Defense Outsourcing: The OMB Circular A-76 Policy

Defense Outsourcing: The OMB Circular A-76 Policy

Order Code RL30392
CRS Report for Congress
Received through the CRS Web
Defense Outsourcing:
The OMB Circular A-76 Policy
Updated October 5, 2006
Valerie Bailey Grasso
Analyst in National Defense
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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 transferred to
performance by the private sector, or performed by federal government employees.
The FAIR Act creates statutory reporting requirements for federal executive agencies,
by requiring federal executive agencies to identify activities both “inherently
governmental” and those not inherently governmental, and to conduct managed
competitions to determine who is best to perform the service. Competitive sourcing,
through managed competitions, was a major initiative identified by the first Bush
Administration’s Presidential Management Agenda, and one of five government-
wide initiatives to improve the management and performance of the federal
government. It is likely that competitive sourcing will continue to serve as a major
initiative in the second Bush Administration.
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. 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. Other proponents view the
policy as an instrument for driving efficiencies. Some opponents view OMB Circular
A-76 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 the transfer of jobs from federal employees to the private sector.
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 (2) determining whether cost savings are
real; and (3) granting federal agencies the authority to explore alternatives to achieve
costs savings besides OMB Circular A-76.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Views on OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
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 . . . . . . . . . . . . . 8
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, 2001-2004 Results . . . . . . . . . . . . . 14
Report on Competitive Sourcing Results for FY2004 . . . . . . . . . . . . . . . . . 15
Report on Competitive Sourcing Results for FY2003 . . . . . . . . . . . . . . . . . 16
Report on the Delayed Implementation of the Revised OMB
Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Congressional Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Questions for the 109th Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Will DOD Comply with the Reporting Requirements? . . . . . . . . . . . . . . . . 25
Can an Agency Conduct Its Own Inventory? . . . . . . . . . . . . . . . . . . . . . . . . 26
How Will Challenges to the Inventory Be Resolved? . . . . . . . . . . . . . . . . . 26
Will the Policy Result in Actual Cost Savings? . . . . . . . . . . . . . . . . . . . . . . 27
What Will Be the Impact on Defense Operations? . . . . . . . . . . . . . . . . . . . 29
Are There Alternatives to OMB Circular A-76? . . . . . . . . . . . . . . . . . . . . . 29
List of Tables
Table 1. Number of Positions Studied, 1988-1997 . . . . . . . . . . . . . . . . . . . . . . . . 9
Table 2. DOD’s FY2000 Budget Submission, Reflecting Positions
Currently Under OMB Circular A-76 Study . . . . . . . . . . . . . . . . . . . . . . . . 10

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 has
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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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.
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
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.
7 The AFGE Activist’s Personal Consultant to A-76 Policy Implementation. American
(continued...)

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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
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
7 (...continued)
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/].
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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(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 ME) 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 ME.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
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 ME’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
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). pp. 4-6.

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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
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-
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/NAIAD-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
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.

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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;
(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 five-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.
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.
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.

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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
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
21 See the FAIR Internet site, at [http://www.whitehouse.gov/omb/circulars/].
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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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.
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:
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.

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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.
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 1992-1995 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 FT 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
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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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.
Table 2. DOD’s FY2000 Budget Submission,
Reflecting Positions Currently Under OMB Circular A-76 Study
Air
Marine
Defense
Total
Type of study
Force
Army
Navy
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
29 Provided by the Competitive Sourcing and Privatization Office, Office of the Deputy
Undersecretary of Defense for Industrial Affairs and Installations.
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/NAIAD 99-4. 36 p.
33 Ferris, Nancy. “Targeting Jobs.” Government Executive. December 1999.

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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
ME 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.
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 outsourced 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 ME. 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 war fighting 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 outsourced, 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 D.S./Baker LLC, the other from the
Morrison Knudsen Corporation.
34 General Accounting Office. Comptroller General decision. Aberdeen Technical Services,
B283727.2, February 22, 2000, 10 p.

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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:
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
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.

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Major New Developments
Revised DOD Acquisition Policy
GAO issued a final rule which allows the Agency Tender Official (ATO) in
charge of the agency’s competitive sourcing bid to file a protest before GAO if the
OMB Circular A-76 competition involved more than 65 positions. If the ATO
decides not to file a protest, no other employee representative has the standing to file
a protest. The impact of this ruling is that federal employees do not have any
standing to file protests in competitions when there are 65 or fewer positions
involved, and federal employee unions may not file protests on behalf of federal
employees. Federal employees may have other representatives intervene if a protest
is filed by a third party or a losing bidder.38
The Bush Administration has set additional criteria for eligibility for contracting
in Iraq. A memorandum issued by Deputy Secretary of Defense Paul Wolfowitz on
December 5, 2003, states that he has determined that it is in the public interest to
limit competition for the procurement of certain Iraqi Relief and Reconstruction
prime contracts awarded by the Coalition Provisional Authority (CPA) and DOD, on
behalf of the CPA.39 The Iraq Program Management Office website can be accessed
at [http://www.rebuilding-iraq.net]. Companies from all countries are eligible to
compete for subcontracting opportunities, with the exception of countries that
support terrorist networks (see [http://www.export.gov/iraq/]).
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.40
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
to foster acquisition flexibility in responding to urgent, unusual, and compelling
circumstances.41
38 Federal Register, vol. 70, no. 71, pp. 19679-19681, April 14, 2005.
39 The memorandum cites the authority as contained in 41 U.S.C. 253 (c)(7) and 10
U.S.C.(c)(7), as implemented by FAR 6.302-7.
40 [http://www.acq.osd.mil/dpap/policy/directives.htm].
41 [http://www.acq.osd.mil/dpap].

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The President’s Management Agenda, 2001-2004 Results
The President’s Management Agenda (PMA) was undertaken as part of
President Bush’s movement toward a better managed and more entrepreneurial
government. Competitive sourcing is one of five initiatives that make up 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.”42 The PMA applies to about 850,000 commercial positions
throughout the government, including DOD.
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.43
According to the PMA, nearly half of all federal employees perform tasks that are
readily available in the commercial marketplace. Accordingly, the Bush
Administration had directed that half of the 850,000 commercial positions identified
in the Federal Activities Inventory Reform (FAIR) Act 44 inventories be competed
or directly converted to private sector performance.45 Although no date for the 50%
target had been formally established, the Administration set a target of 5% for
FY2002 and 10% for FY2003. The 50% target was used by OMB in the
42 The President’s Management Agenda, 2002, p. 17.
43 Ibid., p. 4.
44 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 CARS 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/
USACEFunctionsCodeDictionaryOMBVersion.htm].
45 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
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.

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Administration’s FY2004 budget documents to assign a rating in the management
scorecard for the competitive sourcing component of the PMA.46
On August 9, 2004, the Undersecretary of Defense for Personnel and Readiness
released the results of the competitive sourcing initiative. According to the report,
competitions under OMB Circular A-76 makes up the bulk of activities under the
Competitive Sourcing Program; however, service contracting under OMB Circular
A-76 makes up less than 2% of all DOD service contracts.47 DOD has completed
501 OMB Circular A-76 initiatives, conducted public-private competitions for
defense activities that affected 37,986 positions, and generated $5.2 billion, or 36%,
in savings. By the end of FY2005, DOD expects to generate an additional $1.7
billion of savings.48
Report on Competitive Sourcing Results for FY2004
OMB has issued a report on the results of competitive sourcing activities
conducted by federal agencies during FY2004.49 The report is based on a
compilation of information reported by federal agencies, in compliance with an
annual reporting requirement. According to the report, DOD completed competitions
for 7,484 Full-Time Equivalents, or FTEs50, and announced competitions for 266
FTEs. Government-wide, the total FTEs in competitions completed in FY2004 were
12,573, and competitions were announced for another 9,651 FTEs. Based on the
number of FTEs competed, 90% of the competitions were awarded to the ME, while
10% of the competitions were awarded to the contractor.
Following the abolishment of statutory provisions which prevented DOD from
participating in competitions under the revised Circular, the Army Corp of Engineers
was the first DOD component to announce a competition conducted under the revised
Circular - a competition for informational technology services which involved over
1,400 FTEs.
46 Performance and Management Assessments: Fiscal Year 2004, 2003.
47 United States Department of Defense. The President’s Management Agenda: The Results
for the Department of Defense. Memorandum from Davis S. C. Chu, Undersecretary of
Defense for Personnel and Readiness. August 9, 2004, p. A-12.
48 Ibid., p. A-12.
49 The statistics offered here are extracted from the latest Office of Management and Budget
(OMB) competitive sourcing report. Executive Office of the President, Report on
C o mp e t i t i v e S o u r c i n g R e s u l t s , F i s c a l Y e a r 2 0 0 4 , M a y 2 0 0 5 , a t
[http://www.whitehouse.gov/omb/procurement/comp_sourcing_results_fy04.pdf].
50 Employment figures are expressed as “Full-Time Equivalent” or FTE. An FTE is a
computed statistic which represents the number of full-time employees that could have been
employed if the reported number of hours worked by part-time employees had been worked
by full-time employees. For further information, see Compendium of Public Employment,
Volume 3, Public Employment. U.S. Department of Commerce, Economic and Statistical
Administration, U.S. Census Bureau. Issued September 2004, Appendix A, p. A-2.

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The report identified the types of activities competed or announced for FY2004
competitions, from the following areas: finance and accounting, environment,
procurement, social services, health services; intermediate, direct, or general repair
& maintenance of equipment; depot repair, maintenance, modification, conversion,
or overhaul of equipment; base maintenance/multi-function contracts; research,
development, test, and evaluation; installation services; logistics, education and
training; communications, computing and other information services; and
maintenance, repair, alteration, and minor construction of real property. During
FY2005, DOD projected that approximately 13,755 FTEs were scheduled for public-
private competitions.51
Report on Competitive Sourcing Results for FY2003
OMB has issued a report on the results of competitive sourcing activities
within federal agencies during FY2003. DOD had been statutorily prohibited from
announcing new competitions under the revised OMB Circular A-76, so it is difficult
to accurately determine what projected costs savings are from public-private
competitions throughout DOD.
According to the report, of the 17,595 jobs considered for competitive sourcing
during FY2003 and the first quarter of FY2004, approximately 89% of the jobs
studied for competition were awarded to federal employees, meaning that the federal
agencies determined that the best value (costs savings) would be achieved by
allowing the jobs to stay in-house. The report can be accessed on the OMB website
site, at [http://www.whitehouse.gov/omb/].
Report on the Delayed Implementation of the Revised OMB
Circular A-76
Section 335 of the FY2004 Department of Defense Authorization Act (P.L. 108-
136) directed DOD to delay implementation of the revised OMB Circular A-76 until
45 days after DOD provided an implementation plan and report to Congress. The
revised OMB Circular A-76 supports the Bush Administration’s goal, as outlined in
the President’s Management Agenda, to cut the federal civilian workforce by 50%
(from 850,000 positions to 425,000 positions.)
On September 12, 2003, the Deputy Secretary of Defense designated the Deputy
Under Secretary of Defense (Installations and Environment), Raymond F. DuBois,
as the DOD Competitive Sourcing Official. On October 24, 2003, Deputy Under
Secretary DuBois wrote a letter to the Associate Administrator of the Office of
Federal Procurement Policy to request approval of a plan to assist in the
implementation of the revised circular and requested that DOD be granted some
limited deviation from the transition plan for certain initiatives.
On November 17, 2003, DOD was granted some authority to proceed under a
deviated plan. However, as required by 10 U.S.C. 2462, DOD was prohibited from
converting any of the performance of activities from in-house to private sector
51 See Appendix D of the FY2004 OMB Report.

CRS-17
performance until “... after considering in-house performance costs and making a
determination that a private sector source could provide the needed service at a cost
that is lower than the costs at which the Department could provide the same
service.”52
Section 335 of the FY2004 Defense Authorization Act (P.L. 108-136) required
DOD to submit a report outlining how the department planned to implement the
revised OMB Circular A-76. DOD submitted the Section 335 report to Congress on
February 24, 2004. A memorandum from the Acting Under Secretary of Defense for
Acquisition, Technology and Logistics, which accompanied the report, describes a
“Transition Plan” approved by OMB that permits the use of the previous Circular to
complete the majority of ongoing competitive sourcing initiatives and identifies six
issues cited in Section 335 that affect the implementation of the revised Circular.
They are 1) the extent to which the revised circular will ensure that DOD employees
will have the opportunity to compete to return their jobs; 2) the extent to which the
revised circular provides appeal and protest rights to DOD employees; 3) the extent
to which safeguards will be identified in the revised circular that would ensure
fairness and meet the requirements of full and open competition; 4) an
implementation plan to phase in the use of the new circular; 5) training on the revised
circular of DOD employees, including employee selection for training, funding for
training, and the numbers of employees likely to receive training; and 6) data
collection and analysis on the results of the revised circular, including costs, quality
of work, how much work is contracted out or retained in-house, and other post-
competition requirements and objectives.
OMB Circular A-76
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 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.”53 The panel recommended abolishing 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 Panel’s final report 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
52 Memorandum to the Honorable Raymond F. Dubois, Deputy Under Secretary of Defense
(Installation and Environment), Department of Defense, from Robert A. Burton, Associated
Administrator, Office of Federal Procurement Policy, November 17, 2003, p. 1.
53 See Commercial Activities Panel Report at [http://www.gao.gov/].

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Acquisition Regulations (FAR);54 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.”55 The House
Armed Services Committee, Subcommittee on Military Readiness, heard testimony
from members of the Commercial Activities Panel on June 26, 2002.56 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,
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 2003.57 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,58 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.59
54 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 DFARS.
55 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.”
56 Hearing on Outsourcing. House Armed Services Committee, Subcommittee on Military
Readiness, June 26, 2002.
57 Peckenpaugh, Jason. OMB targets more jobs for outsourcing in 2003. Government
Executive, June 25, 2001. 1 p.
58 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.
59 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,
(continued...)

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Congressional Action
H.R. 5631 (P.L. 109-289), the FY2007 National Defense Appropriations Act,
was signed into law on September 29, 2006. Section 8013 of the bill would prevent
the conversion of activities or functions performed by (10 or more) federal employees
unless (1) the conversion is based on the results of a public-private competition that
includes a “most efficient organization” (MEO); (2) the costs of conversion to
contractor performance is at least 10% or $10,000,000 less than the cost if the
activities or functions were performed by federal employees; and (3) the contractor
does not receive an advantage (for a proposal that would reduce DOD’s costs) by
eliminating an employee-sponsored health insurance plan for affected employees, or
offer a health insurance plan that requires an employer to contribute less toward the
health insurance premium or subscription share than the amount that DOD
contributes for affected employees. The bill notes exceptions for contracts for
performance of commercial or industrial functions under Section 2 of the Javits-
Wagner-O’Day Act, qualified nonprofit agencies, and qualified Native American-
owned companies.
H.R. 5122, the proposed FY2007 National Defense Authorization bill, is now
in the conference committee. One key highlight of the bill is the establishment of a
“Panel on Contracting Integrity” to review DOD’s progress in “eliminating areas of
vulnerability of the defense contracting system that allow fraud, waste, and abuse to
occur,”60 as well as reviews by the Comptroller General (required by P.L. 109-163,
FY2006 National Defense Authorization Act ) with recommendations for changing
policy, or regulation, or law.
P.L. 108-287, the FY2005 DOD Appropriations Act (H.R. 4613), provides
limits on the conversion to contractor performance of any activity or function in
DOD that, as of the date of enactment of this act (August 5, 2004) is performed by
11 or more DOD civilian employees unless (1) the conversion is based on a public-
private competition involving an ME; (2) the MEO’s personnel-related costs or 10%
or $10 million less than that of the contractor; and (3) the contractor offers a bid
proposal that requires less of a financial contribution toward the premium share of
the DOD health benefits for civilian employees, compared to the amount paid by
DOD for health benefits under 5 U.S.C. Chapter 89.
In November 2004, David Safavian was confirmed as head of OMB’s Office of
Federal Procurement Policy (OFPP). Mr. Safavian, a former congressional aide,
chief of staff at the General Services Administration, and former lobbyist, replaces
Angela Styles, the former OFPP head, who left the position in September 2003.
Recently, Mr. Safavian announced that OFPP has asked GSA to move the Federal
Acquisition Institute (FAI) into the Defense Acquisition University; that FAI would
perform an analysis of the deficiencies in both skill and personnel in the acquisition
59 (...continued)
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.
60 Section 813, H.R. 5122 (Conference Report)

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workforce; that his administration would take a look at suspension and debarment
policies as they impact small businesses, as well as protest rights under OMB
Circular A-76.
P.L. 108-375 (H.R. 4200, the FY2005 DOD Authorization Act) was signed into
law on October 28, 2004. Under the bill, federal employees are granted a limited
authority through the “agency tender official (AT)”61 to protest actions under OMB
Circular A-76 public-private competitions. Section 326 of the bill grants the agency
tender official the authority to serve as an “interested party”62 and file a protest on
behalf of federal employees, unless the AT determines that there is no reasonable
basis for the protest. If an interested party files a protest, a person representing a
majority of the federal employees engaged in the performance of the activities subject
to the public-private competition may intervene in the protest. Section 327 requires
that DOD must include a formal cost comparison during public-private competitions,
and that there must be a cost-savings of “$10 million or 10%” before activities
performed by federal employees can be converted to performance by a private
contractor.63
Other key provisions in P.L.108-375 call for DOD to provide new accountability
on the reporting of the size and scope of the service contractor workforce. The DOD
Inspector General is required to report to Congress, by February 1, 2005, on whether
DOD has a sufficient number of employees to satisfactorily conduct public-private
competitions and administer any resulting contracts, and whether DOD has
implemented a conclusive and dependable system to track and assess both the cost
and the quality of functions performed by DOD service contractors. The Secretary
of Defense is required to submit two reports to Congress by the end of April 2005:
(1) guidance on the establishment of policies for the management and oversight of
the contractors that support deployed forces in Iraq, including the roles and
responsibilities of military commanders, coordination of the movement of contractor
security personnel, establishment of rules of engagement for armed contractor
security personnel, and the establishment of categories of security, intelligence, law
61 The Office of Management and Budget. Circular A-76, Revised. May 29, 2003. The
Circular states: The Agency Tender Official (AT) shall (1) be an inherently governmental
agency official with decision-making authority; (2) comply with this circular; (3) be
independent of the contracting officer (CO), source selection authority (SSA), source
selection evaluation board (SEB), and performance work statement (PWS) team; (4)
develop, certify, and represent the agency tender; (5) designate the most efficient
organization (ME) team after public announcement of the standard competition; (6) provide
the necessary resources and training to prepare a competitive agency tender; and (7) be a
directly interested party. An agency shall ensure that the AT has access to available
resources (e.g., skilled manpower, funding) necessary to develop a competitive agency
tender.
62 31 U.S.C. 3551 (2). The term “interested party,” with respect to a contract or a solicitation
or other request for offers described here, means an actual or prospective bidder or offer or
whose direct economic interest would be affected by the award of the contract or by failure
to award the contract.
63 Under OMB Circular A-76, the activities would remain in-house and not be converted to
performance by the private contractor unless the contractor’s costs would be at least $10
million or 10% lower than the personnel-related cost of the “Most Efficient Organization.”

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enforcement, and criminal justice functions to determine if they are inherently
governmental and should be performed by contractor personnel or military personnel;
and (2) policy guidance and a report on DOD’s plan to manage contractor personnel
who support deployed forces, including procedures for making and documenting
decisions regarding contractor personnel, a description of disciplinary and criminal
actions brought against contractor employees, an explanation of the legal status of
contractor employees engaged in security functions in Iraq after the transfer of
sovereignty to Iraq, and a plan for the collection of data on the number and type of
contractors, monetary value of the contracts, number of casualties, and the number
of defense contractor personnel in Iraq.
On Thursday, March 4, 2004, the Senate passed S.Amdt. 2660 (as an
amendment to S. 1637, a bill to amend the Internal Revenue Code of 1986) by a vote
of 70-26. The amendment, referred to as the Jumpstart Our Business Strength
(JOBS) Act, was proposed by Senator Dodd to “protect United States workers from
competition of foreign workforces for performance of Federal and State contracts.”64
In general, the measure would prohibit most federal civilian agencies from procuring
goods or services from companies that perform “offshore outsourcing,” which sends
jobs overseas. Exceptions are made for certain agencies, such as the Departments of
Defense and Homeland Security, and for selected programs at the Department of
Energy, as well as exceptions for certain other items that may be unavailable within
the United States.65
The FY2004 DOD Authorization Act (P.L. 108-136) includes a number of
provisions that affect defense competitive sourcing policy. Section 336 authorized
the development of a pilot program for the procurement of information technology
services that uses “best value” as a source selection criteria in the competitive
sourcing process and directs the Comptroller General to submit a review of the pilot
program to Congress by February 1, 2008. Language in the act exempts the pilot
program from the requirements of 10 U.S.C. 2462. Section 801 amends 10 U.S.C.
2381 (Contracts: regulations for bids) by requiring the Secretary of Defense, the head
of each defense agency, and the head of each DOD field activity to ensure that any
consolidation of contract requirements (as in contract bundling) provides small
businesses with appropriate opportunities to serve as prime contractors and
subcontractors; the act requires that senior acquisition officials conduct market
research, identify alternative contracting approaches, and determine that contract
consolidation is both necessary and justified before executing an acquisition strategy
to consolidate contracts at amounts above $5 million dollars. Section 805 requires
DOD to comply with the requirements of the Competition in Contracting Act (10
U.S.C. Chapter 137) and other applicable procurement laws and regulations for Iraqi
reconstruction contracts and to procure contracts through the use of full and open
competition. (A closely related provision, Section 1442, requires that federal
executive agency heads make public in the Federal Register or Commerce Business
Daily any contracts for the repair, maintenance, or construction of infrastructure in
64 Amendment SA2660 as agreed to by the Senate, as it appears in the Congressional
Record, CRS2206, March 4, 2004.
65 Gruber, Amelia. Senate Approves Restrictions On Offshore Outsourcing. Government
Executive, March 5, 2004, 2 p.

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Iraq without full and open competition. The publication must be no later than 30
days after the date on which the contract is entered into and does not apply to
contracts issued after September 30, 2005.)
P.L. 108-136 prohibits the procurement of certain defense items and
components from foreign countries that restrict the provision or sale of military
goods or services to the United States because of counter-terrorism or military
operations and directs the Secretary of Defense to coordinate with the Secretary of
State to identify and list foreign countries that fall into this category and to remove
a country from the list if the Secretary of Defense determines that doing so would be
in the interest of national defense. The provision authorizes the Secretary of Defense
to exercise waiver authority and make written notification and justification to
Congress. Section 822 directs the Secretary of Defense to plan and establish an
incentive program for contractors who participate in major defense acquisition
programs. The objective of the incentive program is to encourage contractors to
purchase machine tools and other capital assets that are manufactured from within
the United States.
H.R. 2658, the FY2004 Defense Appropriations Act (P.L. 108-87), includes the
following key provisions:
(1) restrictions on the procurement of carbon, alloy, or armor steel plating (Section
8030);
(2) prohibitions on the application of Buy American requirements to the procurement
of any fish, shellfish, or seafood product during FY2004;
(3) prohibitions on the purchase of welded shipboard anchor and mooring chain 4
inches in diameter and under, unless the anchor and mooring chair are
manufactured in the United States from components that are substantially
manufactured in the United States;
(4) prohibitions on the procurement of carbon, alloy or armor steel plate that were not
melted and rolled in the United States or Canada, for use in any government-
owned facility under DOD’s control; and
(5) prohibitions against the use of certain funds without compliance with the Buy
American Act (Sections 8033 and 8045); and (6) waiver of the Buy American
Act when there are reciprocal defense procurement agreements with certain
foreign countries.
Other provisions of the FY2004 Defense Appropriations Act will require reports
to Congress on the amount of foreign purchases made in FY2003 (Section 8033) and
on contracts for Iraq reconstruction and recovery efforts that are funded in whole or
part with DOD funds (Section 8169). Finally, there are limitations on the policy
governing OMB Circular A-76 cost comparisons, including prohibitions on the
conversion of DOD activities or functions from performance by federal employees
to performance by contractors for activities performed by more than10 DOD civilian
employees unless (1) the conversion is based on the result of a public-private
competition that includes a most-efficient and cost-effective organization plan

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developed by the activity or function, and (2) the Competitive Sourcing Official
determines that the cost of performance of the activity or function would be less
costly to DOD by a differential of 10% or $10,000,000.00, which must be equal to
or less than the personnel-related costs of the most-efficient organization (Section
8014); prohibitions on funds appropriated by this act to be used for A-76 cost
comparison studies if the study being performed exceeds 24 months after initiation
of the study for a single-function activity or 30 months after initiation of such a study
for a multi-function activity; permits competitions for depot maintenance activities
between DOD and private firms, provided that the DOD Senior Acquisition
Executive for the military or the defense agency certifies that successful bids include
comparable estimates of all direct and indirect costs for both public and private bids;
further, the provision stipulates that policies governing OMB Circular A-76 shall not
apply to competitions conducted under this section (Section 8032).
Provisions from both H.R. 1836, the Civil Service and National Security
Personnel Improvement Act, and H.R. 1837 , the Service Acquisition Reform Act,
have been incorporated into the House-passed version of H.R. 1588. H.R. 1836 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
service personnel system, and give the Secretary of Defense “sole and unreviewable
discretion” to implement changes to DOD’s personnel rules. H.R. 1837 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

CRS-24
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.
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) prohibited
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.)

CRS-25
Questions for the 109th Congress
The 109th Congress may examine a number of acquisition reform and defense
competitive sourcing issues and may face increased calls for examination and
oversight of DOD contracting policies. The management of DOD service contracts,
and contractors, has been a continued source of congressional interest. DOD
announced the creation of a Defense Science Board Task Force to study the integrity
of the defense acquisition and procurement system, policies, and procedures, and to
determine whether current rules provides enough safeguards to prevent future
mishaps as in the handling of the Boeing KC-767 tanker aircraft leasing contract.
DOD announced that an investigation of the tanker contract is underway and should
be completed by mid-January 2005.
Competitive sourcing was a major initiative identified by the first Bush
Administration’s Presidential Management Agenda, and one of five government-
wide initiatives to improve the management and performance of the federal
government. It is likely that competitive sourcing will continue to serve as a major
initiative in the second Bush Administration. In addition to competitive sourcing, the
management of DOD service contracts, and contractors, has been a continued source
of congressional interest.
Congress, in its oversight role, may conduct additional hearings on the
implementation of the revised OMB Circular.
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 considered inherently governmental and those considered “not inherently
governmental. 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
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

CRS-26
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.66
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
noted.67 OMB now devotes space on its website 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 conduct
managed competitions. FAIR does not require that agencies transfer out activities,
but implies that agencies will strongly consider outsourcing to the private sector.
Disputes may require mediation over commercial activities which, because of
their unique application, may vary from agency to agency. Furthermore, agencies
may follow the letter of the law, but not the spirit of the law. It may 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.
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
66 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.
67 Ibid., p. 2.

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be contracted out.68 The final disposition is pending, At this time, NASA has
reportedly rejected all its seven challenges.69
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.70
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,71 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:
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.
68 Friel, Brian. “Contractors Challenge Outsourcing Lists.” Government Executive.
November 1, 1999.
69 Saldarini, Katy. “Agencies Reject Challenges To FAIR Act Job Lists.” Government
Executive. December 8, 1999.
70 Saldarini, Katy. “Unions Fight To Get Jobs Off FAIR Act Lists.” Government Executive.
December10, 1999. 2 p.
71 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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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.72
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.73
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
72 Ibid., p. 2.
73 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. pp. 5-6.

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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 8110.74
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.75 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.76
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.77 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
74 House Appropriations Committee Report, H.Rept. 106-244, 106th Congress, 1st Session.
75 Friel, Brian. “Depot Managers Protest Outsourcing.” Government Executive, September
21, 1998.
76 “Navy to Seek Private Bids for Weapons Handling.” Los Angeles Times, Part A, Mar. 13,
1999.
77 Ferris, Nancy. “Targeting Jobs.” Government Executive. December 1999, p. 6.

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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.78
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,79 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.80 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
calls this new initiative “strategic sourcing” and describes it as the “umbrella” under
which all outsourcing future decisions will be made.81
78 New DOD Outsourcing Guidelines. December 16, 1999. Available on Military Report
website, at [http://www.militaryreport.com/].
79 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.
80 Cahlink, George. “DOD May Avoid A-76 Contests.” Defense News, July 26, 1999, p. 60.
81 Friel, Brian. “DOD May Put More Jobs Up For Outsourcing.” Government Executive.
January 5, 2000, p. 1.