Defense Acquisitions
Actions Needed to Ensure Value for Service Contracts Gao ID: GAO-09-643T April 23, 2009In fiscal year 2008, the Department of Defense (DOD) obligated over $200 billion on contracts for services, which accounted for more than half of its total contract obligations. Given the serious budget pressures facing the nation, it is critical that DOD obtain value when buying these services. Yet DOD does not always use sound practices when acquiring services, and the department lacks sufficient people with the right skills to support its acquisitions. Although DOD has ongoing efforts to improve its planning, execution, and oversight of service acquisitions, many concerns that prompted GAO to put DOD contract management on its high-risk list in 1992 remain. The committee asked GAO to address challenges facing DOD in measuring the value from and risks associated with its contracting for services. This testimony provides an overview of key concerns GAO cited in its previous reports. Specifically it focuses on (1) challenges DOD faces in following sound contract and contracting management practices and (2) recent actions DOD has taken to improve its management of service contracting. GAO has made numerous recommendations over the past decade aimed at improving DOD's management and oversight of service contracts, but it is not making any new recommendations in this testimony.
DOD continues to face challenges in employing sound practices when contracting for and managing service contracts. The department has obtained services based on poorly defined requirements, used inappropriate business arrangements and types of contracts, and failed to adequately oversee and manage contractor performance. For example: (1) DOD sometimes authorized contractors to begin work before reaching a final agreement on the contract terms and conditions, including price. These arrangements, known as undefinitized contract actions, are used to meet urgent need or when the scope of the work is not clearly defined. In July 2007, GAO reported that DOD paid contractors nearly $221 million in questioned costs under one of these arrangements. (2) In fiscal year 2005, DOD obligated nearly $10 billion for professional, administrative, management support, and other services under time-and-materials contracts--contracts that are high risk for the government because they provide no profit incentive to the contractor for cost control or labor efficiency. As such, their use is supposed to be limited to cases where no other contract type is suitable and specific approvals are obtained. However, DOD frequently failed to provide such justification, and GAO's findings indicated the contracts were often used for expediency. (3) In a 2008 review, GAO found that incomplete contract files at some Army contracting offices hindered incoming contract administration personnel's assessments of contractors to make informed decisions related to award fees, which can run into the millions of dollars. These challenges expose DOD to unnecessary risk and may impede the department's efforts to manage the outcomes of its service contracts. For example, the absence of well-defined requirements complicates efforts to hold DOD and contractors accountable for poor acquisition outcomes. Use of inappropriate contract types, in addition to other factors, can result in DOD not obtaining the best value for its contract spending. Finally, failure to provide adequate oversight makes it difficult to identify and correct poor contractor performance in a timely manner. While DOD has taken some actions to respond to GAO's recommendations and congressional legislation, inconsistent implementation has hindered past DOD efforts to address these high-risk areas. To improve outcomes on the whole, DOD must ensure that these policy changes and others are consistently put into practice and reflected in decisions made on individual acquisitions. In addition, DOD needs to develop basic data about its service contracts to help inform how it contracts for services and its reliance on these contractors. GAO continues to assess DOD's efforts to implement a service acquisition management approach and the department's management and oversight of contractors supporting deployed forces.
GAO-09-643T, Defense Acquisitions: Actions Needed to Ensure Value for Service Contracts
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Testimony:
Before the Defense Acquisition Reform Panel, Committee on Armed
Services, U.S. House of Representatives:
United States Government Accountability Office:
GAO:
For Release on Delivery:
Expected at 8:00 a.m. EDT:
Thursday, April 23, 2009:
Defense Acquisitions:
Actions Needed to Ensure Value for Service Contracts:
Statement of John Hutton, Director, Acquisition and Sourcing Management
and William Solis, Director, Defense Capabilities and Management:
GAO-09-643T:
GAO Highlights:
Highlights of GAO-09-643T, a testimony before the House Committee on
Armed Services, Panel on Defense Acquisition Reform.
Why GAO Did This Study:
In fiscal year 2008, the Department of Defense (DOD) obligated over
$200 billion on contracts for services, which accounted for more than
half of its total contract obligations. Given the serious budget
pressures facing the nation, it is critical that DOD obtain value when
buying these services. Yet DOD does not always use sound practices when
acquiring services, and the department lacks sufficient people with the
right skills to support its acquisitions. Although DOD has ongoing
efforts to improve its planning, execution, and oversight of service
acquisitions, many concerns that prompted GAO to put DOD contract
management on its high-risk list in 1992 remain.
The committee asked GAO to address challenges facing DOD in measuring
the value from and risks associated with its contracting for services.
This testimony provides an overview of key concerns GAO cited in its
previous reports. Specifically it focuses on (1) challenges DOD faces
in following sound contract and contracting management practices and
(2) recent actions DOD has taken to improve its management of service
contracting.
GAO has made numerous recommendations over the past decade aimed at
improving DOD‘s management and oversight of service contracts, but it
is not making any new recommendations in this testimony.
What GAO Found:
DOD continues to face challenges in employing sound practices when
contracting for and managing service contracts. The department has
obtained services based on poorly defined requirements, used
inappropriate business arrangements and types of contracts, and failed
to adequately oversee and manage contractor performance. For example:
* DOD sometimes authorized contractors to begin work before reaching a
final agreement on the contract terms and conditions, including price.
These arrangements, known as undefinitized contract actions, are used
to meet urgent need or when the scope of the work is not clearly
defined. In July 2007, GAO reported that DOD paid contractors nearly
$221 million in questioned costs under one of these arrangements.
* In fiscal year 2005, DOD obligated nearly $10 billion for
professional, administrative, management support, and other services
under time-and-materials contracts”contracts that are high risk for the
government because they provide no profit incentive to the contractor
for cost control or labor efficiency. As such, their use is supposed to
be limited to cases where no other contract type is suitable and
specific approvals are obtained. However, DOD frequently failed to
provide such justification, and GAO‘s findings indicated the contracts
were often used for expediency.
* In a 2008 review, GAO found that incomplete contract files at some
Army contracting offices hindered incoming contract administration
personnel‘s assessments of contractors to make informed decisions
related to award fees, which can run into the millions of dollars.
These challenges expose DOD to unnecessary risk and may impede the
department‘s efforts to manage the outcomes of its service contracts.
For example, the absence of well-defined requirements complicates
efforts to hold DOD and contractors accountable for poor acquisition
outcomes. Use of inappropriate contract types, in addition to other
factors, can result in DOD not obtaining the best value for its
contract spending. Finally, failure to provide adequate oversight makes
it difficult to identify and correct poor contractor performance in a
timely manner.
While DOD has taken some actions to respond to GAO‘s recommendations
and congressional legislation, inconsistent implementation has hindered
past DOD efforts to address these high-risk areas. To improve outcomes
on the whole, DOD must ensure that these policy changes and others are
consistently put into practice and reflected in decisions made on
individual acquisitions. In addition, DOD needs to develop basic data
about its service contracts to help inform how it contracts for
services and its reliance on these contractors. GAO continues to assess
DOD‘s efforts to implement a service acquisition management approach
and the department‘s management and oversight of contractors supporting
deployed forces.
View [hyperlink, http://www.gao.gov/products/GAO-09-643T] or key
components. For more information, contact John P. Hutton at (202) 512-
4841 or huttonj@gao.gov and William M. Solis at (202) 512-8365 or
solisw@gao.gov.
[End of section]
Mr. Chairman and Members of the Committee:
We are pleased to be here today to discuss challenges the Department of
Defense (DOD) faces in ensuring that it gets value for the taxpayers'
dollar and obtains quality contractor services in a cost-efficient and
effective manner. Many of these challenges are long-standing, but they
have become increasingly important as the department's reliance on
contractors for services has grown in size and scope to the point that
DOD officials have acknowledged their inability to perform their
mission without contract support. These contracts provide a wide range
of services that touch almost all of the department's activities,
including health care, support to intelligence activities, contracting
support, and various professional, management and administrative
services, such as budget and program management. In addition, service
contracts provide a wide range of support to our troops in Afghanistan
and Iraq, including base support, weapons and equipment maintenance,
communication support, interrogators, security, engineering support,
and administrative support.
At issue is not whether the department should contract for services,
for it must. The issue rather is to what extent it should and how best
to provide oversight when it does. Numbers underscore the magnitude of
the oversight challenge. From fiscal years 2001 through 2008, DOD's
reported obligations on contracts for services when measured in real
terms doubled--from roughly $92 billion to slightly over $200 billion.
In fiscal year 2008, this figure included more than $25 billion for
services to support Operations Enduring Freedom and Iraqi Freedom.
DOD's increasing use of contractor-provided services results from
thousands of individual decisions and not from strategic, comprehensive
planning across the department. In other words, the volume and
composition of contracted services has not been a measured outcome. In
2006, we reported that DOD's approach to managing services acquisition
tended to be reactive and had not fully addressed the key factors for
success at either a strategic or transactional level. The strategic
level is where the enterprise--DOD--sets a direction for what it needs,
captures knowledge to make informed management decisions, ensures that
departmentwide goals and objectives are achieved, and assesses the
resources it has to achieve desired outcomes. The strategic level sets
the context for the transactional level, where the focus is on making
sound decisions on individual service acquisitions using valid and well-
defined requirements, appropriate business arrangements, and adequate
management of contractor performance. Although DOD actions are underway
to improve the planning, execution, and oversight of services
acquisitions, remaining concerns with the department's management and
use of service contracts are among the reasons why we continue to
include DOD's contract management on our high-risk list. To demonstrate
the longstanding nature of these problems, we first identified DOD
contract management as a high-risk issue in 1992.[Footnote 1]
Earlier this month we testified before this committee that significant
improvement in DOD's acquisition of weapons systems is possible and
that the ability to measure knowledge, processes, and outcomes is
critical to achieving such improvements.[Footnote 2] DOD's acquisition
of services differs from weapon system acquisitions, because contracted
services are less homogeneous, more numerous, and harder to measure,
thus they pose unique challenges when attempting to define
requirements, establish performance-based outcomes, and assess
contractor performance.[Footnote 3] Our statement today will focus on
two areas: (1) the challenges DOD faces in consistently following sound
contracting and contract management practices and (2) recent actions
DOD has taken to improve its management of services contracting. Our
statement is based on work we have completed over the past decade,
which demonstrates ongoing weaknesses in DOD's management of service
contracts. Our work was conducted in accordance with generally accepted
government auditing standards.[Footnote 4] We have made numerous
recommendations to DOD to improve its management and use of services
contracts.
DOD Continues to Face Challenges in Employing Sound Practices When
Contracting For and Managing Service Contracts:
It is essential that DOD employ sound practices when using contractors
to support its missions or operations to ensure the department receives
value. This means clearly defining its requirements, using the
appropriate contract type, and properly overseeing contract
administration. Our work, however, has repeatedly identified problems
with the practices DOD uses to acquire services. Further, an
overarching issue that impacts DOD's ability to properly manage its
growing acquisition of services is having an adequate workforce with
the right skills and capabilities.[Footnote 5] Collectively, these
problems expose DOD to unnecessary risk and make it difficult for the
department to ensure that it is getting value for the dollars spent.
Since fiscal year 2001, DOD obligations for service contracts have
doubled while its acquisition workforce has remained relatively
unchanged (see figure 1).
Figure 1: Changes in DOD's Contract Obligations and Contracting
Workforce, Fiscal Year 2001 to Fiscal Year 2008 (Dollars are constant
fiscal year 2008 dollars, in thousands; workforce is in thousands):
[Refer to PDF for image: combination vertical bar and line graph]
Fiscal year: 2001;
Products: $80;
Services: $92.7;
Contracting career field: 25,400.
Fiscal year: 2002;
Products: $91.2;
Services: $108.3
Contracting career field: 27,900.
Fiscal year: 2003;
Products: $103.5;
Services: $135.5;
Contracting career field: 27,000.
Fiscal year: 2004;
Products: $114.8;
Services: $141.9;
Contracting career field: 26,200.
Fiscal year: 2005;
Products: $132.1;
Services: $153.6;
Contracting career field: 26,000.
Fiscal year: 2006;
Products: $144.6;
Services: $159.4;
Contracting career field: 27,700.
Fiscal year: 2007;
Products: $160.4;
Services: $174.4;
Contracting career field: 26,000.
Fiscal year: 2008;
Products: $186.8;
Services: $200.9;
Contracting career field: 25,700.
Source: GAO analysis, Federal Procurement Data System-Next Generation,
DOD.
[End of figure]
Properly Defined Requirements are Essential to Obtaining Value:
Properly defined requirements--whether at the DOD-wide level or the
contract level--are a prerequisite to obtaining value for the
department. At the DOD-wide level the department should have an
understanding of what it needs to contract for and why. However, we
have frequently noted that the department continues to be challenged to
understand how reliant it is on contractors and has yet to clearly
determine what services it should obtain from contracts and what
services should be provided by the military or DOD civilian employees.
Furthermore, DOD lacks basic data about its service contracts that
could help it determine how it contracts for services and how reliant
it is on contractors. For example, at this time, the department does
not have complete and accurate information on the number of services
contracts in use, the services being provided by those contracts, the
number of contractors providing those services, and the number and
types of contracts awarded.
Once DOD determines what services contractors should provide, both the
contractor and the government need to have a clear sense of what the
contractor is required to do under the contract. Poorly defined or
changing requirements have contributed to increased costs, as well as
services that did not meet the department's needs. The absence of well-
defined requirements and clearly understood objectives complicates
efforts to hold DOD and contractors accountable for poor acquisition
outcomes. For example:
* DOD sometimes authorizes contractors to begin work before reaching a
final agreement on the contract terms and conditions, including price.
These types of contract actions, known as undefinitized contract
actions, are used to meet urgent needs or when the scope of the work is
not clearly defined. In July 2007, we reported that, DOD contracting
officials were more likely to pay costs questioned by Defense Contract
Audit Agency (DCAA) auditors if the contractor had incurred these costs
before reaching agreement with DOD on the work's scope and price.
[Footnote 6] In fact, DOD decided to pay the contractor nearly all of
the $221 million in questioned costs after making a determination based
on additional information. The lack of timely negotiations contributed
significantly to DOD's decision--all 10 task orders were negotiated
more than 180 days after the work commenced. The negotiation delays
were in part caused by changing requirements, funding challenges, and
inadequate contractor proposals.
* In both July 2004 and September 2006 we reported that a disagreement
between a contractor and DCAA on how to bill for services to feed
soldiers in Iraq resulted in at least $171 million in questioned costs
that DOD did not pay.[Footnote 7] The disagreement regarded whether the
government should be billed on the camp populations specified in the
statement of work or on the actual head count. A clearer statement of
work, coupled with better DOD oversight of the contract, could have
prevented the disagreement and mitigated the government's risk of
paying for more services than needed. Negotiations between the
contractor and DOD resulted in a settlement whereby $36 million would
not be paid to the contractor.
On the other hand, requirements that provide DOD with a greater level
of service or performance than required can undermine the department's
efforts to ensure value. For example:
* In December 2008, we issued a report on performance based logistics,
which is defined by DOD as the purchase of performance outcomes (such
as the availability of functioning weapon systems) through long-term
support arrangements rather than the purchase of individual elements of
support--such as parts, repairs, and engineering support.[Footnote 8]
In that report, we noted for eight of the performance based logistics
arrangements we reviewed, the contractors significantly exceeded some
of the contractual performance requirements. We further noted that
since the government is paying for this excess performance, the
performance based logistics arrangement, as structured, may not provide
the best value to the government. For example, since 2002, the average
annual operational readiness for the Tube-launched, Optically-tracked,
Wire-guided missile - Improved Target Acquisition System has not been
below 99 percent, and the system's operational readiness has averaged
100 percent since 2004. According to a program official, the Army's
readiness standard for this system is 90 percent. Despite the Army's
standard, it continued to include a performance incentive that
encouraged higher levels of performance when negotiating a follow-on
performance based logistics contract in 2007. The performance incentive
includes payment of an award fee that encourages operational readiness
rates from 91 to 100 percent, with the highest award fee paid for 100
percent average operational readiness.
Selected Contract Type and Business Arrangements Not Always
Appropriate:
When contracting for services, DOD has a number of choices regarding
the contracting arrangements to use. Selecting the appropriate type is
important because cost reimbursable contracts may increase the
government's cost risk whereas firm-fixed price arrangements transfer
some of that cost risk to the contractor.[Footnote 9] While use of the
appropriate contract type is important, it is not the sole factor in a
successful acquisition outcome--as noted in this statement, good
requirements and oversight of contractor performance are also
important. We have found that DOD did not always use the contracting
arrangements that would result in the best value to the government. For
example:
* In January 2008, we that reported the cost-plus-fixed fee provisions
of a task order issued by the Army to repair equipment for use in Iraq
and Afghanistan required the Army to pay the contractor to fix
equipment rejected by Army inspectors for failing to meet the quality
standard established in the task order.[Footnote 10] Under the cost-
plus-fixed fee maintenance provisions in the task order, the contractor
was reimbursed for all maintenance labor hours incurred, including
labor hours associated with maintenance performed after the equipment
failed to meet the Army's maintenance standards. This resulted in
additional cost to the government. Our analysis of Army data between
May 2005 and May 2007 showed that the contractor worked about 188,000
hours to repair equipment after the first failed Army inspection at an
approximate cost to the government of $4.2 million.
* In June 2007, we found numerous issues with DOD's use of time-and-
materials contracts.[Footnote 11] DOD reported that it obligated nearly
$10 billion under time-and-materials contracts in fiscal year 2005,
acquiring, among other services, professional, administrative, and
management support services. Some specific examples of the services DOD
acquired included subject matter experts in the intelligence field and
systems engineering support. These time-and-materials contracts are
appropriate when specific circumstances justify the risks, but our
findings indicate that they are often used as a default for a variety
of reasons--ease, speed, and flexibility when requirements or funding
are uncertain. According to DOD, time-and-materials contracts are
considered high risk for the government because they provide no
positive profit incentive to the contractor for cost control or labor
efficiency and their use is supposed to be limited to cases where no
other contract type is suitable. We found, however, that DOD under
reported its use of time-and-materials contracts, frequently did not
justify why such contracts were the only contract type suitable for the
procurement, and inconsistently monitored these contracts.
* In 2007, we also reported that DOD needed to improve its management
and oversight of undefinitized contract actions (UCAs), under which DOD
can authorize contractors to begin work and incur costs before reaching
a final agreement on contract terms and conditions, including price.
[Footnote 12] The contractor has little incentive to control costs
during this period, creating a potential for wasted taxpayer dollars.
DOD's use of some UCAs could have been avoided with better acquisition
planning. In addition, DOD frequently did not definitize the UCAs
within the required time frames thereby increasing the cost risk to the
government. Further, its contracting officers were not documenting the
basis for the profit or fee negotiated, as required. As such, we called
on DOD to strengthen management controls and oversight of UCAs to
reduce the risk of paying unnecessary costs.
* In July 2004, we reported that the Air Force had used the Air Force
Contract Augmentation Program contract to supply commodities for its
heavy construction squadrons because it did not deploy with enough
contracting and finance personnel to buy materials quickly or in large
quantities.[Footnote 13] In many instances, the contractor provided a
service for the customer, such as equipment maintenance, in addition to
the procurement of the supplies. In other cases, however, the
contractor simply bought the supplies and delivered them to the
customer. In July 2004 we noted that the contract allowed for an award
fee of up to 6 percent for these commodity supply task orders. While
contractually permitted, the use of a cost-plus-award-fee contract as a
supply contract may not be cost-effective. In these instances, the
government reimburses the contractors' costs and pays an award fee that
may be higher than warranted given the contractors' low level of risk
when performing such tasks. Air Force officials recognized that the use
of a cost-plus-award-fee contract to buy commodities may not be cost-
effective. Under the current contract, commodities may be obtained
using firm-fixed-price task orders, cost-plus award-fee task orders, or
cost-plus-fixed-fee task orders.
Inadequate Oversight of Contractor Performance:
We reported on numerous occasions that DOD did not adequately manage
and assess contractor performance to ensure that its business
arrangements were properly executed. Managing and assessing post-award
performance entails various activities to ensure that the delivery of
services meets the terms of the contract and requires adequate
surveillance resources, proper incentives, and a capable workforce for
overseeing contracting activities. If surveillance is not conducted, is
insufficient, or not well documented, DOD is at risk of being unable to
identify and correct poor contractor performance in a timely manner.
For example:
* Our 2008 review of six Army services contracts or task orders found
that contract oversight was inadequate in three of the contracts we
reviewed because of a lack of trained oversight and management
personnel.[Footnote 14] For example, in the contracting office that
managed two of the contracts we reviewed, 6 of 18 oversight positions
were vacant. One of the vacant positions was the performance evaluation
specialist responsible for managing the Army's quality assurance
program for two multi-million dollar contracts and training other
quality assurance personnel. Other vacant positions included three
contract specialists responsible for, among other tasks, reviewing
monthly contractor invoices. As a result of these vacancies, the
contracting officer's representative was reviewing contractor invoices
to ensure that expenses charged by the contractor were valid, a
responsibility for which he said he was not trained. We also reported
that contract oversight personnel for the Army's linguist contract were
unable to judge the performance of the contractor employees because
they were generally unable to speak the languages of the contractor
employees they were responsible for overseeing.
* DOD has, over the last several years, emphasized the use of
performance based logistics arrangements, in part, to reduce the cost
of supporting weapon systems. However, in December 2008, we reported
that although DOD guidance recommends that cost data be captured for
performance based logistics contracts to aid in future negotiations, we
found program offices generally did not receive detailed cost data and
only knew the overall amounts paid for support.[Footnote 15] For
example, for the 21 fixed-price arrangements in our sample, only two
program offices obtained contractor support cost data reports. We also
reported that, in seven out of eight programs we reviewed where follow-
on, fixed-price performance based logistics contracts had been
negotiated, expected cost reductions either did not materialize or
could not be determined.
* In our September 2008 review of services contracts supporting
contingency operations, we reported the Army's oversight of some of the
contracts was inadequate in part because contracting offices were not
maintaining complete contract files documenting contract administration
and oversight actions taken, in accordance with DOD policy and
guidance.[Footnote 16] As a result, incoming contract administration
personnel did not know whether the contractors were meeting their
contract requirements effectively and efficiently and therefore were
limited in their ability to make informed decisions related to award
fees, which can run into the millions of dollars.
* In December 2006, we reported that DOD did not have sufficient
numbers of contract oversight personnel at deployed locations, which
limits its ability to obtain reasonable assurance that contractors are
meeting contract requirements efficiently and effectively.[Footnote 17]
For example, an Army official acknowledged that the Army struggled to
find the capacity and expertise to provide the contracting support
needed in Iraq. Similarly, an official with the LOGCAP Program Office
told us that the office did not prepare to hire additional budget
analysts and legal personnel in anticipation of an increased use of
LOGCAP services due to Operation Iraqi Freedom. According to the
official, had adequate staffing been in place early, the Army could
have realized substantial savings through more effective reviews of the
increasing volume of LOGCAP requirements. A Defense Contract Management
Agency official responsible for overseeing the LOGCAP contractor's
performance at 27 locations noted that he was unable to visit all of
those locations during his 6-month tour to determine the extent to
which the contractor was meeting the contract's requirements.
* In December 2005, we reported that DOD, in using award fee contracts,
routinely engaged in practices that did not hold contractors
accountable for achieving desired acquisition outcomes.[Footnote 18]
These practices included evaluating contractors on award-fee criteria
not directly related to key acquisition outcomes; paying contractors a
significant portion of the available fee for what award-fee plans
describe as "acceptable, average, expected, good, or satisfactory"
performance; and giving contractors at least a second opportunity to
earn initially unearned or deferred fees. As a result, DOD had paid an
estimated $8 billion in award fees on contracts in our study
population, regardless of whether acquisition outcomes fell short, met,
or exceeded DOD's expectations. As such, we recommended that DOD
improve its use of fees by specifically tying them to acquisition
outcomes in all new award-and incentive-fee contracts, maximizing
contractors' motivation to perform, and collecting data to evaluate the
effectiveness of fees.
* In March 2005, we reported instances of insufficient surveillance on
26 of 90 DOD service contracts we reviewed.[Footnote 19] In each
instance, at least one measure to ensure adequate surveillance did not
take place. These measures include (1) training personnel in how to
conduct surveillance, (2) assigning personnel at or prior to contract
award, (3) holding personnel accountable for their surveillance duties,
and (4) performing and documenting surveillance throughout the period
of the contract.
DOD has Taken Some Steps to Address Service Contract Management and
Oversight Challenges:
GAO's body of work on contract management and the use of contractors to
support deployed forces have resulted in numerous recommendations over
the last several years. In addition, Congress has enacted legislation
requiring DOD to take specific actions to improve its management and
oversight of contracts. In response, DOD has issued guidance to address
contracting weaknesses and promote the use of sound business
arrangements. DOD has established a framework for reviewing major
services acquisitions, promulgated regulations to better manage its use
of contracting arrangements that can pose additional risks for the
government, including time-and-materials contracts and undefinitized
contracting actions, developed guidance on linking monetary incentives
for contractors to acquisition outcomes, and has efforts under way to
identify and improve the skills and capabilities of its workforce.
These are positive steps, but inconsistent implementation has hindered
past DOD efforts to address these high-risk areas. To improve outcomes
on the whole, DOD must ensure that these policy changes and others are
consistently put into practice and reflected in decisions made on
individual acquisitions. We have ongoing work assessing DOD's efforts
to implement a service acquisition management approach, including its
development of a structure for reviewing its major services
acquisitions, as well as its use of different types of contract
arrangements.
Section 801 of the National Defense Authorization Act for Fiscal Year
2002 required DOD to establish a management structure for the
procurement of services, including developing a structure for reviewing
individual service transactions, holding accountable employees
responsible for procuring services, and collecting and analyzing
service contract data.[Footnote 20] In addition, section 802 of the
National Defense Authorization Act for Fiscal Year 2002 established a
goal for DOD to use improved management practices to achieve savings in
expenditures for procurement of services. In response to this
requirement, DOD and the military departments established a service
acquisition management structure, including processes at the
headquarters level for reviewing individual, high-dollar acquisitions.
The National Defense Authorization Act for Fiscal Year 2006 further
developed the requirements for a management structure for the
procurement of contract services.[Footnote 21] Among other things, the
National Defense Authorization Act for Fiscal Year 2006 required DOD's
management structure to provide for the Under Secretary of Defense for
Acquisition, Technology and Logistics (USDAT&L) to:
* establish contract services acquisition categories, based on dollar
thresholds, for the purpose of establishing the level of review,
decision authority, and applicable procedures[Footnote 22]
* identify the critical skills and competencies needed to carry out the
procurement of services.
The National Defense Authorization Act for Fiscal Year 2006 also
required the USDAT&L and senior acquisition management officials within
the military departments to ensure that competitive procedures and
performance-based contracting are used to the maximum extent
practicable. In 2006, DOD updated its policies aimed at strengthening
how it plans, manages, and oversees services acquisition in response to
the legislation. Later, in December 2008, DOD incorporated its
acquisition review thresholds for major services acquisitions in DOD
Instruction 5000.02, Operation of the Defense Acquisition System.
The National Defense Authorization Act for 2008[Footnote 23] required
DOD to take additional actions to improve its visibility over the
department's reliance on services contractors as well as its management
and oversight of its services acquisitions.
* Section 807 required DOD to provide Congress an annual inventory of
contractor-provided services, to include information on the missions
and functions of the contractor, the number of full-time contractor
employees paid for performing the activity, and the organization whose
requirements are being met through contractor performance. In addition,
this provision required the military departments to review the
inventory to identify activities that should be considered for
conversion to performance by DOD civilian employees or to an
acquisition approach that would be more advantageous to DOD. The first
inventory was to have been reported to Congress not later than June 30,
2008. At this time however, only the Army has begun the process to
comply with this requirement. According to DOD officials, the Air Force
and Navy will issue their prototype inventories in the third quarter of
fiscal year 2009.
* Section 808 required DOD to issue guidance and implementation
instructions for performing periodic independent management reviews of
contracts for services. In September 2008, DOD issued a policy
memorandum to implement these reviews, referred to as peer reviews.
[Footnote 24] Under DOD's plan the Director, Defense Procurement,
Acquisition Policy and Strategic Sourcing would be responsible for
implementing reviews of acquisitions of services with an estimated
maximum value of over $1 billion, while the DOD components would be
responsible for reviews of acquisitions under $1 billion. In February
2009, DOD revised its guidance for how the review teams should conduct
peer reviews to address pre-and-post-award review elements of the
acquisition and the criteria that should be used to conduct these
reviews. According to DOD officials, this guidance was developed as
part of the agency's response to some of the issues identified in our
DOD contact management high risk area. We continue to monitor DOD's
implementation of these efforts.
In late 2008, DOD began an effort, directed by the Chairman of the
Joint Chiefs of Staff, to examine the department's use of service
contracts in Iraq and Afghanistan. The purpose of this effort is to
improve DOD's understanding of the range and depth of contractor
capabilities necessary to support the Joint Force. The study will
address where DOD is most reliant on contractor support, informing
longer term force structure issues such as the potential for increasing
DOD's military and civilian work force in order to in-source services
currently provided by contractors.
We have also made numerous recommendations over the past 10 years aimed
at improving DOD's management and oversight of contractors supporting
deployed forces, including the need for (1) DOD-wide guidance on how to
manage contractors that support deployed forces, (2) improved training
for military commanders and contract oversight personnel, and (3) a
focal point within DOD dedicated to leading DOD's efforts to improve
the management and oversight of contractors supporting deployed forces.
In addition, Section 854 of the National Defense Authorization Act for
2007 directed the Secretary of Defense in consultation with the
Chairman of the Joint Chiefs of Staff to develop joint policies for
requirements definition, contingency program management, and
contingency contracting during combat and post-conflict operations.
[Footnote 25] The National Defense Authorization Act for Fiscal Year
2008 added a new requirement directing that these joint policies
provide for training of military personnel outside the acquisition
workforce who are expected to have acquisition responsibilities
including oversight of contracts or contractors during combat
operations, post-conflict operations and contingency operations.
[Footnote 26]
As we reported in November 2008, while DOD has more to do in this area,
it is developing, revising, and finalizing new joint policies and
guidance on the department's use of contractors to support deployed
forces.[Footnote 27] Examples include:
* In October 2008, DOD finalized Joint Publication 4-10, Operational
Contract Support, which establishes doctrine for planning, conducting,
and assessing operational contract support integration and contractor
management functions in support of joint operations. The joint
publication provides standardized guidance and information related to
integrating operational contract support and contractor management.DOD
is revising DOD Instruction 3020.41, Program Management for the
Preparation and Execution of Acquisitions for Contingency Operations,
which strengthens the department's joint policies and guidance on
program management, including the oversight of contractor personnel
supporting a contingency operation.
DOD has also taken steps to improve the training of military commanders
and contract oversight personnel. As we reported in November 2008, the
Deputy Secretary of Defense issued a policy memorandum in August 2008
directing the appointment of trained contracting officer's
representatives prior to the award of contracts.[Footnote 28] U.S.
Joint Forces Command is developing two training programs for non-
acquisition personnel to provide information necessary to operate
effectively on contingency contracting matters and work with
contractors on the battlefield. In addition, the Army has a number of
training programs available that provide information on contract
management and oversight to operational field commanders and their
staffs. The Army is also providing similar training to units as they
prepare to deploy, and DOD, the Army, and the Marine Corps have begun
to incorporate contractors and contract operations in mission rehearsal
exercises.
In October 2006, the Deputy Under Secretary of Defense for Logistics
and Materiel Readiness established the office of the Assistant Deputy
Under Secretary of Defense (Program Support) to act as the focal point
for DOD's efforts to improve the management and oversight of
contractors supporting deployed forces. This office has taken several
steps to help formalize and coordinate efforts to address issues
related to contractor support to deployed forces. For example, the
office took a leading role in establishing a community of practice for
operational contract support--comprising subject matter experts from
the Office of the Secretary of Defense, the Joint Staff, and the
services--that may be called upon to work on a specific task or
project. Additionally, the office helped establish a Joint Policy
Development General Officer Steering Committee to guide the development
of the Office of the Secretary of Defense, Joint Staff, and service
policy, doctrine, and procedures to adequately reflect situational and
legislative changes as they occur within operational contract support.
In addition, DOD has efforts under way to identify and improve the
skills and capabilities of its workforce. For example, in response to
recommendations from the Gansler Commission,[Footnote 29] the Army
proposed increasing its acquisition workforce by over 2,000 personnel.
However, the Army also acknowledged that this process will take at
least 3 to 5 years to complete. In addition, we continue to monitor
DOD's planned and completed corrective actions to address our audit
report recommendations to improve its acquisition of services.
Concluding Observations:
As the largest buyer of services in the federal government, and
operating in an environment where the nation's large and growing
deficits require difficult resource decisions, DOD must maximize its
return on investment and provide the warfighter with needed
capabilities at the best value for the taxpayer. DOD has recognized
that it faces challenges with contract management and the department
has taken steps to address these challenges, including those outlined
in this testimony. These challenges are daunting. While DOD's recent
initiatives may improve how the department plans service acquisitions
at a strategic level, these efforts will not payoff unless DOD's
leadership can translate its vision into changes in frontline
practices. At this point, DOD does not know how well its services
acquisition processes are working and whether it is obtaining the
services it needs while protecting DOD's and the taxpayer's interests.
While DOD has generally agreed with our recommendations intended to
improve contract management, much remains to be done. For example:
* In the near term, DOD must act forcefully to implement new procedures
and processes in a sustained, consistent, and effective manner across
the department. Doing so will require continued, sustained commitment
by senior DOD leadership to translate policy into practice and to hold
decision makers accountable.
* At the same time, while the department and its components have taken
or plan to take actions to further address contract management
challenges, many of these actions, such as the Army's efforts to
increase its acquisition workforce, will not be fully implemented for
several years. DOD will need to monitor such efforts to ensure that
intended outcomes are achieved.
* At the departmentwide level, DOD has yet to conduct the type of
fundamental reexamination of its reliance on contractors that we called
for in 2008.[Footnote 30] Without understanding the depth and breadth
of contractor support, the department will be unable to determine if it
has the appropriate mix of military personnel, DOD civilians, and
contractors. As a result, DOD may not be totally aware of the risks it
faces and will therefore be unable to mitigate those risks in the most
cost-effective and efficient manner.
* The implementation of existing and emerging policy, monitoring of the
department's actions, and the comprehensive assessment of what should
and should not be contracted for are not easy tasks, but they are
essential if DOD is to place itself in a better position to deliver
goods and services to the warfighters. Moreover, with an expected
increase of forces in Afghanistan, the urgency for action is heightened
to help the department avoid the same risks of fraud, waste, and abuse
it has experienced using contractors in support of Operation Iraqi
Freedom.
Mr. Chairman and members of the committee, this concludes our
testimony. We would be happy to answer any questions you might have.
[End of section]
Contacts and Acknowledgments:
For further information about this testimony, please contact John
Hutton, Director, Acquisition and Sourcing Management, on (202) 512-
4841 or huttonj@gao.gov or William Solis, Director, Defense
Capabilities and Management, on (202) 512-8365 or solisw@gao.gov.
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this testimony. Other key
contributors to this testimony include Carole Coffey, Timothy DiNapoli,
Justin Jaynes, John Krump, Christopher Mulkins, James A. Reynolds,
Karen Thornton, Thomas Twambly, and Anthony Wysocki.
[End of section]
Appendix I: Selected GAO Products:
High-Risk Series:
High-Risk Series: An Update. [hyperlink,
http://www.gao.gov/products/GAO-09-271]. Washington, D.C.: January
2009.
Contract Management:
Defense Contracting: Army Case Study Delineates Concerns with Use of
Contractors as Contract Specialists. [hyperlink,
http://www.gao.gov/products/GAO-08-360]. Washington, D.C.: March 26,
2008.
Defense Contract Management: DOD's Lack of Adherence to Key Contracting
Principles on Iraq Oil Contract Put Government Interests at Risk.
[hyperlink, http://www.gao.gov/products/GAO-07-839]. Washington, D.C.:
July 31, 2007.
Defense Contracting: Improved Insight and Controls Needed over DOD's
Time-and-Materials Contracts. [hyperlink,
http://www.gao.gov/products/GAO-07-273]. Washington, D.C.: June 29,
2007.
Defense Contracting: Use of Undefinitized Contract Actions Understated
and Definitization Time Frames Often Not Met. [hyperlink,
http://www.gao.gov/products/GAO-07-559]. Washington, D.C.: June 19,
2007.
Defense Acquisitions: Improved Management and Oversight Needed to
Better Control DOD's Acquisition of Services. [hyperlink,
http://www.gao.gov/products/GAO-07-832T]. Washington, D.C.: May 10,
2007.
Defense Acquisitions: Tailored Approach Needed to Improve Service
Acquisition Outcomes. [hyperlink,
http://www.gao.gov/products/GAO-07-20]. Washington, D.C.: November 9,
2006.
Operational Contract Support:
Contract Management: DOD Developed Draft Guidance for Operational
Contract Support but Has Not Met All Legislative Requirements.
[hyperlink, http://www.gao.gov/products/GAO-09-114R]. Washington, D.C.:
November 20, 2008.
Contingency Contracting: DOD, State, and USAID Contracts and Contractor
Personnel in Iraq and Afghanistan. [hyperlink,
http://www.gao.gov/products/GAO-09-19]. Washington, D.C.: October 1,
2008.
Military Operations: DOD Needs to Address Contract Oversight and
Quality Assurance Issues for Contracts Used to Support Contingency
Operations. [hyperlink, http://www.gao.gov/products/GAO-08-1087].
Washington, D.C: September 26, 2008.
Defense Management: DOD Needs to Reexamine Its Extensive Reliance on
Contractors and Continue to Improve Management and Oversight.
[hyperlink, http://www.gao.gov/products/GAO-08-572T]. Washington, D.C.:
March 11, 2008.
Defense Logistics: The Army Needs to Implement an Effective Management
and Oversight Plan for the Equipment Maintenance Contract in Kuwait.
[hyperlink, http://www.gao.gov/products/GAO-08-316R]. Washington, D.C.:
January 22, 2008.
[End of section]
Footnotes:
[1] GAO, High-Risk Series: An Update, [hyperlink,
http://www.gao.gov/products/GAO-09-271] (Washington, D.C.: January
2009).
[2] GAO, Defense Acquisitions: Measuring the Value of DOD's Weapon
Programs Requires Starting with Realistic Baselines, [hyperlink,
http://www.gao.gov/products/GAO-09-543T] (Washington, D.C.: Apr. 2009).
[3] GAO, Defense Acquisitions: Tailored Approach Needed to Improve
Service Acquisition Outcomes, [hyperlink,
http://www.gao.gov/products/GAO-07-20] (Washington, D.C.: November
2006).
[4] Generally accepted government auditing 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 the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives.
[5] In March 2009, we recommended DOD improve its management and
oversight of its acquisition workforce. See GAO, Department of Defense:
Additional Actions and Data Are Needed to Effectively Manage and
Oversee DOD's Acquisition Workforce, [hyperlink,
http://www.gao.gov/products/GAO-09-342] (Washington, D.C.: Mar. 25,
2009).
[6] GAO, Defense Contract Management: DOD's Lack of Adherence to Key
Contracting Principles on Iraq Oil Contract Put Government Interests at
Risk, [hyperlink, http://www.gao.gov/products/GAO-07-839] (Washington,
D.C.: July 31, 2007).
[7] GAO, Stabilizing and Rebuilding Iraq: Actions Needed to Address
Inadequate Accountability over U.S. Efforts and Investments,
[hyperlink, http://www.gao.gov/products/GAO-08-568T] (Washington, D.C.:
Mar. 11, 2008) and Iraq Contract Costs and DOD Consideration of Defense
Contract Audit Agency's Findings, [hyperlink,
http://www.gao.gov/products/GAO-06-1132] (Washington, D.C.: Sept. 25,
2006).
[8] GAO, Defense Logistics: Improved Analysis and Cost Data Needed to
Evaluate the Cost-effectiveness of Performance Based Logistics,
[hyperlink, http://www.gao.gov/products/GAO-09-41] (Washington, D.C.:
Dec. 19, 2008).
[9] Cost reimbursable contracts include cost-plus-fixed-fee, cost-plus-
award-fee, and time-and materials contracts.
[10] GAO, Defense Logistics: The Army Needs to Implement an Effective
Management and Oversight Plan for the Equipment Maintenance Contract in
Kuwait, [hyperlink, http://www.gao.gov/products/GAO-08-316R]
(Washington, D.C.: Jan. 22, 2008).
[11] GAO, Defense Contracting: Improved Insight and Controls Needed
over DOD's Time-and-Materials Contracts, [hyperlink,
http://www.gao.gov/products/GAO-07-273] (Washington, D.C.: June 29,
2007).
[12] GAO, Defense Contracting: Use of Undefinitized Contract Actions
Understated and Definitization Time Frames Often Not Met, [hyperlink,
http://www.gao.gov/products/GAO-07-559] (Washington, D.C.: June 19,
2007).
[13] GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, [hyperlink,
http://www.gao.gov/products/GAO-04-854] (Washington, D.C.: July 19,
2004).
[14] GAO, Military Operations: DOD Needs to Address Contract Oversight
and Quality Assurance Issues for Contracts Used to Support Contingency
Operations, [hyperlink, http://www.gao.gov/products/GAO-08-1087]
(Washington, D.C: Sept. 26, 2008).
[15] [hyperlink, http://www.gao.gov/products/GAO-09-41].
[16] [hyperlink, http://www.gao.gov/products/GAO-08-1087].
[17] GAO, Military Operations: High-Level DOD Action Needed to Address
Long-standing Problems with Management and Oversight of Contractors
Supporting Deployed Forces, [hyperlink,
http://www.gao.gov/products/GAO-07-145] (Washington, D.C.: Dec. 18,
2006).
[18] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and
Incentive Fees Regardless of Acquisition Outcomes, [hyperlink,
http://www.gao.gov/products/GAO-06-66] (Washington D.C.: Dec. 19,
2005).
[19] GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, [hyperlink,
http://www.gao.gov/products/GAO-05-274] (Washington, D.C.: Mar. 17,
2005).
[20] Pub. L. No. 107-107, §§ 801 (2001) (section 801 added sections
2330 and 2330a to Title 10 of the U.S. Code).
[21] Pub. L. No. 109-163, § 812 (2006).
[22] The requirements pertaining to establishing contract service
acquisition categories were to be phased in over a period of 3 years,
with the first categories, for acquisitions with an estimated value of
$250 million or more, to be established by October 2006.
[23] P.L. 110-181.
[24] During these reviews, teams of DOD acquisition officials are to
review aspects of services acquisitions including: requirements
definition and documentation, contractor surveillance, and staffing of
contract management and oversight functions. In December 2008, DOD
incorporated its peer review requirements for major services
acquisitions in DOD Instruction 5000.02, Operation of the Defense
Acquisition System.
[25] Pub. L. No. 109-364, §854(d).
[26] Pub. L. No. 110-181, § 849(a).
[27] GAO, Contract Management: DOD Developed Draft Guidance for
Operational Contract Support but Has Not Met All Legislative
Requirements, [hyperlink, http://www.gao.gov/products/GAO-09-114R]
(Washington, D.C.: Nov. 20, 2008).
[28] [hyperlink, http://www.gao.gov/products/GAO-09-114R].
[29] Commission on Army Acquisition and Program Management in
Expeditionary Operations, Urgent Reform Required: Army Expeditionary
Contracting (Wash., D.C.: Oct. 31, 2007).
[30] GAO, Defense Management: DOD Needs to Reexamine Its Extensive
Reliance on Contractors and Continue to Improve Management and
Oversight, [hyperlink, http://www.gao.gov/products/GAO-08-572T]
(Washington, D.C.: Mar. 11, 2008).
[End of section]
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