Defense Acquisitions
DOD's Increased Reliance on Service Contractors Exacerbates Long-standing Challenges Gao ID: GAO-08-621T January 23, 2008The Department of Defense's (DOD) spending on goods and services has grown significantly since fiscal year 2000, to well over $314 billion annually. 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. 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. This statement discusses (1) the implications of DOD's increasing reliance on contractors to fill roles previously held by government employees, (2) the importance of the acquisition workforce in DOD's mission and the need to strengthen its capabilities and accountability, and (3) assumptions about cost savings related to the use of contractors versus federal employees. This statement is based on work GAO has ongoing or has completed over the past several years covering a range of DOD contracting issues.
DOD has increasingly turned to contractors to fill roles previously held by government employees and to perform many functions that closely support inherently governmental functions, such as contracting support, intelligence analysis, program management, and engineering and technical support for program offices. This trend has raised concerns about what the proper balance is between public and private employees in performing agency missions and the potential risk of contractors influencing the government's control over and accountability for decisions that may be based, in part, on contractor work. Further, when the decision is made to use contractors in roles closely supporting inherently governmental functions, additional risks are present. Contractors are not subject to the same ethics rules as government even when doing the same job, and the government risks entering into an improper personal services contract if an employer/employee relationship exists between the government and the contractor employee. DOD's increasing reliance on contractors exacerbates long-standing problems with its acquisition workforce. GAO has long reported that DOD's acquisition workforce needs to have the right skills to effectively implement best practices and properly manage the acquisition of goods and services. Weaknesses in this area have been revealed in recent contingency situations, but they are present in nonemergency circumstances as well, with the potential to expose DOD to fraud, waste, and abuse. It is important to note that the role of the acquisition function does not end with the award of a contract. Continued involvement of the workforce throughout contract implementation and closeout is needed to ensure that contracted services are delivered according to the schedule, cost, quality, and quantity specified in the contract. GAO has in the past several years reported wide discrepancies in the rigor with which contracting officer's representatives perform these duties, particularly in unstable environments such as the conflict in Iraq and the aftermath of Hurricane Katrina. A key assumption of many of the federal management reforms of the 1990s was that the cost-efficiency of government operations could be improved through the use of contractors. GAO recently reported that sufficient data are not available to determine whether increased service contracting has caused DOD's costs to be higher than they would have been had the contracted activities been performed by uniformed or DOD civilian personnel. GAO recently probed, in-depth, the cost of contractor versus government contract specialists at the Army's Contracting Center for Excellence and found that the Army is paying up to 26 percent more for the contractors as compared to their government counterparts.
GAO-08-621T, Defense Acquisitions: DOD's Increased Reliance on Service Contractors Exacerbates Long-standing Challenges
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Testimony:
Before the Subcommittee on Defense, Committee on Appropriations, House
of Representatives:
United States Government Accountability Office:
GAO:
Expected at 3:30 p.m. EST:
Wednesday, January 23, 2008:
Defense Acquisitions:
DOD's Increased Reliance on Service Contractors Exacerbates Long-
standing Challenges:
Statement of David M. Walker Comptroller General of the United States:
GAO-08-621T:
GAO Highlights:
Highlights of GAO-08-621T, 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 $314 billion
annually. 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. 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. This statement discusses (1) the implications of DOD‘s
increasing reliance on contractors to fill roles previously held by
government employees, (2) the importance of the acquisition workforce
in DOD‘s mission and the need to strengthen its capabilities and
accountability, and (3) assumptions about cost savings related to the
use of contractors versus federal employees. This statement is based on
work GAO has ongoing or has completed over the past several years
covering a range of DOD contracting issues.
What GAO Found:
DOD has increasingly turned to contractors to fill roles previously
held by government employees and to perform many functions that closely
support inherently governmental functions, such as contracting support,
intelligence analysis, program management, and engineering and
technical support for program offices. This trend has raised concerns
about what the proper balance is between public and private employees
in performing agency missions and the potential risk of contractors
influencing the government‘s control over and accountability for
decisions that may be based, in part, on contractor work. Further, when
the decision is made to use contractors in roles closely supporting
inherently governmental functions, additional risks are present.
Contractors are not subject to the same ethics rules as government even
when doing the same job, and the government risks entering into an
improper personal services contract if an employer/employee
relationship exists between the government and the contractor employee.
DOD‘s increasing reliance on contractors exacerbates long-standing
problems with its acquisition workforce. GAO has long reported that
DOD‘s acquisition workforce needs to have the right skills to
effectively implement best practices and properly manage the
acquisition of goods and services. Weaknesses in this area have been
revealed in recent contingency situations, but they are present in
nonemergency circumstances as well, with the potential to expose DOD to
fraud, waste, and abuse. It is important to note that the role of the
acquisition function does not end with the award of a contract.
Continued involvement of the workforce throughout contract
implementation and closeout is needed to ensure that contracted
services are delivered according to the schedule, cost, quality, and
quantity specified in the contract. GAO has in the past several years
reported wide discrepancies in the rigor with which contracting
officer‘s representatives perform these duties, particularly in
unstable environments such as the conflict in Iraq and the aftermath of
Hurricane Katrina.
A key assumption of many of the federal management reforms of the 1990s
was that the cost-efficiency of government operations could be improved
through the use of contractors. GAO recently reported that sufficient
data are not available to determine whether increased service
contracting has caused DOD‘s costs to be higher than they would have
been had the contracted activities been performed by uniformed or DOD
civilian personnel. GAO recently probed, in-depth, the cost of
contractor versus government contract specialists at the Army‘s
Contracting Center for Excellence and found that the Army is paying up
to 26 percent more for the contractors as compared to their government
counterparts.
What GAO Recommends:
This testimony contains no recommendations.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-621T].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact John Needham at (202) 512-
4841 or needhamj@gao.gov.
[End of section]
This testimony was delivered on January 23, 2008; we are publicly
releasing it on April 3, 2008.
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss challenging issues relating to
the Department of Defense's (DOD) increasing reliance on contractors
for services to support its mission. Over the past decade, DOD has
experienced dramatic changes in its mission, accompanied by a
significant infusion of funds, with fiscal year 2008 base
appropriations of $449 billion. The President has also requested $189
billion for fiscal year 2008 war costs. Much of this money is spent
buying goods and, increasingly, services from the private sector.
Enhancing governmentwide acquisition and contracting capability is one
of the major areas that we have identified as necessary for improving
the government's capacity to address 21st century challenges and
deliver real and sustainable results.[Footnote 1] In examining our
defense work, we have observed 15 systemic acquisition challenges
facing DOD, which I have included in appendix I. These challenges have
been long-standing and are becoming more apparent in recent years as
the department's reliance on contractors has grown in both size and
scope. Overall trends indicate that DOD's spending continues to
increase. We reported to you in 2006 that, in fiscal year 2005, DOD's
reported contracting obligations totaled $270 billion. This amount
increased to $314 billion in 2007, representing a 136 percent increase
over fiscal year 2000 spending.
The acquisition of services differs from that of products in several
key respects and can be particularly challenging in terms of defining
requirements and assessing contractor performance. DOD's service
acquisitions range from basic services such as landscaping and
janitorial services to those that are more complex, like intelligence
analysis, acquisition support, security services, and program office
support. We have reported that the department needs to do a much better
job managing its service acquisitions, and last year made a number of
recommendations to put the department in a position to proactively do
so.[Footnote 2] Congress, too, has imposed requirements over the past
several years intended to improve DOD's service acquisition practices.
For example, in January 2006, Congress required DOD to take a number of
actions, including identifying the critical skills and competencies
needed to procure services.[Footnote 3]
I will address three important points today:
* DOD's increasing reliance on contractors to fill roles previously
held by government employees: This trend has raised issues as to what
the proper balance is between public and private employees in
performing agency missions, as well the need for greater attention
given to decisions to contract for services and the risks associated
with these decisions on work that closely supports inherently
government functions. DOD has three different options in terms of who
will perform its functions, namely military, civilian, or contractor.
Today I will focus on the role of contractors at the department.
* The importance of the acquisition workforce to DOD's mission and the
need to strengthen its capabilities and accountability: Weaknesses in
this area have been revealed in recent contingency situations, but they
are present in non-emergency circumstances as well, with the potential
to expose DOD to significant fraud, waste, and abuse. There may also be
opportunities to provide additional authorities to strengthen the
acquisition workforce, such as the use of term appointments.
* Assumptions about cost savings related to the use of contractors
versus federal employees: The savings may not be realized in actual
practice, as some of our current work begins to indicate.
My comments today are based on work that GAO has completed over the
past several years and, in some cases, on ongoing work. All of our
related performance audits were conducted in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
DOD's Growing Reliance On Contractors:
Contractors have an important role to play in the discharge of the
government's responsibilities, and in some cases the use of contractors
can result in improved economy, efficiency, and effectiveness. However,
in many cases contractors are used because the government lacks its own
personnel to do the job. Long-standing problems with the lack of
oversight and management of contractors are compounded by the growing
reliance on them to perform functions previously carried out by
government personnel.
The government is relying on contractors to perform many tasks that
closely support inherently governmental functions, such as contracting
support, intelligence analysis, security services, program management,
and engineering and technical support for program offices. We recently
surveyed officials from 52 of DOD's major weapons programs, who
reported that over 45 percent of the program office staff was composed
of individuals outside of DOD. Some program officials expressed
concerns about having inadequate personnel to conduct their program
office roles. In a prior review of space acquisition programs, we found
that 8 of 13 cost estimating organizations and program officials
believed the number of government cost estimators was inadequate and
that 10 of those offices had more contractor personnel preparing cost
estimates than government personnel.[Footnote 4]
In general, I believe there is a need to focus greater attention on
what type of functions and activities should be contracted out and
which ones should not. Inherently governmental functions include
activities that require either the exercise of discretion in applying
government authority, or the making of value judgments in making
decisions for the government; as such, they are required to be
performed by government employees, not private contractors. The closer
contractor services come to supporting inherently governmental
functions, the greater the risk of contractors influencing the
government's control over and accountability for decisions that may be
based, in part, on the contractor's work. This situation may result in
decisions that are not in the best interest of the government and
American taxpayer, while also increasing overall vulnerability to
waste, fraud, or abuse. The Federal Acquisition Regulation provides 19
examples of services and actions that may approach the category of
inherently governmental because of the nature of the function, the
manner in which the contractor performs the contracted services, or the
manner in which the government administers contractor performance.
These include acquisition support, budget preparation, engineering and
technical services, and policy development.
One way in which DOD has expanded the role of contractors is its use of
a lead systems integrator for major-weapons development. This approach
allows one or more contractors to define a weapon system's architecture
and then manage both the acquisition and the integration of subsystems
into the architecture. In such cases, the government relies on
contractors to fill roles and handle responsibilities that differ from
the more traditional prime contractor relationship, a scenario that can
blur the oversight responsibilities between the contractor and federal
program management officials. For example, the Army's Future Combat
Systems program is managed by a lead systems integrator that assumes to
some extent the responsibilities of developing requirements, selecting
major system and subsystem contractors, and making trade-off decisions
among costs, schedules, and capabilities. While this management
approach has some advantages for DOD, we found that the extent of
contractor responsibility in many aspects of the Future Combat Systems
program management process is a potential risk.[Footnote 5] Moreover,
if DOD uses a lead systems integrator but does not provide effective
oversight, DOD is vulnerable to the risk that the integrator may not
make its decisions in a manner consistent with the government's and
taxpayers' best interests, especially when faced with potential
organizational conflicts of interest.
Potential Risks Associated with Use of Contractors:
When the decision is made to use contractors in roles closely
supporting inherently governmental functions, additional risks are
present. Defense contractor employees are not subject to the same laws
and regulations that are designed to prevent personal conflicts of
interests among federal employees. Moreover, there is not a
departmentwide requirement for DOD offices to employ personal conflict
of interest safeguards for contractor employees, although new
governmentwide policy implemented in November 2007 requires that
certain contractors receiving awards worth more than $5,000,000 and 4
months of work have an ethics program.[Footnote 6] A separate proposed
rule was recently published at the request of the Justice Department to
amend the regulation to require that companies holding certain types of
contracts disclose suspected violations of federal criminal law in
connection with the award or performance of contracts, or face
suspension or debarment. Public comments are due in January
2008.[Footnote 7] We will be issuing a report on personal conflicts of
interest, as they pertain to defense contractor employees,
shortly.[Footnote 8]
In addition, personal services contracts are prohibited, unless
authorized by statute.[Footnote 9] The government is normally required
to obtain its employees by direct hire under competitive appointment or
other procedures required by the civil service laws. GAO bid protest
decisions also have determined that a personal services contract is one
that, by its express terms or as administered, makes the contractor
personnel appear to be, in effect, government employees.[Footnote 10]
Whether a solicitation would result in a personal services contract
must be judged in the light of its particular circumstances, with the
key question being whether the government will exercise relatively
continuous supervision and control over the contractor personnel
performing the requirement.
The Federal Acquisition Regulation lists six elements to be used as a
guide in determining the existence of a personal services contract,
which are shown in table 1.
Table 1: Elements to Be Used as a Guide in Determining the Existence of
Personal Services:
1. Performance on site.
2. Principal tools and equipment furnished by the government.
3. Services are applied directly to the integral effort of the agency
or an organizational subpart in the furtherance of its assigned
function or mission.
4. Comparable services, meeting comparable needs, are performed in the
same or similar agencies using civil service personnel.
5. The need for the type of service provided can reasonably be expected
to last beyond one year.
6. The inherent nature of the service, or the manner in which it is
provided, reasonably requires, directly or indirectly, government
direction or supervision of contractor employees in order to - (i)
adequately protect the government's interest (ii) retain control of the
function involved; or (iii) retain full personal responsibility for the
function supported in a duly authorized Federal officer or employee.
[End of table]
Source: FAR Subpart 37.104(d).
When contractors work side by side with government employees and
perform the same mission-related duties, the risk associated with such
contracts can be increased.
Contingency Situations Reveal Acquisition Workforce Shortfalls:
In July 2006, we reported[Footnote 11] that DOD's acquisition workforce
is subject to certain conditions that increase DOD's vulnerabilities to
contracting fraud, waste, and abuse, including:
* growth in overall contracting workload,
* pending retirement of experienced government contracting personnel,
and:
* a greater demand for contract surveillance because of DOD's
increasing reliance on contractors for services.
Fraud is any intentional deception taken for the purpose of inducing
DOD action or reliance on that deception. Fraud can be perpetrated by
DOD personnel--whether civilian or military--or by contractors and
their employees. Trust and access to funds and assets that come with
senior leadership and tenure can become a vulnerability if the control
environment in an organization is weak. We also need to target waste in
government spending. Government waste is growing and far exceeds the
cost of fraud and abuse. Several of my colleagues in the accountability
community and I have developed a definition of waste, which is
contained in appendix II. Although waste does not normally involve a
violation of law, its effects can be just as profound. In response to
our July 2006 report, DOD's Panel on Contracting Integrity reported
this month that it has identified 21 initial actions for implementation
in 2008 that it expects will address areas of vulnerability in the
defense contracting system that allow fraud, waste, and abuse to occur.
Some amount of vulnerability to mismanagement, fraud, waste, or abuse
will always be present in contracting relationships, even with rules
and regulations in place to help prevent it. These vulnerabilities are
more dramatically revealed in contingency situations, such as the
conflicts in Iraq and the aftermath of Hurricane Katrina, when large
amounts of money are quickly made available and actions are hurried.
One very significant weakness is the condition of the government's
acquisition workforce. We and others have reported for a number of
years on the risks posed by a workforce that has not kept pace with the
government's spending trends. The Acquisition Advisory Panel, for
example, recently noted the significant mismatch between the demands
placed on the acquisition workforce and the personnel and skills
available within that workforce to meet those demands.[Footnote 12] To
put it another way, at the same time that procurement spending has
skyrocketed, fewer acquisition professionals are available to award
and--just as importantly--administer contracts. Two important aspects
of this issue are the numbers and skills of contracting personnel and
DOD's ability to effectively oversee contractor performance.
Acquisition Workforce Shortfalls:
In its January 2007 report, the Acquisition Advisory Panel stated that
the government's contracting workforce was reduced in size in the
1990s, with DOD's declining by nearly 50 percent due to personnel
reductions during that time. Despite recent efforts to hire acquisition
personnel, there remains an acute shortage of federal procurement
professionals with between 5 and 15 years of experience. This shortage
will become more pronounced in the near term because roughly half of
the current workforce is eligible to retire in the next 4 years. We
have long noted that DOD's acquisition workforce needs to be made a
priority. We have reported that DOD needs to have the right skills in
its acquisition workforce to effectively implement best practices and
properly manage the acquisition of goods and services. We have also
observed that the acquisition workforce continues to face the challenge
of maintaining and improving skill levels to use alternative
contracting approaches introduced by acquisition reform initiatives of
the past few decades.
Recent developments indicate that the tide may be turning, with actions
underway to address what is generally agreed to be a problematic state
of the acquisition workforce. For example, DOD's Panel on Contracting
Integrity, in its 2007 report to Congress, identified the following
focus areas for planned actions, all of which focus on acquisition
workforce issues:
* reinforce the functional independence of contracting personnel,
* fill contracting leadership positions with qualified leaders,
* determine the appropriate size of the contracting workforce and
ensure that it has the appropriate skills, and:
* improve planning and training for contracting in combat and
contingency environments.
Also, the Commission on Army Acquisition and Program Management in
Expeditionary Operations issued a report in November 2007, entitled
"Urgent Reform Required: Army Expeditionary Contracting."[Footnote 13]
The commission found that the acquisition failures in expeditionary
operations require a systemic fix of the Army acquisition system and
cited the lack of Army leadership and personnel (military and civilian)
to provide sufficient contracting support to either expeditionary or
peacetime operations. It noted that only 3 percent of Army contracting
personnel are active duty military and there are no longer any Army
contracting career general officer positions. It found that what should
be a core competence--contracting--is treated as an operational and
institutional side issue. One general officer told the commission that
"this problem is pervasive DOD-wide, because workload continues to go
up while contracting and acquisition assets go down-there is a cost to
these trends that is paid in risk, and we don't realize how big the
bill is until there's a scandal." The commission recommended increasing
the stature, quantity, and career development of military and civilian
contracting personnel. In response to the commission's report, the Army
approved the creation of an Army Contracting Command, which will fall
under the Army Materiel Command and be led by a two-star general. The
Army also plans to increase its contracting workforce by approximately
400 military personnel and 1,000 civilian personnel.
We believe that, while there is no way to completely prevent fraud,
waste, abuse, or poor decision making, increasing the numbers and
skills of the acquisition workforce is critical to lessening the
likelihood of future problems and affecting positive change. We must
address this soon in order to prevent additional waste and increased
risk.
Monitoring Contractor Performance:
The role of the acquisition function does not end with the award of a
contract. It requires continued involvement throughout contract
implementation and closeout to ensure that contracted services are
delivered according to the schedule, cost, quality, and quantity
specified in the contract. In DOD, oversight--including ensuring that
the contract performance is consistent with the description and scope
of the contract--is provided by both contracting officers and the
contracting officers representative (COR), typically a government
employee with technical knowledge of the particular program.
We have reported wide discrepancies in the rigor with which CORs
perform their duties, particularly in unstable environments. For
example, in the aftermath of Hurricanes Katrina and Rita, the number of
government personnel monitoring contracts was not always sufficient or
effectively deployed to provide adequate oversight.[Footnote 14]
Instability--such as when wants, needs, and contract requirements are
in a state of flux--requires greater attention to oversight, which in
turn relies on a capable government workforce. Unfortunately, attention
to oversight and a capable government workforce have not always been
evident in a number of instances, including during the Iraq
reconstruction effort. We have reported that, particularly in the early
phases of the conflict, the Army lacked an adequate acquisition
workforce in Iraq to oversee the billions of dollars for which it was
responsible.[Footnote 15] Further, Army personnel who were responsible
for overseeing the performance of contractors providing interrogation
and other services were not adequately trained to properly exercise
their responsibilities.[Footnote 16] Contractor employees were
stationed in various locations around Iraq, with no COR or assigned
representative on site to monitor their work. An Army investigative
report concluded that the lack of training for the CORs assigned to
monitor contractor performance at Abu Ghraib prison, as well as an
inadequate number of assigned CORs, put the Army at risk of being
unable to control poor performance or become aware of possible
misconduct by contractor personnel.
DOD's Panel on Contracting Integrity raised similar concerns, noting
that contracting personnel in a combat/contingent environment do not
always have functional independence. Contracting personnel, including
CORs, are sometimes placed in positions where their direct supervisor
is not in the contracting chain of command, thus possibly injecting
risk into the integrity of the contracting process. The report found
that CORs are not sufficiently trained and prepared, and sometimes lack
support from their operational chain of command, to perform
effectively. The Commission on Army Acquisition and Program Management
in Expeditionary Operations also expressed concern about this issue,
stating that after contract award there are "no resources trained" to
monitor and ensure that the contractor is performing and providing the
services needed by the warfighter. It stated that the inability to
monitor contractor performance and enforce contracts are critical
problems in an expeditionary environment and cited an example: "When
the critical need is to get a power station running, and there are no
resources to monitor contractor performance, only the contractor knows
whether the completed work is being sabotaged nightly."
In December 2006, we reported that while DOD has taken some steps to
improve its guidance on the use of contractors to support deployed
forces, addressing some of the problems we have raised since the mid-
1990s, it continues to face long-standing problems that hinder its
management and oversight of contractors at deployed locations. DOD has
not allocated the organizational resources to review and oversee issues
regarding contractor support to deployed forces. While DOD's new
guidance is a noteworthy step, a number of problems we have previously
reported on continue to pose difficulties for military personnel in
deployed locations.[Footnote 17]
* Lack of visibility by senior leaders into the number and location of
contractors and services provided at deployed locations.
* Inadequate number of oversight personnel at deployed locations.
* No systematic collection and sharing of DOD's institutional knowledge
on using contractors to support deployed forces.
* Limited or no training for military personnel on the use of
contractors as part of their pre-deployment training or professional
military education.
Cost of Contractors:
A key assumption of many of the federal management reforms of the 1990s
was that the cost-efficiency of government operations would be
improved. In addition to a desire for cost savings, the need to meet
mission requirements while contending with limitations on government
full-time equivalent positions and a desire to use contractors'
capabilities and skills in particular situations were factors in
increasing the use of contractors. We recently reported that sufficient
data are not available to determine whether increased service
contracting has caused DOD's costs to be higher than they would have
been had the contracted activities been performed by uniformed or DOD
civilian personnel.[Footnote 18]
To learn more about the role and cost of contractors providing
contracting support services, we have recently undertaken new work to
look at contractors providing contract specialist services to the Army
Contracting Agency's Contracting Center for Excellence (CCE).[Footnote
19] This agency currently provides contracting support to 125 DOD
customers in the National Capitol Region, including the Joint Chiefs of
Staff, Tricare Management Activity, Defense Information Systems Agency,
DOD Inspector General, Pentagon Renovation Office, and Office of the
Judge Advocate General. During fiscal year 2007, the agency awarded
about 5,800 contract actions and obligated almost $1.8 billion. CCE is
one of many government agencies that have turned to contractors to
support its contracting functions.
As a part of our review, we examined how the costs of CCE's contractor
contract specialists compared to those of its government contract
specialists. Our analysis indicates that the government is paying more
for the contractors. At CCE, the contractors are performing the same
duties as their government counterparts and have been used in this role
since 2003. We compared the costs of the government employees at the GS-
12 and GS-13 levels to their equivalent contractor counterparts
(referred to as contract specialists II and III) and found that, on
average, the Army is paying up to 26 percent more for the contractors,
as depicted in table 2.
Table 2: Comparison of the Average Cost of CCE's Government and
Contractor Contract Specialists:
GS equivalent: GS-12 equivalent; Average hourly cost of a government
contract specialist: $59.21; Average hourly cost of a contractor
contract specialist: $74.99; Percentage difference between the hourly
cost of a government employee and a contract employee: 26.65.
GS equivalent: GS-13 equivalent; Average hourly cost of a government
contract specialist: $72.15; Average hourly cost of a contractor
contract specialist: $84.38; Percentage difference between the hourly
cost of a government employee and a contract employee: 16.95.
[End of table]
Source: GAO analysis based on government information and contract
files.
Key elements of our analysis were:
* The loaded hourly cost of a government employee includes their
salary, costs of the government's contributions to the employee's
benefits, the costs to train the employee, the employee's travel
expenses, and the costs of operations overhead--which are the costs of
the government employees that provide support services, such as budget
analysts or human capital staff.
* Government employee salaries and benefits were based on actual data
from one pay period. These data were then compared to the hourly cost
of contractors ordered during the month of that pay period. The cost of
a contractor employee is the fully loaded hourly rate the government
pays for these services. We reported the weighted average of those
hourly rates because the agency used two contractors at two different
rates during the pay period.
* We excluded the costs that the government incurs for both government
and contractor-provided specialists. These include the costs of
supplies, facilities, utilities, information technology, and
communications costs.
This example is one illustrative case. In another example, officials at
the Missile Defense Agency told us last year that, according to their
calculations, the average cost of their government employees was
$140,000, compared with an average cost of $175,000 for their
contractors--who accounted for 57 percent of their 8,186 personnel
positions.[Footnote 20] We will continue to do work in this area.
Concluding Points:
In closing, I believe that we must engage in a fundamental re-
examination of when and under what circumstances we should use
contractors versus civil servants or military personnel. This is a
major and growing concern that needs immediate attention. Once the
decision to contract has been made, we must address challenges we have
observed in ensuring proper oversight of these arrangements--especially
considering the evolving and enlarging role of contractors in federal
acquisitions.
And we must elevate the acquisition function within the department. I
would like to emphasize the critical need for actions to be taken to
improve the acquisition workforce. The acquisition workforce's workload
and complexity of responsibilities have been increasing without
adequate agency attention to the workforce's size, skills and
knowledge, and succession planning. DOD is experiencing a critical
shortage of certain acquisition professionals with technical skills
related to systems engineering, program management, and cost
estimation. Without adequate oversight by and training of federal
employees overseeing contracting activities, reliance on contractors to
perform functions that once would have been performed by members of the
federal workforce carries risk. As a final note, we are continuing to
explore acquisition workforce issues in ongoing work and we hope to be
making recommendations on these issues.
Mr. Chairman and Members of the subcommittee, this concludes my
statement. I would be happy to answer any questions you might have.
[End of section]
Appendix I Systemic Acquisition Challenges at the Department of
Defense:
1. Service budgets are allocated largely according to top-line
historical percentages rather than Defense-wide strategic assessments
and current and likely resource limitations.
2. Capabilities and requirements are based primarily on individual
service wants versus collective Defense needs (i.e., based on current
and expected future threats) that are both affordable and sustainable
over time.
3. Defense consistently overpromises and underdelivers in connection
with major weapons, information, and other systems (i.e., capabilities,
costs, quantities, schedule).
4. Defense often employs a "plug and pray approach" when costs escalate
(i.e., divide total funding dollars by cost per copy, plug in the
number that can be purchased, then pray that Congress will provide more
funding to buy more quantities).
5. Congress sometimes forces the department to buy items (e.g., weapon
systems) and provide services (e.g., additional health care for non-
active beneficiaries, such as active duty members' dependents and
military retirees and their dependents) that the department does not
want and we cannot afford.
6. DOD tries to develop high-risk technologies after programs start
instead of setting up funding, organizations, and processes to conduct
high-risk technology development activities in low-cost environments
(i.e., technology development is not separated from product
development). Program decisions to move into design and production are
made without adequate standards or knowledge.
7. Program requirements are often set at unrealistic levels, then
changed frequently as recognition sets in that they cannot be achieved.
As a result, too much time passes, threats may change, or members of
the user and acquisition communities may simply change their mind. The
resulting program instability causes cost escalation, schedule delays,
smaller quantities, and reduced contractor accountability.
8. Contracts, especially service contracts, often do not have
definitive or realistic requirements at the outset in order to control
costs and facilitate accountability.
9. Contracts typically do not accurately reflect the complexity of
projects or appropriately allocate risk between the contractors and the
taxpayers (e.g., cost plus, cancellation charges).
10. Key program staff rotate too frequently, thus promoting myopia and
reducing accountability (i.e., tours based on time versus key
milestones). Additionally, the revolving door between industry and the
department presents potential conflicts of interest.
11. The acquisition workforce faces serious challenges (e.g., size,
skills, knowledge, succession planning).
12. Incentive and award fees are often paid based on contractor
attitudes and efforts versus positive results (i.e., cost, quality,
schedule).
13. Inadequate oversight is being conducted by both the department and
Congress, which results in little to no accountability for recurring
and systemic problems.
14. Some individual program and funding decisions made within the
department and by Congress serve to undercut sound policies.
15. Lack of a professional, term-based chief management officer at the
department serves to slow progress on defense transformation and reduce
the chance of success in the acquisitions/contracting and other key
business areas.
[End of section]
Appendix II Definition of Waste:
Several of my colleagues in the accountability community and I have
developed a definition of waste. As we see it, waste involves the
taxpayers in the aggregate not receiving reasonable value for money in
connection with any government-funded activities due to an
inappropriate act or omission by players with control over or access to
government resources (e.g., executive, judicial or legislative branch
employees; contractors; grantees; or other recipients). Importantly,
waste involves a transgression that is less than fraud and abuse.
Further, most waste does not involve a violation of law, but rather
relates primarily to mismanagement, inappropriate actions, or
inadequate oversight. Illustrative examples of waste could include the
following:
* unreasonable, unrealistic, inadequate, or frequently changing
requirements;
* proceeding with development or production of systems without
achieving an adequate maturity of related technologies in situations
where there is no compelling national security interest to do so;
* the failure to use competitive bidding in appropriate circumstances;
* an over-reliance on cost-plus contracting arrangements where
reasonable alternatives are available;
* the payment of incentive and award fees in circumstances where the
contractor's performance, in terms of costs, schedule, and quality
outcomes, does not justify such fees;
* the failure to engage in selected pre-contracting activities for
contingent events; and:
* congressional directions (e.g., earmarks) and agency spending actions
where the action would not otherwise be taken based on an objective
value and risk assessment and considering available resources.
[End of section]
Footnotes:
[1] GAO, A Call for Stewardship: Enhancing the Federal Government's
Ability to address Key Fiscal and Other 21st Century Challenges, GAO-08-
93SP (Washington, D.C.: December 2007).
[2] GAO, Defense Acquisitions: Tailored Approach Needed to Improve
Service Acquisition Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9,
2006).
[3] National Defense Authorization Act for Fiscal Year 2006, Pub. L.
No. 109-163 § 812, 119 Stat. 3136, 3376-3379 (2006).
[4] GAO, Space Acquisitions: DOD Needs to Take More Action To Address
Unrealistic Initial Cost Estimates of Space Systems, GAO-07-96
(Washington, D.C.: Nov.17, 2006).
[5] GAO, Defense Acquisitions: Role of Lead Systems Integrator on
Future Combat Systems Program Poses Oversight Challenges, GAO-07-380
(Washington, D.C.: June 6, 2007).
[6] 72 Fed. Reg. 65873 - 82 (Nov. 23, 2007), effective date Dec. 24,
2007.
[7] 72 Fed. Reg. 64019 - 23 (Nov. 14, 2007).
[8] GAO, Defense Contracting: Additional Personal Conflict of Interest
Safeguards Needed for Certain DOD Contractor Employees, GAO-08-169
(Washington, D.C.: Mar. 7, 2008). In addition, the National Defense
Authorization Act for Fiscal Year 2008 requires us to report on the
ethics programs of major defense contractors. National Defense
Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, § 848.
[9] Federal Acquisition Regulation 37.104.
[10] Encore Management, Inc., B-278903.2, Feb. 12, 1999, 99-1 CPD ¶ 33
at 3.
[11] GAO, Contract Management: DOD Vulnerabilities to Contracting
Fraud, Waste, and Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006).
[12] The Acquisition Advisory Panel was authorized by Section 1423 of
the Services Acquisition Reform Act of 2003, which was enacted as part
of the National Defense Authorization Act for Fiscal Year 2004. The
panel was tasked with reviewing laws, regulations, and governmentwide
acquisition policies. Pub. L. No. 108-136, 117 Stat. 1663 (2003).
[13] The report uses the term expeditionary to include operations
outside of the U.S. as well as domestic emergency operations.
[14] GAO, Hurricane Katrina: Improving Federal Contracting Practices in
Disaster Recovery Operations, GAO-06-714T (Washington, D.C.: May 4,
2006).
[15] GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures
and Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).
[16] GAO, Interagency Contracting: Problems with DOD's and Interior's
Orders to Support Military Operations, GAO-05-201 (Washington, D.C.:
April 29, 2005).
[17] GAO, Military Operations: High-Level DOD Action Needed to Address
Long-standing Problems with Management and Oversight of Contractors
Supporting Deployed Forces, GAO-07-145 (Washington, D.C.: Dec. 18,
2006).
[18] DOD does maintain data from its competitive sourcing, or A-76,
program. However, the number of A-76 public/private competition
contracts is relatively small and the results from this program may not
be representative of the results from all services contracts for new or
expanded operations and maintenance work. See GAO, DOD Budget: Trends
in Operation and Maintenance Costs and Support Services Contracting,
GAO-07-631 (Washington, D.C.: May 18, 2007).
[19] GAO, Defense Contracting: Army Case Study Delineates Concerns with
Use of Contractors as Contract Specialists, GAO-08-360 (Washington,
D.C.: Mar. 26, 2008).
[20] Government employees accounted for 33 percent of the personnel
positions, with the remainder filled by employees of federally funded
research and development centers and university and affiliated research
centers that were under contract or other types of agreements to
perform missile defense tasks.
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