 Various service initiatives are underway to improve the
development of performance work statements through the use of
standard templates, expert study teams to conduct A-76 studies, and
outsourcing the entire A-76 study process. Such steps could help to
mitigate, but not eliminate, the need for contract changes.
\9 OMB Circular A-76: DOD's Reported Savings Figures Are Incomplete
and Inaccurate (GAO/GGD-90-58, Mar. 15, 1990).
\10 DOD Functions Contracted Out Under OMB Circular A-76: Contract
Cost Increases and the Effects on Federal Employees (GAO/NSIAD-85-49,
Apr. 15, 1985).
\11 Similar to the Service Contract Act, the Davis-Bacon Act, 40
U.S.C. 276a et. seq., requires that federal construction
contractors pay their workers not less than prevailing wages as
determined by the Department of Labor.
\12 Cost Growth in Commercial Activity Contracts, Mar. 31, 1995.
\13 From fiscal year 1987 to 1996, total operations and maintenance
(O&M) budget authority declined 25 percent in real terms, reflecting
the overall decline in defense spending. The O&M funding
appropriation account provides the principal source of funds for
day-to-day activities at the services' installations and bases,
including maintenance and repair of most facilities and civilian
personnel pay. Within O&M funding, even steeper reductions have
occurred in obligations for facilities maintenance and repair, a
common base support function, declining 38 percent in real terms
during the same period. During the same period, DOD's civilian
workforce has declined by 27 percent and is expected to decline by 33
percent by fiscal year 2002.
POTENTIAL AREAS FOR
SIGNIFICANT SAVINGS
---------------------------------------------------------- Letter :4.3
Both omnibus contracting and the conversion of military positions to
civilian or contractor performance appear to have the potential to
yield larger savings than those projected from current or planned DOD
outsourcing efforts. However, the services could face significant
constraints on their abilities to achieve savings in these areas.
OMNIBUS CONTRACTING
-------------------------------------------------------- Letter :4.3.1
Despite recent studies highlighting the potential for larger savings
from omnibus contracting than from contracting piecemeal, the extent
to which the services plan to emphasize omnibus contracting is
unclear. Emphasis on omnibus contracting may be constrained by
competing DOD goals, such as the goal to provide contracting
opportunities for small and disadvantaged businesses.
Currently, few installations have omnibus support contracts. The
Army's Fort Irwin, California, and the Navy's submarine bases at
Bangor, Washington, and Kings Bay, Georgia, outsourced support
services under single contracts when the current organizations were
first established. Others, such as Vance Air Force Base, Oklahoma,
outsourced in 1962 as part of a test with another base to determine
whether outsourced support services were less costly than support
services performed in-house. The former Craig Air Force Base in
Selma, Alabama, retained all support functions in-house, while Vance
Air Force Base outsourced all support. Vance Air Force Base retained
its omnibus contract because Air Force officials concluded the
contract was less costly than having services done in-house.
While DOD's experience with omnibus contracts has been limited, some
of the services' outsourcing experiences suggest the potential for
larger savings and benefits from such contracts. According to
officials at one installation, significant savings are realized by
competing functions that have large numbers of workers. Although
there are few examples of omnibus contracting, Air Force and Navy
contracting data showed that a higher percentage of savings was
achieved in cases where large functions were competed. For example,
Air Force data showed that functions with
1 to 25 positions averaged 13 percent in staff savings, while
functions with over 300 positions averaged 41 percent in staff
savings. The Navy data showed that functions with 1 to 10 positions
averaged 22 percent in savings, while functions with over 200
positions averaged 35 percent in savings.
A 1996 internal assessment by the Army's Forces Command identified
several benefits of omnibus contracting. Examples of benefits are
(1) a single manager is held accountable for performance; (2)
efficiencies, such as reduced overhead, are more often achievable
under an omnibus contract than under separate contracts; and (3) the
flexibility to change the contract performance work statement is
increased. The assessment concluded that the greatest advantage of
omnibus contracting was the reduced effort and cost to develop and
award one contract versus multiple contracts. A 1984
government-sponsored study concluded that Vance Air Force Base was
able to implement several organizational and managerial cost-saving
initiatives because of its omnibus support contract and that such
savings would not have been possible under the usual installation
structure involving several contractors and in-house organizations.
Similarly, a 1991 Air Force report concluded that the Vance omnibus
contract resulted in an overall lower contract cost for the same
service compared to individual contracts at similar installations.
Conversely, while omnibus contracts may produce larger savings, such
contracts do not always succeed or are sometimes viewed as having
drawbacks. For example, in 1996, the Army awarded five separate
contracts to replace its omnibus contract to provide base support
services to Fort Irwin. Army officials stated that the omnibus
contract was replaced because the contract was too large to manage
and the quality of service was not maintained for some portions of
the contract.\14 At installations we visited, we encountered varying
views regarding omnibus contracts. Some officials viewed them as a
more efficient way to manage, while others cited the potential for a
greater number of activities to be adversely affected should contract
problems arise.
On October 28, 1996, the Deputy Secretary of Defense issued a policy
statement concerning the consolidation of contracts. In it, the
Deputy Secretary announced that in planning to consolidate several
contracts or requirements, the services must consider the effect on
small businesses. According to the Deputy Secretary, requirements
cannot preclude small businesses as prime contractors unless a market
research analysis shows significant benefits in terms of reduced
costs and services or both.
Omnibus contracts can exclude the participation of small businesses
as the prime contractor because they often do not have the capacity
to fulfill the various parts of single, large contracts. The policy
statement recognizes the balance that must be maintained between the
cost benefits that can be obtained through consolidated contracts and
the loss of small businesses' participation. The Deputy Secretary's
statement also recognizes the policy of fostering the participation
of small business in federal contracting embodied in statutes such as
the Small Business Act and section 2323 of title 10 as implemented by
the Federal Acquisition Regulation (FAR) and the Defense Federal
Acquisition Regulation Supplement (DFARS).
Small business policies that could affect the use of omnibus
contracts include the requirement contained in FAR 19.502-2 that an
acquisition be set aside for exclusive small business participation
if there is a reasonable expectation that offers will be obtained
from at least two responsible small businesses and that the award
will be made at a fair market price. If DOD is considering a
consolidation of services currently done by small businesses, under
section 15(a) of the Small Business Act, it must also consider
alternative procurement methods that would increase small business
opportunities (15 U.S.C. 644(a)).
The use of omnibus contracting must also be consistent with the
mandate for full and open competition contained in the Competition in
Contracting Act of 1984. The use of an omnibus contract could
restrict such competition because multiple requirements are combined
into one contract. Therefore, such a contract must represent DOD's
legitimate needs, rather than administrative convenience or
unsupported claims of economy.
Because of legislation and policy that affect the ability of an
activity to consolidate activities for outsourcing, the services'
plans to outsource through omnibus contracts are uncertain.
Officials at the Army's Training and Doctrine Command and U.S.
Forces Command told us they are planning to study the potential for
outsourcing all logistics and public works functions at installations
under omnibus contracts. These functions make up the majority of
support activities on Army installations.\15 However, according to an
official at the Army's Training and Doctrine Command, the command has
not yet dealt with the potential effect of the policies associated
with small businesses.
Conversely, various Air Force installation officials told us that
they had encountered problems with omnibus contracts for base support
services in the past, even though the contracts resulted in
significant savings, and they foresee problems in being able to use
omnibus contracts in the future. Air Force headquarters officials
said that while they encourage commands to outsource under omnibus
contracts, the decision to do so is left to the field commander.
In January 1997, the Navy directed field activities to consider
omnibus contracting where possible. Field activities decide whether
to consolidate activities for study purposes. Recently announced
study plans indicate that some activities will be combined. The
Marine Corps has not yet determined what functions it will study.
--------------------
\14 Our review did not examine this contract in-depth to assess why
it did not succeed.
\15 Army logistics functions include vehicle maintenance, supply,
food service, and transportation of military and civilian personnel.
Public works functions include the maintenance and repair of
buildings and grounds.
MILITARY-TO-CIVILIAN
CONVERSIONS
-------------------------------------------------------- Letter :4.3.2
Historical data suggest the potential for significant savings from
converting military support positions to government civilian or
contractor positions. The April 1996 CNA report concluded that
competing activities done by military personnel yielded the highest
percentage savings--50 percent, on average. Our 1996 report also
illustrated the potential for significant cost savings from such
conversions.\16 The extent to which the services' outsourcing studies
will involve military positions remains unclear.\17
At the same time, the conversions could be a time-consuming and
difficult process within DOD, since they would involve changing how
funding is provided between two different appropriation accounts--a
centralized military personnel account and an installation's O&M
account. Service officials told us that because of the
budget/appropriations process, changing funding from the military
personnel account to the O&M account to pay for civilian or
contractor functions could take up to 2 years. In responding to our
previous recommendations to convert military positions to civilian
positions, OSD stated such conversions were impeded by the lack of
consistent funding for the hiring of the civilian replacements, the
ongoing civilian personnel drawdown, and the established minimums for
military strength. The conversion of military positions to civilian
or contractor positions could result in changes to military end
strength. Without reductions to military end strength
authorizations, the conversion of military functions will not produce
the expected personnel savings.
--------------------
\16 DOD Force Mix Issues: Converting Some Support Officer Positions
to Civilian Status Could Save Money (GAO/NSIAD-97-15, Oct. 23,
1996).
\17 The DOD fiscal year 1994 inventory shows almost 300,000 military
performing commercial-type activities. A Defense Science Board 1996
summer study, Achieving an Innovative Support Structure for 21st
Century Military Superiority, notes that 40 percent of active duty
military are in infrastructure versus war-fighting positions.
SOME HISTORICAL IMPEDIMENTS TO
OUTSOURCING HAVE BEEN
ADDRESSED, BUT OTHERS REMAIN
------------------------------------------------------------ Letter :5
Historically, impediments to outsourcing have included institutional
resistance, extensive requirements of the A-76 process, and
legislative barriers. Changes have been made in these areas to
lessen the impediments to varying degrees; however, some impediments
remain.
INSTITUTIONAL EFFECTS ON
OUTSOURCING
---------------------------------------------------------- Letter :5.1
In the past, institutional resistance to outsourcing, and legislation
that contained prohibitions regarding the A-76 process and gave
installation commanders the authority to forgo outsourcing, served to
limit efforts to outsource commercial support activities. Recently,
the strong leadership of OSD and the services, as well as funding and
personnel reductions, were cited by various service officials as
important elements to reduce the resistance to outsourcing. Yet,
some institutional barriers to outsourcing remain.
The services have for a long time set aside positions in support
activities to ensure adequate opportunities to rotate military
personnel from overseas locations or sea duty to tours of duty in the
continental United States. For activities with such military
positions, the services generally blocked the consideration of
outsourcing. Over the years, the Army has converted many of its
military positions set aside for rotation purposes to civilian
positions. As such, the Army does not consider rotation requirements
a barrier to outsourcing. The Air Force and the Navy, on the other
hand, have relatively more commercial activities with positions
reserved for military rotation.
Because of the recent emphasis placed on outsourcing, the Air Force
and the Navy have begun to review ways to restructure activities with
rotation positions to compete the activities for outsourcing.
Because such efforts are in the beginning stages, however, it is
uncertain to what extent these efforts will free up commercial
activities for outsourcing.
A-76 STUDY PROCESS
REQUIREMENTS
---------------------------------------------------------- Letter :5.2
As discussed in appendix I, OMB recently revised its supplemental
handbook to Circular No. A-76 in an effort to streamline and improve
the A-76 study process. The effect of the revised handbook is
uncertain, however, since DOD has not yet completed any study using
the new supplement. DOD officials have expressed differing views on
the revised handbook. Some approved of the revised handbook, while
others said they would like the A-76 process to be eliminated.\18
Although the revised handbook allows each service Assistant Secretary
to waive A-76 studies under certain circumstances, the services'
headquarters have received few requests to do so. Officials said
they expect more requests as installation outsourcing programs
mature. However, a recurring provision in section 8015 of the
Department of Defense Appropriations Act for Fiscal Year 1997 (P.L.
104-208) requires DOD to certify in-house cost estimates before
converting most DOD activities with more than 10 civilian employees
to the private sector. The provision, in essence, restricts DOD's
use of the new waiver authority.
It is uncertain whether DOD will be able to complete A-76 studies
within the time frames outlined in the revised handbook. The
handbook states that studies of single activities should be completed
within 18 months and studies of multiple activities should be
completed within 36 months. According to DOD data, cost studies have
averaged 2 to 4 years. In July 1991, we reported that DOD averaged 4
years and 3 months to complete A-76 studies during fiscal years 1987
and 1990.\19 Further, service officials told us the procurement
process that typically follows the A-76 study, takes time. For
example, a large-scale effort to outsource aircraft maintenance at
Altus Air Force Base, Oklahoma, took 23 months, 17 of which involved
some contracting actions. The A-76 study took place concurrently
with roughly one-half of the procurement process. The services have
various initiatives underway to streamline the A-76 process,
including using work statement templates, assembling A-76 teams of
experts to conduct studies, and outsourcing the A-76 study process to
industry. However, most officials we spoke with said that the time
involved in following the federal procurement process lengthened the
outsourcing process.
Despite changes to the factors used to cost in-house performance,
such as the costing of overhead, industry representatives testified
in September 1996 before the Senate Committee on Governmental Affairs
that cost comparisons between the public and private sectors will
continue to be difficult due to differing accounting structures and
budgeting processes. The services have some initiatives to improve
in-house cost determinations, but efforts are in the early stages.
--------------------
\18 It should be noted that an A-76 study is not required to convert
functions with 10 or fewer positions or outsource emerging
requirements, such as new functions. DOD is considering the
possibility of avoiding A-76 studies by eliminating a given function
as a government activity and relying on the private sector for its
provision (privatization). Various DOD and service officials
indicated that the latter may provide the basis for greater reliance
on the commercial sector in the future, unencumbered by A-76
requirements. However, the extent to which conversions, outsourcing,
or eliminations are likely to occur is not now known.
\19 OMB Circular A-76: Legislation Has Curbed Many Cost Studies in
Military Services (GAO/GGD-91-100, July 30, 1991).
RESOURCES TO MANAGE THE A-76
PROGRAM
---------------------------------------------------------- Letter :5.3
Installation officials have expressed concern about the availability
of resources to conduct A-76 studies and manage the program. In the
past, most studies were done using in-house staff. At most
installations we visited, we were told that, as a result of
downsizing, they had lost many personnel who were experienced in the
A-76 program. For example, officials at one Navy command said that
during the 1980s they had about 70 staff who administered the
commercial activities program commandwide. Since then, the command
had lost all field staff and all but two staff at headquarters to
administer the program. To help alleviate this problem, both the
Navy and the Army plan to outsource parts of the A-76 study process,
although portions will be retained in-house, such as costing of the
in-house organization. OSD provided $14.5 million in near-term
funding to the services for A-76 studies. Air Force officials told
us they are considering augmenting the study process with contractor
personnel. Marine Corps officials told us they have not decided how
they will conduct A-76 studies.
LEGISLATION AFFECTING
OUTSOURCING
---------------------------------------------------------- Letter :5.4
Various laws have affected DOD's outsourcing efforts. Key
provisions--which allowed installation commanders to determine
whether to conduct A-76 studies and prohibited the award of contracts
resulting from such studies--have lapsed. Yet a number of provisions
in chapter 146 of title 10 continue to affect outsourcing.
Chapter 146 of title 10 contains various provisions that burden or
restrict DOD's outsourcing.\20 Section 2461 of title 10 requires A-76
cost comparison studies, congressional notification of studies
involving more than 45 civilians, and annual reports to Congress on
outsourcing. Section 2465 of title 10 prohibits DOD from outsourcing
civilian firefighters or security guards at military installations.
DOD's fiscal year 1996 inventory of civilian and military personnel
involved with commercial activities shows that about 9,600
firefighters and 16,000 security guards were exempt from outsourcing
because of the law and considerations such as mobility requirements.
Outsourcing of these positions was permitted only if positions were
outsourced before September 24, 1983. Various service officials
expressed concern about the exclusion of these functions from the
A-76 process, from an equity standpoint.
--------------------
\20 Some of the provisions in chapter 146 apply only to depot-level
maintenance and, therefore, do not affect the outsourcing of base
support services.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :6
In commenting orally on a draft of this report, DOD expressed the
belief that our concern about the effect of cost growth on
competition savings was overstated. DOD stated that cost growth may
indeed result from changes in the scope of work, but changes in the
scope of work can occur to any workload, including those which DOD
never subjects to competition. We recognize that cost growth can
occur under either circumstance; however, circumstances associated
with outsourcing competitions have made this a troublesome issue for
many service officials. Historically, this has included difficulty
in drafting performance work statements that fully capture work to be
done, as well as mandated wage increases that sometimes occur under
the Davis-Bacon and Service Contract acts. Our report recognizes the
importance of competition to achieving operating efficiencies and
cost savings, but at the same time expresses an appropriate level of
caution about the potential for large-scale savings from outsourcing
competition in today's operating environment.
DOD also pointed out that it has programmed investment funds
necessary to provide the resources to conduct the A-76 studies needed
to reach the services' savings goals. Our report recognizes the
initial provision of these resources for the services' recently
announced studies. However, providing initial funding to facilitate
outsourcing competition studies does not necessarily translate into
achievement of the savings goals, and does not eliminate concerns
about having sufficient personnel to manage the program over time.
DOD also provided several technical comments to enhance the accuracy
and completeness of the report and we have incorporated them in the
text where appropriate.
Our scope and methodology are discussed in appendix III.
---------------------------------------------------------- Letter :6.1
We are sending copies of this report to the Chairmen of the Senate
Committees on Armed Services and on Appropriations, House Committees
on National Security and on Appropriations; the Secretaries of
Defense, the Air Force, the Army, and the Navy; and the Director of
OMB.
Please contact me at (202) 512-5140 if you or your staff have any
questions concerning this report. Major contributors to this report
were Christine Frye, Barry Holman, and Martin Scire.
Sincerely yours,
Mark E. Gebicke
Director, Military Operations
and Capabilities Issues
SUMMARY OF 1996 CHANGES TO
CIRCULAR A-76 HANDBOOK
=========================================================== Appendix I
The revised supplemental handbook to Office of Management and Budget
(OMB) Circular No. A-76 expands the authority to waive studies,
limits the length of studies, standardizes the costing methodology,
and encourages the consideration of contract performance and best
value.
A cost comparison study may be waived where (1) the conversion will
result in a significant financial or service quality improvement and
will not significantly reduce the level or quality of competition in
the future award or performance of work or (2) the waiver will
establish why in-house or contract offers cannot reasonably be
expected to win a competition under the cost comparison process. The
revised handbook indicates that no one lower than the service
Assistant Secretary may grant a waiver.
Under the revised handbook, A-76 cost studies are to be completed
within 18 months for single activities and 36 months for multiple
activities.
The revised handbook includes various changes to the factors to be
used to cost in-house performance in an effort to balance the
comparison of government costs to industry. For example, under the
revised handbook, government overhead is calculated based on a
standard factor of 12 percent of direct labor costs. In the past,
private industry contended that government costing was inherently
unfair to industry because the government understated its cost of
in-house performance.
The revised handbook places increased emphasis on consideration,
during the review of industry offers, of the best overall value to
the government. The government may select a contractor based on the
quality of past performance, as well as cost.
BASE OPERATING SUPPORT FUNCTIONS
========================================================== Appendix II
Base commercial activities, also called base support, are the
functions necessary to support, operate, and maintain Department of
Defense (DOD) installations. The revised supplemental handbook to
OMB Circular No. A-76 defines base support as the following 29
services:
Natural resource services
Advertising and public relations
Financial and payroll services
Debt collection
Bus services
Laundry and dry cleaning
Custodial services
Pest management
Refuse collection and disposal services
Food services
Furniture repair
Office equipment maintenance and repair
Motor vehicle operation
Motor vehicle maintenance
Fire prevention and protection
Military clothing
Guard service
Electric plants and systems operation and maintenance
Heating plants and systems operation and maintenance
Water plants and systems operation and maintenance
Sewage and waste plants operation and maintenance
Air conditioning and refrigeration plants
Other utilities operation and maintenance
Supply operations
Warehousing and distribution of publications
Transportation management services
Museum operations
Contractor-operated parts stores and civil engineering supply
stores
Other installation services
Although OMB's supplemental handbook lists all these functions as
base support, DOD does not have a generally accepted definition of
base support activities, and the services differ in how they define
base support activities. For example, the Army's Cost and Economic
Analysis Center identified 122 functions supporting Army
installations. The Center for Naval Analyses developed a working
definition of 37 different functions supporting Navy installations.
Air Force officials told us that they did not have a definition for
base operating support and that functions included as base support
may differ across the service. According to a cognizant Marine Corps
official, the Marine Corps does not have a standardized definition
for base operation support.
Without a common definition of base support, it is difficult to
accurately determine the size and cost of DOD's base support
workforce. In fiscal
year 1994, DOD estimated it had 629,000 military and civilians
involved in commercial activities in house. In 1996, DOD revised its
inventory and estimated it had about 449,000 personnel involved in
those activities. This significant revision reflects a change in
what the Air Force considered commercial activities. According to
Air Force officials, a number of functions were deleted from the Air
Force inventory because DOD considered them inherently governmental.
DOD's inventory total also changed, according to officials, because
the services had recently surveyed their databases and added and
deleted various functions.
Some support services common to military installations are neither
part of the A-76 handbook definition nor the services' varied
definitions of base support. For example, family housing maintenance
and repair is a common base support service. Yet, the A-76
definition of base support does not include family housing
maintenance. Further, installation officials told us that they did
not consider family housing maintenance a part of base support for
budgeting purposes.
OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================= Appendix III
For this report, we determined (1) the extent to which DOD and the
services emphasize the outsourcing of base support services, (2) the
factors that influence savings in the outsourcing process, and (3)
impediments to DOD outsourcing. We focused our review on the
outsourcing of base support-type functions because DOD expects the
streamlining of infrastructure, of which base support is a major
component, to yield significant savings to fund weapons procurement.
To determine how current DOD and service efforts to outsource compare
with those of prior years, we analyzed DOD's database of A-76 cost
comparison studies conducted since 1978. Due to the size and
complexity of the DOD database, we did not validate the accuracy of
the data. We determined the cost of base support activities using
DOD's definition of base support in its budget and discussions with
Office of the Secretary of Defense (OSD) officials on what portions
of base support to include. We reviewed DOD and industry studies on
DOD's A-76 program and an extensive number of our reports. We spoke
with responsible service and OSD officials about the environmental
influences on outsourcing in DOD and current efforts to outsource
support activities. On a limited basis, we also discussed
outsourcing with industry officials.
To determine the reasonableness of DOD's projected cost savings from
outsourcing, we selectively analyzed DOD's database of A-76 cost
comparison studies to determine average cost savings projected and
savings trends. We also used DOD's database to trace in-house
activities to an updated listing of installation activities. We
demonstrated that installation activities and staffing change and
that tracking savings is difficult. We discussed the various
institutional, procedural, and legislative effects on savings with
responsible service headquarters, installation, and OSD officials.
On a limited basis, we discussed installation officials' experiences
with specific contracts.
To determine what factors currently constrain DOD's outsourcing
efforts, and efforts to correct problems, we spoke with responsible
service headquarters and installation officials. We researched laws
cited by officials and discussed specific legislation, such as the
Small Business Act, with OSD officials and the services' small
business offices.
The majority of our work was done in Washington, D.C. Work was also
done at the U.S. Atlantic Fleet, Norfolk, Virginia; U.S. Army
Training and Doctrine Command, Fort Monroe, Virginia; U.S. Army
Forces Command, Atlanta, Georgia; the Air Force Air Education and
Training Command, San Antonio, Texas; the Air Force Air Combat
Command, Langley, Virginia; and the Air Force Materiel Command,
Wright-Patterson Air Force Base, Ohio. We performed our review from
May 1996 to February 1997 in accordance with generally accepted
government auditing standards.
RELATED GAO PRODUCTS
============================================================ Chapter 0
Air Force Maintenance: Privatization-in-Place Plans Are Costly While
Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).
Navy Depot Maintenance: Cost and Savings Issues Related to
Privatizing-in-Place at the Louisville, Kentucky, Depot
(GAO/NSIAD-96-202, Sept. 18, 1996).
Army Depot Maintenance: Privatization Without Further Downsizing
Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).
Defense Depot Maintenance: Commission on Roles and Mission's
Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July
15, 1996).
Defense Depot Maintenance: DOD's Policy Report Leaves Future Role of
Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996).
Military Bases: Opportunities for Savings in Installation Support
Costs Are Being Missed (GAO/NSIAD-96-108, Apr. 23, 1996).
Defense Depot Maintenance: Privatization and the Debate Over the
Public- Private Mix (GAO/T-NSIAD-96-148, Apr. 17, 1996).
OMB Circular A-76: Legislation Has Curbed Many Cost Studies in the
Military Services (GAO/GGD-91-100, July 30, 1991).
OMB Circular A-76: Expected Savings Are Not Being Realized in Ft.
Sill's Logistics Contract (GAO/GGD-91-33, Feb. 11, 1991).
OMB Circular A-76: DOD's Reported Savings Figures Are Incomplete and
Inaccurate (GAO/GGD-90-58, Mar. 15, 1990).
Army Procurement: Fort Benjamin Harrison's Commercial Activity Study
Should Be Redone or Updated (GAO/NSIAD-89-90, Feb. 24, 1989).
Federal Productivity: DOD's Experience in Contracting Out
Commercially Available Activities (GAO/GGD-89-6, Nov. 28, 1988).
Army Procurement: No Savings From Contracting for Support Services
at Fort Eustis, Virginia (GAO/NSIAD-89-25, Oct. 31, 1988).
Air Force Contracting: Contracting for Maintenance of Training
Aircraft at Columbus Air Force Base (GAO/NSIAD-88-136BR, Apr. 6,
1988).
Federal Productivity: DOD Functions With Savings Potential From
Private Sector Cost Comparisons (GAO/GGD-88-63FS, Apr. 8, 1988).
DOD Functions Contracted Out Under OMB Circular A-76: Costs and
Status of Certain Displaced Employees (GAO/NSIAD-85-90, July 12,
1985).
Information From Previous Reports on Various Aspects of Contracting
Out Under OMB Circular A-76 (GAO/NSIAD-85-107, July 5, 1985).
DOD Functions Contracted Out Under OMB Circular A-76: Contract Cost
Increases and the Effects on Federal Employees (GAO/NSIAD-85-49, Apr.
15, 1985).
Synopsis of GAO Reports Involving Contracting Out Under OMB Circular
A-76 (GAO/PLRD-83-74, May 24, 1983).
Review of DOD Contracts Awarded Under OMB Circular A-76
(GAO/PLRD-81-58, Aug. 26, 1981).
Factors Influencing DOD Decisions to Convert Activities From In-house
to Contractor Performance (GAO/PLRD-81-19, Apr. 22, 1981).
*** End of document. ***
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