Use of Legislative Incentive for Performance-Based Contracting Unknown
Gao ID: GAO-03-674R May 22, 2003The Department of Defense (DOD) spent about $93 billion in fiscal year 2002 to acquire various types of services, such as base operations, logistical support, and information technology. To achieve greater cost savings and better outcomes when agencies acquire these and other services, Congress and the executive branch have encouraged greater use of performance-based contracting. Performance-based contracts specify the desired outcomes and allow the contractors to determine how best to achieve those outcomes, rather than prescribe the methods contractors should use. In October 2000, Congress sought to provide an incentive for the use of performance-based contracts through legislation giving DOD temporary authority to treat certain performance-based service contracts as contracts for commercial items. Contracts for commercial items may be awarded using streamlined procedures under Part 12 of the Federal Acquisition Regulation (FAR). This authority is scheduled to expire in October 2003. As required by the October 2000 legislation, we reviewed DOD's implementation of the temporary authority, including the interim and final implementing regulations, public comments on the interim regulation, and other DOD documents. We also discussed with DOD officials the extent to which the authority had been used. We conducted our review from September 2002 through February 2003 in accordance with generally accepted government auditing standards.
DOD issued regulations to implement the legislative authority, but because there is no tracking mechanism, DOD does know the extent to which the authority has been used. DOD officials believe, however, that use of the authority has been limited, at best. Although a January 2002 DOD policy memorandum indicated that additional guidance on reporting use of the authority would be forthcoming, no additional guidance has been issued to date.
GAO-03-674R, Use of Legislative Incentive for Performance-Based Contracting Unknown
This is the accessible text file for GAO report number GAO-03-674R
entitled 'Use of Legislative Incentive for Performance-Based
Contracting Unknown' which was released on May 22, 2003.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
May 22, 2003:
Congressional Committees:
Subject: Use of Legislative Incentive for Performance-Based Contracting
Unknown:
The Department of Defense (DOD) spent about $93 billion in fiscal year
2002 to acquire various types of services, such as base operations,
logistical support, and information technology. To achieve greater cost
savings and better outcomes when agencies acquire these and other
services, Congress and the executive branch have encouraged greater use
of performance-based contracting. Performance-based contracts specify
the desired outcomes and allow the contractors to determine how best to
achieve those outcomes, rather than prescribe the methods contractors
should use.
In October 2000, Congress sought to provide an incentive for the use of
performance-based contracts through legislation[Footnote 1] giving DOD
temporary authority to treat certain performance-based service
contracts as contracts for commercial items.[Footnote 2] Contracts for
commercial items may be awarded using streamlined procedures under Part
12 of the Federal Acquisition Regulation (FAR). This authority is
scheduled to expire in October 2003.
As required by the October 2000 legislation, we reviewed DOD's
implementation of the temporary authority, including the interim and
final implementing regulations, public comments on the interim
regulation, and other DOD documents. We also discussed with DOD
officials the extent to which the authority had been used. We conducted
our review from September 2002 through February 2003 in accordance with
generally accepted government auditing standards.
Results in Brief:
DOD issued regulations to implement the legislative authority, but
because there is no tracking mechanism, DOD does know the extent to
which the authority has been used. DOD officials believe, however, that
use of the authority has been limited, at best. Although a January 2002
DOD policy memorandum indicated that additional guidance on reporting
use of the authority would be forthcoming, no additional guidance has
been issued to date.
Background:
In October 2000, Congress passed section 821(b) of the National Defense
Authorization Act for Fiscal Year 2001, which allows DOD to treat
performance-based service contracts or task orders as contracts for the
procurement of commercial items under specified conditions. The
conditions are that the contract or task order must: (1) be valued at
$5 million or less; (2) define the work in measurable, mission-related
terms; (3) identify a specific end product or output; (4) contain a
firm, fixed price; and (4) be awarded to a contractor that provides
similar services to the general public under terms and conditions
similar to those offered to the federal government.[Footnote 3]
The use of performance-based contracts to acquire services offers a
number of potential benefits. Performance-based contracts can encourage
contractors to be innovative and to find cost-effective ways of
delivering services. By shifting the focus from process to results,
they hold the promise of better outcomes and reduced costs. In view of
the potential benefits, Congress has been encouraging greater use of
performance-based contracting, and the administration has set a general
goal that 20 percent of eligible service contracts should be
performance based.[Footnote 4] DOD has a goal that 50 percent of its
service contracts will be performance based by 2005.
Congress and the administration also have been encouraging agencies to
acquire commercial items to the maximum extent practicable to satisfy
agency needs for goods and services. The objectives are to reduce the
government's reliance on government specifications and to take
advantage of technical innovations available in the commercial
marketplace. Special rules designed to facilitate the acquisition of
commercial items are contained in Part 12 of the FAR. These rules
permit greater flexibility in negotiating contract terms and
conditions. In addition, certain enumerated laws do not apply to
commercial item acquisitions, such as the requirement that the
contractor submit cost or pricing data. In general, to be acquired
using the commercial item procedures of FAR Part 12, services must be
of a type that are sold competitively in substantial quantities in the
commercial marketplace based on established catalog or market prices
for specific tasks performed. Under the authority of section 821(b), a
service could be acquired as a commercial item even though it would not
otherwise meet the commercial item definition.
DOD Issued Regulations to Implement Section 821:
On December 6, 2001, DOD issued an interim rule amending the Defense
Federal Acquisition Regulation Supplement to implement section 821(b).
The rule listed the legislative conditions for use of the new
authority, as well as additional conditions that apply generally to the
use of performance-based contracts. For example, the rule required the
use of quality assurance surveillance plans. Although there is no
mention of these plans in section 821(b), other sections of the FAR
require them whenever performance-based service contracting is used.
DOD also requested comments on the interim rule and received four sets
of comments from various sources. In some cases DOD agreed with the
points raised and revised the final rule. Other comments dealt with
conditions imposed by the legislation. For example, one comment pointed
out that the requirement that a contract under the section 821(b)
authority be with an entity that provides similar services to the
general public precludes use of the authority to contract with an
entity whose only business activity consists of contracts with the
government under section 8(a) of the Small Business Act or other
federal preference programs. DOD agreed with this conclusion, but noted
that the requirement was contained in the legislation and could not be
changed through regulation. DOD published the final rule in the Federal
Register on October 25, 2002.
DOD Does Not Know the Extent to Which Section 821(b) Has Been Used:
Department of Defense officials are not aware of the extent to which
the new authority contained in section 821(b) has been used to acquire
services because DOD does not have a reporting system to track the use
of this authority. At our request, however, DOD officials asked each of
the military services to query some of their buying commands about
possible instances of the use of section 821(b) authority. Officials
from each of the services confirmed that data on the possible use of
this authority are not collected. In addition, Air Force and Navy
officials told us that they were unaware of instances in which
contracting personnel used the authority. Army officials, however, said
they believed a minimal number of contracting personnel in the Army had
used the authority to treat certain services as commercial items, such
as plumbing and electrical motor repair services. Army officials were
unable to identify the specific contracts on which the authority had
been used.
DOD officials suggested two possible explanations for why the authority
provided by section 821(b) may have seen little, if any, use. First,
the officials cited a perception among some contracting personnel that
the section provided no new authority. In fact, in our discussions with
some DOD personnel it was apparent that they believed section 821(b)
could only be used to acquire services that already met the definition
of commercial item. As indicated by DOD, however, the implementing
regulation "provides additional authority for use of FAR Part 12 to
acquire services that do not meet the definition of commercial
item."[Footnote 5] Second, numerous DOD officials cited the requirement
for a firm, fixed-price contract as an impediment to use of the
authority. In this regard, the existing regulatory definition of
commercial item expressly excludes services sold in the commercial
marketplace at hourly rates without an established catalog or market
price for a specific service performed. Although services priced on an
hourly basis--and thus by definition not considered to be commercial
items--might be good candidates for use of the new authority, the
requirement of section 821(b) for a fixed-price contract reportedly
made the authority less attractive.
In January 2002, the Under Secretary of Defense, Acquisition and
Technology issued a policy memorandum reemphasizing the department's
commitment to performance-based contracting and highlighting the
temporary authority provided in section 821(b). The memorandum said it
was "important that we thoroughly test this authority during the pilot
period to demonstrate its value." In addition, the memorandum said that
DOD would provide additional direction on the reporting requirements
applicable to the pilot authority. To date, DOD has not provided any
additional direction. According to one DOD official, a reporting system
would have been an unnecessary burden on contracting personnel because
they anticipated only limited use of the temporary authority.
We requested comments from DOD on a draft of this report. On May 16,
2003, a representative of the Office of the Director of Defense
Procurement and Acquisition Policy stated that the draft report was
technically accurate and that no other comments were needed.
- - - - - -:
We are sending copies of this report to the Secretary of Defense;
Director, Office of Management and Budget; and interested congressional
committees. We will also make copies available to others on request. In
addition, this report will be available at no charge on the GAO web
site at http://www.gao.gov.
If there are any questions concerning this report, please call me at
(202)-512-8214. The major contributors to this report were Odi Cuero,
Chris Galvin, Gary Middleton, and Ralph White.
William T. Woods:
Director:
Acquisition and Sourcing Management:
Signed by William T. Woods:
List of Congressional Committees:
The Honorable John Warner:
Chairman:
Committee on Armed Services:
United States Senate:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Ted Stevens:
Chairman:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Daniel Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
Unites States Senate:
The Honorable John Ensign:
Chairman:
Subcommittee on Readiness & Management Support:
Committee on Armed Services:
United States Senate:
The Honorable Daniel Akaka:
Ranking Minority Member:
Subcommittee on Readiness & Management Support:
Committee on Armed Services:
United States Senate:
The Honorable Duncan Hunter:
Chairman:
Committee on Armed Services:
House of Representatives:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable Jerry Lewis:
Chairman:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
The Honorable John Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
The Honorable Joel Hefley:
Chairman:
Subcommittee on Readiness:
Committee on Armed Services:
House of Representatives:
The Honorable Solomon Ortiz:
Ranking Minority Member:
Subcommittee on Readiness:
Committee on Armed Services:
House of Representatives:
(120171):
FOOTNOTES
[1] Section 821(b) of the Defense Authorization Act for Fiscal Year
2001, Pub. L. 106-398, Oct. 30, 2000.
[2] The term "commercial item" is defined as any item that is of a type
customarily used for nongovernmental purposes that has been sold,
leased, or licensed or offered for sale, lease, or license to the
general public. 41 U.S.C. 403 (12). With respect to services, the
statute includes "services offered and sold competitively, in
substantial quantities, in the commercial marketplace based on
established catalog or market prices for specific tasks performed and
under standard commercial terms and conditions." Id.
[3] In addition, the legislation provided that special simplified
procedures previously authorized for acquiring commercial items valued
up to $5 million would not apply to acquisitions of services deemed to
be commercial items under section 821(b).
[4] For additional information, see Contract Management: Guidance
Needed for Using Performance-Based Service Contracting, GAO-02-1049
(Washington, D.C. Sept. 23, 2002).
[5] 67 Fed. Reg. 65,512 at 65,513 (Oct. 25, 2002). (Emphasis in
original.)
