Defense Outsourcing

The Office of Management and Budget's (OMB) Circular A-76 and its supplemental handbook provide guidance to federal agencies on how to decide whether to contract out for commercial goods, services, and activities. This report examines three provisions associated with a March 1996 revision to the A-76 supplemental handbook. GAO discusses (1) the basis for OMB's new requirement that a standardized 12-percent overhead rate be applied to in-house cost estimates, regardless of the type of commercial activity or where in the country the activity is to be performed; (2) whether the Defense Department has developed a separate overhead rate for military personnel and, if so, the basis for that rate; and (3) how "best value" criteria are expected to be used in A-76 competitions.

GAO noted that: (1) because actual cost data in government agencies have historically been unavailable and unreliable, OMB told GAO it lacked meaningful information on which to develop a standard overhead rate or to differentiate between particular types of activities or regions of the country; (2) absent this data, OMB selected a single overhead rate of 12 percent, a rate that was near the midpoint of overhead rates suggested by government agencies and private sector groups; (3) most government and private-sector groups GAO contacted agreed that reasonable levels of overhead should be included in A-76 cost estimates and, absent anything better, the 12-percent rate is acceptable at this time; (4) in this respect, the revised handbook allows federal agencies to develop their own rates, but to date, none have done so; (5) while the 12-percent rate represents an appropriate move toward including overhead costs in government cost estimates, until actual overhead costs are captured, the magnitude of savings expected will be uncertain and the results of A-76 studies are apt to continue to be controversial; (6) recent legislation and federal management reforms emphasize the need for such actual cost data; (7) despite the requirement to develop a separate rate for military personnel included in government in-house estimates, DOD officials that manage commercial activity programs have no plans to develop such a rate; (8) they explained that, by definition, commercial activities under the A-76 program should not include any military-essential functions; (9) therefore, when they prepare an in-house estimate under the A-76 program, they assume that all military personnel currently working in the activity will be reassigned and the activity will be staffed with civilians, therefore no overhead costs for military personnel will be incurred; (10) the use of best-value procurement is an important development; (11) while not appropriate for use in all cases, best-value helps ensure that decisions to outsource are based on a number of important, performance-related factors, not just cost; (12) recently, only the Air Force has used best-value criteria, and only in 5 of its 15 competitions completed since March 1996; and (13) in the future, DOD officials expect to use best-value criteria for activities for which performance standards are particularly important, but not for more routine tasks often associated with base support activities.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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