DOD Acquisitions
Contracting for Better Outcomes Gao ID: GAO-06-800T September 7, 2006The Department of Defense's (DOD) spending on goods and services has grown significantly since fiscal year 2000 to well over $250 billion annually. Prudence with taxpayer funds, widening deficits, and growing long-range fiscal challenges demand that DOD maximize its return on investment, while providing warfighters with the needed capabilities at the best value for the taxpayer. DOD needs to ensure that its funds are spent wisely, and that it is buying the right things, the right way. In this testimony, GAO discusses (1) recent trends in DOD contracting activity and the environment in which this activity takes place, and (2) practices which undermine its ability to establish sound business arrangements, particularly those involving the selection and oversight of DOD's contractors and incentivizing their performance. This statement is based on work GAO has completed over the past 6 years covering a range of DOD acquisition and contracting issues. Some of these issues are long-standing. GAO has identified DOD contract management as a high-risk area for more than decade. With awards to contractors large and growing, DOD will continue to be vulnerable to contracting fraud, waste or misuse of taxpayer dollars, and abuse.
DOD obligated nearly $270 billion on contracts for goods and services in fiscal year 2005, an 88 percent increase over the amount obligated in fiscal year 2000. All indications are that this upward trend will continue. Aside from growth in dollar value there have also been changes in what DOD is buying. DOD's new weapons system programs are expected to be the most expensive and complex ever and will consume an increasingly large share of its budget. In the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion, and DOD is counting on these efforts to fundamentally transform military operations. As overall obligations have increased so has its reliance on the private sector to provide services to fulfill DOD's missions and support its operations. Additionally, in recent years DOD has increased its use of existing contracts awarded by other agencies (i.e. interagency contracts). While this approach provides a number of benefits, our work, and that of some agency inspector generals, revealed instances of improper use, including issuing orders that were outside the scope of the underlying contract as well as failing to establish clear lines of accountability and responsibility. While the amount, nature, and complexity of DOD contract activity have increased, its acquisition workforce has remained relatively unchanged in size. At the same time, the acquisition workforce faces certain skills gaps and serious succession planning challenges. There are a number of DOD practices which undermine its ability to establish sound business arrangements. For example, with regard to competition and pricing, we recently found that the Army acquired guard services under authorized sole-source contracts at 46 of 57 Army installations, despite the Army's recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance. As a result, DOD paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD's expectations. DOD also increased its risk of poor acquisition outcomes by not assuring that another element of a sound business arrangement, contractor oversight, was sufficient. For example, in 2005 we reported that DOD's oversight on nearly a third of 90 service contracts reviewed was insufficient, in part because DOD failed to assign performance monitors.
GAO-06-800T, DOD Acquisitions: Contracting for Better Outcomes
This is the accessible text file for GAO report number GAO-06-800T
entitled 'DOD Acquisitions: Contracting for Better Outcomes' which was
released on September 7, 2006.
This text file was formatted by the U.S. Government Accountability
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.
Testimony:
Before the Subcommittee on Defense, Committee on Appropriations, House
of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EDT:
Thursday, September 7, 2006:
DOD Acquisitions:
Contracting for Better Outcomes:
Statement of David M. Walker:
Comptroller General of the United States:
DOD Contracting:
GAO-06-800T:
GAO Highlights:
Highlights of GAO-06-800T, a testimony before the Subcommittee on
Defense, Committee on Appropriations, House of Representatives
Why GAO Did This Study:
The Department of Defense‘s (DOD) spending on goods and services has
grown significantly since fiscal year 2000 to well over $250 billion
annually. Prudence with taxpayer funds, widening deficits, and growing
long-range fiscal challenges demand that DOD maximize its return on
investment, while providing warfighters with the needed capabilities at
the best value for the taxpayer. DOD needs to ensure that its funds are
spent wisely, and that it is buying the right things, the right way.
In this testimony, GAO discusses (1) recent trends in DOD contracting
activity and the environment in which this activity takes place, and
(2) practices which undermine its ability to establish sound business
arrangements, particularly those involving the selection and oversight
of DOD‘s contractors and incentivizing their performance.
This statement is based on work GAO has completed over the past 6 years
covering a range of DOD acquisition and contracting issues. Some of
these issues are long-standing. GAO has identified DOD contract
management as a high-risk area for more than decade. With awards to
contractors large and growing, DOD will continue to be vulnerable to
contracting fraud, waste or misuse of taxpayer dollars, and abuse.
What GAO Found:
DOD obligated nearly $270 billion on contracts for goods and services
in fiscal year 2005, an 88 percent increase over the amount obligated
in fiscal year 2000. All indications are that this upward trend will
continue. Aside from growth in dollar value there have also been
changes in what DOD is buying. DOD‘s new weapons system programs are
expected to be the most expensive and complex ever and will consume an
increasingly large share of its budget. In the last 5 years DOD has
doubled its commitment to major weapon systems from $700 billion to
$1.4 trillion, and DOD is counting on these efforts to fundamentally
transform military operations. As overall obligations have increased so
has its reliance on the private sector to provide services to fulfill
DOD‘s missions and support its operations. Additionally, in recent
years DOD has increased its use of existing contracts awarded by other
agencies (i.e. interagency contracts). While this approach provides a
number of benefits, our work, and that of some agency inspector
generals, revealed instances of improper use, including issuing orders
that were outside the scope of the underlying contract as well as
failing to establish clear lines of accountability and responsibility.
While the amount, nature, and complexity of DOD contract activity have
increased, its acquisition workforce has remained relatively unchanged
in size. At the same time, the acquisition workforce faces certain
skills gaps and serious succession planning challenges.
There are a number of DOD practices which undermine its ability to
establish sound business arrangements. For example, with regard to
competition and pricing, we recently found that the Army acquired guard
services under authorized sole-source contracts at 46 of 57 Army
installations, despite the Army‘s recognition that it was paying about
25 percent more for its sole-source contracts than for those it
previously awarded competitively. Another element of a sound business
arrangement is the fee mechanism used to incentivize excellent
contractor performance. In December 2005, we reported that DOD gives
its contractors the opportunity to collectively earn billions of
dollars through monetary incentives. Unfortunately, we found DOD
programs routinely engaged in practices that failed to hold contractors
accountable for achieving desired outcomes and undermined efforts to
motivate results-based contractor performance. As a result, DOD paid
out an estimated $8 billion in award fees on contracts in our study
population, regardless of whether acquisition outcomes fell short of,
met, or exceeded DOD‘s expectations. DOD also increased its risk of
poor acquisition outcomes by not assuring that another element of a
sound business arrangement, contractor oversight, was sufficient. For
example, in 2005 we reported that DOD‘s oversight on nearly a third of
90 service contracts reviewed was insufficient, in part because DOD
failed to assign performance monitors.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-800T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Katherine V. Schinasi at
(202) 512-4841 or schinasik@gao.gov.
[End of Section]
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss challenges that the Department
of Defense (DOD) faces to achieving better acquisition outcomes. With
DOD spending well over $250 billion annually to acquire products and
services, prudence with taxpayer funds, widening deficits, and growing
long-range fiscal challenges demand that DOD maximize its return on
investment and provide the warfighter with needed capabilities at the
best value for the taxpayer. DOD needs to ensure that its funds are
spent wisely, and, in doing so, it needs to ensure that it is buying
the right things, the right way. Several elements are essential to
achieving this objective, including a sound business case supporting
executable programs, sound business arrangements, and clear lines of
responsibility and accountability.
My testimony today is based on work we have completed over the past 6
years that covered a range of acquisition and contracting issues and
which was conducted in accordance with generally accepted government
auditing standards. My testimony will focus on (1) DOD's recent
contracting trends, such as the spending on goods and services and the
environment in which this activity takes place; and (2) selected
practices which undermine DOD's ability to establish solid business
arrangements, particularly those involving the selection and oversight
of DOD's contractors and incentivizing their performance. As requested,
we have included briefing slides that we previously gave to your staff
regarding these issues and I will make reference to specific slides
during the course of my testimony.
First, I would like to reiterate the broader context. Given current
policies, in the next few decades the nation will face large and
growing structural deficits due to known demographic trends, rising
healthcare costs and current revenue-to-expenditure gaps. At the same
time, weapons programs are commanding more and more resources as DOD
undertakes increasingly ambitious efforts to transform its ability to
confront current and potential threats. Further, managing DOD is a
challenge as it is one of the world's largest and most complex
organizations, spending billions of dollars each year to sustain key
business operations that support our forces. While DOD has embarked on
a series of efforts to reform its business operations, serious
challenges and inefficiencies remain. In fact, eight individual areas
that GAO considers to be high risk because of their greater
vulnerabilities to fraud, waste, abuse and mismanagement are specific
to DOD. Some of these issues are long-standing; for example, we have
identified DOD weapon systems acquisition and contract management as
high-risk areas for more than a decade.[Footnote 1] In a report issued
in July,[Footnote 2] we concluded that, with awards to contractors
large and growing, DOD will continue to be vulnerable to contracting
fraud, waste or misuse of taxpayer dollars, and abuse. While DOD has
acknowledged its vulnerabilities and taken some actions to address
them, many of the initiatives are still in their early stages and it is
too soon to tell what impact they may have.
Further, there are numerous factors that can contribute to poor
acquisition outcomes, which in turn erode DOD's buying power. We list
some of these factors on slide 2. This list is illustrative and not
intended to be exhaustive, and the risk these factors pose may manifest
itself differently depending on the nature of the acquisition. To
start, DOD's tendency to look for revolutionary solutions that depend
on the maturation and availability of critical technologies often
results in programs taking longer, costing more and delivering less
capability than originally promised to the warfighter. Further, DOD
wants often do not reflect "true" requirements--in other words, based
on credible threats and risk-based needs--resulting in a mismatch
between wants, needs, affordability and sustainability. Once true
requirements are established, they need to be stable. At times, DOD has
allowed new requirements to be added well into the acquisition cycle,
significantly stretching technology and creating design challenges, and
exacerbating program budget overruns. Of course, defining requirements,
managing contracts and overseeing contractors requires a capable
workforce that is up to meeting these challenges, adheres to sound
contracting practices, and provides contractors with incentives that
are based on results, rather than attitudes and efforts.
Recent Contracting Trends:
With this context in mind, I would like to turn now to recent trends in
DOD's contracting activities. If you would turn to slide 4, DOD's
spending on goods and services has increased by 88 percent since fiscal
year 2000. In fiscal year 2005, DOD obligated nearly $270 billion on
contracts for products, research and development efforts, and services,
such as for information technology and management support.
All indications are that this upward trend will continue. Aside from
growth in dollar value, there have also been changes in what DOD is
buying. DOD's new weapon system programs are expected to be the most
expensive and complex ever, and will consume an increasingly large
share of DOD's budget. To illustrate, in the last 5 years DOD has
doubled its commitment to major weapon systems from $700 billion to
$1.4 trillion. DOD is counting on these efforts to fundamentally
transform military operations. The Army, for example, is undertaking
the Future Combat Systems program--a family of weapons, including 18
manned and unmanned ground vehicles, air vehicles, sensors and
munitions, that will be linked by an information network--to enable its
combat force to become lighter, more agile, and more capable. Future
Combat Systems' procurement will represent 60 to 70 percent of Army
procurement from fiscal years 2014 to 2022.
The Army, however, is not alone in pursuing complex and costly systems.
For example, the Air Force is modernizing its tactical aircraft fleet
as part of the $200 billion Joint Strike Fighter program and the F-22A
Raptor aircraft, which is expected to cost more than $65 billion.
Similarly, the Navy's Virginia class submarine is expected to cost
about $80 billion, while the DDG-51 class of destroyer is expected to
cost some $70 billion. DOD's development of such systems requires more
funds than may reasonably be expected to be available. For example, we
testified in April 2006 that the Navy's shipbuilding plan projects a
supply of shipbuilding funds that will double by 2011 and will stay at
high levels for years to follow.[Footnote 3]
As overall obligations have increased, so has DOD's reliance on the
private sector to provide services to fulfill DOD's missions and
support its operations. In some cases, the growth in services reflects
that DOD is using a different acquisition approach to support its
missions. For example, DOD is now buying launch services, rather than
rockets. Service contracts pose a number of challenges in terms of
defining requirements, establishing expected outcomes, and assessing
contractor performance.
Additionally, in recent years, federal agencies including DOD have
moved away from using in-house contracting capabilities and are making
greater use of existing contracts awarded by other agencies. If you
would turn now to slide 7, these interagency contracts are intended to:
* leverage the government's buying power;
* provide a faster and easier method for procuring commonly used goods
and services, and:
* reduce initial contracting administrative costs.
If you would turn to slide 7, you will see the growth in interagency
contracts since 1992. DOD is the largest user of these interagency
contracting vehicles, and their availability has enabled DOD to save
time by paying other agencies to award and administer contracts for
goods and services on its behalf. DOD, however, lacks complete
information about purchases made through other agencies' contracts.
Moreover, our work and that of some agency inspectors general have
uncovered instances of improper use of interagency contracts, including
issuing orders that were outside the scope of the underlying contract,
failing to follow procedures intended to ensure best pricing, and
failing to establish clear lines of accountability and responsibility.
Further, in some instances fee-for-service arrangements may have led to
an inordinate focus on meeting customer demands at the expense of
complying with sound contracting policy and required ordering
procedures. These and other issues led us to designate management of
interagency contracting a governmentwide high-risk issue in January
2005. Ensuring the proper use of interagency contracts must be viewed
as a shared responsibility which requires that agencies clearly define
responsibilities and adopt clear, consistent, and enforceable policies
and processes that balance the need for customer service with the
requirements of contract regulations.
At the same time that the amount, nature, and complexity of contract
activity has increased, DOD's acquisition workforce has remained
relatively unchanged in size and At the same time, the acquisition
workforce faces certain skill gaps and serious succession planning
challenges. DOD's acquisition workforce must have the right skills and
capabilities if it is to effectively implement best practices and
properly manage the goods and services it buys. We noted in a report
issued in 2003, and again in July 2006, earlier this month,however,
that procurement reforms, changes in staffing levels, workload, and the
need for new skill sets have placed unprecedented demands on the
acquisition workforce.[Footnote 4] Moreover, DOD's current civilian
acquisition workforce level reflects the considerable downsizing that
occurred in the 1990s. DOD's approach to acquisition workforce
reduction during the 1990s was not oriented toward shaping the makeup
of the workforce; rather, DOD relied primarily on voluntary turnover
and retirements, freezes on hiring authority, and its authority to
offer early retirements and buyouts to achieve reductions. Indeed,
during our work on the early phases of DOD downsizing, some DOD
officials voiced concerns about what was perceived to be a lack of
attention to identifying and maintaining a balanced, basic level of
skills needed to maintain in-house capabilities.
Sound Business Arrangements:
I would like to turn now to briefly discuss some of DOD's practices in
three areas--(1) competition and sound pricing; (2) incentivizing
contractors; and (3) contract oversight--that increase risks and
undermine DOD's ability to establish sound business arrangements.
Competition and Sound Pricing:
Our work has identified a number of issues related to competition and
pricing in DOD's efforts to obtain needed goods and services. Under the
Competition in Contracting Act of 1984, DOD contracting officers are,
with certain exceptions, to solicit offers and award contracts using
full and open competition, in which all responsible sources are
permitted to compete. As shown on slide 10, DOD reports that more than
only forty-one percent of its contract obligations in fiscal year 2005
were made on contracts that were awarded using full and open
competition. The impact of not using full and open competition is
reflected in one recent example involving the Army's award of sole-
source contracts for security guards. In this case, we found that the
Army devoted twice as many contract dollars -n--nearly $495 million---
to sole-sourced contracts for security guards at 46 of 57 Army
installations, despite the Army's recognition that it was paying about
25 percent more for its sole-source contracts than for those it
previously awarded competitively.
Incentivizing Contractors:
Another element of a sound business arrangement is the fee mechanism
used to incentivize excellent contractor performance3. In December
2005, we reported that DOD gives its contractors the opportunity to
collectively earn billions of dollars through monetary
incentives.[Footnote 5] Unfortunately, we found DOD programs routinely
engaged in practices that failed to hold contractors accountable for
achieving desired outcomes and undermined efforts to motivate results-
based contractor performance, such as:
* evaluating contractor performance on award-fee criteria that are not
directly related to key acquisition outcomes (e.g., meeting cost and
schedule goals and delivering desired capabilities to the warfighter);
* paying contractors a significant portion of the available fee for
what award-fee plans describe as "acceptable, average, expected, good,
or satisfactory" performance, which sometimes did not require meeting
the basic requirements of the contract; and:
* giving contractors at least a second opportunity to earn initially
unearned or deferred fees.
As a result, DOD has paid out an estimated $8 billion in award fees on
contracts in our study population, regardless of whether acquisition
outcomes fell short of, met, or exceeded DOD's expectations. On slide
15, we have included four cases in which contractors that were behind
schedule and over cost were paid between 74 and 100 percent of the
available award fee.
Despite paying billions of dollars in award and incentive fees, DOD has
not compiled data or developed performance measures to evaluate the
validity of its belief that award and incentive fees improve contractor
performance and acquisition outcomes. DOD's strategies for
incentivizing its contractors, especially on weapon system development
programs, are symptomatic of a lack of discipline, oversight,
transparency, and accountability in DOD's acquisition process.
Contract Oversight:
I would like to briefly discuss the third element of sound business
arrangements, DOD's oversight of its service contracts. Government
monitoring and inspection of contractor activity, if not done well, can
contribute to a lack of accountability and poor acquisition outcomes.
noted 6In 2005, we reported that DOD's monitoring of nearly a third of
the 90 service contracts we reviewed was insufficient.[Footnote 7] In
these cases, we identified a number of contributing factors, including
DOD's failure to assign government performance monitors and the fact
that personnel are usually assigned such duties on a part-time basis
and not evaluated on how well they performed their duties. DOD and
senior military acquisition policy officials acknowledged that the
priority of contracting offices is awarding contracts, not ensuring
that trained performance monitors are assigned early so that contract
oversight can begin upon contract award. Ultimately, however, if
appropriate monitoring is not being done, DOD is at risk for paying
contractors more than the value of the services they performed.
In closing, these three illustrative business arrangement issues, along
with those we have identified in DOD's acquisition and business
management processes, present a compelling case for change. In short,
it takes a myriad of things to go right for acquisitions to be
successful, but only a few things to go wrong to cause major problems.
Slide 17 provides examples of the impact of the impact that these
problems can have on reducing the government's buying power. Such
examples illustrate the outcomes of poor acquisition executions. The
debate now centers on future investments and what return on investment
will be realized.
Finally, on slide 18, you will find a number of actions that can and
should be taken to improve acquisition outcomes. By implementing the
recommendations we have made on individual issues, DOD can improve
specific processes and activities and save huge amounts of taxpayers
dollars. At the same time, by working more broadly to improve its
acquisition practices, DOD can set the right conditions for becoming a
smarter buyer, getting better acquisition outcomes, and making more
efficient use of its resources in what is sure to be a more fiscally
constrained environment. DOD's written acquisition policies reflect
many of our recommendations and often incorporate best practices. As
such, the policies provide the basis for sound decisions and actions.
The policies, however, are not consistently manifested on decisions
made on individual acquisitions. In these cases, officials are rarely
held accountable when acquisitions go astray. It is essential to create
an environment conducive to changing behaviors and to recognize that
achieving sound acquisition outcomes are a shared responsibility
between the Congress, DOD, and the contractor community. Unless changes
are made, DOD will continue on a path where wants, needs, affordability
and sustainability are mismatched, with predictably and recurring
unsatisfactory results.
Mr. Chairman and members of the subcommittee, this concludes my
testimony. I would be happy to answer any questions you may have.
Scope and Methodology:
In preparing for this testimony, we relied principally on previously
issued GAO reports. We also obtained data on DOD's contract activity
from DOD's DD350 database and from the General Services
Administration's Federal Procurement Data System. We have previously
expressed concerns about the accuracy of the data contained in the
Federal Procurement Data System. We determined, however, that the data
were sufficiently reliable for the purposes of this testimony. We also
obtained data from the Office of Personnel Management regarding DOD's
acquisition workforce. For the purposes of this report, we selected 14
occupation series including contracting, business, purchasing, quality
assurance and supply and inventory management personnel. We conducted
our work in April and July 2006 in accordance with generally accepted
government auditing standards.
Contact and Staff Acknowledgments:
For further information regarding this testimony, please contact
Katherine V. Schinasi at (202) 512-4841 or schinasik@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this testimony. Key contributors to
this report were Lily Chin, David E. Cooper, Brendan Culley, Thomas
Denomme, Timothy DiNapoli, Paul Francis, Alan Frazier, Christopher
Kunitz, Michele Mackin, William Russell, Adam Vodraska, and Karen
Zuckerstein.
[End of section]
Appendix I:
DOD Acquisitions: Contracting for Better Outcomes:
House Appropriations Committee:
Subcommittee on Defense:
September 2006:
Factors Contributing to Poor Acquisition Outcomes:
DOD's buying power eroded due to:
Historical preference for grand, revolutionary solutions that depend on
immature technology:
Frequent mismatch between wants, needs, affordability, and
sustainability:
Unrealistic and continually changing requirements:
Undisciplined management of programs once started:
Lack of competition and adherence to sound contracting practices that
adequately allocates risk between the contractor and taxpayer:
Incentives and fees based on attitudes and efforts rather than results:
Workforce capabilities strained to meet 21st century challenges:
Conducting the Business of Government:
Among the 21st century challenges faced by the government is
determining who will do the business of government.
The work of the government is increasingly performed by the private
sector under contract.
DOD's spending on goods and services has grown significantly since
fiscal year 2000, and all indications are the trend will continue.
DOD's weapon systems acquisition and contract management processes have
been on GAO's high-risk list for more than a decade.
GAO designated the management of interagency contracting a
governmentwide high-risk issue in January 2005; DOD is the largest user
of interagency contracting vehicles.
DOD Contract Obligations and Acquisition Workforce Trends Since Fiscal
Year 2000:
Dollars in billions/Personnel in thousands;
[See PDF for Image]
Source: Contract obligations: DD350 database.
Workforce: GAO analysis of OPM data of 14 acquisition-related job
series.
[End of Figure]
Obligations Increased Across Goods and Services Categories:
Contract obligations Dollars in billions:
[See PDF for image]
Source: DD350 database, actions over $25,000.
[End of figure]
Growth in Contracting for Services Poses New Challenges:
New missions and approaches contribute to increased spending on
services:
* Following the terrorist attacks of September 11, 2001, increased
security requirements and deployment of active duty and reserve
personnel resulted in DOD having fewer military personnel to protect
domestic installations. The U.S. Army awarded contracts worth nearly
$733 million to acquire contract guards at 57 installations.
* The Air Force historically bought space launch vehicles, such as the
Delta and Titan rockets, as products; under the Evolved Expendable
Launch Vehicle program, the Air Force purchases launch services using
contractor-owned launch vehicles. Projected program cost is $28
billion.
Defining requirements, establishing expected outcomes, and assessing
contractor performance is often more complicated compared with
contracting for supplies and equipment.
Rapid Growth of Interagency Contracting:
While total sales of GSA's Multiple Award Schedule are available, data
on the full extent of interagency contracting were not available.
Multiple Award Schedule Sales, Fiscal Year 1992 through 2004:
Dollars in billions:
[See PDF for Image]
Source: GSA.
[End of Figure]
Interagency Contracting Designated a Governmentwide High-Risk Area:
Rapid growth in use of these contracts in terms of amount spent:
Lack of transparency and reliable data regarding extent and details of
use of interagency contracting:
Increasing demands on the acquisition workforce, coupled with
insufficient training and guidance:
Fee-for-service arrangements in interagency contracting, which may have
led to an inordinate focus on meeting customer demands at the expense
of proper use and good value:
Lack of a meaningful "fair opportunity" process when selecting
contractors for individual task orders:
Lack of clearly established lines of accountability between agencies
that award umbrella contracts and agencies that issue individual orders
under those umbrella contracts:
Lack of Fully Defined Requirements Increases DOD Cost Risk:
Lack of fully defined requirements in DOD acquisitions contributes to
numerous changes to the scope and cost of the work.
Use of task order contracts and time-and-materials contracts provides
DOD flexibility to add work to contracts once needs are defined but may
pose additional management and oversight risks.
DOD may authorize contractors to begin work before reaching agreement
on terms and conditions, including scope of work, specifications, and
price, under agreements termed letter contracts or undefinitized
contract actions.
* DOD obligated nearly $6.5 billion under letter contracts in fiscal
year 2004.
* Allows DOD to initiate work quickly to meet urgent operational needs,
but contract incentives to control costs are likely to be less
effective.
Competition:
The Competition in Contracting Act of 1984 requires that contracting
officers promote and provide for full and open competition-i.e. all
responsible sources are permitted to compete-when soliciting offers and
awarding government contracts.
* This enables the government to rely on competitive market forces to
obtain needed goods and services at fair and reasonable prices.
* Use of other than full and open competition must be justified in
writing and must cite specific statutory authority.
Fiscal Year 2005 DOD Competition Statistics:
[See PDF for image]
Pie chart divided into 3 sections:
Other than full and open competition: 50%.
Not reported 9%.
Full and open competition 41%.
Source: GAO analysis of DOD data.
[End of figure]
Examples of Competition and Pricing Issues:
Army's approach to acquire contract guard services under sole-source
contracts at 46 of 57 installations resulted in the Army paying 25
percent more for its sole-source contracts than for those it previously
awarded competitively.
February 2005 review of sole-source AWACS spare parts found that DOD
did not
* obtain or evaluate appropriate pricing information, such as sales
data for items asserted to be commercial, or:
* adequately consider analyses conducted by the Defense Contract Audit
Agency or Defense Contract Management Agency.
In the absence of adequate price competition, the Truth-in-Negotiations
Act enables DOD to obtain certified cost and pricing data for
negotiated contracts exceeding $550,000 that are not for commercial
items.
* GAO reviewed 20 contract actions valued at $4.4 billion in which DOD
waived the requirement for cost and pricing data.
* DOD lacked guidance to help contracting officers determine whether a
waiver should be granted, what constitutes acceptable data and
analyses, or the need for assistance.
Impact of Multiple Contractor Levels on Costs Uncertain:
Evidence suggests DOD is increasingly relying on contractors to manage
a greater range of responsibilities than traditional prime contractors.
Examples include:
* The Army's $200 billion Future Combat Systems, in which the
contractor is acting as a lead system integrator. Contractor is
assuming greater responsibility for requirements development, design,
and source selection of major system and subsystem contractors, and
trade-off decisions.
* In an interagency contract for construction services, DOD paid 7
percent to Treasury to award a contract to a staffing company, which
then subcontracted to a construction firm. In combination, Army paid 17
percent more than subcontractor's proposed price.
Historically, DOD has limited visibility over the cost impact
associated with using multiple layers of contractors to perform work.
Award-and Incentive-Fee Structures:
To encourage innovative, efficient, and effective performance, DOD
provides its contractors the opportunity to collectively earn billions
of dollars through monetary incentives known as award and incentive
fees.
* On award-fee contracts, DOD personnel conduct periodic evaluations of
the contractor's performance against specified criteria and recommend
the amount of fee to be paid. Criteria and evaluations tend to be
subjective.
* Incentive-fee contracts typically apply a formula, specified in the
contract, that adjusts the fee based on an objective evaluation of the
contractor's performance.
DOD reports it obligated more than $75 billion on award-and incentive-
fee contracts in fiscal year 2004.
DOD Practices Undermine Award-and Incentive-Fee Objectives:
December 2005 analysis of 93 award-or incentive-fee contracts found
that DOD programs engaged in practices that undermined efforts to
motivate contractor performance and that did not hold contractors
accountable for achieving desired outcomes. DOD:
* frequently paid most of available award fees regardless of whether
acquisition outcomes fell far short of, met, or exceeded expectations;
* allowed contractors at least a second opportunity to earn initially
unearned or deferred fees; and:
* paid significant amount of fee for "acceptable, average, expected,
good, or satisfactory" performance.
Contracts with incentive fees provided a clearer link to acquisition
outcomes; however, about half of the contracts failed or are projected
to fail to complete the acquisition at or below the target price.
Despite paying billions in fees, DOD has little evidence to support its
contention that these fees improved contractor performance.
Award Fee Decisions Not Tied to Acquisition Outcomes:
Program Performance and Award-Fee Payments on Selected DOD Development
Programs:
Acquisition Outcomes: Research and development cost increase over
baseline;
Comanache reconnaissance attack helicopter: $3.7 billion, 41.2%;
F-22A Raptor tactical fighter aircraft: $10.2 billion, 47.3 %;
Joint Strike Fighter tactical fighter aircraft: $10.1 billion, 30.1%;
Space-Based Infrared System High: $3.7 billion, 99.5%.
Acquisition Outcomes: Acquisition cycle time increase over baseline;
Comanache reconnaissance attack helicopter: 33 months, 14.8%;
F-22A Raptor tactical fighter aircraft: 27 months, 13.3 %;
Joint Strike Fighter tactical fighter aircraft: 11 months, 5.9%;
Space-Based Infrared System High: More than 12 months.
Acquisition Outcomes: Percentage and total award fee paid to prime
systems contractor (adjusted for rollover)*;
Comanache reconnaissance attack helicopter: 85%, $202.5 million paid
through 2004;
F-22A Raptor tactical fighter aircraft: 91%, $848.7 million;
Joint Strike Fighter tactical fighter aircraft: 100%, $494.0 million;
Space-Based Infrared System High: 74%, $160.4 million.
Sources: DOD submissions to GAO, and GAO-05-301 (data); GAO (analysis).
*When calculating the percentage of award fee paid (i.e. percentage of
award paid = total fee paid to date/ (total fee pool - remaining fee
pool)), we included rolled-over fees in the remaining fee pool when
those fees were still available to be earned in future evaluation
periods.
[End of table]
Insufficient Oversight on DOD Service Contracts:
Monitoring and inspection of contractor performance is a key oversight
mechanism.
* If monitoring and inspection is not performed, not sufficient, or not
well documented, DOD is at risk of:
- being unable to identify and correct poor contractor performance in a
timely manner, and:
- paying contractors more than the value of the services performed.
DOD personnel performed insufficient monitoring on nearly a third of
the 90 service contracts reviewed in March 2005 report.
* DOD personnel failed to assign personnel to perform monitoring or did
not document monitoring and some monitoring personnel were not formally
trained;
* Monitoring is not perceived as important as awarding contracts; and:
* Personnel are usually assigned monitoring duties as a part-time
responsibility and are not evaluated on how well duties were performed.
Examples of Programs With Reduced Buying Power:
Billions of fiscal year 2006 dollars:
Program: Joint Strike Fighter;
Initial estimate: $189.8;
Initial quantity: 2,866 aircraft;
Latest estimate: %216.2;
Latest quantity: 2,458 aircraft;
Percent of unit cost increase: 32.8.
Program: Future Combat Systems;
Initial estimate: $82.6;
Initial quantity: 15 systems;
Latest estimate: %127.2;
Latest quantity: 15 systems;
Percent of unit cost increase: 54.1.
Program: F-22A Raptor;
Initial estimate: $81.1;
Initial quantity: 648 aircraft;
Latest estimate: $66.8;
Latest quantity: 185 aircraft;
Percent of unit cost increase: 188.3.
Program: Evolved Expendable Launch Vehicle;
Initial estimate: $15.4;
Initial quantity: 181 vehicles;
Latest estimate: $27.6;
Latest quantity: 138 vehicles;
Percent of unit cost increase: 134.7.
Program: Space-based Infrared System High;
Initial estimate: $4.1;
Initial quantity: 5 satellites;
Latest estimate: $10.1;
Latest quantity: 3 satellites;
Percent of unit cost increase: 311.8.
Program: Expeditionary Fighting Vehicle;
Initial estimate: $8.1;
Initial quantity: 1,025 vehicles;
Latest estimate: $10.9;
Latest quantity: 1,025;
Percent of unit cost increase: 33.7.
Source: GAO analysis of DOD Selected Acquisition Report data. Images
sourced in their respective order: JSF Program Office; Program Manager,
Unit of Action, U.S. Army; F-22A System Program Office; (Left) © 2003
ILS/Lockheed Martin, (right) © 2003 The Boeing Company; Lockheed Martin
Space Systems Company; General Dynamics Land Systems.
[End of table]
Improving Acquisition Outcomes:
Reconcile the differences between wants, needs, affordability and
sustainability on an enterprise-wide basis, considering current and
future threats and resources levels:
Nail down system requirements and ensure the maturity of technology to
improve performance and enhance accountability:
Ensure that acquisitions are performance-and outcome-based, with
appropriate risk-sharing contracts in place:
Limit pay for performance-based contract incentives to positive
acquisition outcomes:
Make it acceptable to pull the plug or reduce quantities of weapon
systems and information systems projects when facts and circumstances
warrant:
Ensure a capable acquisition workforce and accountable leadership:
Create an environment conducive to behavioral change; sound acquisition
outcomes are a shared responsibility between Congress, DOD, and the
contractor community:
Assure that individual decisions are consistent with sound acquisition
policies and practices:
[End of Section]
FOOTNOTES
[1] GAO, GAO's High-Risk Program, GAO-06-497T (Washington, D.C.: Mar.
15, 2006); and GAO, High-Risk Series: An Update, GAO-05-207
(Washington, D.C.: Jan. 2005).
[2] GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud,
Waste, and Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006).
[3] GAO, Defense Acquisitions: Actions Needed to Get Better Results on
Weapons Systems Investments, GAO-06-585T (Washington, D.C.: April 5,
2006).
[4] GAO, Federal Procurement: Spending and Workforce Trends, GAO-03-443
(Washington, D.C.: April 30, 2003); and GAO, Contract Management: DOD
Vulnerabilities to Contracting Fraud, Waste, and Abuse, GAO-06-838R
(Washington, D.C.: July 7, 2006).
[6] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66
(Washington, D.C.: Dec. 19, 2005); and GAO, Defense Acquisitions: DOD
Wastes Billions of Dollars through Poorly Structured Incentives, GAO-06-
409T (Washington, D.C.: April 5, 2006).
[7] GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
