Proposed Revisions to OMB Circular A-76
Gao ID: GAO-03-391R January 16, 2003This report contains GAO's assessment of the Office of Management and Budget's (OMB) efforts to revise OMB Circular A-76, which prescribes policies and procedures agencies must use when considering the transfer of commercial activities between the public and private sectors. The proposed revision was issued for public comment on November 19, 2002. GAO found the proposed revision consistent in many ways with the sourcing principles and recommendations adopted by the Commercial Activities Panel. There are several areas, however, where the proposed revisions to the Circular are not consistent with the principles or recommendations of the Commercial Activities Panel. Specifically, these include the absence of a link between sourcing policy and agency missions, unnecessarily complicated source selection procedures, certain unrealistic time frames, and insufficient guidance on calculating savings.
RecommendationsOur 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.
Director: William T. Woods Team: Government Accountability Office: Acquisition and Sourcing Management Phone: (202) 512-8214GAO-03-391R, Proposed Revisions to OMB Circular A-76
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January 16, 2003:
The Honorable Mitchell E. Daniels, Jr.
Director, Office of Management:
and Budget:
Subject: Proposed Revisions to OMB Circular A-76:
Dear Mr. Daniels:
I want to recognize the considerable effort expended by you and your
team on the proposed revision to Office of Management and Budget (OMB)
Circular A-76, which prescribes policies and procedures agencies must
use when considering the transfer of commercial activities between the
public and private sectors. The proposed revision was issued for public
comment on November 19, 2002, and I understand that OMB has received
hundreds of comments on the proposal. As you consider these comments, I
want to provide GAO‘s assessment of the proposed changes, as well as
our recommendations for how the proposal could be improved.
The proposed revision in many ways is consistent with the sourcing
principles and recommendations adopted by the Commercial Activities
Panel, which I chaired, in its April 30, 2002, report.[Footnote 1] In
particular, the proposal stresses the use of competition in making
sourcing decisions and, through reliance on procedures contained in the
Federal Acquisition Regulation (FAR), should result in a more
transparent, expeditious, fair, and consistently applied competitive
process. The proposal should promote sourcing decisions that reflect
the best overall value to the agencies, rather than just the lowest
cost. Importantly, the proposed revision also should result in greater
accountability for performance, regardless of the service provider
selected.
There are several areas, however, where the proposed revisions to the
Circular are not consistent with the principles or recommendations of
the Commercial Activities Panel. Specifically, these include the
absence of a link between sourcing policy and agency missions,
unnecessarily complicated source selection procedures, certain
unrealistic time frames, and insufficient guidance on calculating
savings. Each of these areas is discussed in detail below, together
with recommendations intended to align the proposal more fully with the
views expressed by the Panel.
Emphasize Sourcing As a Strategic Issue:
The first of the 10 sourcing principles unanimously adopted by the
Panel is that federal sourcing policy should support agency missions,
goals, and objectives. In other words, sourcing policy is not just
about choosing among potential service providers. Rather, an agency‘s
sourcing policy should be viewed as part of an overall strategy for how
best to accomplish the mission of the agency, including how it conducts
human capital planning. The current A-76 Revised Supplemental Handbook
reflects this idea by pointing out that in focusing on core mission
competencies and service requirements, agencies should consider a wide
range of options, including restructuring, privatization, devolution of
activities to state and local governments, or the termination of
obsolete functions. To this list of options, the Panel recommended
adding high-performing organizations and public-private partnerships.
The proposed revision, however, does not list these or other
options,[Footnote 2] nor does it otherwise stress the importance of
considering alternative approaches to accomplishing agency missions.
Given that many of these options can result in improved efficiency and
enhanced performance, we recommend that the Circular continue to
encourage agencies to consider these and other alternatives to A-76.
Source Selection Issues:
The Panel recommended that public-private competitions be conducted
using the framework of the FAR, with appropriate changes to accommodate
public-sector proposals. For the most part, the proposed revised
Circular would implement this recommendation in a manner consistent
with the Panel‘s principles. We have concerns, however, regarding the
source selection evaluation approaches contained in the proposal.
The proposed revised Circular provides for two different types of
evaluation approaches--“integrated“ and ’phased“--to address cases
where an agency may wish to make trade-offs between cost and higher
performance levels in selecting a service provider. The trade-off
concept is fully consistent with the Panel‘s call for a process that
considers both quality and cost factors and is used routinely
throughout the government in FAR-based acquisitions. In the proposed
integrated approach, however, the revised Circular would require that
decisions to select other than the lowest cost provider be supported by
a ’quantifiable rationale.“ While it is certainly reasonable to expect
procurement officials to articulate the rationale for their decisions-
-and the FAR requires that they do so--there is no requirement in the
FAR that the rationale be ’quantifiable.“ It is not clear what is
intended by the use of the term ’quantifiable,“ or what the agencies
would need to do beyond what the FAR currently requires to ensure that
trade-off decisions are justified and adequately explained. We
recommend that the revised Circular include additional guidance
concerning any requirement that an agency‘s trade-off decision be
’quantifiable.“:
In the phased evaluation approach, an agency would evaluate the
technical merit of tenders and offers in the first phase, adjust its
required performance standards as needed, and then select the lowest-
cost provider in the second phase. This approach raises two issues.
First, in the technical evaluation phase, the agency essentially would
conduct a cost-benefit analysis for each instance in which a proposed
performance standard differed from a solicitation requirement. This
process, which does not appear to be based on the FAR, likely would be
quite burdensome both for the offerors, who must assign specific dollar
values to each differing level of performance, and for the agencies in
evaluating the costs and benefits of differing performance levels for
perhaps scores of discrete performance standards. Second, should it
decide that an offered performance standard is desirable, an agency
would be required to advise all competitors of its revised requirements
and allow the submission of revised proposals or tenders. Particularly
for some of the more complex requirements, this process could serve as
a disincentive to innovation should offerors become reluctant to
propose improved ways to enhance contract performance out of fear that
their proposed approaches will be shared with their competitors. We
recommend that the phased evaluation approach be revised to simplify
the process and ensure the protection of certain proprietary and highly
competition-sensitive information.
Unrealistic Time Frames:
In the course of its review, the Commercial Activities Panel repeatedly
heard complaints from all sides about the length of time required to
conduct A-76 cost comparisons, and there is an obvious effort in the
proposed revision to expedite the process. The proposal would establish
a 12-month limit for completing the standard competition process and,
within that time frame, a 4-month limit for source selection. In our
view, however, the proposed required time frames are unrealistic. Over
the last 5 years, the average time to complete a cost comparison
process in the Department of Defense was 25 months (excluding appeals
and protests). Source selection alone averaged 7 months. While these
averages demonstrate the need to expedite the process, we question
whether simply imposing aggressive, fixed deadlines is the answer.
Rather, additional training, technical resources, or other support for
agency officials in preparing for and participating in public-private
competitions may be needed. We recommend that the time frames be
revised to be more realistic (perhaps 15 to 18 months overall) and that
OMB ensure that agencies provide sufficient resources to comply with
the new A-76 requirements.
Business Case Direct Conversions:
The Commercial Activities Panel strongly supported continued emphasis
on competition in determining whether the public or the private sectors
should perform commercial services. In fact, the Panel said that direct
conversions from one sector to another without the benefit of
competition generally should occur only where the number of affected
positions is de minimis (10 or fewer full-time equivalent [FTE]
positions). For the most part, the proposed revision of A-76 would
maintain current policy and permit direct conversions only in limited
circumstances, such as for direct research and development, for
national defense or intelligence security with the prior approval of
OMB, or for ’small activities“ (i.e., 10 or fewer civilian employees).
The proposed revision would expand the list of permissible direct
conversions, however, to include activities performed by up to 50
employees based on a ’business case analysis.“ This analysis, which is
essentially the same as the streamlined cost comparisons currently
permitted for activities involving up to 65 positions, would compare
the estimated cost of agency performance with the lowest-priced
existing contract for a similar workload to determine whether to
directly convert the function.
We have two concerns about the proposed business case direct
conversions. First,
changing the characterization of the process from a streamlined cost
comparison to a business case direct conversion sends an unfortunate
signal that the administration is attempting to increase the number of
direct conversions. As you know, this is a particularly sensitive
matter for federal employees, whose trust in the objectivity and
fairness of the system will be critical to the success of the
administration‘s competitive sourcing initiative. Second, the cost
comparison would continue to be based upon an agency‘s current
organization, with no opportunity for developing a ’most efficient
organization“ (MEO). We recommend that the proposed revision require
that any streamlined cost comparison be based on a reliable estimate of
the efficiencies likely to be realized through the creation of an in-
house MEO. Should the cost comparison indicate that continued agency
performance of the function would be more advantageous to the
government than other alternatives, the agency should be required to
develop and implement the MEO.
Lack of Guidance on Calculating Savings:
The Circular requires that agencies report the savings that accrue from
A-76 competitions. The Circular does not provide any guidance, however,
on how savings are to be calculated. Our work examining the use of
Circular A-76 in the Department of Defense has shown a lack of
consistency among and even within the military services in how they
calculate savings. While our analyses indicate that significant savings
are likely from many of these competitions, we have not been able to
quantify the precise level of savings because of the lack of good
baseline data and other limitations. Calculation of savings is an area
that requires additional OMB guidance.
Implementation Is Key:
Finally, the critical issue for all affected parties is how the
government‘s sourcing policies are implemented. In this regard, one of
the Panel‘s sourcing principles was that the government should avoid
arbitrary numerical or FTE goals. This principle is based on the
concept that the success of government programs should be measured by
the results achieved in terms of providing value to the taxpayer, not
the size of the in-house or contractor workforce. Although the proposed
revised Circular contains no numerical targets or goals for competitive
sourcing, this has been a controversial area in the past. In our view,
the administration needs to avoid arbitrary targets or quotas, or any
goal that is not based on considered research and analysis.
With the changes specified above, the revised Circular A-76 would be
more consistent with the recommendations of the Commercial Activities
Panel and with the sourcing principles the Panel adopted. Please
contact me at (202) 512-5500 or Bill Woods, Director, Acquisition and
Sourcing Management, if you would like further discussion of these
issues. Bill can be reached at (202) 512-8214 or at Woodsw@gao.gov.
Sincerely yours,
David M. Walker:
Comptroller General of the United States:
Signed by David M. Walker
cc: Mark Everson:
Deputy Director for Management:
Angela Styles:
Administrator, Office of:
Federal Procurement Policy:
(120191):
FOOTNOTES
[1] Commercial Activities Panel, Improving the Sourcing Decisions of
the Government (Washington, D.C.: April 30, 2002).
[2] In fact, the proposed Circular discourages public-private
partnerships by prohibiting agencies from entering into new contracts
when creating ’most efficient organizations.“
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