The Federal Activities Inventory Reform Act and Circular A-76

The Federal Activities Inventory Reform Act and Circular A-76

Order Code RL31024
The Federal Activities Inventory Reform Act
and Circular A-76
Updated April 6, 2007
L. Elaine Halchin
Analyst in American National Government
Government and Finance Division

The Federal Activities Inventory Reform Act
and Circular A-76
Summary
The Federal Activities Inventory Reform Act of 1998 (FAIR) (P.L. 105-270)
and Office of Management and Budget (OMB) Circular A-76 are intertwined. Given
the Bush Administration’s emphasis on competitive sourcing, which is one of the
elements of the President’s Management Agenda, Congress may wish to revisit FAIR
and Circular A-76.
FAIR is, in some respects, an extension of Circular A-76, and it was
implemented through a 1999 revision to the circular. FAIR levies a statutory
requirement on agencies to provide inventories of commercial activities, provides a
challenge and appeal process, and statutorily defines “inherently governmental”
activities (i.e., functions unsuitable for contracting out). FAIR does not require
agencies to compete or convert directly any of the activities listed on their
inventories. Although the initial implementation of FAIR was successful with regard
to compiling annual inventories, it revealed areas needing improvement. OMB
responded, in 2000, 2002, and 2003, with additional guidance.
Initially issued in 1966, OMB Circular A-76 rests on a policy of subjecting
commercial activities to public-private competition. Circular A-76 requires agencies
to submit annual inventories of their commercial activities and inherently
governmental activities to the federal budget agency and provides guidance for
agencies to use in determining whether to “make or buy” a particular commercial
service. A “commercial activity” is a good or service that could be obtained from the
private sector and that is not inherently governmental. The essence of an inherently
governmental activity is that it involves the discretionary exercise of government
authority or monetary commitments.
Early in 2001, two initiatives related to Circular A-76 and FAIR began. The
Bush Administration initially directed agencies to compete a certain percentage of
the full-time equivalents listed on their commercial inventories. In summer 2003, the
Administration eliminated these targets and instead encouraged agencies to develop
their own competitive sourcing goals. Additionally, Congress directed the then-
General Accounting Office to establish a panel to examine Circular A-76 and FAIR.
The Commercial Activities Panel (CAP), which was convened by GAO, issued its
report on April 30, 2002. Following the release of this report, and as part of the
Administration’s competitive sourcing initiative, OMB issued a revised circular in
May 2003.
This report begins with a brief history of Circular A-76, a review of the its key
components, and an assessment of the implementation of the circular. The section
on FAIR describes how it emerged from a series of compromises, explains the
statute’s key provisions, and reviews the implementation process, including guidance
issued by OMB. The final section addresses recent initiatives, notably the President’s
competitive sourcing initiative and the Commercial Activities Panel. This report will
be updated as additional information about the initiative becomes available.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OMB Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Origins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Key Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Policy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Commercial Activities Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Competitive Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Federal Activities Inventory Reform Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Challenges and Appeals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Definition of Inherently Governmental . . . . . . . . . . . . . . . . . . . . . . . . 15
Applicability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Other Competitive Sourcing Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Bush Administration’s Competitive Sourcing Initiative . . . . . . . . . . . . . . . 19
Commercial Activities Panel (CAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2003 Revision to Circular A-76 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Congressional Reporting Requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Competitive Sourcing Statutes and Provisions . . . . . . . . . . . . . . . . . . . . . . 24
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

The Federal Activities Inventory Reform Act
and Circular A-76
Background
In some cases, the government does not have to consider whether it should make
or buy goods and services. Private companies build tanks and buildings, manufacture
pens and copy machines, and make tools and military uniforms. Because the
government does not produce these items, and has neither the capability nor the
interest to do so, it procures them from private industry. But in those cases where
both government and industry are capable of providing the same, or comparable,
commercial goods and services,1 government is faced with the “make or buy”
decision.
Guidance for agencies on how to resolve the “make or buy” question is found
in Office of Management Budget (OMB) Circular A-76. The circular was issued
initially in 1966 and has since been revised several times.2 The 1999 revision was
1 A “commercial activity” is a good or service that could be obtained from the private sector
and that is not inherently governmental. Photography, data processing, and management
support services are examples of categories of commercial activities. An inherently
governmental activity “is a function that is so intimately related to the public interest as to
mandate performance by Government employees. These functions include those activities
that require either the exercise of discretion in applying Government authority or the making
of value judgments in making decisions for the Government. Governmental functions
normally fall into two categories: (1) The act of governing, i.e., the discretionary exercise
of Government authority, and (2) monetary transactions and entitlements.” (U.S. Office of
Management and Budget, “Policy Letter on Inherently Governmental Functions,” Federal
Register, vol. 57, no. 190, Sept. 30, 1992, p. 45100.) While the policy letter includes a list
of activities considered to be inherently governmental (Appendix A) and a list of activities
not considered to be inherently governmental (Appendix B), it also provides guidelines for
determining whether a function is inherently governmental or not. First, “not every exercise
of discretion is evidence” that a function is inherently governmental. Second, several
factors should be considered in determining whether a transfer of official responsibility
would take place with the contracting out of a particular function. (Ibid., p. 45101.) While
the policy letter distills the essence of the term “inherently governmental,” this concept is
still broad enough to be open to interpretation and controversy.
2 The Federal Register entries for major revisions to Circular A-76 and/or the Supplemental
Handbook are: vol. 44, no. 67, Apr. 5, 1979, pp. 20558-20566; vol. 48, no. 159, Aug. 16,
1983, pp. 37110-37116; vol. 61, no. 63, April 1, 1996, pp. 14338-14346; vol. 64, no. 121,
June 24, 1999, pp. 33927-33935; vol. 65, no. 175, p. 54568, Sep. 8, 2000; and vol. 68, no.
103, pp. 32134-32142. Revisions have been used to clarify and interpret policy and to
streamline and improve the cost comparison process through the addition, elimination, and
(continued...)

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used to implement the Federal Activities Inventory Reform Act of 19983 (FAIR).
FAIR requires agencies to compile inventories of their functions that could be
performed by government or the private sector. While Circular A-76 required, for
a number of years, that agencies submit inventories, it was not until the enactment
of FAIR that inventories became a statutory requirement and that agency
participation became widespread. The 2003 revision, among other things, required
agencies to submit inventories of their inherently governmental activities; eliminated
direct conversions (that is, functions that met certain requirements could be converted
to the private sector without the agency having to hold a public-private competition
for each function); and established specific time frames for the completion of
standard and streamlined competitions.
This report covers the policy history of competitive sourcing and outsourcing,4
the development over time of two vehicles (Circular A-76 and FAIR) central to
public-private competition and contracting out, and other significant initiatives.
Because Circular A-76 is a precursor to FAIR, the report begins with a review of the
origins of Circular A-76, a description of the circular’s components and related
issues, and a discussion of its implementation. Next, the report summarizes the
history of FAIR, explains its provisions, and describes its implementation and
revisions. The report concludes with an overview of significant initiatives.
OMB Circular A-76
Origins
Competition between government and the private sector has been a policy issue
for many years. Efforts to create, in the 1930s, a committee on “government
competition with private enterprise”5 in the House of Representatives were followed,
2 (...continued)
updating of requirements, procedures, and data (e.g., cost factors). Key changes include the
initial publication of the Supplemental Handbook (1979); incorporating the language of
government reinvention (1996); and implementing FAIR (1999).
3 P.L. 105-270 (Oct. 19, 1998), 112 Stat. 2382, 31 U.S.C. § 501 note.
4 Competitive sourcing refers to selecting a source — government agency or private sector
contractor — through a competitive process, such as the one established by Circular A-76.
Outsourcing, or contracting out, refers specifically to awarding a contract to a private sector
source. This distinction has not always been acknowledged or noticed. References to A-76
may characterize it as a vehicle for outsourcing or, alternatively, as a means for conducting
public-private competitions. The different ways in which A-76 is portrayed may result from
a conflation of the terms “outsourcing” and “competitive outsourcing” or may reflect
different goals that people have for the program. The term “privatization” is not used in
this report because, for some, it applies specifically and exclusively to the government
divestiture of a function or agency.
5 Commission on Government Procurement, Report, vol. 1, (Washington: GPO, 1972), p.
57.

CRS-3
in the 1950s, by initiatives with a similar focus.6 In 1953, the Intergovernmental
Relations Subcommittee of the House Committee on Government Operations
“reported that the number of [commercial and industrial] activities conducted by
Government agencies posed a real threat to private industry and imperiled the tax
structure” and “recommended that ‘a permanent, vigorous, preventive and corrective
program be inaugurated....’”7 According to the Commission on Government
Procurement, the Commissions on Organization of the Executive Branch of
Government, in both the 1949 report (First Hoover Commission) and 1955 report
(Second Hoover Commission), addressed the issue of competition between the
government and private businesses.8 The Second Hoover Commission developed 22
recommendations aimed at moderating government competition with the private
sector.9 Between 1953 and 1960, the Senate Select Committee on Small Business
held several hearings on government activities that competed with business.10
President Dwight D. Eisenhower’s Administration issued several policy
statements supporting the notion that the federal government should rely on the
private sector to provide needed goods and services. The Bureau of the Budget,
predecessor of OMB, issued, in 1955, Bulletin Number 55-4, which stated: “It is the
general policy of the administration that the Federal Government will not start or
carry on any commercial activity to provide a service or product for its own use if
such product or service can be procured from private enterprise through ordinary
business channels.”11 Two subsequent bulletins, Numbers 57-7 (February 5, 1957)
and 60-2 (September 21, 1959), reiterated this policy of governmental reliance on the
private sector.
Government policymakers’ interest in reducing competition between
government and the private sector might have been tempered somewhat, in the years
following the issuance of the three Bureau of the Budget bulletins, by contracting-
related problems or issues that surfaced in the 1960s. The problems or issues
included concern for how government employees were affected by the contracting
out of government functions; a study of contract personnel at an Air Force base that
revealed the contract was more costly than using government employees; an opinion
from the general counsel of the Civil Service Commission that stated it was illegal
for government employees to directly supervise contract employees; and a
6 In this context, government competes with private sector sources in traditional fashion in
the marketplace. Government competition with the private sector also occurs under the
auspices of Circular A-76, which is referred to as a “competitive process” or “public-private
competition,” for the provision of services to the government itself.
7 Commission on Government Procurement, Report, vol. 1, (Washington: GPO, 1972), p.
58.
8 Ibid.
9 Commission on Organization of the Executive Branch of the Government, “Business
Enterprises,” report to Congress, 1955.
10 Commission on Government Procurement, Report, vol. 1, (Washington: GPO, 1972), p.
58.
11 Information about the bulletin was obtained from the U.S. Office of Management and
Budget, Office of Federal Procurement Policy.

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Department of Defense (DOD) study that found “that many service contracts were
in conflict with Civil Service laws and were also more costly than in-house
performance.”12
Mindful of the promise of relying on the private sector to provide goods and
services, and perhaps the potential pitfalls as well, President Lyndon B. Johnson’s
Administration continued what the Eisenhower Administration had begun, and
developed the first permanent directive dealing with the issue of governmental
reliance on the private sector. Published in 1966, Bureau of the Budget Circular A-
76 provided guidance designed to aid agencies in determining whether to make or
buy needed goods and services. President Johnson explained in a memorandum to
departments and agencies that “uniform guidelines and principles” were needed “to
conduct the affairs of the Government on an orderly basis; to limit budgetary costs;
and to maintain the Government’s policy of reliance upon private enterprise.”13 In
issuing Circular A-76, the “Administration came to grips ... with a [l]ong-smoldering
controversy over Federal competition with private industry....”14
Key Components
Although Circular A-76 has been revised many times, its chief components,
except where noted otherwise, have remained stable. They are a policy statement,
a requirement for agencies to submit inventories of their commercial activities to
OMB, and guidance for determining who — government agency or private business
— will perform commercial activities.
Policy Statement. Circular A-76 has included an explanation of its origins
and in doing so reiterated the policy presented initially in the three Bureau of the
Budget bulletins issued in the 1950s. As stated in the 1979 revision to the circular,
the policy was:
In a democratic free enterprise economic system, the Government should not
compete with its citizens. The private enterprise system, characterized by
individual freedom and initiative, is the primary source of national economic
strength. In recognition of this principle, it has been and continues to be the
general policy of the Government to rely on competitive private enterprise to
supply the products and services it needs.15
12 Commission on Government Procurement, Report, vol. 1, (Washington: GPO, 1972), p.
58.
13 U.S. President (Johnson), “Memorandum Announcing Revised Guidelines Governing
Development by the Government of Products or Services for Its Own Use,” Public Papers
of the Presidents of the United States, Book I, 1967, p. 269.
14 Frank C. Porter, “New Guidelines Issued on U.S. Procurement,” Washington Post, Mar.
4, 1966, p. A5. Porter also reported: “Business spokesmen have long contended that the
Federal Government, taking advantage of its tax-free, non-profit status, competes unfairly
with private enterprise in many areas” (ibid.).
15 U.S. Office of Management and Budget, “Acquiring of Commercial of [sic] Industrial
Products and Services Needed by the Government; Policy Revision,” Federal Register, vol.
(continued...)

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Substantively, the policy of Circular A-76 remained the same through the 1999
revision. In this revision to the circular, only a few words were changed.
In the process of governing, the Government should not compete with its
citizens. The competitive enterprise system, characterized by individual freedom
and initiative, is the primary source of national economic strength. In
recognition of this principle, it has been and continues to be the general policy
of the Government to rely on commercial sources to supply the products and
services the Government needs.16
Arguably, the policy statement found in the 2003 revision retained the basic thrust
of earlier policy statements, but is worded differently. It reads, in part:
The longstanding policy of the federal government has been to rely on the private
sector for needed commercial services. To ensure that the American people
receive maximum value for their tax dollars, commercial activities should be
subject to the forces of competition.17
As of 1979, the circular also stated that it is the policy of the federal government
to retain governmental functions in-house and to consider comparative costs.18 In
discussing this proposed revision, an entry in the Federal Register in 1978 stated:
The current Circular A-76 states the Government’s general policy of relying on
the private sector to supply its needs. The draft revision expands this policy
statement to recognize that ‘governmental functions’ must be performed by
Government personnel, and that the taxpayer is entitled to economy in
Government, which requires appropriate emphasis on comparative cost.19

The expanded policy statement was incorporated in the 1979 revision of the circular
and remained unchanged through the 1999 circular: “It is the policy of the United
States Government to: achieve economy and enhance productivity, retain
governmental functions in-house, and rely on the commercial sector.”20 In the 2003
15 (...continued)
44, no. 67, Apr. 5, 1979, pp. 20556-205557.
16 U.S. Office of Management and Budget, “Implementation of the Federal Activities
Inventory Reform Act of 1998 (P.L. 105-270) (‘FAIR Act’),” Federal Register, vol. 64, no.
121, June 24, 1999, p. 33931.
17 U.S. Office of Management and Budget, Circular No. A-76 (Revised), May 29, 2003, p.
1, available at [http://www.whitehouse.gov/omb/circulars/a076/a76_incl_tech_correction.
pdf].
18 U.S. Office of Management and Budget, “Acquiring of Commercial of [sic] Industrial
Products and Services Needed by the Government; Policy Revision,” Federal Register, vol.
44, no. 67, Apr. 5, 1979, p. 20558.
19 U.S. Office of Management and Budget, “Proposed Policy Revision,” Federal Register,
vol. 43, no. 163, Aug. 22, 1978, p. 37410.
20 U.S. Office of Management and Budget, “Implementation of the Federal Activities
Inventory Reform Act of 1998 (P.L. 105-270) (‘FAIR Act’),” Federal Register, vol. 64, no.
(continued...)

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circular, inherently governmental activities are addressed in this fashion: “In
accordance with this circular ... agencies shall: a. Identify all activities performed by
government personnel as either commercial or inherently governmental. b. Perform
inherently governmental activities with government personnel.”21
Commercial Activities Inventories. The requirement for agencies to
compile inventories of their commercial activities was established by the original
circular. Under the heading of “administering the policy,” the Bureau of the Budget
wrote in 1966:
Each agency will compile and maintain an inventory of its commercial or
industrial activities having an annual output of products or services costing
$50,000 or more or a capital investment of $25,000 or more. In addition to such
general descriptive information as may be appropriate, the inventory should
include for each activity the amount of the Government’s capital investment, the
amount paid annually for the products or services involved, and the basis upon
which the activity is being continued under the provisions of this [1966] Circular.
The general descriptive information needed for identifying each activity should
be included in the inventory by June 30, 1966.22
A significant change to this requirement occurred with the issuance of the 2003
revision to the circular, which requires agencies to also submit inventories of their
inherently governmental activities annually to OMB.23

Competitive Process. Although Circular A-76 did not require agencies to
conduct cost comparisons,24 it provided a competitive process, sometimes referred
to as public-private competition, to be used in determining who would supply
commercial goods and services. The competitive, or cost comparison, process
consists of three stages: developing a performance work statement (PWS), which
describes the work to be done; designing the most efficient organization (MEO),
which, in effect, becomes the government’s bid; and comparing the government’s
20 (...continued)
121, June 24, 1999, p. 33931.
21 U.S. Office of Management and Budget, Circular No. A-76 (Revised), May 29, 2003, p.
1. (boldface in original)
22 Executive Office of the President, Bureau of the Budget, “Circular No. A-76,” Mar. 3,
1966, p. 6.
23 U.S. Office of Management and Budget, Circular No. A-76 (Revised), May 29, 2003, pp.
A-1-A-4.
24 Two Presidents, Ronald Reagan and George W. Bush, took steps to require agencies to
conduct cost comparison studies. President Reagan signed an executive order to this effect
in 1987 (see “Implementation” under “OMB Circular A-76”). Under President Bush, the
Office of Management and Budget initially released guidance that required agencies to
compete a certain percentage of their positions that perform commercial activities. This
requirement later was abandoned in favor of agency-specific targets. See below,
“Competitive Sourcing Initiative,” for more information about the Bush Administration’s
efforts in this area.

CRS-7
and contractors’ bids to determine who can perform the work most efficiently.
Circular A-76 generated both praise and concerns. Some have applauded the
program for its chief feature, competition, which promises to yield increased
efficiency, cost savings, better quality products, and more innovation. Even groups
that recognized these benefits, however, had concerns: “Many contractors have
complained that the A-76 process gives public workers an advantage, while federal
unions have complained that the process tilts the playing field in favor of the private
sector.”25 The fact that agencies are not required by statute to conduct cost
comparison studies is another source of dispute. For agency heads and managers,
this fact means they have latitude to decide how to manage their agencies’ activities,
workload, and personnel. The maintenance and exercise of agency discretion means,
on the other hand, that the private sector is not assured of access to new contracting
opportunities.
Implementation
Implementation of Circular A-76 has not always proceeded smoothly. In the
early days of the A-76 program, implementation was hampered, and deemed
inequitable, because of procedural problems. GAO reported, in 1972, that, with a
few exceptions, “there were no explanations supporting local recommendations that
in-house performance of activities be continued. Recommendations often were based
on the reviewer’s personal knowledge, and there was no evidence of the factors that
had been considered.”26 This problem was acknowledged, several years later, in
written comments accompanying a proposed revision: “Agency implementation of
OMB Circular A-76 has been heavily criticized as inconsistent and frequently
inequitable.”27 A remedy was offered, in 1979, with the publication of the
Supplemental Handbook; its purpose was to effect changes “intended to promote
more effective and consistent implementation.”28 Implementation problems
reportedly were the catalyst for another revision four years later. In announcing a
proposed change to Circular A-76 in 1983, OMB noted: “This proposed revision
greatly simplifies and shortens the cost comparison procedures and clarifies and
strengthens other procedures in the Circular that unnecessarily impede its
implementation.”29 Continuing with the same theme, a 1995 Federal Register entry
explained the need for a revision to Circular A-76: “The proposed revision improves
25 Brian Friel, “Study Promotes Fairness in A-76 Competitions,” GovExec.com, Daily
Briefing, Dec. 23, 1999, available at [http://www.govexec.com/dailyfed/1299/
122399b1.htm].
26 Ibid.
27 U.S. Office of Management and Budget, “Proposed Changes in Policy of Government
Reliance on Private Enterprise,” Federal Register, vol. 42, no. 224, Nov. 21, 1977, p. 59817.
28 U.S. Office of Management and Budget, “Circular No. A-76, Revised.” Federal Register,
vol. 44, No. 67, Apr. 5, 1967, p. 20557. The Supplemental Handbook is available at
[http://www.whitehouse.gov/omb/circulars/a076supp.pdf].
29 U.S. Office of Management and Budget, “Invitation for Public Comment, Proposed
Revision to OMB Circular No. A-76 ‘Performance of Commercial Activities’,” Federal
Register, vol. 48, no. 8, Jan. 12, 1983, p. 1376.

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upon existing guidance that may have made the cost comparison process
unnecessarily difficult or lead [sic] to less than optimal outcomes.”30
Another implementation issue has been the degree of agency participation in the
A-76 program. Participation rates, particularly among civilian agencies, have been
somewhat low. Prior to the enactment of FAIR, which made the submission of
inventories a statutory requirement, some agencies failed to submit inventories or
failed to submit them on time. In 1971, OMB gathered data on the status of A-76
efforts and discovered that 16% of agency activities had not been reviewed despite
the fact that the deadline had been June 30, 1968.31 The number of cost comparison
studies declined during the 1990s. In June 1996, OMB requested that agencies
submit their inventories by September 13, 1996. Six of the 24 largest agencies had
not submitted their inventories as of April 1998.32 GAO reported, in 1998, that
There has been minimal A-76 activity among many agencies since the late 1980s,
with some major civilian agencies, such as the Departments of Education,
Housing and Urban Development, and Justice, reporting that they have not
studied any positions under A-76 in the past 11 years. Moreover, despite OMB’s
intention that the March 1996 revision to the A-76 Supplemental Handbook
would make A-76 a more attractive vehicle for agencies to use, no significant
increase in efforts under A-76 among civilian agencies are readily evident.33
A 1987 executive order that levied a cost comparison quota on agencies apparently
had little effect, either, on agency participation.34
Several factors may have contributed to the relatively low participation rate,
including legislative opposition. Members of Congress hold diverse views on
competitive sourcing and outsourcing. In addition to voicing their concerns,
congressional opponents have sponsored successful legislation that levied restrictions
on the application of Circular A-76. These included “prohibitions on contracting-out
specific activities” and requirements to maintain minimum staffing levels in certain
30 U.S. Office of Management and Budget, “Notice of Request for Comments on the
Proposed Revision to the OMB Circular No. A-76 ‘Performance of Commercial Activities’,”
Revised Supplemental Handbook,” Federal Register, vol. 60, no. 204, Oct. 23, 1995, p.
54394.
31 Commission on Government Procurement, Report, vol. 1, (Washington: GPO, 1972), p.
59.
32 U.S. General Accounting Office, OMB Circular A-76: Oversight and Implementation
Issues, Testimony, T-GGD-98-146 (Washington: June 4, 1998), p. 6.
33 Ibid., pp. 3-4.
34 One provision of the executive order signed by President Ronald Reagan required that
each agency, “beginning with Fiscal year 1989, conduct annual [cost comparison] studies
of not less than 3 % of the department or agency’s total civilian population, until all
identified potential commercial activities have been studied.” (U.S. President (Reagan),
“Performance of Commercial Activities,” Executive Order 12615, Federal Register, vol. 52,
no. 225, Nov. 23, 1987, p. 44853.)

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functions.35 For example, P.L. 102-555 prohibited the sale or commercialization of
any portion of the weather satellite systems operated by the Department of
Commerce; 10 U.S.C. 114(a)(2) prohibited the contracting out of Department of
Defense research and development activities; and 43 U.S.C. 1707(204)(a) required
that the Bureau of Land Management be managed directly by federal employees.36
Although Circular A-76 promised increased efficiency and cost savings, which
made it appealing on a conceptual level, in practice its appeal apparently was
diminished by a litany of problems experienced by agencies.37 Anticipated benefits
were overshadowed by agency managers’ experiences: they found the program to be
“time-consuming, difficult to implement, disruptive, and threatening to both
managers and employees,”38 as well as expensive and complicated.39 The expense
to agencies includes study costs and may include transition costs. Within the
Department of Defense, estimates of study costs ranged from $1,500 to $8,500 per
position studied. GAO’s review of a sample of completed A-76 studies found that
the per position cost ranged from $364 to $9,000.40 Transition costs41 for the
Department of Defense were estimated to reach $1,288,000 for FY1997 through
FY2005.42
According to GAO, the inability of government to calculate accurately the cost
of its functions and to verify the savings realized from cost comparisons has
undermined a major selling point of Circular A-76. In turn, this could have been a
disincentive to agency participation. In 1998, GAO reported that the government did
not have complete cost data. Without this data, it was difficult to calculate accurately
the cost of a government function. One result was an increased “difficulty [in]
35 U.S. General Accounting Office, Government Contractors: An Overview of the Federal
Contracting-Out Program, Testimony, T-GGD-95-131 (Washington: March 29, 1995), p.
6.
36 U.S. Congress, House Committee on Government Reform and Oversight, Subcommittee
on Civil Service, Contracting Out: Summary and Overview, hearing, 104th Cong., 1st sess.,
Mar. 29, 1995 (Washington: GPO, 1995), pp. 47-48.
37 U.S. General Accounting Office, Government Contractors: An Overview of the Federal
Contracting-Out Program, Testimony, T-GGD-95-131 (Washington: Mar. 29, 1995), p. 1.
38 Ibid., p. 2.
39 Tichakorn Hill, “Rules Are Roadblock to Agency Outsourcing,” Federal Times, vol. 36,
no. 39, Oct. 30, 2000, p. 1.
40 U.S. General Accounting Office, DOD Competitive Sourcing: Some Progress, but
Continuing Challenges Remain in Meeting Program Goals, GAO Report NSIAD-00-106,
(Washington: Aug. 8, 2000), p. 16.
41 Transition costs include separation costs for civilian employees who lose their jobs either
because an activity was contracted out or because an activity that remained in-house requires
a reduced work force.
42 U.S. General Accounting Office, DOD Competitive Sourcing: Some Progress, but
Continuing Challenges Remain in Meeting Program Goals, GAO Report NSIAD-00-106,
(Washington: Aug. 8, 2000), p. 15.

CRS-10
carrying out the A-76 competitive process.”43 With regard to savings, GAO was
unable to verify “that the results of Federal agencies’ contracting out decisions have
been beneficial and cost-effective in the aggregate.”44 One specific problem was that
claims about savings usually were based on initial estimates instead of updated, or
actual, figures.45
OMB took several steps to encourage agencies to use Circular A-76, though
some judged OMB’s actions as insufficient. OMB asserted that the purpose of the
circular was not to convert work from one source to another. Rather, OMB saw it
as one of many tools46 and a means for agencies to develop the most efficient
organization. At least some agencies shared OMB’s perspective that the A-76
program was one tool among many available to them.
The availability of an array of management tools, coupled with real or perceived
A-76 implementation problems, might have affected agencies’ participation in the
A-76 program. At a congressional hearing, W. Scott Gould, chief financial officer
and assistant secretary for administration, U.S. Department of Commerce, described
some of the tools available to his agency:
A-76 is one valuable tool among many for achieving our cost efficiency and
management performance goals. I wish to emphasize that over the past 6 years
we have added many such tools to our toolbox as we collectively explore ways
to make government more efficient and effective . . . . Throughout the first
Clinton administration, while the Office of Management and Budget was revising
the A-76 supplemental handbook, we at Commerce shifted our emphasis to the
principles of government-wide reinvention. [Commerce also explored]
downsizing, reengineering, reinvention labs, performance-based organizations,
franchise funds and customer service improvement.47
43 U.S. General Accounting Office, OMB Circular A-76: Oversight and Implementation
Issues, Testimony, T-GGD-98-146 (Washington: June 4, 1998), p. 9.
44 U.S. Congress, House Committee on Government Reform and Oversight, Subcommittee
on Civil Service, Contracting Out: Summary and Overview, hearing, 104th Cong., 1st sess.,
Mar. 29, 1995 (Washington: GPO, 1995), pp. 10-11.
45 U.S. General Accounting Office, OMB Circular A-76: Oversight and Implementation
Issues, Testimony, T-GGD-98-146 (Washington: June 4, 1998), p. 3. Although the
problems discussed here might detract from the appeal of Circular A-76 for some, GAO has
reported how the A-76 program can benefit government nonetheless: “Agencies’
experiences with A-76 suggest that competition is a key to realizing savings, whether
functions are eventually performed by private sector sources or remain in-house . . . . There
appears to be a clear consensus, which we share, that savings are possible when agencies
undertake a disciplined approach, such as that called for under A-76, to review their
operations and implement the changes to become more efficient themselves or contract with
the private sector for services.” (p.3.)
46 U.S. General Accounting Office, OMB Circular A-76: Oversight and Implementation
Issues, Testimony, T-GGD-98-146 (Washington: June 4, 1998), p. 2.
47 U.S. Congress, Senate Committee on Governmental Affairs, Subcommittee on Oversight
of Government Management, Restructuring, and the District of Columbia, Competition for
Commercial Activities in the Federal Government, hearing, 105th Cong., 2nd sess., June 4,
(continued...)

CRS-11
Union opposition probably has played a role, albeit an indirect one, in
depressing participation in the A-76 program. Although supportive of public-private
competition, such as that provided for by Circular A-76, unions have been vocal and
persistent in objecting to outsourcing. While testifying at a joint congressional
hearing, Robert M. Tobias, former national president of the National Treasury
Employees Union, offered this assessment:
Contracting out is not a panacea. It is not even an end in itself. It is a process.
One that, in fact, has been used with alarming frequency in recent years as
evidenced by the vast sums of money the federal government spends on contract
services each year. It has led to documented waste, fraud and abuse and has,
more often than not, been accomplished absent the most basic checks and
balances.48
The annals of contracting out are replete with examples of contracting out being
done to avoid Unions, to undermine pay and benefits of employees and generally
shortchange workers.49
In charging that government contracts are too costly, the National Federation of
Federal Employees argued that “contractors often are not prepared to do the job, and
then the government has to pay for training for them; government employees
sometimes have to redo work a contractor did; and contractors omit some costs from
their bids.”50 Unions also have challenged some of the claims and assumptions made
by and about the private sector. In a portion of his testimony before a subcommittee
of the Senate Committee on Governmental Affairs, the former national president of
AFGE argued:
Just because contractors are hard-working taxpayers ... does not mean that they
have some entitlement to funds in the public purse. After all, Federal employees
are also hard-working taxpayers. And just because agencies with managers and
rank-and-file employees, often working together in partnership, are more
successful competitors in the A-76 process does not necessarily mean that the
47 (...continued)
1998 (Washington: GPO, 1998), p. 19.
48 U.S. Congress, Senate Committee on Governmental Affairs, Subcommittee on Oversight
of Government Management, Restructuring, and the District of Columbia, and House
Committee on Government Reform and Oversight, Subcommittee on Government
Management, Information, and Technology, A Free Market Approach to Federal
Contracting: The Fair Competition Act of 1998 and the Competition in Commercial
Activities [Act] of 1998, March 24, 1998 hearing, 105th Cong., 2nd sess., Mar. 24, 1998
(Washington: GPO, 1998), p. 100.
49 Ibid., p. 112.
50 U.S. Congress, Senate Committee on Governmental Affairs, Subcommittee on Oversight
of Government Management, Restructuring, and the District of Columbia, and House
Committee on Government Reform and Oversight, Subcommittee on Government
Management, Information, and Technology, A Free Market Approach to Federal
Contracting: The Fair Competition Act of 1998 and the Competition in Commercial
Activities [Act] of 1998, March 24, 1998 hearing, 105th Cong., 2nd sess., Mar. 24, 1998
(Washington: GPO, 1998), pp. 392-393.

CRS-12
system has suddenly become defective. And just because contractors are not
winning as many A-76 competitions now as they had in years past does not
necessarily mean that they are being victimized by biased public-private
competitions.51
Federal Activities Inventory Reform Act52
Background
It took several decades to enact legislation giving a statutory foundation to
Circular A-76. The bill that led to FAIR emerged from a series of compromises.
As introduced by Senator Craig Thomas, on February 12, 1997, during the first
session of the 105th Congress, S. 314 was an effort to enact a “Freedom from
Government Competition” statute. As introduced, S. 314 would have prohibited
agencies from beginning or carrying out “any activity to provide any products or
services that can be provided by the private sector,” and it also would have prohibited
agencies from obtaining “any goods or services from or [providing] any goods or
services to any other governmental entity.” Exceptions would have been allowed for
inherently governmental goods and services; goods or services having to do with
national security; when it was determined that the federal government was the “best
value source” for the goods or services; or when private sector sources were unable
to meet the agency’s requirements.
S. 314 was reported to the Senate by the Committee on Governmental Affairs.
on July 28, 1998. When S. 314 emerged from the committee, it was very different
from the bill that Senator Thomas had introduced nearly 18 months earlier. S. 314
reported to the Senate with an amendment to the title and an amendment in the nature
of a substitute that “represented an agreement reached among members of the
Committee.”53 The Federal Activities Inventory Reform Act represented a
compromise between at least two different points of view. Federal employee unions
were “happy that the bill [did] not mandate contracting out, while the business
coalition consider[ed] the act a step toward more outsourcing of government
business.”54
51 U.S. Congress, Senate Committee on Governmental Affairs, Subcommittee on Oversight
of Government Management, Restructuring, and the District of Columbia, S. 314 —
Freedom from Government Competition Act, hearing, 105th Cong., 1st sess., June 18, 1997
(Washington: GPO, 1997), p. 41.
52 P.L. 105-270, Oct. 19, 1998, 112 Stat. 2382, 31 U.S.C. 501 note, S. 314 (105th Congress).
H.R. 716 was the companion bill.
53 U.S. Congress, Senate Committee on Governmental Affairs, Federal Activities Inventory
Reform Act of 1998, p. 8.
54 Brian Friel, “Bill Creates Outsourcing Target Lists,” Government Executive, Daily
Briefing, July 16, 1998, available at [http://www.govexec.com/dailyfed/0798/071698b2.
htm].

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S. 314, as amended, was passed by the Senate on July 30, 1998 by unanimous
consent. Senator Thomas and Senator Fred Thompson were the only Members to
comment on the bill. Senator Thomas offered a brief history of S. 314 and the
rationale for the measure55 while Senator Thompson noted that the bill as introduced
“has had [a] long and contentious past,” but the measure that passed represented a
consensus.56
On July 31, 1998, the engrossed Senate bill was sent to the House of
Representatives, where it was referred to the Committee on Government Reform and
Oversight. The measure was called up, considered, and passed by the House on
October 5, 1998. Discussion about the relative merits and drawbacks of S. 314
preceded its passage by the House. Congressman John J. Duncan, Jr., noted the
legislation was “a modest proposal” that would “help eliminate some government
competition with small business” and that it had the support of over 100
organizations.57 Concerned that the bill was “the first step down the road towards
privatizing much of the Federal Government,” Congressman Dennis J. Kucinich
objected to S. 314.58 He argued that the bill erroneously assumed that the federal
workforce is too large and the federal government does not do enough contracting.59
He also questioned the appropriateness of allowing the private sector, whose goal it
is to make a profit, to take over some functions performed by government.60
After S. 314 was agreed to by a voice vote in the House on October 5, 1998, it
was presented to President William J. Clinton on October 8, 1998. He signed it on
October 19, 1998.
Provisions
FAIR and Circular A-76 are intertwined, as evidenced by the 1999 revision to
Circular A-76 that implemented FAIR. The circular also provides the competitive
process that agency heads must use when they consider contracting out commercial
activities identified in their annual inventories under FAIR. FAIR reinforces selected
features of A-76, such as the definition of “inherently governmental” and the
55 “Federal Activities Inventory Reform Act of 1998,” remarks in the Senate, Congressional
Record, July 28, 1998, p. S9104, available at [http://frwebgate.access.gpo.gov/cgi-bin/
getpage.cgi?dbname=1998_record&page=S9104&position=all].
56 “Federal Activities Inventory Reform Act of 1998,” remarks in the Senate, Congressional
Record, July 30, 1998, p. S9505, available at [http://frwebgate.access.gpo.gov/cgi-bin/
getpage.cgi?dbname=1998_record&page=S9505&position=all].
57 “Federal Activities Inventory Reform Act of 1998,” remarks in the House, Congressional
Record, Oct. 5, 1998, p. H9448, available at [http://frwebgate.access.gpo.gov/cgi-bin/
getpage.cgi?dbname=1998_record&page=H9448&position=all].
58 Ibid., p. H9448.
59 Ibid., p. H9449.
60 Ibid. An example of congressional opposition in the 107th Congress to the push for
outsourcing can be found in the form of H.R. 721 or S. 1152. Each measure emphasized
“Truthfulness, Responsibility, and Accountability in Contracting” (TRAC).

CRS-14
requirement for agencies to prepare and submit inventories of their commercial
activities to OMB.
Inventories. FAIR requires agencies to compile, annually, a list of commercial
activities performed by their employees and submit it to OMB by the end of the third
quarter of each fiscal year (June 30). Each entry shall include:
(1) organization unit
(2) state(s) and location(s) where the activity is performed
(3) the number of full-time employees who perform the activity
(4) activity function code
(5) reason code
(6) the fiscal year the activity first appeared on a FAIR inventory
(7) a point of contact within the agency
(8) the year a cost comparison or conversion was performed (if applicable)
(9) the amount of civilian FTE savings (if applicable)
(10) the estimated annualized cost comparison dollar savings (if applicable)
(11) the date a post-Most Efficient Organization (MEO) performance review was
completed (if applicable).61
Function codes are used to characterize the type of work employees perform.62
Although only commercial activities are included on agency inventories, this does not
mean that all of the activities listed are eligible for cost comparison or direct
conversion. Eight of the nine reason codes indicate an activity might not be eligible
for a specific reason.63 For example, a function may be exempted by the agency, an
executive order, a waiver, legislation, or OMB. Functions that already have been
included in a cost study, and were retained in-house as a result, also are exempt.
After OMB’s review and consultation, an agency head is required to make the
inventory available to the public and send a copy to Congress. OMB is to publish a
notice in the Federal Register that the list is available. If any changes occur after
initial publication of the list, an agency head is required to make the changes
available to the public and submit a list of the changes to Congress. OMB publishes
a notice in the Federal Register.
61 U.S. Office of Management and Budget, Circular No. A-76 Revised Supplemental
Handbook, Performance of Commercial Activities, March 1996 (updated June 1999), p. 38.
62 See Ibid., pp. 41-44.
63 Ibid., p. 39.

CRS-15
Challenges and Appeals. Interested parties, such as contractors, federal
employees, federal labor unions, or business or professional associations, may appeal
the omission of an activity from, or the inclusion of an activity on, an agency’s list.
Challenges must be submitted to the agency within 30 working days after a notice
that the list is available has been published in the Federal Register. An agency must
decide the challenge and respond in writing to the requester within 28 working days64
of receiving the challenge. An interested party may appeal an adverse decision to the
head of an agency within 10 working days after receiving the ruling on the challenge.
The agency head has 10 working days to respond in writing.
Competition. FAIR does not require agencies to compete or convert directly
any of the activities listed on their inventories. However, the act does require an
agency head to review the list within a reasonable amount of time after it has been
made available to the public. If he or she considers contracting out an activity on the
list, the agency must use a competitive process, such as A-76, to determine who will
provide the service or good. This requirement includes a caveat, though, which
allows for exceptions as set forth in another statute, an executive order, regulations,
or an executive branch circular.
Definition of Inherently Governmental. A significant feature of FAIR is
that it statutorily defines “inherently governmental.” The FAIR definition states that
an inherently governmental function is one “that is so intimately related to the public
interest as to require performance by Federal Government employees.” The
definition includes a passage that identifies the circumstances under which the
interpretation and execution of the laws of the United States are considered
inherently governmental; a list of functions normally not considered to be inherently
governmental; and two categories into which inherently governmental activities
normally fall (the act of governing, and monetary transactions and entitlements).
Applicability. FAIR applies to executive civilian and military departments and
agencies. The General Accounting Office, government corporations, nonappropriated
funds instrumentalities, and certain DOD depot-level maintenance and repair
functions are exempt from FAIR. Executive agencies that have fewer than 100 full-
time employees also are exempt, unless they plan to conduct public-private
competitions, and then they must prepare and submit inventories of their commercial
activities.65
Implementation
The FAIR Act took effect on October 1, 1998, and the first year’s inventories
were due June 30, 1999. OMB issued proposed regulations in March 1999 to
implement FAIR through revisions to Circular A-76 and the Supplemental
64 Initial guidance on the challenge and appeals process stated that the 30-day period (see
preceding sentence in text) and 28-day period were calendar days. After the first round of
inventories had been completed, OMB changed the two periods to working days. (U.S.
Office of Management and Budget, “Issuance of OMB Circular A-76 Transmittal
Memorandum No. 22,” Federal Register, vol. 65, no. 175, Sept. 8, 2000, p. 54570.)
65 Sec. 840 of P.L. 109-115, which amends P.L. 105-270.

CRS-16
Handbook.66 OMB issues guidance on FAIR inventories annually, which is available
at [http://www.whitehouse.gov/omb/procurement/fair-index.html].
Although not required by FAIR to submit inventories of their inherently
governmental activities, agencies, beginning in 2001, have been required by OMB
to submit these inventories along with their commercial activities inventories each
year. As with commercial activities inventories, inherently governmental activities
inventories are made available to Congress and the public; and, furthermore, agencies
must prepare written justifications for activities designated as inherently
governmental.67
Initially, businesses and trade and professional associations were disappointed
and frustrated that not as many activities had been identified as eligible for
competition as they had expected or would have liked. The number of potential
contracting opportunities was reduced by agencies’ actions. First, agencies identified
their inherently government activities, thus removing those activities from
consideration as potential candidates for competitive sourcing. About one-third of
the challenges filed by industry in response to the 1999 inventories targeted activities
that had been left off agencies’ inventories.68 Secondly, in the course of assigning
reason codes to commercial activities, agencies exempted some of these functions
from consideration for cost study or direct conversion. A comparison between the
total number of commercial activities reported and the number eligible for the A-76
program showed that many activities were declared exempt. Industry representatives
argued that reason codes were used to shield commercial functions from A-76.69 The
executive director of the Management Association for Private Photogrammetric
Surveys argued, after the 1999 lists had been released, that too many positions on the
lists were “untouchable,” and added:
That was never in the law. It’s either commercial or inherently governmental.
OMB has far overstepped its legislative authority by allowing agencies to
classify over 600,000 positions as commercial that the agencies also say are out
of bounds.70
As noted above, beginning in 2001, OMB requires agencies to prepare and
submit lists of their inherently governmental activities, and OMB’s refinement of this
policy over the years may have helped to alleviate concerns about the completeness
and availability of agencies’ inventories. Initially, the only requirement regarding
66 U.S. Office of Management and Budget, “Implementation of the Federal Activities
Inventory Reform Act of 1998 (P.L. 105-270) (‘The FAIR Act’),” Federal Register, vol. 64,
no. 39, Mar. 1, 1999, p. 10031.
67 CRS Report RL32017, Circular A-76 Revision 2003: Selected Issues, by L. Elaine
Halchin.
68 U.S. General Accounting Office, Competitive Contracting: Agencies Upheld Few
Challenges and Appeals Under the FAIR Act, GAO Report GAO/GGD/NSIAD-00-244
(Washington: Sept. 29, 2000), p. 9.
69 Ibid., p. 11.
70 Brian Friel, “Agencies Make Few Changes to Outsourcing Lists.”

CRS-17
inherently governmental functions was for agencies to submit their inventories of
these functions to OMB. As a result of subsequent policy changes by OMB, notably
changes effected by the 2003 revision to Circular A-76, inherently governmental
inventories are made available to the public; interested parties may challenge
activities that are included on, or omitted from, such lists; and a designated agency
official must prepare written justifications for activities designated as inherently
governmental.71
OMB’s policy on commercial activities that carry reason code A also may help
to alleviate concerns about how agencies use their inventories. Each commercial
activity is assigned one of six reason codes which, in short, indicate whether an
activity is available or is not available for public-private competition. The six reason
codes are as follows:
! A — “The commercial activity is not appropriate for private sector
performance pursuant to a written determination by the CSO [the
agency’s competitive sourcing official].”
! B — “The commercial activity is suitable for a streamlined or
standard competition.”
! C — “The commercial activity is the subject of an in-progress
streamlined or standard competition.”
! D — “The commercial activity is performed by government
personnel as the result of a standard or streamlined competition ...
within the past five years.”
! E — “The commercial activity is pending an agency approved
restructuring decision (e.g., closure, realignment).”
! F — “The commercial activity is performed by government
personnel due to a statutory prohibition against private sector
performance.”72
Circular A-76 requires agencies to prepare and, upon request, make available to the
public and OMB written justifications for activities that carry reason code A.73
Additional guidance issued by OMB in 2005 and 2006 requires agencies to include
the written justifications with the inventories they submit to OMB. Additionally,
OMB personnel may “request that agencies refine previously submitted justifications
for ... reason code A functions if there are questions.”74
71 U.S. Office of Management and Budget, Circular A-76, pp. A-1-A-4.
72 Ibid., p. A-3.
73 Ibid.
74 Clay Johnson III, Deputy Director for Management, U.S. Office of Management and
Budget, “2006 Inventories of Commercial and Inherently Governmental Activities,”
(continued...)

CRS-18
Unions also have been unhappy with FAIR. Testifying before a subcommittee
of the House Committee on Government Reform in 1999, an officer of the American
Federation of Government Employees expressed his concern that the private sector
was likely to use FAIR inventories as “shopping catalogues.”75 Part of the concern
was that, eventually, FAIR could lead to an increase in contracting out.76 Comments
by industry representatives probably have helped to fuel this concern. As the first
commercial activities inventories were being released in fall 1999, a representative
of the U.S. Chamber of Commerce, after praising FAIR for its role in generating the
inventories, added: “Information is a dangerous thing. You’ll see some increasing
pressure from the private sector and Congress to compete the work or outsource it
directly....”77
Another criticism levied at FAIR by unions is that the legislation requires
agencies to report information about their federal employee workforces, but there is
no requirement for contractors to report on the size and scope of their workforces.
Colleen M. Kelley, national president, National Treasury Employees Union, has
argued: “To make public an inventory of the in-house workforce while systematically
ignoring the contract workforce presents a skewed picture of the actual work being
performed on the federal government’s behalf.”78
Other Competitive Sourcing Initiatives
Issues of public-private competition and contracting out continue to evolve. The
Bush Administration is moving ahead with plans to promote competitive sourcing.
Within President Bush’s first three months in office, OMB issued three memoranda
aimed at, among other things, expanding the use of the A-76 program and FAIR. In
accordance with legislation passed during the 106th Congress, GAO convened a panel
in May 2001 to examine both the circular and FAIR. The panel’s report was released
in April 2002. OMB made significant changes to Circular A-76 in 2003, releasing
its revision May 29, 2003. A statutory reporting requirement was enacted during the
74 (...continued)
memorandum M-06-08, Mar. 8, 2006, available at [http://www.whitehouse.gov/omb/
memoranda/fy2006/m-06-08.pdf].
75 U.S. Congress, House Committee on Government Reform, Subcommittee on Government
Management, Information, and Technology, The Implementation of the Federal Activities
Inventory Reform Act, hearing, 106th Cong., 1st sess., Oct. 28, 1999, (Washington: GPO,
1999), p. 31.
76 Ibid.
77 Brian Friel, “Contractors Eye Job Lists; Agencies Try to Retain Work,” GovExec.com,
Daily Briefing, Oct. 4, 1999, available at [http://www.govexec.com/dailyfed/1099/
100499b1.htm].
78 U.S. Congress, House Committee on Government Reform, Subcommittee on Government
Management, Information, and Technology, The Implementation of the Federal Activities
Inventory Reform Act, hearing, 106th Cong., 1st sess., Oct. 28, 1999 (Washington: GPO,
1999), pp. 55-56.

CRS-19
109th Congress, and other legislation that includes one or more competitive sourcing
provisions has been enacted since the 106th Congress.
Bush Administration’s Competitive Sourcing Initiative79
Following up on a position he took during his presidential campaign,80 President
Bush, in early 2001, directed executive agencies and departments to plan for
competing some of the commercial activities listed on their FAIR inventories.81 An
OMB memorandum, issued February 14, 2001, notified agencies and departments
that the President envisioned a government that would be citizen-based, results-
oriented, and market-driven. The five governmentwide reforms announced in the
memorandum were: “delayering management levels to streamline organizations;
reducing erroneous payments to beneficiaries and other recipients of government
funds; making greater use of performance-based contracts; expanding the application
of on-line procurement and other E-Government services and information; and,
expanding A-76 competitions and more accurate FAIR Act inventories.”82 Agencies
were instructed to include performance goals for these reforms in the performance
plans they submit under the Government Performance and Results Act (GPRA) of
1993.83 A major feature of the Administration’s competitive sourcing initiative has
been OMB efforts to increase agency involvement in public-private competitions.
Detailed information about these efforts may be found in CRS Report RL32079,
Federal Contracting of Commercial Activities: Competitive Sourcing Targets.
Commercial Activities Panel (CAP)
During the 106th Congress, Senator John Warner proposed an amendment to S.
2549,84 S.Amdt. 3464, that directed the General Accounting Office to create a panel
to study Circular A-76 and related issues. Taking note of concerns voiced by federal
employee unions and private industry about Circular A-76, Senator Warner
79 This initiative is part of the President’s Management Agenda, which is reviewed in CRS
Report RS21416, The President’s Management Agenda: A Brief Introduction, by Virginia
A. McMurtry.
80 In a speech on June 9, 2000, then presidential candidate Bush said: “Today, hundreds of
thousands of full-time federal employees perform tasks that could be done by the private
sector. I will put as many of these tasks as possible up for competitive bidding. If the
private sector can do a better job, it should get the contract.” (Tichakorn Hill, “OMB Plans
To Compete 400,000 More Jobs,” Federal Times, vol. 37, no. 3, Feb. 19, 2001, p. 1.)
81 These initiatives were incorporated in The President’s Management Agenda, which was
released by the Executive Office of the President and OMB in August 2001.
82 U.S. Office of Management and Budget, “Performance Goals and Management Initiatives
for the FY 2002 Budget,” Memorandum M-01-11, Feb. 14, 2001, p. 2. Available at
[http://www.whitehouse.gov/omb/memoranda/m01-11.html].
83 5 U.S.C. prec. 301, 306; 31 U.S.C. 1101 & nt, 1105, 1115-19, prec. 9701, 9703-4; 39
U.S.C. prec. 2001, 2801-05. P.L. 103-62, 107 Stat. 285; P.L. 103-62; 107 Stat. 285.
84 S. 2549 was a defense authorization bill. It was incorporated as an amendment into the
bill, H.R. 4205, that passed as the Floyd D. Spence National Defense Authorization Act for
Fiscal Year 2001 (P.L. 106-398, 114 Stat. 1654A-1, at 1654A).

CRS-20
concluded that an objective, systematic study of the competitive sourcing process was
needed.
Section 832 of P.L. 106-39885 contains the Warner amendment (which was
originally designated Section 814) with clarifying language added by the House of
Representatives. The House added a list of topics for the panel to study; specified
that the panel would include the Department of Defense and the Office of
Management and Budget; explicitly identified the comptroller general, or his
designee, as the chairman of the panel; and added to the instructions for report
preparation and submission a deadline and a requirement to report recommended
changes.
Section 832 directed GAO to establish a panel of experts to examine Circular
A-76 and FAIR and report its findings to Congress no later than May 1, 2002. The
topics and issues studied by the panel included:86
(1) procedures for determining whether functions should continue to be
performed by Government personnel;
(2) procedures for comparing the costs of performance of functions by
Government personnel and the costs of performance of such functions by Federal
contractors;
(3) implementation by the Department of Defense of the Federal Activities
Inventory Reform Act of 1998 (P.L. 105-270; 31 U.S.C. 501 note);87
(4) procedures of the Department of Defense for public-private competitions
pursuant to the Office of Management and Budget Circular A-76.
The comptroller general was directed to ensure that the Department of Defense,
private industry, federal labor organizations, and OMB “receive fair representation”
on the panel and that other interested parties have the opportunity to submit
information and their views. Comptroller General David M. Walker chose to chair
the Commercial Activities Panel (CAP), and he appointed these individuals to serve
on it:88
! Dr. Frank A. Camm, senior economist, RAND
! Mark Filteau, president, Johnson Controls World Services
! Stephen Goldsmith, former mayor of Indianapolis
! Bobby L. Harnage Sr., national president, American Federation of
Government Employees
85 Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001; 114 Stat.
1654A-1, at 1654A-221.
86 Section 832(a) of P.L. 106-398.
87 Despite the fact that the Department of Defense is featured in this list, the scope of the
panel’s work is governmentwide.
88 U.S. General Accounting Office, “Commercial Activities Panel,” Federal Register, vol.
66, no. 74, April 17, 2001, p. 19786.

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! Colleen M. Kelley, national president, National Treasury Employees
Union
! Sean O’Keefe, administrator, National Aeronautics and Space
Administration
! Angela Styles, administrator, Office of Federal Procurement Policy89
! Senator David Pryor (retired), director, Institute of Politics, Harvard
University
! Stan Z. Soloway, president, Professional Services Council
! Robert M. Tobias, distinguished adjunct professor, and director of
the Institute for the Study of Public Policy Implementation,
American University
! Kay Coles James, director, Office of Personnel Management
! Edward C. Aldridge, under secretary of defense for acquisition and
technology
The initial meeting of the panel, which focused on organizational issues, was
held on May 8, 2001, in Washington, D.C.90 CAP held 11 meetings, including three
public hearings, during its year-long study. On April 30, 2002, the panel issued its
report, Improving the Sourcing Decisions of the Government, which covers the
current sourcing system, trends and challenges, and the panel’s review, findings, and
four recommendations. The report also includes individual statements from the panel
members.
The panel recommended that the government adopt a set of 10 sourcing
principles, make limited changes to Circular A-76, develop and demonstrate an
integrated competition process that would draw from both the FAR and Circular A-
76, and promote the development of high-performing organizations (HPOs).91 The
10 sourcing principles are

! Support agency missions, goals, and objectives.
! Be consistent with human capital practices designed to attract,
motivate, retain, and reward a high-performance federal workforce.
! Recognize that inherently governmental and certain other functions
should be performed by federal workers.
! Create incentives and processes to foster high-performing, efficient
and effective organizations throughout the federal government.
! Be based on a clear, transparent, and consistently applied process.
89 Sean O’Keefe served as OMB’s representative to the panel through December 2001.
After he took over as administrator of NASA, Angela Styles replaced him on the panel.
90 U.S. General Accounting Office, “Formation of the Commercial Activities Panel,” press
advisory, Apr. 16, 2001.
91 Commercial Activities Panel, Improving the Sourcing Decisions of the Government
(Washington: U.S. General Accounting Office, 2002), pp. 46-53.

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! Avoid arbitrary full-time equivalent (FTE) or other arbitrary
numerical goals.
! Establish a process that, for activities that may be performed by
either the public or the private sector, would permit public and
private sources to participate in competitions for work currently
performed in-house, work currently contracted to the private sector,
and new work, consistent with these guiding principles.
! Ensure that, when competitions are held, they are conducted as
fairly, effectively, and efficiently as possible.
! Ensure that competitions involve a process that considers both
quality and cost factors.
! Provide for accountability in connection with all sourcing decisions.
In addition to recommending that government adopt these sourcing principles,
the panel incorporated them into its three other recommendations.92
In its recommendation for making limited changes to Circular A-76, the panel
identified 14 items and described, briefly, what needs to be done in each area. The
thrust of making limited changes is to provide greater accuracy and enhanced
accountability, and ensure greater fairness. A key feature of this recommendation is
the expectation that the changes could be implemented expeditiously and without
legislation.93
The integrated competition process, the panel’s third recommendation, would
be based on the Federal Acquisition Regulation (FAR) and would incorporate some
elements of Circular A-76. Drawing from the FAR, for example, could result in the
same evaluation team reviewing all proposals and the elimination from consideration
of any proposals judged to have no reasonable chance of being selected.94 The panel
recommended that the integrated competition process borrow from the circular,
among other things, the concept of the most efficient organization and the A-76 cost
conversion differential.95
Separate and distinct from the issue of competitive sourcing, the panel
recommended that government promote the development of high-performing
organizations (HPOs).96 The panel also stated, though, that an organization or work
92 Ibid., pp. 46-49.
93 Commercial Activities Panel, Improving the Sourcing Decisions of the Government, pp.
51-52.
94 Ibid., p. 50.
95 Ibid.
96 Commercial Activities Panel, Improving the Sourcing Decisions of the Government, pp.
52-53, 82-84. One definition of HPOs states that they “are groups of employees who
(continued...)

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center designated as an HPO could be exempted from competitive sourcing for a
specified period of time.
2003 Revision to Circular A-76
The most recent revision to the circular was issued by OMB on May 29, 2003.
In addition to replacing the 1999 version, OMB indicated that the 2003 revision
supersedes and rescinds ... OMB Circular No. A-76 Revised Supplemental
Handbook (Revised 2000), March 1996; OMB Circular No. A-76 Transmittal
Memoranda Nos. 1-25; and Office of Federal Procurement Policy (OFPP) Policy
Letter 92-1, Inherently Governmental Functions, September 23, 1992.97
Some of the major changes effected by the 2003 revision include the elimination of
direct conversions, the modification of the definition of “inherently governmental,”
identifying the government’s response to a solicitation as an “agency tender,” and
removing the guarantee that an agency tender will still be under consideration when
the performance decision is made. For detailed information about the 2003 circular,
see CRS Report RL32017, Circular A-76 Revision 2003: Selected Issues.
Congressional Reporting Requirement
Under Section 647(b) of P.L. 108-199, agencies are required to submit to
Congress by December 31 of each year a report on their competitive sourcing
activities. Additionally, agencies are required to submit their reports to, and have
them cleared by, OMB prior to transmitting their reports to Congress.98 Each agency
report is to include:
(1) the total number of competitions completed;
(2) the total number of competitions announced, together with a list of the
activities covered by such competitions;
96 (...continued)
produce desired goods or services at higher quality with the same or fewer resources. Their
productivity and quality improve continuously, from day to day, week to week, and year to
year, leading to the achievement of their mission.” (Jack A. Briziu, et al., Creating High-
Performance Government Organizations (San Francisco: Jossey-Bass, 1998), p. 11.
Another, process-oriented definition states that an HPO is “an organizational system that
continually aligns its strategy, goals, objectives, and internal operations with the demands
of its external environment to maximize organizational performance.” (Bradley L. Kirkman,
Kevin B. Lowe, and Dianne P. Young, High-Performance Work Organizations: Definitions,
Practices, and an Annotated Bibliography (Greensboro, NC: Center for Creative
Leadership, 1999), p. 8 (italics in original).
97 U.S. Office of Management and Budget, “Performance of Commercial Activities,”
Federal Register, vol. 68, no. 103, May 20, 2003, p. 32134 (italics in original).
98 Paul A. Denett, Administrator, Office of Federal Procurement Policy, Report to Congress
on FY2006 Competitive Sourcing Efforts, memorandum M-01-01, Oct. 5, 2006, available
at [http://www.whitehouse.gov/omb/memoranda/fy2007/m07-01.pdf].

CRS-24
(3) the total number (expressed as a full-time employee equivalent number) of
the Federal employees studied under completed competitions;
(4) the total number (expressed as a full-time employee equivalent number) of
the Federal employees that are being studied under competitions announced but
not completed;
(5) the incremental cost directly attributable to conducting the competitions
identified under paragraphs (1) and (2), including costs attributable to paying
outside consultants and contractors;
(6) an estimate of the total anticipated savings, or a quantifiable description of
improvements in service or performance, derived from completed competitions;
(7) actual savings, or a quantifiable description of improvements in service or
performance, derived from the implementation of competitions completed after
May 29, 2003;
(8) the total projected number (expressed as a full-time employee equivalent
number) of the Federal employees that are to be covered by competitions
scheduled to be announced in the fiscal year covered by the next report required
under this section; and
(9) a general description of how the competitive sourcing decisionmaking
processes of the executive agency are aligned with the strategic workforce plan
of that executive agency.99
OMB also provides a consolidated report to Congress on agency competitive
sourcing efforts.100
Competitive Sourcing Statutes and Provisions
Following the enactment of FAIR in 1998 and the passage of legislation in the
106th Congress that established the Commercial Activities Panel, there have been a
number of bills passed — notably, appropriations bills — in subsequent Congresses
that include one or more competitive sourcing provisions. Competitive sourcing
targets and funding limits on competitive sourcing activities are examples of
procedures or policies that have been addressed by one or more statutes. For
additional information, see CRS Report RL32833, Competitive Sourcing Legislation.
Conclusion
The Federal Activities Inventory Reform Act of 1998 is a significant legislative
initiative in a long line of efforts aimed at encouraging the competitive sourcing and
outsourcing of commercial activities. Coupled with Circular A-76, it provides the
99 Sec. 647(b) of P.L. 108-199.
100 OMB’s competitive sourcing reports are available at [http://www.whitehouse.gov/
omb/procurement/index_comp_sourcing.html].

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means for cataloguing government activities, as either inherently governmental or
commercial, and for conducting cost comparison studies, or converting commercial
functions directly to contract.
Nearly a half century has passed since the Bureau of the Budget issued its first
bulletins on the policy of governmental reliance on the private sector, and as a
principle the policy appears to be firmly entrenched. Although Congress acted in
1998 to provide statutory backing to the policy in FAIR, debate continued on how
best to implement the policy and promote agency participation. The ongoing debate
over public-private competition and contracting out reflects, in some instances, a
fundamental disagreement over the so-called division of labor between government
and the private sector and the implications that might follow from particular
arrangements. Congress may wish to examine this issue, including FAIR and
Circular A-76, in light of the Bush Administration’s policies on competitive
sourcing.