Order Code RL30392
CRS Report for Congress
Received through the CRS Web
Defense Outsourcing:
The OMB Circular A-76 Policy
Updated July 22, 2003
Valerie Bailey Grasso
Analyst in National Defense
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Defense Outsourcing:
The OMB Circular A-76 Policy
Summary
This report provides information on the Office of Management and Budget’s
(OMB) Circular A-76, “Performance of Commercial Activities,” and the impact of
a related reform initiative, the Federal Activities Inventory Reform Act (FAIR) of
1998, within the Department of Defense (DOD). The Circular defines federal policy
for determining whether recurring commercial activities should be outsourced to
commercial sources, governmental facilities, or through inter-service support
agreements. The FAIR Act creates statutory reporting requirements for federal
executive agencies, by requiring federal executive agencies to identify activities “not
inherently governmental” and consider outsourcing through managed competitions.
However, FAIR does not require that agencies contract out these activities.
Despite the fact that DOD has substantially downsized its force structure after
the end of the Cold War, operations and support cost have not been proportionately
reduced. In order to achieve greater reductions, and as part of its Defense Reform
Initiative, DOD announced that 229,000 positions would be opened to managed
competition; by FY2005, some 237,000 jobs. Historically, DOD has set the pace as
the lead federal agency in using OMB Circular A-76 cost comparison studies as a
tool for managing competition for federal contracts.
The effectiveness of the OMB Circular A-76 policy has been the subject of
rising debate. A revised circular, a recommendation of the congressionally mandated
Commercial Activities Panel, is currently under OMB review.
Some proponents view the policy as a catalyst for competition in the
marketplace, and as the vehicle to increase efficiencies, lower costs and encourage
technological advances. They argue that the government should stop providing some
services, and not compete against its private citizens. Some proponents view the
policy as an instrument for driving efficiencies. Some opponents of the program
view it and the passage of FAIR as efforts to dismantle what has been traditionally
viewed as the “proper role of government.” They challenge the notion that the
process will ultimately save money, by arguing that projections of costs savings have
been overly optimistic. Others assert that besides resulting in the loss of thousands
of federal jobs, FAIR may create new constituencies that could generate new
pressures for federal outsourcing.
The degree to which managed competitions, throughout the federal government,
increase efficiency and save money will likely depend on the extent to which federal
agencies employ OMB Circular A-76 and the FAIR Act. Congress can exercise its
oversight authority by (1) monitoring federal agency progress in the implementation
of OMB Circular A-76 policy and FAIR, and the level of managed competitions,
since there is no requirement that agencies must conduct them, and (2) granting
federal agencies the authority to explore alternatives to the OMB Circular A-76.
Congress may also review the results of a congressionally-mandated study, chaired
by the Comptroller General, that examined the policies and procedures governing the
transfer of commercial activities from the federal government to the private sector.

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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Views on OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Congressional Interest in Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Federal Activities Inventory Reform Act of 1998 (FAIR) . . . . . . . . . . . . . . . 7
The Use of OMB Circular A-76 Within the Federal Government . . . . . . . . . . . . . 9
Results of Selected OMB Circular A-76 Cost Comparison Studies . . . . . . . . . . 11
Major New Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Revised DOD Acquisition Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
The President’s Management Agenda and the Army’s Third Wave . . . . . 14
OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The FY2002 FAIR Act Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Congressional Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Other Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Questions for the 108th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Will DOD Comply with the Reporting Requirements? . . . . . . . . . . . . . . . . 22
Can An Agency Conduct Its Own Inventory? . . . . . . . . . . . . . . . . . . . . . . . 23
How Will Challenges to the Inventory Be Resolved? . . . . . . . . . . . . . . . . 24
Will the Policy Result in Actual Cost Savings? . . . . . . . . . . . . . . . . . . . . . . 24
What Will Be the Impact on Defense Operations? . . . . . . . . . . . . . . . . . . . 26
Are There Alternatives To OMB Circular A-76? . . . . . . . . . . . . . . . . . . . . 27
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
List of Tables
Table 1. Number of Positions Studied, 1988-1997 . . . . . . . . . . . . . . . . . . . . . . . 10
Table 2. DOD’s FY2000 Budget Submission, Reflecting Positions
Currently Under OMB Circular A-76 Study . . . . . . . . . . . . . . . . . . . . . . . . 11
Table 3. 106th Congress, Outsourcing Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

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Defense Outsourcing:
The OMB Circular A-76 Policy
Introduction
The end of the Cold War and the reduction of Department of Defense (DOD)
spending created a strong need to reform the manner in which the federal government
procured goods and services. In the 1980s, the Reagan Administration emphasized
the view that big government was inefficient, wasteful and unmanageable. Later, the
recommendations of the Clinton Administration’s National Performance Review
(formerly called NPR, now the National Partnership for Reinventing Government)
served as an impetus for the executive branch to propose new procurement reform.1
The NPR effort broadened the goal of creating a government that “works better and
costs less “ to a government that “works better and does less.” 2 The NPR promoted
the idea that the government should focus its attention on those activities which it
should and could do best, and then put incentives in place to insure optimum results.
In August 2001, President Bush unveiled “The President’s Management Agenda,”
which identified competitive sourcing as one of five management initiatives designed
to enhance government effectiveness.3
DOD has substantially reduced its force structure since the end of the Cold War.
Unfortunately, defense operations and support costs have not reduced proportionately
to the size of the force.4 As a result, DOD must reduce spending further to achieve
greater cost savings to finance weapons and military equipment modernization.
Combined with a national mood reflecting a growing change in the public’s
perception of the role of government, a shrinking defense procurement budget,
increased private sector lobbying for government contracts, the notion of contracting
out, or outsourcing, of federal procurement activities has taken center stage.
Outsourcing is a decision by the government to purchase goods and services
from sources outside of the affected government agency. In the past, outsourcing
1 Office of the Vice President. From Red Tape to Results: Creating a Government that
words Better and Costs Less. Report of the National Performance Review. Washington
1993, 168p.
2 Office of the Vice President. Serving the American Public: Best Practices in Downsizing,
Bench-marking Study Report. Report of the National Performance Review. Washington
1997, 36 p.
3 U.S. Office of Management and Budget. The President’s Management Agenda for FY2002
(Washington: OMB, 2001), p. 1. [http://www.results.gov/agenda/fiveinitatives.html]
4 General Accounting Office. Observations on the Department of Defense’s Fiscal Year
2000 Performance Plan. July 20, 1999. GAO/NSIAD-99-178R. 14 p.

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CRS-2
has usually meant that the government purchased specific goods or services from the
private sector. For example, an agency may hire a janitorial cleaning service, a
cafeteria/food service vendor, or an audio-visual equipment vendor. Outsourcing
evolved as one of the principal mechanisms used to reduce the size, scope, and costs
of the federal government.
A 1996 Report of the Defense Science Board, Task Force on Outsourcing and
Privatization, defined outsourcing in this way:
Outsourcing often refers to the transfer of a support function traditionally
performed by an in-house organization to an outside service provider.
Outsourcing occurs in both the public and private sectors. While the outsourcing
firm or government organization continues to provide appropriate oversight, the
vendor is typically granted a degree of flexibility regarding how the work is
performed. In successful outsourcing arrangements, the vendor utilizes new
technologies and business practices to improve service delivery and/or reduce
support costs. Vendors are usually selected as the result of a competition among
qualified bidders.5
Under the umbrella of outsourcing, privatization occurs when the government
ceases to provide certain goods or services. When an activity is privatized, the level
of the government’s involvement is altered, and the government may exercise any
one of a number of options. Each option represents a different business decision.
The options are the following business decisions: (1) selling the government assets
and/or operational capabilities, and (2) creating inter-service agreements, voucher
arrangements, franchises, or government corporations.6 For the purposes of this
report, privatization will be referred to as the contracting out of government goods
and services, not the sale of government assets.
The OMB Circular A-76 has been viewed by some as a management reform tool
to facilitate government outsourcing and privatization. This report will discuss the
Office of Management and Budget (OMB) Circular A-76 policy titled “Performance
of Commercial Activities,” and the impact of a closely-related reform initiative, the
Federal Activities Inventory Reform (FAIR) Act, P.L. 105-270, within DOD.
5 Department of Defense, Office of the Undersecretary of Defense for Acquisition and
Technology. Report of the Defense Science Board, Task Force on Outsourcing and
Privatization. August 1996. p. 7a.
6 “Where Do We Stand?” AFGE’s Privatization Policy. American Federation of
Government Employees, AFL-CIO. 28 p.

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CRS-3
The OMB Circular A-76
The OMB A-76 Circular provides “an analytical framework on which the
government bases a decision on who can best provide the products and services it
needs.”7 OMB Circular A-76 has defined a commercial activity as one that is a result
of a requirement, or need, that the federal government has for a product or service,
and that the product or service could be obtained from a private sector source. A
“recurring” commercial activity is one that is required by the federal government on
a consistent, long-term basis. The Circular provides federal executive agencies with
guidance and procedures for determining whether recurring commercial activities
should be performed by private sector sources, government sources, or through an
“Inter-Service Support Agreement,” which is an agreement between two federal
agencies to provide each other with certain services or functions.8
The policy9 outlines a very formal, intricate, and often lengthy process for
conducting managed competitions. Initially, no time frames were required for the
completion of competitions. Later, a provision was included in the FY1991 DOD
Appropriations Act (P.L. 101-511) and future DOD appropriations bills directing that
single function competitions are to be completed within 24 months and multi-
function competitions are to be completed within 48 months.10 DOD estimated that
increased efficiencies resulting from these competitions could yield a 20-30% cost
savings, regardless of whether the government or the commercial sector wins.
According to DOD, about 60% of the competitions are won by the original
employing agency, reconfigured into a “most efficient organization (MEO),” while
40% are won by competing private contractors and government agencies.11
7 The AFGE Activist’s Personal Consultant to A-76 Policy Implementation. American
Federation of Government Employees.
8 See OMB Circular A-76 Supplemental Handbook.
9 The current OMB Circular A-76 policy was issued in 1966. The policy was revised in
1977 and 1979. The Supplemental Handbook was issued in 1983, and revised in 1996. The
policy, supplemental handbook, and accompanying policy memoranda were revised together
and issued on June 14, 1999. Authority for the OMB Circular A-76 originated in the
Budgeting and Accounting Act of 1921 (31 U.S.C. 1 et seq.) and the Office of Federal
Procurement Policy Act Amendments of 1979 (41 U.S.C. 401 et seq.) Legal or procedural
challenges to the policy or procedures are provided for in the Supplemental Handbook. The
handbook also allows for direct conversion to a private sector contractor and cost
comparison waivers to the OMB Circular A-76 policy. Copies of updated versions can be
found on the Internet at [http://www.whitehouse.gov/OMB/circulars/index-procure.html].
10 General Accounting Office. DOD Competitive Sourcing: Results of Recent Competitions.
Letter 4.2, GAO/NSIAD-88-44. Feb. 22, 1999. 2 p.
11 Camelo, Wilson (First Lt.). “Competitive Sourcing, Privatization Vital to Air Force
Future.” Air Force News. May 25, 1998. 2 p.

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CRS-4
The policy rests on these assumptions:
(1) The federal government should not compete against its citizens but rely on
the commercial sector to supply products and services needed by the
government.
(2) The government can conduct cost comparison studies to determine “who
best to do the work” through a process of “managed competitions.”
(3) Market forces can determine the most effective and cost-efficient methods
to operate functions in both government and commercial sectors; and
(4) The nature of competition within the marketplace can be “self-managed,”
and not require government oversight.
The policy states that, whenever possible, and to achieve greater efficiency and
productivity, the federal government should conduct cost comparison studies to
determine who can best perform the work. Under the OMB Circular A-76 policy, a
managed competition is the vehicle to conduct cost comparison studies.
Competitions are held between public agencies and the private commercial sectors.
The three types of managed competitions under the policy are (1) public-public, (2)
public-private, and (3) private-private. In accordance with the provisions of the
Circular, the federal government will not start, or maintain, a commercial product or
service that the private sector can provide more economically.
Federal agencies are not required to use the OMB Circular A-76 policy;
however, federal executive agencies are required to (1) develop a performance work
statement, defining the technical aspects of the work to be performed; (2) determine
the most efficient organizational structure using the current government workforce
(called the “Most Efficient Organization, or MEO) through realignment/
reexamination of the management structure, personnel requirements and procedures;
and, when such a comparison is required, (3) conduct cost comparison studies among
all sectors, including private, other public agencies, and the current government
MEO.12 Cost-comparison studies are not required to convert certain activities to, or
from, an in-house operation, commercial contract, or inter-service support
agreements.13
12 See OMB Circular A-76: Oversight and Implementation Issues.
13 OMB Circular No. A-76. Executive Office of the President, Office of Management and
Budget. June 14, 1999 (revised). p. 4-6.

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CRS-5
Views on OMB Circular A-76
Some proponents of OMB Circular A-76 view the culture of most federal
agencies as slow, conservative, averse to risk, and resistant to change. They view the
OMB Circular A-76 policy as a way to gain efficiencies in the contracting process,
while reducing overall costs. They argue that the resulting managed competitions
enhance quality, efficiency, and productivity, and spur on technological advances.
Within DOD it is believed that potential contract cost savings from the competition
for defense work would free up sorely needed funds to finance weapons and
equipment modernization.
Some opponents support the competitive aspects of the policy, and believe that
the process is unfavorable to the private, commercial sector. Criticisms include, but
are not limited to, perceptions that the 12-13% administrative and overhead costs
(that the government routinely assigns to federal agencies when competing for
contracts) are too low, and that the low overhead costs give the government an
automatic advantage in formulating lower bids. Additionally, to win the competition,
outside proposals must be at least 10% less than the MEO’s proposals. Some argue
that this policy favors the government. Within the information technology
community, an overhead rate of 40% is viewed as the standard. The private sector
believes that the 12-13% overhead rate does not accurately and completely reflect
infrastructure and overhead costs; some suggest that the rate is significantly higher
for all industries.14 Other critics believe that government procurement specialists
decide contract awards based on the lowest cost, not necessarily what would
represent the best value to the government.
Both sides generally agree that the OMB Circular A-76 process takes too long
to complete. Managed competitions have ranged from 18 months, for smaller,
single-function agency activities, to more than four years, for multi-functioned
agency activities; however, GAO reports that multi-function studies conducted since
1991 have taken about 30 months, on average.15 Both sides concede that managed
competitions could result in the loss of jobs and benefits for tens of thousands of
federal government employees; they believe that some organic, technical capability
should be retained within the federal government, to support unique requirements
(for example, some computerized engineering or nuclear propulsion capability),
although exactly how much (or how many employees) is unclear. Evidence has
shown that when government employees are reorganized into MEOs, often they can
operate more efficiently and cost-effectively than commercial contractors.16
14 For a discussion of overhead rates, see “Part II - Preparing the In-house and Contract Cost
Estimates, OMB Circular No. A-76-Revised Supplemental Handbook.” Executive Office
of the President. Office of Management and Budget. March 1996. p. 15-34; and Defense
Outsourcing: Better Data Is Needed to Support Overhead Rates for A-76 Studies. General
Accounting Office, GAO/NSIAD-98-62. Feb. 27, 1998. 20 p.
15 Ferris, Nancy. “Targeting Jobs.” Government Executive. December 1999, p. 6.
16 Statement of Maj. Gen. Robert L. Van Antwerp, Jr., Assistant Chief of Staff for
Installations Management, Department of the Army. Mar. 2, 1999. House National Security
(continued...)

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CRS-6
However, it is unclear whether MEOs should be allowed to continue to perform
activities viewed to be outside “the proper role of government.”
Federal labor unions, such as the American Federation of Government
Employees (AFGE),17 have opposed any policy that promotes the outsourcing or
privatization of functions performed by the federal government. Nevertheless, AFGE
has sought to play an active role in the execution of A-76 policy on the national and
local levels. AFGE does not believe that privatization ultimately saves money, nor
that competition within the marketplace is capable of self-management. AFGE
believes that the current debate on A-76 policy is being driven by a desire to
downsize the federal work force, rather than to benefit from greater private-sector
efficiencies and technological advances. During the debate leading to the passage of
the FAIR Act, managers at twenty-one DOD depots protested the expansion of the
jobs that would be subject to review for A-76 competitions through outsourcing. The
Federal Managers Association’s (FMA) President Michael Styles wrote to Secretary
of Defense Cohen, commenting that “DOD managers believe that contractors low-
ball their bids in order to get the work and then increase their prices once the
government competition is eliminated.”18
Congressional Interest in Outsourcing
Over the past seven years, Congress has passed a series of important federal
procurement initiatives that promoted outsourcing, including the following
legislation:19
(1) The Federal Acquisition Streamlining Act (P.L. 103-355), which encouraged
federal agencies to buy more commercial products, and simplified procurement
procedures for securing commercial programs;
(2) The Federal Acquisition Reform Act (P.L. 104-106), which eliminated the
requirement for certified costs and pricing data for commercial products, thus
further simplifying procurement procedures, while preserving the concept of full
and open competition;
16 (...continued)
Subcommittee on Military Readiness.
17 For a discussion of AFGE’s policy on privatization, see Where Do We Stand? AFGE’s
Privatization Policy. The American Federal of Government Employees, AFL-CIO. 28 p.
18 Friel, Brian. “Depot Managers Protest Outsourcing.” Government Executive. September
21, 1998 [http://www.govexec.com/dailyfed/0998/092198b2.htm].
19 For a discussion on federal procurement reform, see CRS Report 96-373, Federal
Acquisition Reform Act of 1996, by Michael Seitzinger, April 29, 1996, 6 p.; CRS Report
96-598, Civilian Procurement Reform Efforts, by Stephanie Smith, July 3, 1996, 5 p.; and
CRS Issue Brief IB96022, Defense Acquisition Reform: Status and Current Issues, by
Valerie Bailey Grasso (updated regularly).

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(3) The Information Technology Management Reform Act of 1996 (P.L. 104-
106), which eliminated the General Services’ Administration’s (GSA) central
authority in the administration of information technology, empowered each
federal agency to develop its own information technology procurement program
and combined bid protests authority for both information technology and federal
procurement under GAO; and
(4) The Defense Reform Initiative,20 which evolved out of the Quadrennial
Defense Review and is focused on reducing DOD infrastructure support and
streamlining its business practices.
The 105th Congress considered a greater use of outsourcing for government
goods and services when Representative John J. Duncan, Jr. introduced H.R. 716, the
“Freedom from Governmental Competition Act.” Introduced on February 12, 1997,
this bill would have required the government to procure all goods and services from
the private sector; however, the bill would have prohibited the competitive
outsourcing of federal functions. The Clinton Administration voiced strong
objections to the bill, and it did not survive the challenge. Another version of the bill
was later introduced; it would have required that all commercial activities be subject
to competitive outsourcing within a 5-year period, as well as the appointment of a
“Commercial Activities Czar.” That bill was dropped in Committee due to a lack of
congressional support.
On the same day (February 12, 1997), Senator Craig Thomas introduced S. 314,
“a bill to provide a process for the government to identify functions not inherently
governmental.” A final version of S. 314 became the Federal Activities Inventory
Reform (FAIR) Act. FAIR passed in the second session of the 105th Congress and
was signed into law on October 19, 1998 (P.L. 105-270). The Act was published in
the Federal Register at 64 FR 100031.
The Federal Activities
Inventory Reform Act of 1998 (FAIR)
The passage of FAIR created statutory federal agency reporting requirements.
OMB published the proposed implementation rules in the Federal Register on March
1, 1999; final guidance on the implementation of the FAIR Act was published on
June 24, 1999, in Transmittal Memorandum #20.21 The FAIR Act contained both
the requirement for agencies to inventory their commercial activities, and the pre-
existing definition of “inherently governmental functions.” Federal executive
20 For a discussion of the progress of the Defense Reform Initiative, see Defense Reform
Initiative. Organization, Status, and Challenges. General Accounting Office. April 1999,
GAO/NSIAD-99-87. 95 p.
21 See the FAIR Internet site, [http://www.whitehouse.gov/OMB/circulars/index-
procure.html].

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CRS-8
agencies22 are required to submit to OMB, by June 30 of each year, annual
inventories (or lists) of “non-inherently governmental functions.” Agencies are
afforded opportunity to argue for inclusions/exclusions to their lists. Such lists will
be made available to Congress and eventually published in the Federal Register. The
lists can be challenged by “interested parties,” as defined in the legislation. Once
challenged, agencies must either accept the challenge, make changes to the list, or
reject the challenge, and agree to do so within 30 days after the challenge is filed.
September 30, 1999, was the deadline for agencies to respond to the first FAIR Act
inventory challenges.23
What did emerge through the passage of the FAIR Act was a process whereby
the federal government would identify activities considered “not inherently
governmental” in nature. Inherently governmental activities are described as “those
so intimately related to the exercise of the public interest as to mandate performance
by federal employees.”24 The Office of Federal Procurement Policy (OFPP) Policy
Letter 92-1, dated September 23, 1992, provides the following guidance on how to
identify inherently governmental activities:
These functions include those activities that require either the exercise of
discretion in applying Government authority or the making of value judgements
in making decisions for the Government. Governmental functions normally fall
into two categories: (1) the act of governing, i.e., the discretionary exercise of
Governmental authority, and (2) monetary transactions and entitlement. An
inherently governmental function involves, among other things, the interpretation
and execution of the laws of the United States so as to:
(a) bind the United States to take or not to take some action by contract, policy,
regulation, authorization, order, or otherwise;
(b) determine, protect, and advance its economic, political, territorial, property,
or other interests by military or diplomatic action, civil or criminal judicial
proceedings, contract management, or otherwise;
(c) significantly affect the life, liberty, or property of private persons;
(d) commission, appoint, direct, or control officers or employees of the United
States; or
(e) exert ultimate control over the acquisition, use, or disposition of the property,
real or personal, tangible or intangible, of the United States, including the
collection, control, or disbursement of appropriated and other Federal funds.
22 Exceptions to the FAIR Act include, but are not limited to, the General Accounting
Office, government corporations or “government-controlled corporations,” non-appropriated
funds instrumentalities, and certain depot-level maintenance and repair organizations. FAIR
Act, P.L. 105-270, p.4.
23 Saldarini, Katy. “Challenges To Agency Job Lists Keep Rolling In.” Government
Executive. November 12, 1999, 2 p.
24 “Inherently Governmental Functions.” Appendix 5, Office of Federal Procurement Policy
Letter 92-1, September 23, 1992, p. 53.

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CRS-9
Inherently governmental functions do not normally include gathering information
for or providing advice, opinions, recommendations, or ideas to Government
officials. They also do not include functions that are primarily ministerial and
internal in nature, such as building security; mail operation, operation of
cafeterias; housekeeping; facilities operations and maintenance, warehouse
operations, motor vehicle fleet management and operations, or other routine
electrical or mechanical services.25
Any function not considered inherently governmental would be considered
commercial, and subject to competitive outsourcing.26
The Use of OMB Circular A-76
Within the Federal Government
Within the federal government, the OMB Circular A-76 has not been used
uniformly. On the one hand, DOD has set the pace as the lead federal agency to use
the OMB Circular A-76 policy. On the other hand, civilian agencies did not report
a single federal position for outsourcing, under OMB Circular A-76, in 1997.
Reportedly, they have relied instead on management improvement techniques, such
as re-invention, re-engineering, and consolidation, as recommended in the National
Partnership for Reinventing Government.27 The Clinton Administration has
encouraged more frequent use of the policy, as reflected below:
As noted in the President’s FY1999 budget, competition spurs efficiency.
Agencies that require or provide administrative or other commercial support
services should have the stimulus of competition to make available new
technologies, capital and new management techniques to improve performance
and reduce costs. This Administration is expanding the level of competition for
the provision of commercial goods and services, by requiring agencies to
compete with one another and with the private sector on a level playing field.28
Table 1 summarizes the number of federal job positions that have been studied
and subjected to the process, government-wide, from 1988-1997.
25 Ibid, p. 53.
26 Definitions of terms commonly associated with the OMB Circular A-76 Program are
provided in Appendix I, OMB Circular A-76, Revised Supplemental Handbook (Mar. 1996.)
27 Maxwell, Alison. “Agencies Avoid Contracting Studies.” Government Executive. June
5, 1998.
28 Office of Management and Budget, Executive Office of the President. Memorandum For
Heads of Executive Departments And Agencies. Issued by Franklin Raines. May 12, 1998.

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Table 1. Number of Positions Studied, 1988-1997
Fiscal Year
Total FTEs
DOD FTEs
Civilian Agencies FTEs
1988
17,249
12,000
5,249
1989
8,469
6,100
2,369
1990
9,547
6,989
2,558
1991
2,026
1,243
783
1992
564
496
68
1993
509
441
68
1994
1,691
1,623
68
1995
2,386
2,128
258
1996
5,267
5,241
26
1997
25,255
25,255
0
Sources: This table and the accompanying explanation were provided by J. Christopher Mihm,
Director, Federal Management Workforce Issues, General Government Division, GAO. Mr. Mihm
testified before the Subcommittee on Oversight of Government Management Restructuring, and the
DC Committee on Governmental Affairs, U.S. Senate, on June 4, 1998. Table 1 was prepared by Bill
Reinsberg, National Defense Analyst, Federal Management and Workforce Issues, General
Government Division, GAO. As reported by OMB, civilian agencies data for 1992-95 are based on
annual averages for that time period. Not all agencies are included, but OMB stated that the number
excluded is significant. GAO did not independently verify the accuracy of the data provided by
OMB.
An FTE is the calculation of staffing levels using staff work time as a factor.
As a result of an OMB Circular A-76 competition, the functions currently performed
by federal agency workers could be transferred to a source outside of the agency,
including another federal agency or the private sector. As previously stated, DOD
heads the lists in using OMB Circular A-76 as a tool for managing outsourcing
competitions for federal contracts.
Table 2 shows DOD’s projections for FY2000 cost comparison studies. As part
of the President’s FY2000 Budget, DOD and the military services have announced
the following positions currently under study.29 Under OMB Circular A-76, DOD
plans to open about 250,000 jobs to managed competitions by the year 2003, much
of it conducted through FAIR.
29 Provided by the Competitive Sourcing and Privatization Office, Office of the Deputy
Undersecretary of Defense for Industrial Affairs and Installations.

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Table 2. DOD’s FY2000 Budget Submission,
Reflecting Positions Currently Under OMB Circular A-76 Study
Type of Study
Air
Army
Navy
Marine
Defense
Total
Force
Corps
Agencies
Positions
Single-function
5,080
—
638
none
1,215
6,933
Multi-function
4,123
14,757
4,910
none
3,753
27,543
Total Positions
9,203
14,757
5,548
none
4,968
34,476
DOD has projected that it could save about $6 billion by FY2003, and $2.5
billion each year thereafter, through a more aggressive use of the OMB Circular A-76
policy.30 The General Accounting Office (GAO) has questioned whether these
savings are overly optimistic.31 Historically, savings resulting from competitions
have reportedly ranged from 20-30% lower than original projections. Generally,
about 60% of the competitions are won by the original employing agency,
reconfigured into a “most efficient organization,” while 40% are won by competing
private contractors and government agencies.32 Results of recent competitions,
however, reflect a shift. Private contractors now win about 60% of the competitions,
while government agencies garner about 40%.33
Results of Selected OMB Circular A-76
Cost Comparison Studies
The results of some recent OMB Circular A-76 competitions suggest that the
process can work effectively and efficiently, even when protests are filed. Two years
ago, the Army’s Aberdeen Proving Grounds solicited for proposals to perform
logistics, operations and maintenance, risk management, organizational support, and
community and family activities under OMB Circular A-76. Initially, the in-house
MEO lost the competition to Aberdeen Technical Services (ATS), a group of private
contractors. The employee group appealed, based on allegations that ATS incorrectly
calculated health and welfare benefit costs; as a result, the contract award was
overturned. ATS protested the award and challenged the veracity of the cost
comparison study. The Comptroller General recently upheld the contractor’s protest.
30 Statement of David Warren, Director, Defense Management Issues, U.S. General
Accounting Office. Mar. 13, 1998. House National Security Subcommittee on Military
Readiness.
31 For a discussion of projected savings from A-76 competitions, see Outsourcing DOD
Logistics: Savings Achievable But Defense Science Board’s Projected Are Overstated.
December 8, 1997. GAO/NSIAD-98-48. 18 p.
32 General Accounting Office. DOD Competitive Sourcing: Results of Recent Competitions.
Feb. 22, 1999. GAO/NSIAD 99-4. 36 p.
33 Ferris, Nancy. “Targeting Jobs.” Government Executive. December 1999.

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Aberdeen officials have until the end of April 2000 to determine whether to issue a
new request for bids or award the contract to ATS.34
However, another competition has proven both arduous and controversial. In
April 1999, the Army announced that it would outsource the management of its
Wholesale Logistics Modernization Program. To avoid a lengthy competition
process, the Army sought a waiver from OMB Circular A-76. If the Army is
successful, some 500 employees could potentially lose their jobs, without the
opportunity to compete as an MEO. Public criticism has mounted. The National
Federation of Federal Employees, Local 1763, filed an appeal in May. Some
employees have filed age discrimination complaints with the Army’s Equal
Employment Opportunity Office. The Small Business Administration and affected
employees filed an appeal with the Secretary of the Army; the appeal was denied.
Finally, a provision was added to the FY2000 DOD Authorization Bill requiring the
Army to allow the current employees to compete for their jobs. That provision was
changed to a “Sense of the Congress” resolution that the Army retain sufficient in-
house expertise to ensure that DOD’s warfighting capabilities are not compromised,
and that contractor performance can be monitored. The Army had projected
December 10, 1999 as the contract award date. Since the Army announced its
decision to outsource, 10% of the employees at the two software centers that run the
program have quit. This type of controversy is likely to continue.
Another Air Force OMB Circular A-76 award decision was overturned by the
GAO Board of Contract Appeals, and later reinstated by the Office of Government
Ethics. In this case, interested parties were invited to submit initial technical
proposals for work at Wright-Patterson Air Force Base, Dayton, Ohio. The proposal
was to perform maintenance, operation, repair and minor construction services for
the Base. The contract solicitation for bids was issued on May 29, 1998. Two
technical proposals were received: one from DZS/Baker LLC, the other from the
Morrison Knudsen Corporation.
On the basis of the technical evaluation team’s review of the two proposals,
the Air Force requested revised technical proposals. The evaluation team reviewed
the revised technical proposals and determined that both proposals were incomplete
and unacceptable. Based on their assessment, the Air Force canceled the original
solicitation, meaning that the proposal was withdrawn. Both companies were
notified. Afterwards, the Air Force made plans to implement its most efficient
organization, meaning, to re-engineer the current work unit to keep the work within
the government, performed by federal workers.
The two competing companies were notified; they promptly filed protests with
GAO. On January12, 1999, the GAO Board of Contract Appeals overturned the Air
Force A-76 award decision to cancel the solicitation, due to the appearance of a
conflict of interest. After investigating the protests, GAO ruled:
34 General Accounting Office. Comptroller General decision. Aberdeen Technical Services,
B283727.2, February 22, 2000, 10 p.

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CRS-13
DZS/Baker and Morrison Knudsen argue that the determination that their
proposals were technically unacceptable — that is, the determination on which
cancellation of the solicitation was based — resulted from a failure to conduct
meaningful discussions, and an unreasonable evaluation of technical proposals
by evaluators with an improper conflict of interest. In this latter regard, the
protesters note that 14 of 16 evaluators — 4 of 6 core evaluators (5 “designated”
core evaluators and an evaluator considered by the evaluation team to be a core
evaluator) responsible for evaluating the entire proposals, and all 10 technical
advisers responsible for evaluating specific portions of the proposals — held
positions that were under study as a part of the A-76 study.
We agree with the protesters that the evaluation process was fundamentally
flawed as a result of a conflict of interest.35
The Office of Government Ethics (OGE) later challenged GAO’s decision.
Citing an exemption to “conflict of interest” rules, as prescribed under Section 208
of Title 18 of the U.S. Code,36 OGE ruled that:
In accordance with 18 U.S.C. § 208(b)(2), OGE has provided an exemption for
such employees who participate in particular matters where the disqualifying
financial interest arises from Federal Government employment.37
Major New Developments
Revised DOD Acquisition Policy
DOD has issued a revised acquisition policy, to replace the DOD 5000 series
that was cancelled on October 30, 2002. The new policy consists of two directives:
1) the DOD 5000.1, and 2) the DOD 5000.2. The DOD 5000.1, The Defense
Acquisition System, defines the management principles and policy for defense
acquisition programs, while the DOD 5000.2, Operation of the Defense Acquisition
System, describes the procedures for the Major Defense Acquisition Programs
(MDAP) and Major Automated Information Systems Acquisition Programs.38
The Director of Defense Procurement has published a summary of the new and
existing procurement authorities for the use of temporary emergency procurement
funds. The Army, Navy, and Air Force have also issued guidelines and techniques
35 General Accounting Office. GAO Bid Protest Decision. DZS/Baker LLC; Morrison
Knudsen Corporation, B-281224. January 12, 1999. 5 p.
36 Friel, Brian. “A-76 Conflict Of Interest Ruling Challenged.” Government Executive.
September 24, 1999.
37 Office of Government Ethics. OGE Reaffirms Applicability of Section 208 Exemption
in Outsourcing and Privatization Activities. September 9, 1999.
38 [http://www.acq.osd.mil/dpap/policy/directives.htm].

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CRS-14
to foster acquisition flexibility in responding to urgent, unusual, and compelling
circumstances.39
The President’s Management Agenda and
the Army’s Third Wave
The current effort to change the business operations of the Army fall under the
government-wide President’s Management Agenda (PMA) and a United States Army
initiative known as the “Third Wave.”40
The PMA was undertaken as part of President Bush’s movement toward a more
entrepreneurial government. The competitive sourcing initiative is one of five
components of the PMA. The goal of the competitive sourcing initiative is to
“simplify and improve the procedures for evaluating public and private sources, to
better publicize the activities subject to competition, and to ensure senior level
agency attention to the promotion of competition.”41 The PMA applies to 850,000
commercial positions throughout the government, including DOD. According to the
PMA, nearly half of all federal employees perform tasks that are readily available in
the commercial marketplace. Accordingly, the Bush Administration has directed that
half of the 850,000 commercial positions identified in the Federal Activities
Inventory Reform (FAIR) Act 42 inventories be competed or directly converted to
private sector performance.43 Although no date for the 50% target has been formally
39 [http://www.acq.mil/dpap].
40 The agenda is available at [http://www.whitehouse.gov/omb/budget/fy2002/mgmt.pdf].
CRS Report RL31409, The President’s Management Agenda provides background and
analysis.
41 The President’s Management Agenda, 2002, p.17.
42 The FAIR Act (P.L. 105-270), a legislative companion to the OMB Circular A-76,
requires agencies to submit inventories of their commercial activities to OMB. The FAIR
Act inventories are lists compiled by agencies of the commercial activities performed by
their employees. A “commercial activity” is a not inherently governmental good or service
that can be obtained from the private sector. Photography, data processing, and management
support services are examples of categories of commercial activities. In contrast, an
inherently governmental activity intimately relates to the public interest, thus mandating
performance by government employees. This includes activities that require the exercise
of discretion in applying government authority or the making of value judgments. More
information is available in CRS Report RL31024, The Federal Activities Inventory Reform
Act and Circular A-76. The current definitions of activities for the Corps’ civil works in the
FY2000 inventory are available at
[http://www.asamra.army.pentagon.mil/fair/USACEFunctionsCodeDictionaryOMBVersi
on.htm].
43 OMB Circular A-76, first issued in 1966, provides guidance for agencies to determine
whether commercial activities should be provided through contract with commercial
sources, use of in-house government personnel, or through interservice support agreements
with other federal agencies. Once an activity is selected for Circular A-76 review, the
agency is required to first develop a performance work statement and quality assurance plan.
It then issues a request for proposals or invitation for bids from the private sector. As
(continued...)

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CRS-15
established, the Administration set a target of 5% for FY2002 and 10% for FY2003.
The 50% target was used by OMB in the Administration’s FY2004 budget
documents to assign a rating in the management scorecard for the competitive
sourcing component of the PMA.44
The PMA and Third Wave were undertaken separately but are nonetheless
interrelated. Aspects of the Third Wave dovetail with the PMA’s competitive
sourcing component; however, the Army’s initiative is broader. It searches for ways
to not only improve operations but also focus the Army’s energies on its core, war-
fighting competencies. One difference between the two initiatives is that the PMA
questions what activities should government employees perform, in general, while
the Third Wave questions what activities, in particular, should the Army perform.
The PMA has directed executive federal agencies to competitively source their
commercial activities in order to produce quality services at a reasonable cost
through efficient and effective competition between public and private sources.45
Unlike the government-wide PMA, the Third Wave is specific to the U.S. Army.
In a memorandum dated October 4, 2002, Secretary of the Army Thomas E. White
announced an effort to streamline the Army’s activities to focus on its core
competencies46. The Third Wave has three purposes: (1) to free up military
manpower and resources for the global war on terrorism, (2) to obtain non-core
products and services from the private sector to enable Army leaders to focus on the
Army’s core competencies, and (3) to support the PMA.47 The Third Wave questions
not only what activities can be performed at less cost by private sources but also on
what activities should the Army focus its energies. The Army’s initiative is referred
to as the Third Wave because there were two earlier competitive sourcing initiatives.
During the first wave, which began in 1979, the Army reviewed 25,000 positions for
competition. The second wave was undertaken as part of the Defense Reform
Initiative Directive. During the second wave, as part of the late 1990s’reinventing
government initiatives, the Army competed 13,000 jobs; 375 civilians were
involuntarily separated as a result of these competitions.
Under the Third Wave, the Army is reviewing all of its commands to identify
how to focus the agency’s activities on its war-time fighting capabilities. The Third
Wave reviews all positions and functions (i.e., entire areas of responsibilities and
43 (...continued)
industry develops proposals, the agency puts together a more efficient organization for
retaining the work in-house and prepares its own proposal. The best-value contract offer is
compared with the agency’s proposal to determine final award. The contractor’s offer must
be at least 10% or $10 million below the government’s offer to be awarded the contract.
Otherwise, the savings are not deemed significant enough to outsource.
44 Performance and Management Assessments: Fiscal Year 2004, 2003.
45 The President’s Management Agenda, 2002, p. 4.
46 Secretary White announced his resignation on April 25, 2003. See Gruber, Amelia. Army
Faces Two Top Leadership Vacancies. Government Executive, April 28, 2003.
47 Statement by Dr. John Anderson at the Third Wave Media Roundtable Discussion on Oct.
10, 2002, [http://www.dtic.mil/armylink/news/Oct2002/r20021023transcript160ct02.html].

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CRS-16
missions, such as wetlands regulation) that are not part of the Army’s war-fighting
competencies. What defines core and non-core activities is currently under
discussion within the Army. According to the Secretary of the Army, 32,587
commercial positions are non-core to the Army and are included in the Third Wave.
Options that can be considered for non-core functions and positions include
competitive sourcing, transfer of responsibilities to other agencies, and divestiture.
In the initial phase of the Third Wave, 154,910 civilians (i.e., more than half of the
Army’s 247,400 civilian positions) and 58,727 military positions are being reviewed.
To start the Third Wave, the Army has identified 402,310 commercial positions
in the various commands that would be initially considered. In addition to reviewing
these specific positions, the Third Wave will evaluate how entire functions contribute
to the Army’s core competencies. For example, the civil works program of the Army
Corps of Engineers may be significantly affected by the Third Wave, depending on
whether its water resources functions are deemed core or non-core to its mission.
Because the Third Wave includes the review of entire functions, it encompasses
commercial and inherently governmental activities at the Corps (see previous section
on The Federal Activities Inventory Reform Act of 1998 for a definition of what is
inherently governmental). As previously noted, the options being considered for
functions and positions include competitive sourcing, transfer of responsibilities to
other agencies, and divestiture.
The Third Wave is now in its first phase: a pre-decisional study. The Secretary
has directed the Army commands to develop an implementation plan. The Army
expects to have its core and non-core functions identified in April 2003, including
any requests for exemptions based on disruption to core missions. Each command
has requested exemptions for positions based on disruption to core missions. The
deadline for the request for exemptions was extended from the original deadline of
November 29, 2002, to January 15, 2003, largely because more information was
needed to evaluate many of the exemption requests. The Secretary of the Army
assigned the Assistant Secretary of the Army for Manpower and Reserve Affairs
(M&RA) responsibility to make determinations on exemptions. If commands do not
agree with the exemption recommendations made by the Assistant Secretary, there
will be a negotiation process to determine the final outcome.
OMB Circular A-76
The proposed, revised circular was published in the Federal Register during
November 2002, and the public was given a 30-day comment period. Approximately
700 comments were received and can be viewed at the OMB competitive sourcing
Web site.48 As of this date, no new announcements have been made.
The revised circular was a recommendation of the Commercial Activities Panel,
a congressionally mandated, GAO-convened panel (in accordance with Section 832
of the FY2001 National Defense Authorization Act, P.L. 106-398), to study the
policies and procedures governing the transfer of commercial federal activities from
government personnel to federal contractors. The panel recommended abolishing of
48 [http://www.whitehouse.gov/omb/procurement/comp_sourcing_init.html]

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OMB Circular A-76 and replacing it with an “integrated competition process” based
on the Federal Acquisition Regulations (FAR) with elements of OMB Circular A-76.
The FY2001 Defense Authorization Act (P.L.106-398) directed the Comptroller
General to convene a panel to study the process used by the federal government to
make competitive sourcing decisions. The Commercial Activities Panel was created
largely because of the ineffectiveness of OMB Circular A-76. The Commercial
Activities Panel, chaired by the Comptroller General, was comprised of
representatives from DOD, OMB, federal labor organizations, and private industry.
The mission of the Panel was “to improve the current sourcing framework and
processes so that they reflect a balance among taxpayer interests, government needs,
employee rights, and contractor concerns.”49
The Panel’s final report has made four recommendations: 1) the adoption of
ten sourcing principles as a benchmark against which to measure sourcing decisions;
2) the abolishment of OMB Circular A-76, replacing it with an “integrated
competition process” that combines elements of the OMB Circular A-76 with the
Federal Acquisition Regulations (FAR)50; 3) the implementation of limited changes
to the Circular that do not require legislation; and 4) the move to develop federal
agencies into high-performing organizations, known as HPOs. OMB has accepted
the Panel recommendations and plans to begin the process to implement the Panel’s
recommendations in civilian agencies. DOD, on the other hand, would require
congressional approval to abolish the OMB Circular A-76, because the requirements
of Title 10, Section 2462 of the United States Code (U.S.C.) dictate that DOD make
defense contacting award decisions based on costs, not “best value.”51 The House
Armed Services Committee, Subcommittee on Military Readiness, heard testimony
from members of the Commercial Activities Panel on June 26, 2002.52 The Panel
issued a final report on April 30, 2002.
The Bush Administration has viewed the OMB Circular A-76, and its legislative
companion, the Federal Activities and Inventory Reform (FAIR) Act, as important
management reform tools to meet the Administration’s competitive sourcing goals.
According to Angela Styles, head of OMB’s Office of Federal Procurement Policy,
49 See Commercial Activities Panel Report at [http://www.gao.gov/].
50 Federal procurement policy is defined in the Federal Acquisition Regulation system, more
commonly referred to as the FAR. DOD’s procurement rules are defined in the Defense
FAR, or DFAR.
51 Title 10, Subtitle A, Part IV, Chapter 146, Section 2462 (a) of the United States Code
reads: “In general, except as otherwise provided by law, the Secretary of Defense shall
procure each supply or service necessary for or beneficial to the accomplishment of the
authorized functions of the Department of Defense (other than functions which the Secretary
of Defense determines must be performed by military or Government personnel) from a
source in the private sector if such a source can provide such supply or service to the
Department at a cost that is lower (after including any cost differential required by law,
Executive order, or regulation) than the cost at which the Department can provide the same
supply or service.”
52 Hearing on Outsourcing. House Armed Services Committee, Subcommittee on Military
Readiness, June 26, 2002.

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CRS-18
about 850,000 people in the federal government perform jobs that are commercial in
nature. OMB has directed federal agencies to compete, or outsource, 5% of all
federal jobs considered commercial by October 2002, and to compete, or outsource,
10% of all federal jobs considered commercial in nature by October 2003. 53 DOD
has used OMB Circular A-76 as a way to competitively source its commercial
functions, and as a vehicle to raise funds for weapon systems modernization,54 and
formed the Business Initiative Council (BIC) to take the lead in identifying what is
a core function (and what is not a core function) within DOD.55
The FY2002 FAIR Act Inventories
DOD has issued its FY2002 FAIR Act inventory lists of commercial activities,
as identified by DOD components. The inventory shows that at the beginning of
FY2002, DOD reported 410,699 civilian full-time equivalents (FTE) that perform a
variety of commercial activities, of which 239,001 (58%) have been identified as
potential candidates for competitive sourcing under OMB Circular A-76. The
remaining 171,698 FTE have been judged by DOD to be exempt from competition.
By October 2003, the Bush Administration has required federal agencies to compete
15% of all commercial jobs on the inventory. The DOD FY2002 FAIR Act inventory
can be found on the FAIRNET Web site at [http://web.lmi.org/fairnet/home.html].
Congressional Action
The House-passed version of the FY2004 Defense Authorization Bill, H.R.
1588, contains a provision (Section 1455) that would require the head of a federal
executive agency to publicly disclose any contract entered into, without full and open
competition, for the repair, maintenance, or construction of the Iraqi infrastructure.
The Senate-passed version of H.R. 1588 would allow for the development of a pilot
program (Section 8122) to analyze the use of “best value” criteria in the source
selection for information technology services.
H.R. 1836, The Civil Service and National Security Personnel Improvement
Act, was introduced on April 29, 2003, approved by the House Government Reform
Committee (voice vote) on May 7, and approved by the House Armed Services
Committee on May 15 (58-2). The bill would provide a major overhaul of the civil
53 Peckenpaugh, Jason. OMB targets more jobs for outsourcing in 2003. Government
Executive, June 25, 2001. 1 p.
54 Defense competitive sourcing decisions are usually based on one of three factors: 1)
whether the work activity or function is considered “core” to the mission, or component; 2)
whether the function has been identified as “inherently governmental” according to the rules
of the Office of Management and Budget (OMB) Circular A-76; and, 3) how the function
is coded on the FAIRNET, the Web-based guide to DOD’s inventory in accordance with the
FAIR Act.
55 BIC was created in June 2001 by Secretary of Defense Donald Rumsfeld, is chaired by
the Undersecretary of Defense for Acquisition and Logistics Mr. Edward “Pete” Aldridge,
and is comprised of military service secretaries, several undersecretaries, and the Vice
Chairman of the Joint Chiefs of Staff. The leadership of BIC is rotated among military
services; in May, the lead was transferred to the Department of the Army.

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CRS-19
service personnel system, and give the Secretary of Defense “sole and unreviewable
discretion” to implement changes.
H.R. 1837, The Service Acquisition Reform Act (SARA), was introduced on
April 29, 2003, and referred to the House Armed Services and Government Reform
Committees. The purpose of the Act is to improve the federal acquisition workforce,
processes, and services. Key provisions include statutory changes in the management
of training, career accession, and career education.
OMB Circular A-76, Part 7c (3) notes that the Circular and its Supplement are
not applicable to DOD in times of a declared war or military mobilization. The
Undersecretary of Defense for Acquisition, Technology, and Logistics has issued a
DOD policy memorandum.
H.R. 5010, the FY2003 DOD appropriations bill (P.L. 107-248), contains
several provisions that affect DOD contracting rules, including Section 8014, which
would prohibit the contracting out of some DOD activities unless a “most efficient
and cost-effective analysis” is performed and certified to House and Senate
Appropriations Committees; Section 8022, which would prohibit the use of funds to
perform an Office of Management and Budget (OMB) Circular A-76 cost
comparison study if the study exceeds 24 months (for a single-function study) and
48 months (for a multi-function study); Section 8025, which would afford qualified
nonprofit agencies for the blind or severely handicapped the”maximum practicable
opportunity” to participate as subcontractors and suppliers; Sections 8016 and 8030,
which would prohibit both the procurement of welded shipboard anchor and mooring
chain 4 inches in diameter and under, unless manufactured from components that are
substantially manufactured in the United States, and the procurement of carbon,
alloy, or armor steel plates that were not melted and rolled in the United States or
Canada; Section 8032, which would permit competition for depot maintenance and
repair work between DOD depot maintenance activities and private firms; Section
8033, which would require DOD to submit a report to Congress on the amount of
purchases from foreign entities in FY2003; and Sections 8019 and 8090, which
would prohibit both the demilitarization of certain weapons and the transfer of
“armor piercing ammunition,” unless rendered incapable of reuse.
On June 27, 2002, the Senate passed S. 2514 and incorporated the bill into H.R.
4546 (the House version of the defense authorization bill). H.R. 4546 was passed
as amended and was forwarded to the President on November 13, 2002. Provisions
of H.R. 4546 include 1) the granting of new waiver authority to the Secretary of
Defense though amending 10 U.S.C. 2465, which prohibits the use of contract
firefighters or security guards at military installations or facilities; 2) management
improvements in the DOD Purchase Card Program, to require an annual review,
periodic audits by the DOD Inspector General, appropriate training for both purchase
card holders and management officials, and penalties for violations of purchase card
management regulations; 3) the establishment of rapid acquisition and deployment
procedures, including an expedited procurement and contracting process, for items
urgently needed in “significant and urgent situations”; and 4) new rules governing the
use of Federal Prison Industries contracts. Section 335 would amend 10 U.S.C. 2464
by specifying those DOD core logistic capabilities that are to be maintained as
government-owned and government-operated.

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Section 832 of the FY2002 National Defense Authorization Act (S. 1438, P.L.
107-107) codifies and modifies the Berry Amendment, repealing Sections 9005 of
the FY1993 DOD Appropriations Act (P.L. 102-396) and Section 8109 of the
FY1997 DOD Appropriations Act (P.L. 103-139). The Act calls for the overhaul of
DOD’s management structure for procurement services under the auspices of the
Under Secretary of Defense for Acquisition, Technology, and Logistics (Section
801), to be established and implemented within 180 days of enactment (report due
by June 28, 2002); set procurement savings goals for the next 10 fiscal years;
directing the Secretary of Defense to report to congressional defense committees on
the progress made toward the goals and objectives of the procurement management
plan (report due no later than March 1, 2002); requires the Secretary of Defense to
revise the Defense Federal Acquisition Regulations (a supplement to the Federal
Acquisition Regulations) to develop rules for competition in the procurement of
multiple award contracts (report due by June 28, 2002); and grants temporary
emergency procurement authority to raise the simplified acquisition threshold to
facilitate the defense against terrorism or biological or chemical attack (Section 836).
Section 1062 of S. 1438 (the provision requiring the demilitarization of significant
military equipment) was eliminated from the enrolled bill.
The FY2002 Department of Defense Appropriations Act (H.R. 3338) prohibits
the conversion of certain DOD activities or functions to contractor performance, if
the activities are performed by ten or more civilian DOD employees, until a “most
efficient and cost-effective analysis” is completed and certified to the congressional
appropriations committees (other conditions are noted; see Section 8014), and
prohibits DOD from purchasing welded shipboard anchor and mooring chain (4
inches in diameter) unless the anchor and mooring chain are manufactured in the
United States from components that are substantially manufactured in the United
States (Section 8016). Section 8020 of the Act also prohibits the demilitarization or
disposal of certain military equipment (M-1Carbines, M-1 Garand rifles, M-14 rifles,
.22 caliber rifles, .30 caliber rifles, or M-1911 pistols).
Other Issues
The Undersecretary of Defense for Acquisition, Technology, and Logistics has
reversed his earlier decision not to comply with OMB’s mandate to compete or
directly convert approximately 15% of all federal jobs considered commercial in
nature. However, DOD plans to use the Business Initiative Council to explore other
ways to drive down costs and gain efficiencies. This new development will bring
DOD in line with OMB’s mandate for all federal agencies. Under the OMB
competitive sourcing plan, DOD is required to compete 10% of all jobs on its 2001
inventory.56
On December 18, 2001, the Federal Acquisition Regulation (FAR) published
a final rule in the Federal Register, effective February 19, 2002, that requires
contractors to 1) notify the contracting officer if the contractor becomes aware of an
overpayment, and 2) request instructions for disposition of the overpayment. On
56 Peckenpaugh, Jason. “Pentagon Wants Out of OMB Competitive Sourcing Plan.”.
Government Executive. January 11, 2002.

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December 27, 2001, the FAR Council repealed the “contractor responsibility rule,”
a rule that required federal contractors to consider an outside company’s federal track
record before hiring them. The former rule spelled out specific rules of conduct for
companies to win federal contracts and required companies to investigate the legal
practices of other companies.
Table 3. 106th Congress, Outsourcing Bills
Bill, Date
Short Title
Status
Introduced
S. 2242,
Federal Activities Inventory Reform
Referred to Subcommittee on
March 9, 2000
Act (FAIR) Amendments of 2000
Oversight of Government
Management, Restructuring
and the District of Columbia,
May 19, 2000
H.R. 4722,
Department of Defense
Referred to Subcommittee on
June 22, 2000
Privatization and Outsourcing
Military Readiness and
Moratorium Act
Executive Comment
requested from DOD, June
29, 2000
S. 2242 would amend the FAIR Act by requiring agencies to (1) list both
“inherently governmental” and non-inherently governmental functions; (2) notify all
employees who perform non-inherently governmental functions that their jobs may
be contracted out; (3) consider all costs (including all overhead costs) in the conduct
of public-private competitions; and (4) prohibit the performance of non-inherently
governmental functions for other federal agencies, unless the contract was won due
to a successful public-private competition. Once enacted, the bill would require
OMB to study the portability of federal pension benefits (in the transition of moving
federal employees from public to private employment) and report to Congress within
180 days.
The third legislative initiative, H.R. 4722, would impose a moratorium on the
outsourcing and privatization of work performed by DOD civilian employees. The
moratorium itself would be tied to the Secretary of Defense’ certification to Congress
that all actions in the 1995 round of base closures (under the Defense Base
Realignment and Closure Act of 1990) had been completed. The bill was referred
to the Armed Services Committee.

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Questions for the 108th Congress
Congress, in its oversight role, may conduct hearings on the implementation of
the proposed, newly revised OMB Circular A-76, the impact of the provisions of
Title 10 U.S.C., 2462, which requires DOD to make contracting decisions based on
lowest cost, rather than “best value,” as proposed in the revised circular,57 and
whether legislation to repeal 10 U.S.C. 2462 is necessary in order for DOD to
implement the new Circular. Hearings may be conducted to review legislative
requirements of the FY2000 Defense Appropriations Act (P.L. 106-79), which
directed the Secretary of Defense to submit a report, detailing all OMB Circular A-76
reviews conducted since 1995, including work performed by civilian, military and
contract employees.58
Furthermore, as part of its Defense Reform Initiative, DOD has announced that
229,000 jobs would be opened to managed competition; by FY2005, some 237,000
jobs.59 DOD has announced that out of about 504,000 civilian jobs (about three out
of every four civilian jobs), some 308,000 civilian jobs could be subject to
outsourcing.60 In light of these projections, Congress might want to consider the
following questions, discussed below.
Will DOD Comply with the Reporting Requirements?
P.L. 105-270, the Federal Activities Inventory Report Act of 1998, required
federal executive agencies to submit annual lists, or inventories, of government
activities “not inherently governmental” in nature, not later than the end of the third
quarter of each fiscal year (June 30) to OMB. In a hearing before the House
Subcommittee on Management, Information and Technology, Acting OMB Deputy
Director Deirdre Lee explained that the first implementation of the FAIR Act would
require OMB and federal agencies to mount a thorough and time-consuming effort
to meet the legislative requirements:
The inventories required by the FAIR Act represent a significant workload.
Unless specifically exempted by the FAIR Act itself, OMB’s guidance requires
57 The OMB Circular A-76 Supplemental Handbook allows for the use of “best value”
tradeoffs among the private bidder proposals; however, the winning private sector bidder’s
proposal is later compared with the government’s proposal, and the contract is always
awarded based on lowest cost. In contrast, under the proposed, newly revised OMB Circular
A-76, the government and private sector proposals are competed together. Contract awards
can be made based on best value. The use of best value allows the contracting official to
consider factors other than cost, including technical superiority, quality, innovation, and past
performance. The proposed revision to OMB Circular A-76 can be viewed at
[http://www.whitehouse.gov/omb/circulars/a076/a76_111402.pdf].
58 Section 8109 of the FY2000 Defense Appropriations Bill, P.L. 106-65.
59 General Accounting Office. Defense Reform Initiative: Organization, Status, and
Challenges (Chapter Report). April 21, 1999. GAO/NSIAD-99-87. p. 50.
60 Friel, Brian. “DOD Puts 500,000 Jobs On Outsourcing List.” Government Executive.
December 14, 1999.

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that all executive branch agencies, regardless of their size, submit either a
compliant inventory or a letter indicating that all of their Federal Full-Time
Equivalents (FTE) are inherently governmental. It is a massive data collection
effort. The FAIR Act inventory is the first inventory of commercial activities that
has been required by law and is the first that has ever been prepared for release
to the Congress or the public. Each function and, in many cases, each function
at any given location, has been associated with a point of contact who can
address questions regarding that function. It is also the first inventory where
agency decisions as to what is inherently governmental are subject to
administrative challenge and appeal by outside parties. Not surprisingly, the
initial inventory submissions have taken longer to prepare and have required
more analysis on the part of OMB than previous A-76 inventories. It is our hope
that next year’s inventories (due June 30, 2000) will require less effort on the
part of the agencies since they will be able to build on the substantial efforts they
have made this year in developing their initial inventories.61
According to the FAIR Act, OMB will review and consult with agency heads,
and the lists will be made available to Congress and the public. The Director of
OMB is required to publish the list in the Federal Register, “within a reasonable time
thereafter.” The agency head is then required to review the activities on the list and
consider contracting them out through a competitive process (some exceptions are
noted62. OMB now devotes space on its Web site for the inventories of federal
executive agencies.
Can An Agency Conduct Its Own Inventory?
Can DOD and civilian agencies be expected to fairly and accurately conduct
inventories of their own activities? This is particularly important for civilian
agencies, since no OMB Circular A-76 studies were conducted by civilian agencies
in 1997. Perhaps a more significant question is whether agencies will outsource
those activities deemed “not inherently governmental” through managed
competitions. FAIR does not require that agencies outsource, but implies that
agencies will strongly consider outsourcing as an alternative.
Disputes may require mediation over commercial activities which, because of
their unique application, an agency may be considered inherently governmental.
Furthermore, agencies may follow the letter of the law, but not the spirit of the law.
Since agencies were required to list only those activities deemed not inherently
governmental, agencies are under no obligation to list those activities that they
consider inherently governmental. It will be difficult for outsiders to the agency
(including contractors and other federal agencies) to get a complete and accurate
picture of the entire portfolio of activities and functions performed within each
agency. Congressional oversight will be important to provide an objective and
impartial decision over what commercial activities should be outsourced.
61 Excerpts from the testimony of Acting OMB Deputy Director Deirdre Lee. House
Subcommittee on Management, Information and Technology, Committee on Government
Reform. October 28, 1999.
62 Ibid., p. 2.

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CRS-24
How Will Challenges to the Inventory Be Resolved?
Federal agencies, contractors, and labor unions have all filed challenges to the
inclusion or exclusion of certain activities from agency inventories. Once
challenged, agencies must either accept the challenge, make changes to the list, or
reject the challenge, and agree to do so within 30 days after the challenge is filed.
Several federal agencies have received challenges, questioning why certain
agency activities are not included on their lists. Among them, NASA, for example,
has received about seven challenges, and has sought to exclude about 1,550 mapping
positions from its FAIR Act list. The U.S. Chamber of Commerce and the
Management Association for Private Photogrammetric Surveyors have challenged
NASA because, in their opinion, these mapping positions are commercial and should
be contracted out.63 The final disposition is pending, At this time, NASA has
reportedly rejected all its seven challenges.64
Unions representing federal employees have also filed challenges; among them,
the National Treasury Employees Union (NTEU) and the American Federation of
Government Employees (AFGE). NTEU was able to persuade the Department of
Health and Human Services to reconsider approximately thirty-one positions that
were believed to be commercial, but in fact may be inherently governmental. Of the
thirty-one positions, twenty-three are in human resources management support, while
eight are in personnel management. Both unions have promised to review each new
round of FAIR lists as they are released to the public.65
Aggrieved bidders may ultimately seek legal remedies; however, if not handled
expeditiously, legal challenges could lengthen the procurement cycle time, generate
more federal rule-making, and empower the courts and other regulatory agencies to
provide greater management of the procurement process.
Will the Policy Result in Actual Cost Savings?
In a recent GAO report,66 auditors concluded that DOD’s 1998 estimates of
savings from competitions may have been too high. GAO stated those investment
costs associated with competitions were not fully calculated; that because DOD
experienced difficulty in commencing and completing competitions within initially
projected time frames, projected savings would be delayed. The GAO auditors
summed up their conclusions in this way:
63 Friel, Brian. “Contractors Challenge Outsourcing Lists.” Government Executive.
November 1, 1999.
64 Saldarini, Katy. “Agencies Reject Challenges To FAIR Act Job Lists.” Government
Executive. December 8, 1999.
65 Saldarini, Katy. “Unions Fight To Get Jobs Off FAIR Act Lists.” Government Executive.
December10, 1999. 2 p.
66 General Accounting Office. DOD Competitive Sourcing: Questions About Goals, Pace,
and Risks of Key Reform Initiative. February 22, 1999. Letter 1-GAO/NSIAD-99-46. 2 p.

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DOD has established an ambitious competition program as a means of reducing
its infrastructure support costs and increasing funding available for
modernization and procurement. Establishing realistic competition and savings
goals are key to achieving the program’s desired results. However, DOD’s
savings projections have not adequately accounted for the costs of conducting the
competitions. These costs could significantly reduce DOD’s expected level of
savings in the short term. In addition, the planned competitions are likely to take
longer than initially projected, further reducing the annual savings that will be
realized. Consequently, the estimated savings between fiscal year 1997 and 2003
are overstated. The effects of failing to realize these annual savings could be
significant, since DOD has already reduced future operating budget estimates to
take into account the estimated savings.
Also, the number of competitions DOD expects to complete over the next several
years continues to increase, even as difficulties in meeting previous goals grow.
Service officials are increasingly expressing concern about their ability to meet
these targets, especially considering the unprecedented number of competitions
that are planned to be ongoing simultaneously in the near future. Finally, we
believe there is merit to this concern because most components lack detailed
plans and analyses to help determine whether the numbers of positions to be
competed would be practical.67
DOD’s Office of the Inspector General conducted an audit, dated March 10,
2000, of all service contracts for professional, administrative, and management
support activities. In light of the fact that DOD is relying more and more on the use
of service contracts, while downsizing its acquisition workforce, the report revealed
that:
The 15 contracting activities and program offices requesting the contracts for
services did not adequately manage the award and administration of the 105
contracting actions. Every contract action had one or more of the following
problems:
non-use of prior history to define requirements (58 of 84 or 69%), inadequate
Government cost estimates (81 of 105 or 77%), cursory technical reviews (60 of
105 or 57%), inadequate competition (63 of 105 or 60%), failure to award
multiple-award contracts (7 of 38 or 18%), inadequate price negotiation
memorandums (71 of 105 or 68%), inadequate contract surveillance (56 of 84 or
67%), and lack of cost control (21 of 84 or 25%).
As a result, cost-type contracts that placed a higher risk on the government
continued without question for the same services for inordinate lengths of
time-39 years in one extreme case-and there were no performance measures in
use to judge efficiency and effectiveness of the services rendered. DoD
procurement system controls had material weaknesses.68
67 Ibid, p. 2.
68 Department of Defense, Office of the Inspector General. Contracts for Professional,
Administrative and Management Support Services. Mar. 10, 2000. Audit Report No.
D-2000-100. p. 5-6.

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CRS-26
Furthermore, the final report of the House Appropriations Committee (H.Rept.
106-244) expressed strong reservations as to whether outsourcing and privatization
initiatives would result in the kinds of savings projected by DOD:
The Committee harbors serious concerns about the current DoD outsourcing and
privatization effort. While the Committee recognizes the need to reduce DoD
infrastructure costs, the cost savings benefits from the current outsourcing and
privatization effort are, at best, debatable. Despite end-strength savings, there
is no clear evidence that this effort is reducing the cost of support functions
within DoD with high cost contractors simply replacing government employees.
In addition, the current privatization effort appears to have created serious
oversight problems for DoD especially in those cases where DoD has contracted
for financial management and other routine administrative functions. DoD
appears to be moving toward a situation in which contractors are overseeing and
paying one another with little DoD oversight or supervision. As a result of this
developing situation, the Committee recommends a reduction of $100,000,000
from the budget request as described in a new general provision, Section 8109.
In addition, the Committee directs that DoD undertake a comprehensive review
of A-76 Studies as described in a new general provision, Section 8110.69
What Will Be the Impact on Defense Operations?
A perception growing among some critics is that outsourcing is not always to
the government’s advantage and that outsourcing may actually compromise DOD’s
ability to protect its national security mission.70 One example of where the use of
outsourcing has been questioned is with the Navy’s decision to privatize weapons
handling at a half dozen military bases, including Seal Beach Naval Weapons
Station, one of the nation’s largest munition depots.
Critics of the Navy’s efforts to privatize weapons handling believe that national
security interests are being compromised for the “promise” of greater efficiencies and
costs savings. Some critics believe that weapons handling is a poor choice for
outsourcing efforts because (1) safety is being compromised, since private
contractors (through their own admission) will not subject their workers to the same
level of education and training requirements as federal workers; (2) the threat of
strikes and work stoppages, prohibited by federal workers, could damage the
military’s operational capabilities; (3) federal workers take oaths to uphold the
national interest, while private contractors do not; and (4) costs and efficiency will
govern contractor business decisions, potentially replacing loyal, experienced, and
higher paid federal workers with disloyal, inexperienced, and lesser-paid contract
workers.71
69 House Appropriations Committee Report, H.Rept. 106-244, 106th Congress, 1st Session.
70 Friel, Brian. “Depot Managers Protest Outsourcing.” Government Executive, September
21, 1998.
71 “Navy to Seek Private Bids for Weapons Handling.” Los Angeles Times, Part A, Mar. 13,
1999.

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Are There Alternatives To OMB Circular A-76?
There is general agreement that the process takes too long. As reported earlier,
GAO reports that multi-function studies conducted since 1991 have taken about 30
months, on average.72 Alternatives to the policy may prove more time-efficient and
cost-effective.
Currently, the Defense Resources Board (DRB) has required DOD and the
military services to plan for achieving 11.2 billion dollars in savings, by the year
2005, using the managed competition process as outlined in OMB Circular-A 76
policy. However, one alternative to the Circular, now approved by the DRB, may
represent a fundamental shift in DOD’s outsourcing policy. By the end of this year,
DOD is expected to issue new guidelines which will outline how military services
can modify federal jobs and keep them without having to conduct managed
competitions. This alternative would give military services the authority to
independently pursue other alternatives to reach the same projected costs savings;
each military service would be free to explore other ways to re-engineer its
workforce, but be held responsible for meeting the savings goal. Although giving the
military services more flexibility, critics are concerned that, without some
cost/benefit analysis, outsourcing decisions will be made arbitrarily, absent of any
competitive process.73
The DRB is considering such a change because the Navy has asked DOD to
consider an alternative to the traditional OMB Circular A-76 policy. The Navy seeks
to review all its functions, and to develop a plan to streamline the entire organization.
According to Randall Yim,74 Former Deputy Secretary of Defense for Installations,
the Navy had stated that it could reorganize its workforce and workflow so that about
40% of the projected 64,000 commercial jobs targeted for managed competitions can
be eliminated in-house, avoiding a managed competition and still produce the
projected costs savings.75 DOD may consider many other options, in whole or part,
including restructuring, re-engineering, consolidation, termination of inefficient
practices, and adoption of more streamlined business practices.
This new way of doing business focuses not just on what jobs are commercial;
rather, the focus is on an assessment of both governmental and non-inherently
governmental functions. The goal is a systemwide analysis and review, designed to
streamline, improve, or eliminate processes that do not work or add value. DOD
72 Ferris, Nancy. “Targeting Jobs.” Government Executive. December 1999, p. 6.
73 New DOD Outsourcing Guidelines. December 16, 1999. Available on Military Report
Web site, [http://www.militaryreport.com/].
74 For more information on structuring alternatives to the OMB Circular A-76 policy, see
Friel, Brian. “DOD Considers Downsizing Options Besides A-76.” Government Executive,
July 23, 1999.
75 Cahlink, George. “DOD May Avoid A-76 Contests.” Defense News, July 26, 1999, p. 60.

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calls this new initiative “strategic sourcing” and describes it as the “umbrella” under
which all outsourcing future decisions will be made.76
Conclusion
There is continued, strong congressional and public interest in reducing the size
and scope of government. Congress will need to exercise oversight over the
implementation of FAIR. The degree to which managed competitions, throughout
the federal government, increase efficiency and save money will likely depend on the
extent to which federal agencies enforce both the letter and spirit of the law
governing FAIR. Congress can exercise its oversight authority by (1) monitoring
federal agency progress in the implementation of OMB Circular A-76 policy and
FAIR, and whether federal agencies meet deadlines and report promptly, accurately
and completely; (2) watching the level of managed competitions, since there is no
requirement that agencies must conduct them; without such a requirement, merely
the submission of activity lists may not lead to a greater use outsourcing; and (3)
granting federal agencies the authority to explore alternatives to the OMB Circular
A-76 policy. Furthermore, Congress may also want to further prescribe that certain
government activities are to be considered inherently governmental, since the process
may prove arduous, complex, and controversial.
76 Friel, Brian. “DOD May Put More Jobs Up For Outsourcing.” Government Executive.
January 5, 2000, p. 1.

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