Interagency Contracting
Franchise Funds Provide Convenience, but Value to DOD is Not Demonstrated Gao ID: GAO-05-456 July 29, 2005The Department of Defense (DOD) is the largest user of other federal agencies' contracting services. The availability of these contracting services has enabled DOD and other departments to save time by paying other agencies to award and administer contracts for goods and services on their behalf. DOD can access these contracting services a number of ways, such as ordering directly from interagency contracts for commonly needed items. DOD also can pay someone else to do the work. For example, DOD uses franchise funds, which are government-run, fee-for-service organizations that provide a portfolio of services, including contracting services. As part of a congressional mandate, GAO assessed whether franchise funds ensured fair and reasonable prices for goods and services, whether DOD analyzed purchasing alternatives, and whether DOD and franchise funds ensured value by defining contract outcomes and overseeing contractor performance.
GovWorks and FedSource, two of the franchise funds that DOD has relied on for contracting services, have not always ensured fair and reasonable prices while purchasing goods and services. The franchise funds also may have missed opportunities to achieve savings from millions of dollars in purchases, including engineering, telecommunications, or construction services. In the course of its review, GAO examined $249 million worth of orders and work assignments from the contracts the franchise funds used to make purchases on DOD's behalf. In many cases, GovWorks sought but did not receive competing proposals. GovWorks added substantial work--as much as 20 times above the original value of a particular order--without determining that prices were fair and reasonable. FedSource generally did not ensure competition for work, did not conduct price analyses, and sometimes paid contractors higher prices for services than established in contracts with no justification provided in the contract files. For its part, DOD--in the absence of clear guidance on the proper use of other agencies' contracting services--chose to use franchise funds on the basis of convenience without analyzing whether using franchise funds' contracting services was the best method for meeting purchasing needs. DOD also lacks information about purchases made through other agencies contracts, including franchise funds, which makes it difficult to make informed decisions about the use of these types of contracts. The franchise funds' business-operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors. However, the franchise funds did not perform analyses that DOD could have used to assess whether the funds deliver good value. The funds' performance measures generally focus on customer satisfaction and generating revenues. These measures create an incentive to increase sales volume and meet customer demands at the expense of ensuring proper use of contracts and good value. DOD and the franchise funds--which share responsibility for ensuring value through sound contracting practices such as defining contract outcomes and overseeing contractor performance--did not adequately define requirements. Without well-defined requirements, DOD and the franchise funds lacked criteria to measure contractor performance effectively. On a separate oversight-related issue, GAO found that the departments of the Interior and the Treasury--each of which has responsibility in the successful operation of the respective franchise funds--and the Office of Management of Budget have performed little oversight of GovWorks and FedSource.
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: Team: Phone:GAO-05-456, Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD is Not Demonstrated
This is the accessible text file for GAO report number GAO-05-456
entitled 'Interagency Contracting: Franchise Funds Provide Convenience,
but Value to DOD is Not Demonstrated' which was released on July 29,
2005.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
United States Government Accountability Office:
GAO:
July 2005:
Interagency Contracting:
Franchise Funds Provide Convenience, but Value to DOD is Not
Demonstrated:
GAO-05-456:
GAO Highlights:
Highlights of GAO-05-456, a report to congressional committees:
Why GAO Did This Study:
The Department of Defense (DOD) is the largest user of other federal
agencies‘ contracting services. The availability of these contracting
services has enabled DOD and other departments to save time by paying
other agencies to award and administer contracts for goods and services
on their behalf. DOD can access these contracting services a number of
ways, such as ordering directly from interagency contracts for commonly
needed items. DOD also can pay someone else to do the work. For
example, DOD uses franchise funds, which are government-run, fee-for-
service organizations that provide a portfolio of services, including
contracting services. As part of a congressional mandate, GAO assessed
whether franchise funds ensured fair and reasonable prices for goods
and services, whether DOD analyzed purchasing alternatives, and whether
DOD and franchise funds ensured value by defining contract outcomes and
overseeing contractor performance.
What GAO Found:
GovWorks and FedSource, two of the franchise funds that DOD has relied
on for contracting services, have not always ensured fair and
reasonable prices while purchasing goods and services. The franchise
funds also may have missed opportunities to achieve savings from
millions of dollars in purchases, including engineering,
telecommunications, or construction services. In the course of its
review, GAO examined $249 million worth of orders and work assignments
from the contracts the franchise funds used to make purchases on DOD‘s
behalf. In many cases, GovWorks sought but did not receive competing
proposals. GovWorks added substantial work”as much as 20 times above
the original value of a particular order”without determining that
prices were fair and reasonable. FedSource generally did not ensure
competition for work, did not conduct price analyses, and sometimes
paid contractors higher prices for services than established in
contracts with no justification provided in the contract files.
For its part, DOD”in the absence of clear guidance on the proper use of
other agencies‘ contracting services”chose to use franchise funds on
the basis of convenience without analyzing whether using franchise
funds‘ contracting services was the best method for meeting purchasing
needs. DOD also lacks information about purchases made through other
agencies contracts, including franchise funds, which makes it difficult
to make informed decisions about the use of these types of contracts.
The franchise funds‘ business-operating principles require that they
maintain and evaluate cost and performance benchmarks against their
competitors. However, the franchise funds did not perform analyses that
DOD could have used to assess whether the funds deliver good value. The
funds‘ performance measures generally focus on customer satisfaction
and generating revenues. These measures create an incentive to increase
sales volume and meet customer demands at the expense of ensuring
proper use of contracts and good value.
DOD and the franchise funds”which share responsibility for ensuring
value through sound contracting practices such as defining contract
outcomes and overseeing contractor performance”did not adequately
define requirements. Without well-defined requirements, DOD and the
franchise funds lacked criteria to measure contractor performance
effectively. On a separate oversight-related issue, GAO found that the
departments of the Interior and the Treasury”each of which has
responsibility in the successful operation of the respective franchise
funds”and the Office of Management of Budget have performed little
oversight of GovWorks and FedSource.
What GAO Recommends:
GAO recommends that DOD, the departments of the Interior and the
Treasury, and the Office of Management and Budget improve the manner in
which franchise funds are utilized to ensure value and to ensure
compliance with procurement regulations. The agencies concurred with
GAO‘s recommendations and identified actions they have taken or plan to
take to address them.
www.gao.gov/cgi-bin/getrpt?GAO-05-456.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact David E. Cooper at (202)
512-4125 or cooperd@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Franchise Funds Did Not Always Ensure Fair and Reasonable Prices or
Competitive Procedures:
DOD Focused on Convenience and Did Not Pay Sufficient Attention to
Analyzing Contracting Alternatives:
DOD and Franchise Funds Did Not Pay Sufficient Attention to Defining
Outcomes or Overseeing Contractor Performance:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Franchise Fund Operating Principles:
Appendix III: Overview of Contract Documents Used at GovWorks and
FedSource:
Appendix IV: Comments from the Department of Defense:
Appendix V: Comments from the Department of the Treasury:
Tables:
Table 1: Steps to Purchase Good or Service through GovWorks or
FedSource:
Table 2: Contracting Methods Used by GovWorks or FedSource:
Table 3: GovWorks Fiscal Year 2003 Orders:
Table 4: FedSource Fiscal Year 2003 Projects Reviewed:
Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions of
Dollars):
Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions of
Dollars):
Table 7: GovWorks Contract Documents Used to Define Desired Outcomes
and Performance Criteria:
Table 8: FedSource Contract Documents Used to Define Desired Outcomes
and Performance Criteria:
Figures:
Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues:
Figure 2: Example of Project for Which Army Paid FedSource 17 Percent
In Fees and Markups:
Abbreviations:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
GSA: General Services Administration:
United States Government Accountability Office:
Washington, DC 20548:
July 29, 2005:
Congressional Committees:
In recent years, federal agencies have made increasing use of other
agencies' contracting services to purchase goods and services in less
turnaround time. Use of these services, generally referred to as
interagency contracting, has enabled federal agencies to reduce the
time they spend awarding and administering contracts in the face of
acquisition workforce reductions and growing workloads. Although these
services have grown rapidly and have helped streamline purchasing,
using the many types of contracts demands a high degree of business
acumen and contracting knowledge. Federal agencies can obtain
contracting services through entrepreneurial, fee-for-service
organizations, which are government-run but operate like businesses.
Franchise funds are one such type of organization.
We have reported on the challenges of using other agencies' contracting
services and have cited the need to effectively manage this contracting
environment. Indeed, we and the inspectors general of some federal
agencies have found instances in which interagency contracts have been
improperly used. Furthermore, we have reported that the agencies that
provide and the agencies that use interagency contracting assistance--
such as franchise funds--should be subject to improved oversight and
controls, clearer lines of accountability, and better policies,
processes, and implementation. It is for these reasons that we have
designated management of interagency contracting as a governmentwide
high-risk area.[Footnote 1]
The Department of Defense (DOD) is the largest customer for other
agencies' contracting services for purchases, typically ranging from
office supplies to information technology. Use of interagency contracts
has allowed DOD to focus more of its contracting offices' time and
attention on the acquisition of specialized, highly sophisticated
defense equipment. DOD uses two franchise funds in particular to make
purchases on its behalf--GovWorks, which is run by the Department of
the Interior, and FedSource, run by the Department of the Treasury. In
fiscal year 2004, DOD paid these franchise funds more than $1.2 billion
for purchases of goods and services. (See figure 1.)
The Conference Report accompanying the National Defense Authorization
Act for Fiscal Year 2004 directed us to report on DOD's use of
franchise funds.[Footnote 2] We assessed (1) whether franchise funds
ensured fair and reasonable prices for goods and services; (2) whether
DOD analyzed alternatives to determine the best method for acquiring
certain goods and services; and (3) whether DOD and franchise funds
ensured value through other sound contracting practices, such as
defining contract outcomes, and overseeing contractor performance.
To fulfill these objectives, we examined DOD's largest projects that
involved contracting assistance from GovWorks and FedSource in fiscal
year 2003, the most recent year for which complete data were available
at the time we were planning our review. We reviewed 17 projects,
including the interagency contracts used, and orders and work
assignments representing $249 million in fiscal year 2003 DOD funding.
We interviewed DOD customers and officials at the two franchise funds
and reviewed documentation to assess the contracting practices used to
place orders for goods and services. The results of our review cannot
be generalized to all types of interagency contracts that DOD and the
franchise funds used; however, we believe we have sufficient
information to make informed judgments on the matters in this report.
Appendix I provides details on our scope and methodology. We conducted
our work from June 2004 through June 2005 in accordance with generally
accepted government auditing standards.
Results in Brief:
In providing contracting services to DOD customers, the GovWorks and
FedSource franchise funds did not always obtain the full benefits of
competitive procedures, did not otherwise ensure fair and reasonable
prices, and may have missed opportunities to achieve savings on
millions of dollars in purchases. In half of the GovWorks orders we
reviewed, we found that GovWorks sought, but did not receive, competing
proposals. In more than half of the orders, GovWorks requested that
contractors perform substantial, additional work without determining
that prices were fair and reasonable. FedSource generally did not
ensure competition for work, did not conduct and document price
analyses, and sometimes paid contractors higher prices for services
than were justified. In addition, FedSource relied on administrative
personnel who were not trained as contracting officers to ensure that
potential contractors had opportunities to submit offers.
In the absence of clear guidance on the proper use of other agencies'
contracting services, DOD customers did not perform analyses of
contracting alternatives and chose to use the franchise funds on the
basis of convenience rather than as part of an acquisition plan. DOD
also lacks basic information about purchases made through franchise
funds. Without this data, it is difficult to assess whether franchise
funds' contracting services provide DOD value. For their part, although
franchise funds' business-operating principles require them to maintain
and evaluate cost and performance benchmarks against their competitors,
the funds did not perform analyses that DOD could use to assess whether
the funds deliver good value. Their performance measures generally
focus on customer satisfaction and generating revenues, rather than
compliance with contracting regulations. The fee-for-service
arrangement provides incentives to emphasize customer service to ensure
sustainability of the contracting operation at the expense of proper
use of contracts and good value.
DOD, GovWorks, and FedSource paid little attention to sound contracting
practices for which they shared responsibility to help ensure value:
carefully defining contract outcomes and specific criteria against
which contractor performance can be measured and providing effective
contractor oversight. DOD customers did not provide franchise funds
with detailed information about their needs. Without this information,
the franchise funds did not translate DOD's needs into well-defined
contract requirements that contained criteria to determine whether the
contractor performed successfully. In the absence of well-defined
outcomes, DOD, GovWorks, and FedSource lacked criteria to provide
effective contractor oversight. Regarding a separate oversight issue,
the oversight of GovWorks and FedSource themselves, we found that the
departments of the Interior and the Treasury and the Office of
Management of Budget, each of which has responsibility in the
successful operation of these franchise funds, have performed little
oversight.
DOD and the franchise funds have undertaken a number of corrective
actions during the course of our review. To enhance their initiatives,
we are making recommendations to the Secretary of Defense to develop a
methodology for determining whether franchise funds' contracting
services are in the best interest of the government and to monitor and
evaluate DOD's use of these services. We also recommend that the
Secretaries of the Interior and the Treasury develop procedures and
performance measures to ensure that franchise funds' contracting
officers fulfill the requirements of procurement regulations while
maintaining their focus on customer service. To improve oversight of
franchise funds, we recommend that the Director of the Office of
Management and Budget expand its monitoring and reporting to include
franchise funds' contracting services and develop guidance to clarify
roles and responsibilities of customers and franchise funds in the
contracting process. In comments on a draft of this report, DOD, the
departments of the Interior and the Treasury, and the Office of
Management and Budget concurred with our recommendations and identified
actions they have taken or plan to take to address them. Written
comments from DOD and the Department of the Treasury are reproduced in
their entirety in appendices IV and V, respectively.
Background:
Franchise funds are government-run, self-supporting businesslike
enterprises managed by federal employees. Franchise funds provide a
variety of common administrative services, such as payroll processing,
information technology support, employee assistance programs, public
relations, and contracting.[Footnote 3] This review focuses on DOD's
use of the franchise funds' contracting services. Franchise funds are
required to recover their full costs of doing business and are allowed
to retain up to 4 percent of their total annual income. To cover their
costs, the franchise funds charge fees for services. The Government
Management Reform Act of 1994 authorized the Office of Management and
Budget to designate six federal agencies to establish the franchise
fund pilot program.[Footnote 4] Congress anticipated that the franchise
funds would be able to provide common administrative services more
efficiently than federal agencies' own personnel. The original
operating principles for franchise funds included offering services on
a fully competitive basis, using a comprehensive set of performance
measures to assess the quality of franchise fund services, and
establishing cost and performance benchmarks against their competitors-
-other government organizations providing the same types of
services.[Footnote 5] Although there are five franchise funds currently
in operation, DOD primarily uses two for contracting services--
GovWorks, operated by the Department of the Interior, and FedSource,
operated by the Department of the Treasury. Figure 1 shows the revenues
for GovWorks and FedSource and the percentage of revenue derived from
doing business with DOD in fiscal year 2004.
Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues:
[See PDF for image]
Note: Revenues include the cost of the goods and services acquired and
the franchise funds' service charges or fees.
[End of figure]
Effective contract management requires specialized knowledge and
careful attention to a range of regulatory requirements and contracting
practices designed to protect the government's interests. In obtaining
contracting services through a franchise fund, three main parties share
responsibilities for ensuring that proper procedures are followed:
* government customer--the program office or agency in need of a good
or service;
* franchise fund--the federal entity that provides contracting
services; and:
* contractor--the vendor that provides the good or service desired by
the government customer.
DOD program officials are most familiar with the technical requirements
for the goods and services they need. DOD contracting officers can
place orders directly through many interagency contracts.
Alternatively, DOD pays the franchise fund to assume many of the
contracting responsibilities that normally would have been handled by
DOD's contracting officers if the customers had relied on them to
purchase the goods or services. Whether DOD makes purchases directly or
through another agency, regulatory procedures and requirements are the
same, such as ensuring competition, determining fair and reasonable
pricing, and monitoring contractor performance. Table 1 shows the basic
steps to acquire a good or service through GovWorks or FedSource.
Table 1: Steps to Purchase Good or Service through GovWorks or
FedSource:
Step: 1;
Organization: DOD customer;
Actions taken: Identifies need for a good or service, sometimes
develops government cost estimate, prepares a description of the goods
and services needed, and sends it to franchise fund.
Step: 2;
Organization: GovWorks or FedSource;
Actions taken: Provides DOD customer an estimated price for acquiring
good or service.
Step: 3;
Organization: DOD customer;
Actions taken: Commits funds to pay franchise funds for purchase of
good or service, plus fee.
Step: 4;
Organization: GovWorks or FedSource;
Actions taken: Chooses a contracting vehicle from among several types;
develops order for good or service to be provided under an existing
contract or develops a new contract, conducts competition. Awards
contract to a winning contractor or places order against an existing
contract. Designates a contracting officer's representative or a
contracting officer's technical representative to conduct contractor
oversight. GovWorks generally appoints a representative from the
customer agency.
Step: 5;
Organization: Contractor;
Actions taken: Performs or subcontracts work for DOD according to
order.
Step: 6;
Organization: DOD customer;
Actions taken: Conducts contractor oversight.
Step: 7;
Organization: Contractor;
Actions taken: Submits invoice to franchise fund for work performed.
Step: 8;
Organization: GovWorks or FedSource;
Actions taken: Pays contractor for work performed.
Source: GAO analysis of GovWorks' and FedSource's procedures.
[End of table]
GovWorks and FedSource can either make use of their own or other
agencies' contracts, or they can develop new, customized contracts to
satisfy a DOD customer's needs. GovWorks generally uses other agencies'
contracts, and FedSource generally uses its own contracts. Table 2
lists the various types of contracting methods the franchise funds use.
Table 2: Contracting Methods Used by GovWorks or FedSource:
Contracting method: GSA schedule;
Description: Under the General Services Administration (GSA) schedule
program, GSA negotiates contracts with vendors for a wide variety of
goods and services at varying prices. These contracts permit other
agencies to place orders directly with the vendors, providing agencies
with a simplified process of acquiring goods and services while
obtaining volume discounts.
Contracting method: Indefinite delivery/indefinite quantity (ID/IQ);
Multiple-award and single-award;
Description: These contracts can be used to acquire goods or services
when the exact date of future deliveries is unknown but a recurring
need is likely to arise. One type of indefinite delivery contract is an
indefinite quantity contract. Indefinite quantity contracts provide for
an indefinite quantity, within stated limits, of supplies or services
during a fixed period. The Federal Acquisition Regulation (FAR) states
a preference for multiple-awards of indefinite quantity contracts, but
award to a single vendor is also permitted. Almost all of the ID/IQ
contracts we reviewed were multiple-award.
Contracting method: Requirements;
Description: Under a requirements contract, the government designated
activity is expected to purchase all of its needs for specific products
or services from the holder of the contract.
Contracting method: Blanket purchase agreement;
Description: This type of agreement provides a simplified method of
filling anticipated repetitive needs for supplies and services,
allowing agencies to establish ěcharge accountsî with qualified
vendors.
Contracting method: 8(a);
Description: Under the 8(a) program, the Small Business Administration
enters into contracts with federal agencies and lets subcontracts for
performing those contracts to eligible firms. Small businesses that are
owned by socially and economically disadvantaged individuals and
certified by the Small Business Administration are eligible for these
contracts.
Source: GAO analysis:
[End of table]
While use of other agencies' contracting services may offer convenience
and efficiency, our prior work and that of some agency inspectors
general have identified problems with the use of other agencies'
contracting services, including lack of compliance with federal
requirements for competition and lack of contractor oversight. In prior
work, we found that increasing demands on the acquisition workforce and
insufficient training and guidance are among the causes for these
deficiencies.[Footnote 6] Two additional factors are worth noting.
First, the fee-for-service arrangement creates an incentive to increase
sales volume because revenue growth supports growth of the
organization. This incentive can lead to an inordinate focus on meeting
customer demands at the expense of complying with contracting policy
and required procedures. Second, it is not always clear where the
responsibility lies for such critical functions as describing
requirements, negotiating terms, and conducting oversight. Several
parties--the government customer, the agencies providing the
contracting services, and, in some cases, the contractors--are involved
with these functions. But, as the number of parties grows, so too does
the need to ensure accountability. We have previously reported that
ensuring the proper execution of the contracting process is a shared
responsibility of all parties involved in the acquisition process and
that specific responsibilities need to be more clearly defined.
Franchise Funds Did Not Always Ensure Fair and Reasonable Prices or
Competitive Procedures:
GovWorks and FedSource did not always obtain the full benefits of
competitive procedures, did not otherwise ensure fair and reasonable
prices, and may have missed opportunities to achieve savings on behalf
of DOD customers for millions of dollars worth of goods and services.
With limited evidence that prices were fair and reasonable, GovWorks
sometimes added millions of dollars of work to existing orders--as high
as 20 times the original order value. In addition, we found limited and
inconsistent evidence in the GovWorks and FedSource contract files we
reviewed that the franchise funds sought to negotiate prices or
conducted price analysis when required. DOD customers told us they were
under the impression that franchise funds ensure competition and
analyze prices. However, we found numerous cases in which these
practices did not occur.
Criteria:
The FAR states that contracting officers must purchase goods and
services from responsible sources at fair and reasonable prices. Price
competition is the preferred method to ensure that prices are fair and
reasonable. The FAR also includes special competition procedures for
orders placed under the types of contracts the franchise funds use,
including GSA schedules and multiple-award contracts. DOD's procurement
regulations have additional procedures for ensuring competition when
purchasing services from these types of contracts with certain
exceptions--such as urgency or logical follow-on. For example, when
ordering from GSA schedules, DOD procurement regulations require
contracting officers to request proposals from as many contractors as
practicable and receive at least three offers. If three offers are not
received, a contracting officer must determine in writing that no
additional contractors can fulfill the requirement. Alternatively, the
contracting officer may provide notice to all schedule holders that
could fulfill the requirement.[Footnote 7] When prices for the specific
services being ordered are not established in the contract, the FAR and
GSA ordering procedures require contracting officers to analyze
proposed prices and to document that they are determined to be fair and
reasonable. For example, when labor rates are established in the
contract, relying on labor rates alone is not a good basis for deciding
which contractor is the most competitive. The labor rates do not
reflect the full cost of the order or critical aspects of the service
being provided, such as the number of hours and mix of labor skill
categories needed to perform the work. These procedures are designed to
ensure that the government's interests are protected when purchasing
goods and services.
GovWorks:
We reviewed 10 orders--totaling about $164 million in fiscal year 2003
funding--in which GovWorks provided contracting services to DOD's
customers. With the exception of two orders, which were placed against
GovWorks' own contracts, the orders we reviewed were placed against GSA
schedules. In 5 of the 10 cases, GovWorks sought, but did not receive,
competing proposals as required for the types of contracts used. In 3
of the 10 cases, GovWorks sought and received multiple proposals for
the work. In the remaining 2 cases, GovWorks placed orders on a sole-
source or single-source basis and provided relevant explanations, such
as an urgent need for the work and an award to a small disadvantaged
business. Table 3 provides details on these 10 orders, and additional
information is available in appendix I.
Table 3: GovWorks Fiscal Year 2003 Orders:
GovWorks sought but did not receive competing proposals:
Customer: Air Force Aging Landing Gear Life Extension Program;
Type of service: Engineering;
Contracting method: GSA Schedule;
Number of proposals received: 1;
Award made to incumbent contractor: Yes;
Time frame to submit proposals (days): 14.
Customer: Air Force Deputy Chief of Staff Air and Space Operations;
Type of service: Professional;
Contracting method: GSA Schedule;
Number of proposals received: 1;
Award made to incumbent contractor: Yes;
Time frame to submit proposals (days): 4.
Customer: Air Force Material Command;
Type of service: Network hardware;
Contracting method: Interior multiple-award;
Number of proposals received: 1;
Award made to incumbent contractor: Yes;
Time frame to submit proposals (days): 5.
Customer: Army National Guard Bureau Chief Information Office;
Type of service: Professional;
Contracting method: GSA Schedule;
Number of proposals received: 1;
Award made to incumbent contractor: No;
Time frame to submit proposals (days): 13.
Customer: Navy Program Executive Officer Information Technology;
Type of service: Information technology;
Contracting method: GSA Schedule;
Number of proposals received: 1;
Award made to incumbent contractor: Yes;
Time frame to submit proposals (days): 8.
GovWorks sought and received competing proposals:
Customer: Army Chief Technology Office;
Type of service: Information technology;
Contracting method: GSA Schedule;
Number of proposals received: 2;
Award made to incumbent contractor: Yes;
Time frame to submit proposals (days): 16.
Customer: Army National Guard Bureau;
Type of service: Information technology;
Contracting method: GSA Schedule;
Number of proposals received: 3;
Award made to incumbent contractor: No;
Time frame to submit proposals (days): 45.
Customer: Army National Guard Bureau;
Type of service: Telecommunications;
Contracting method: GSA Schedule;
Number of proposals received: 7;
Award made to incumbent contractor: No;
Time frame to submit proposals (days): 28.
GovWorks placed sole-or single-source orders:
Customer: Army Chief Information Office;
Type of service: Information technology hardware;
Contracting method: Interior 8(a);
Number of proposals received: 1;
Award made to incumbent contractor: No;
Time frame to submit proposals (days): Not applicable.
Customer: Army Program Manager Signals Warfare;
Type of service: Logistics;
Contracting method: GSA Schedule;
Number of proposals received: 1;
Award made to incumbent contractor: No;
Time frame to submit proposals (days): Not applicable.
Source: GovWorks (data); GAO (analysis).
[End of table]
In the five cases for which GovWorks sought competing proposals but
received only one proposal for each order, GovWorks allowed 2 weeks or
less for proposals to be submitted. In four of these cases, orders were
ultimately placed with incumbent contractors to fill requirements for
ongoing programs. For example, when the Air Force's Office of the
Deputy Chief of Staff Air and Space Operations sought a contractor to
provide analytical services, GovWorks gave potential contractors 4
days--around Christmas--to respond. The one contractor that responded
was the incumbent and received the order, which totaled $63.4 million.
When the Air Force's Aging Landing Gear Life Extension Program needed a
contractor to provide services involving landing gear technology,
GovWorks invited 17 contractors to submit proposals and posted the
solicitation on the Internet allowing 14 days for proposals to be
submitted. The incumbent contractor, which had provided services to the
program since its inception in 1998, submitted the only proposal and
received the order, which totaled $19.8 million. Each of these 5 orders
was subject to the standards for obtaining competing offers for DOD
orders, but in only the case of the Aging Landing Gear Life Extension
Program did contract documentation indicate that GovWorks had attempted
to meet Defense procurement regulations for ordering from GSA
schedules.
Our findings at GovWorks are consistent with our previous work on DOD's
use of other agencies' contracts.[Footnote 8] In our prior work we
found that the reasons only one contractor responded to opportunities
to compete for work included a perception among potential contractors
that incumbent contractors have an advantage in competing for ongoing
work and that very short time frames to prepare proposals discouraged
others from competing. In this review, we found GovWorks received
multiple proposals for work when there was no incumbent contractor and
longer time frames allowed for competition to occur.
In the five cases in which competing proposals were sought but not
obtained, we found limited evidence of price analyses in GovWorks'
contract files.[Footnote 9] In four of these cases, orders were subject
to GSA ordering procedures for services requiring a statement of work.
In the fifth case, an Interior multiple-award contract, the FAR
required price analysis. (See table 3.) Consequently, GovWorks should
have determined that the total price was fair and reasonable. GovWorks
told us that it had conducted analyses, but we found that the files
generally included only brief statements that prices had been
determined reasonable, and GovWorks generally could not provide us with
documentation showing what data had been gathered or analyses conducted
to support the conclusion for the cases we reviewed.
In 6 of the 10 cases we reviewed, GovWorks added substantial work
beyond what was originally planned without determining that prices were
fair and reasonable. For example, GovWorks increased an original order
20-fold by adding $45.5 million for management consulting services for
the National Guard Bureau Chief Information Office. GovWorks modified
another National Guard order on numerous occasions, this time
increasing the value of the original order for an automated information
system from $17.6 million to $44.6 million. An order for reconnaissance
and surveillance flight support to Army combatant commands increased in
value from $7.4 million to $34.9 million. The order was intended to
provide support in Bosnia, for a period of 15 months with no option to
renew, but was expanded to include operations in Colombia, and the
period of performance was extended by more than 2 years. In each of
these examples, GovWorks assigned the additional work without
conducting price analyses to determine whether the prices charged were
fair and reasonable.
FedSource:
We reviewed seven FedSource projects--amounting to $85 million in
fiscal year 2003--and found that the franchise fund did not compete
orders it placed under multiple-award contracts or perform analyses to
ensure fair and reasonable pricing.[Footnote 10] FedSource commonly
used multiple-award contracts to make purchases for DOD. When placing
orders against multiple-award contracts, DOD is generally required to
ensure that contract holders have a fair opportunity to submit an offer
and have that offer fairly considered for each order with certain
exceptions--such as urgency or logical follow-on.[Footnote 11] In
addition, FedSource used Blanket Purchase Agreements and requirements
contracts for some of the projects we reviewed. Table 4 provides detail
on the seven projects, and additional information is available in
appendix I.
Table 4: FedSource Fiscal Year 2003 Projects Reviewed:
[See PDF for image]
Source: Department of Treasury (data); GAO (analysis).
[End of table]
The FedSource business model involves a two-step process of placing an
order under previously awarded contracts and subsequently developing
work assignments to define requirements for that order. In the first
step, contracting officers issue orders indicating the type and
approximate dollar value of work that FedSource anticipates will be
required under each contract. This estimated value is based on
historical usage. The second step is executed later when DOD identifies
its needs. At this point, FedSource administrative personnel define
tasks and outcomes and assign work to a contractor. In our past work,
we recommended that the FAR clarify that agencies should not award
large, undefined orders against multiple-award contracts and
subsequently define specific tasks.[Footnote 12] The FAR was revised to
encourage agencies to define work clearly so that the total price for
work could be established at the time orders are issued.[Footnote 13]
Although this requirement was in effect for the period of our review,
we found that FedSource routinely allowed modifications to orders
through work assignments that substantially increased the total price
of the orders.
FedSource did not provide contractors the opportunity to submit offers
for orders under multiple-award contracts and have their offers fairly
considered, as required by the FAR. FedSource officials told us that
their business model does not provide contractors the opportunity to
submit offers on orders. Instead, FedSource officials told us that
administrative personnel were responsible for providing contractors a
fair opportunity to be considered for work under multiple-award
contract orders when assigning specific work to contractors. However,
we found this generally did not occur. Of the 120 work assignments we
reviewed, 75 were for work under multiple-award contracts. We found
that in most of the 75 work assignments, FedSource administrative
personnel did not provide contractors this opportunity. For example,
FedSource used one of these contracts to fill several individual
support staff positions at Brooke Army Medical Center at Fort Sam
Houston and generally assigned work to one of the three multiple-award
contractors without providing the other two contractors an opportunity
to be considered. Justifications accompanying these assignments stated
that assigning work to more than one contractor might create conflict
among assigned staff over variations in pay and benefits. The Army's
Fort McCoy used FedSource to obtain contractor support for a variety of
construction projects, and FedSource assigned the work noncompetitively
for all 12 work assignments we reviewed to 1 of 3 multiple-award
contract holders--totaling $7.2 million. The contract holder, a firm
specializing in staffing, subsequently passed the work through to local
construction companies that Fort McCoy officials had identified.
Justifications accompanying some of the projects stated that the
FedSource contracting officer's representative had determined that it
was "in the best interest of the government to award task orders to the
vendor that solicited and brought in the business." A FedSource quality
review later concluded that these justifications were inadequate. Many
months after the assignments were made, a second justification was
placed in the contract files citing numerous reasons for selecting the
preferred contractor. One of the reasons was that the project required
expedited effort to support urgent requirements, which might have been
an acceptable reason, except that the justification did not indicate
that use of the other two contractors would have resulted in
unacceptable delays.
In another example, the Navy needed to fill several administrative
positions at its 31 regional recruiting centers around the country.
Under another purchasing arrangement,[Footnote 14] FedSource assigned
the work to two contractors, one for recruiting centers east of the
Mississippi River and the other for centers to the west of the river.
These arrangements did not establish prices for any of the services
provided, and FedSource personnel told us that they accepted the prices
provided by the contractors. This type of purchasing arrangement does
not justify purchasing from only one source--contracting officers are
still required to solicit price quotations from other sources. However,
there was no evidence FedSource personnel had negotiated or analyzed
these prices.
In addition, FedSource did not always demonstrate that prices were
reasonable.[Footnote 15] For example, in two of the customer projects
we reviewed, FedSource made work assignments for construction services
at the Army's Fort McCoy and Fort Snelling against a contract for
operational support. Because the original contract had a very broad and
undefined statement of work that did not explicitly include
construction, no prices for that type of work had been established in
the contract. For the project at Fort McCoy, the contractor that
received the assignment solicited prices from potential subcontractors
and presented their price, including a markup, to FedSource. We did not
find any analysis to determine that the contractor's price was
reasonable in FedSource's files. FedSource officials told us that they
have since awarded a separate contract for construction services.
In four of the five projects involving staffing support, FedSource paid
contractors higher prices for services than were established in the
contract. Most of the files we reviewed contained no justifications for
the higher prices. For example, in our review of 25 work assignments
for staffing support services at an Army medical center, 14 of the work
assignments were priced higher than the price established in the
contracts. In 9 of these cases, FedSource had agreed to additional sick
leave or vacation time as part of the hourly rate, but FedSource's
contract file contained no documentation indicating that the contractor
employee qualified for the additional benefits.
DOD Focused on Convenience and Did Not Pay Sufficient Attention to
Analyzing Contracting Alternatives:
DOD did not follow sound management practices designed to ensure value
while expeditiously acquiring goods and services. DOD customers chose
to use franchise funds based on convenience, rather than as part of an
acquisition plan. DOD conducted little analysis, if any, to determine
whether using franchise funds' contracting services was the best method
for acquiring a particular good or service. For their part, although
franchise funds' business operating principles require that they
maintain and evaluate cost and performance benchmarks against their
competitors, they did not perform analyses that DOD could use to assess
whether the franchise funds deliver good value. Their performance
measures generally focus on customer satisfaction and generating
revenues, rather than proper use of contracts and sound management
practices. This focus on customer satisfaction and generating revenues
provides an incentive to emphasize customer service rather than
ensuring proper use of contracts and good value.
DOD Selected Franchise Funds for Convenience with Limited Analysis of
Alternatives:
DOD customers told us that they did not formally analyze contracting
alternatives but generally chose to pay GovWorks and FedSource to
provide contracting services because the franchise funds provided quick
and convenient service. Some customers were dissatisfied with the speed
and quality of services provided by DOD's in-house contracting offices.
For example, two DOD customers told us that their contracting offices
required 9 months to respond to their purchasing needs, while the
franchise fund required only a few weeks. The franchise fund's ability
to place orders quickly was valuable to DOD customers in these
situations. DOD customers said that franchise funds' contracting
services were less restrictive than other DOD contracting alternatives.
Some DOD customers told us that GovWorks and FedSource made it easier
to spend funds at the end of a fiscal year unlike DOD's in-house
contracting offices. Two DOD customers said that GovWorks made it
easier to spend small amounts of funding because GovWorks would place
orders incrementally as funding became available. Some DOD customers
mentioned that using FedSource meant they did not have to "live with
the terms and conditions" of a long term contract or that it was easier
to replace problem contractor employees. In one case, we were told
that, if the organization had to fill positions with government
employees, it would have less flexibility to hire the personnel it
needed in a timely manner.
Analysis of contracting alternatives helps to ensure that purchases are
made by the most appropriate means and are in DOD's best interest;
however, DOD has no clear mechanism for making this determination when
using other agencies' contracting services. DOD's guidance on the use
of these vehicles has been evolving for several years and has not yet
been fully implemented. DOD also lacks a means to gather data on the
use of interagency contracts on a recurring basis, although it has been
subject over the years to various requirements to monitor interagency
purchases. In 2003, in response to a congressional mandate,[Footnote
16] DOD was unable to compile complete data on spending through
interagency contracts. DOD officials told us that their financial
systems are not designed to collect this data. Without this type of
data, it is difficult to make informed decisions about the use of other
agencies' contracting services. DOD issued guidance in October 2004
that requires the military departments and defense agencies to
determine whether using interagency contracts--such as those the
franchise funds manage--is in DOD's best interest. While this guidance
outlines procedures to be developed, and general factors to consider,
it does not provide specific criteria for how to make this
determination and does not require military departments and agencies to
report on the use of interagency contracts. DOD has directed the
military departments and defense agencies to develop their own guidance
to implement this policy. Congress has also recently taken action to
ensure DOD's proper use of interagency contracts.[Footnote 17] The
conference report accompanying this legislation established
expectations that DOD's procedures will ensure that any fees paid by
DOD to the contracting agency are reasonable in relation to work
actually performed.
In 2001, Congress adopted legislation requiring DOD to establish a
management structure and establishing savings goals for the procurement
of services.[Footnote 18] The legislation also requires DOD to ensure
that contracts for services are entered into or issued and managed in
compliance with applicable laws and regulations regardless of whether
the services are procured by DOD directly or through a non-DOD contract
or task order.[Footnote 19] One of the goals of this legislation was to
allow DOD to improve the management of the procurement of services.
However, DOD generally chose to use franchise funds for reasons of
speed, convenience, and flexibility rather than taking a strategic and
coordinated approach to acquiring services. We found that prior to
choosing to use a franchise fund, DOD did not analyze costs and
benefits or prepare business cases to determine whether the franchise
fund provided better value--considering the fees it charges--compared
with other alternatives, such as using a DOD contracting office or
purchasing goods or services through another federal agency's existing
contract. As a result, DOD customers did not consider opportunities to
leverage their buying power when using franchise funds. None of the DOD
customers we spoke to analyzed trade-offs between total price,
including fees, and the benefits of convenience. For example, on a
group of work assignments for construction services valued at $7.2
million, the Army's Fort McCoy paid FedSource a total of about $1
million, or 17 percent above the subcontractor's proposed price, for
the contractor markup and the franchise fund fee. Most of these
assignments were placed towards the end of the fiscal year. This may
have led to a higher price for the services than DOD would have paid in
contracting directly with the subcontractors. Figure 2 shows the
general process by which the Army's Fort McCoy used FedSource to obtain
contractor support for construction services.
Figure 2: Example of Project for Which Army Paid FedSource 17 Percent
In Fees and Markups:
[See PDF for image]
[End of figure]
The DOD customer said that FedSource made it easier than his own
contracting office to assign work with values greater that $25,000 late
in the fiscal year because FedSource's deadlines were not as strict. He
also speculated that the subcontractor probably would have charged more
if contracting directly with the government because dealing with the
government is cumbersome and costly. He did not have information to
indicate what the subcontractor's price might have been, nor did he
perform any formal analysis to compare FedSource with other contracting
opportunities.
Conducting a thorough analysis also might have given DOD a better
understanding of the fees paid to make purchases through the franchise
funds. For example, DOD customers sometimes paid a GovWorks fee, or
service charge, on top of a fee to use another agency's contract
because GovWorks generally uses other agencies' contracts to make
purchases for DOD customers. While some customers were aware of the
fees they paid, in two cases, DOD customers selected GovWorks because
its fees were lower than fees charged by other agencies; however, the
customers did not realize that GovWorks' fees were in addition to the
other agencies' fees. GovWorks' fees generally ranged from 2 percent to
4 percent of the price for goods and services purchased, and our
analysis showed that FedSource fees ranged from 2 percent to 8 percent
for the contracts and orders we reviewed. Congress has mandated that
DOD agencies report fees paid for the use of other agencies' contracts
in the past and required DOD to do so again for fiscal year
2005.[Footnote 20]
Franchise Funds Emphasize Customer Service over Good Value:
The franchise funds' business operating principles require that they
maintain and evaluate cost and performance benchmarks against their
competitors. However, they did not perform analyses that DOD could use
to assess whether the franchise funds deliver good value. FedSource
claims that it achieves lower prices on goods and services because it
aggregates requirements and negotiates price discounts. Further,
FedSource claims that competition with other contracting offices
provides an incentive to provide better quality at lower cost. However,
this incentive may not drive costs down unless customers are sensitive
to the cost of doing business with one agency over another and make
decisions based on costs. Franchise fund officials told us that
demonstrating these advantages was difficult because they lacked
insight into the prices customers would have paid when using other
contracting alternatives to fill their requirements. FedSource
officials also explained that quantifying the value of the other
benefits they provide--such as convenience and flexibility--is
difficult. Instead, GovWorks and FedSource have used such measures as
growth in total contracting activity and revenues as well as customer
satisfaction but have little data to demonstrate that they provide
better quality and lower price goods and services than other federal
contracting alternatives can provide. In fact, GovWorks marketing
materials emphasize convenience and value-added service rather than
costs. In our prior work, we found that fee-for-service contracting
arrangements emphasize the overall sustainability of the contracting
operation, as the fees collected are used to cover the costs of doing
business, which may lead to a focus on customer service at the expense
of compliance with contracting policy and procedures.
DOD and Franchise Funds Did Not Pay Sufficient Attention to Defining
Outcomes or Overseeing Contractor Performance:
DOD, GovWorks, and FedSource did not follow federal contracting
procedures designed to ensure value while expeditiously acquiring goods
and services. DOD and the franchise funds did not define desired
outcomes and the specific criteria against which contractor performance
could be measured and paid limited attention to monitoring contractors'
work. As we have reported previously, it is not always clear where the
responsibility lies for such critical functions as describing
requirements, negotiating terms, and conducting oversight. Although the
FAR states that contracting officers are responsible for including
appropriate quality requirements in solicitations and contracts and for
contract surveillance, the franchise funds do not have sufficient
knowledge about the DOD customers' needs to fulfill these
responsibilities without the assistance of the DOD customer. Recently,
the franchise funds contracting operations performed some internal
reviews that have findings similar to ours, and the funds are working
to address the problems. These shortcomings mirror many of the findings
of our previous work and are among the reasons we have designated
interagency contracting as a governmentwide high-risk area.
GovWorks and FedSource Did Not Clearly Define Outcomes or Establish
Criteria for Quality:
In the GovWorks and FedSource cases we reviewed, required outcomes were
not well-defined, work was generally described in broad terms, and
orders sometimes specifically indicated that work would be defined more
fully after the order was placed. GovWorks and FedSource files we
reviewed lacked clear descriptions of outcomes to be achieved or
requirements that the contractor was supposed to meet.
The FAR states that contracting officers are responsible for including
the appropriate quality requirements in solicitations and contracts.
Without these criteria, accountability becomes harder to determine and
the risk of poor performance is increased. Clear definition of
requirements promotes better mutual understanding of the government's
needs. In a typical situation, the customer--a DOD program office, for
example--is best qualified to know what it needs. However, once a DOD
program office chooses to pay a franchise fund to make purchases on its
behalf, the office must then rely on the franchise fund to provide the
contracting expertise. The two parties have to work together to ensure
that requirements for purchases are well-defined with sufficient detail
to determine whether the desired outcomes were met and the goods and
services provided meet the government's needs. Critical information
must be documented in order to make these determinations. GovWorks and
FedSource use different processes, and the tables in appendix III
explain some of the pertinent contract documents used to define desired
outcomes and criteria.
In 7 of the 10 GovWorks orders we reviewed, statements of work were
very broad. For example, six of these orders contained language stating
that specific tasks could be added, deleted, or redefined throughout
the period of performance. In some cases, DOD program officials told us
that the statements of work were broad because they were not aware of
all requirements when the order was placed or because they were
operating in a constantly changing technological environment. DOD
program officials also told us that the broad statements of work gave
them flexibility to add requirements to existing orders as additional
needs arose.
Orders placed by FedSource against its contracts contained only a very
general statement--generally just a few words--describing the work in
broad terms and an anticipated dollar value. These orders did not
clearly describe all services to be performed or supplies to be
delivered so that the full price for the work could be established when
the order was placed, as required by the FAR. As noted earlier,
FedSource officials explained that in their business model, orders were
not intended to describe specific work to be completed. Instead,
FedSource administrative personnel issued work assignments that were
intended to provide the clear descriptions of desired outcomes that the
orders did not. However, we found that these work assignments were
often unclear as well. Five of FedSource's largest customer projects
for DOD involved use of contracts to provide staff. Work assignments
for staffing services often described the position to be filled,
including a general outline of duties. However, the assignments did not
contain criteria for evaluating the work performed by contract
employees.
In addition, when providing staffing support, FedSource uses these
contracts to fill positions individually, rather than describing
functional needs or desired results. For example, at an Army medical
center FedSource filled over 200 positions individually instead of
aggregating these positions into fewer functional requirements. This
acquisition approach does not provide contractors with the flexibility
to determine how best to staff a function and does not lend itself to a
performance-based approach. Under performance-based contracting, the
contracting agency specifies the outcome or result it desires and
leaves it to the contractor to decide how best to achieve the desired
outcome.[Footnote 21] FedSource officials said they were moving toward
a more performance-based contracting approach.
To determine whether an environment had been created that would allow
improper personal services relationships to develop, we interviewed
officials at five DOD program offices that used FedSource contracts to
staff individual positions. We asked questions about the work performed
by the contractor employees and the relationships between the DOD
customers and the contractor employees. The DOD officials said that
generally: the services provided by the contract employee were integral
to agency functions or missions; the contractor employees were
providing services comparable to those performed using civil service
personnel; and the services were provided on site and with the use of
equipment provided by the government. With regard to the work
relationships, DOD customers told us that government employees assigned
and prioritized daily tasks for the contractor employees. FedSource
guidelines also state that the government customer is responsible for
verifying contract employee hours worked by signing the contractor's
weekly timesheet. Further, a FedSource internal review found that
statements of work contained "personal services-type language like
'under the direction of' or 'oversee' or 'duties' or 'job
description.'" Our review also found documents that had been edited to
revise similar language. FedSource officials were aware of the
potential that these contracts might be used for personal services and
took various steps to clarify that personal services were not to be
provided. For example, FedSource officials provided training for DOD
customers on how to avoid creating a situation that had the appearance
of personal services. Although this training is a positive step, poorly
defined statements of work provided the opportunity for situations to
arise in which personal services relationships could develop.
FedSource relied on administrative staff, not contracting officers, to
work with the customer to define and assign the specific tasks to be
performed or the positions to be filled. A FedSource review found that
trained contracting staff was needed for developing task order
requirements and warranted contracting officers were required for
issuing task orders. The FedSource administrative employees do not have
the same level of expertise as contracting officers, who have
specialized knowledge to ensure compliance with federal regulations and
guidelines. Inadequacies we found in FedSource's contracting practices
pointed to the challenges of relying on administrative personnel rather
than contracting experts to review statements of work, choose
appropriate contracting vehicles, ensure adequate competition, and sign
off on assignments of specific work.
DOD Customers, GovWorks, and FedSource Did Not Specify Necessary
Criteria for Contract Oversight:
DOD customers, GovWorks, and FedSource often relied on methods of
contract oversight that lacked performance measures to ensure that
contractors provided quality goods and services in a timely manner.
Typically, the franchise funds failed to include an oversight plan that
contained specific quality criteria in their contracts or orders.
Without this critical information, neither DOD nor the franchise funds
could effectively measure contractor performance.
The FAR and DOD's procurement regulations require contract surveillance
and documentation that it occurred.[Footnote 22] Contract surveillance,
also referred to as oversight, is a contracting officer's
responsibility, and DOD pays the franchise fund to assume the
responsibilities of contracting officers. The Office of Management and
Budget's Office of Federal Procurement Policy has issued policy stating
that contract oversight begins with the assignment of trained personnel
who conduct surveillance throughout the performance period of the
contract to ensure the government receives the services required by the
contract.[Footnote 23] DOD guidance states that documentation
constitutes an official record and the surveillance personnel assessing
performance are to use a checklist to record their observations of the
contractor's performance. The guidance also states that all performance
should be documented whether it is acceptable or not.[Footnote 24]
The GovWorks contract files we reviewed generally did not include
contractor monitoring plans, quality assurance surveillance plans, test
and acceptance plans, or other evidence of monitoring activities.
However, the files did contain evidence that a contracting officer's
representative from the DOD program office had been appointed to assist
in performing contractor oversight. Although ensuring that contract
oversight occurs is a contracting officer responsibility, GovWorks
officials told us that surveillance plans were not usually kept in the
GovWorks contracting officers' contract files. Instead, these plans
were maintained by the contracting officer's representative at the DOD
customer agency. When we asked about contract oversight, we found that
in the absence of an agreed upon oversight plan, DOD customers
generally ensured that there was some process in place for monitoring
performance. Some customers described status meetings and regular
progress reports, but generally told us that they had no specific
criteria for monitoring contractor performance or established measures
for determining the quality of services. Although GovWorks officials
told us that their contracting officers did assist customers in
measuring quality services from the acquisition planning stages through
contract completion, we found little evidence that this actually took
place.
We found that FedSource generally did not ensure that contractor
oversight occurred. As was the case with GovWorks, FedSource officials
told us that they encouraged DOD to develop criteria for quality.
However, FedSource allowed general information--such as job
descriptions--to serve as requirements, even though the job
descriptions contained no criteria for measuring quality. These
descriptions did not provide sufficient information to establish an
oversight plan. FedSource did not appoint trained contracting officers'
representatives from DOD to conduct on-site monitoring. Instead,
FedSource relied on its own administrative personnel, who had been
trained as contracting officers' technical representatives but were not
located on-site with the customer, to assess contractor performance.
Because they were not on-site, they could not observe the quality of
the contractors' work, and FedSource generally took the absence of
complaints from DOD customers as an indication that the contractor was
performing satisfactorily. A FedSource official explained that
FedSource guidelines state that the customer agency's acceptance of the
contract employee's time sheet indicates agreement that services have
met quality standards and requirements. This policy lacks clear
criteria and measures to determine whether the contractor has provided
quality services. In place of criteria, we found DOD customers said
they generally evaluated performance of contractor staff based on
informal observation and customer satisfaction.
The lack of adequate oversight is consistent with what we have reported
in our recent work on contractor oversight for DOD service contracts,
where we found that almost all of those that had insufficient oversight
were interagency contracts. DOD explained that contractor oversight is
not as important to contracting officials as awarding contracts and
does not receive the priority needed to ensure that oversight occurs.
DOD concurred with our recommendations to develop guidance on
contractor oversight of services procured from other agencies'
contracts, to ensure that proper personnel be assigned to perform
contractor oversight in a timely manner no later than the date of
contract award, and that DOD's service contract review process and
associated data collection requirements provide information that will
provide management visibility over contract oversight.[Footnote 25]
Oversight of Franchise Funds Has Been Limited:
Aside from monitoring the contractors' performance, we also found that
the departments of the Interior and the Treasury, which operate
GovWorks and FedSource, respectively, and the Office of Management and
Budget have conducted infrequent reviews of franchise funds'
procurement activities. GovWorks and FedSource have recently conducted
internal reviews of their operations that have identified concerns
similar to those we found.
A GovWorks' 2004 Management Review identified such issues as lack of
acquisition planning for work added to existing awards, unanticipated
increases in the amounts of orders, and inadequate documentation of
many requirements such as competitive procedures, determinations that
changes were within the scope of the contract, the basis of award
decisions, and that prices were fair and reasonable. FedSource
officials recently started conducting "office assistance reviews." A
June 2004 FedSource review identified lack of documentation, use of
purchasing agreements beyond their intended parameters and dollar
limits, lack of price analysis, lack of quality assurance plans, and
the need for warranted contracting officers rather than administrative
personnel to perform much of the work.
While the operating principles for franchise funds require the funds to
have comprehensive performance measures, these measures do not
emphasize compliance with contracting regulations and generally focus
on customer satisfaction, financial performance, and generating
revenues to cover operating costs. Several customers we interviewed
were unaware of compliance problems and told us that they believed the
franchise funds placed orders on a competitive basis, analyzed prices,
or otherwise sought to ensure the best deal for the government when the
funds, in fact, did not. GovWorks has taken steps that address concerns
raised in its own reviews, such as increased training for contracting
officers, developing a written acquisition procedures manual, and
creating a uniform system of contract file maintenance and sample
documents to ensure adequate documentation. GovWorks officials also
told us they are trying to improve competitive procedures by requiring
all solicitations for DOD work to be posted on e-Buy, an online system
to request quotes for products and services.[Footnote 26] FedSource
also has taken steps toward addressing concerns raised in this report,
such as quality assurance planning, hiring contracting officers, and
restructuring its operations. These initiatives are underway, and it is
too early to tell whether they will improve contracting operations at
the franchise funds.
The Office of Management and Budget's oversight of franchise funds has
been limited. The Office of Management and Budget and the Chief
Financial Officers Council established business-operating principles as
a foundation for effective franchise fund management and, as required
by the Government Management Reform Act, submitted an interim report on
the franchise fund pilot program to Congress in 1998. Among other
efforts, the report recommended that the franchise funds should
continue to seek opportunities to provide services at the least cost to
the taxpayer, contributing to reducing duplicative administrative
functions and consequently to the costs of those functions. The report
noted that the franchise funds' performance measures were in varying
stages of development. The report recommended that the Office of
Management and Budget should report to Congress on franchise fund
activity prior to the expiration of the pilot authority and that the
office should continue to develop and implement operating guidance for
the franchise fund program. Although the Office of Management and
Budget's budget examiners conduct some monitoring of franchise funds as
part of their general oversight responsibilities, Office of Management
and Budget representatives said they have not conducted any
comprehensive reviews of franchise funds since they submitted the
required report to Congress. Neither have they reviewed the funds'
contracting practices.
Conclusions:
GovWorks and FedSource, created as a result of governmentwide
initiatives to improve efficiency, have streamlined contracting
processes to provide customers with greater flexibility and
convenience. However, GovWorks and FedSource have not always adhered to
competitive procedures and other sound contracting practices. They have
paid insufficient attention to basic tenets of the federal procurement
system--taxpayers' dollars should be spent wisely, steps should be
taken to ensure fair and reasonable prices, and purchases should be
made in the best interest of the government. One factor contributing to
these deficiencies is that the departments of the Interior and the
Treasury have not ensured that the franchise funds' contracting
services follow the FAR and other procurement policies. The franchise
funds need to develop clear, consistent, and enforceable policies and
processes that comply with contracting regulations while maintaining
good customer service. Another contributing factor is that the roles
and responsibilities of the parties involved in the interagency
contracting process are not always clearly defined. GovWorks and
FedSource are ultimately accountable for compliance with procurement
regulations when they assume the role of the contracting officer.
However, they often depend on the customer for detailed information
about the customer's needs. To facilitate effective purchasing and to
help obtain the best value of goods and services, all parties involved
in the use of interagency contracts have a stake in clarifying roles
and responsibilities. Additionally, franchise funds sometimes face
incentives to provide good customer service at the expense of proper
use of contracts and good value. These pressures are inherent in the
fee-for-service contracting arrangement.
Because the franchise funds have not always adhered to sound
contracting practices, DOD customers must be cautious when deciding
whether franchise fund contracting services are the best available
alternative. In addition to convenience and flexibility, decisions to
use franchise funds should be grounded in analysis of factors such as
price and fees. Further, to enhance DOD's ability to develop sound
policies related to the use of franchise funds, DOD needs measurable
data that would allow it to assess whether franchise funds' contracting
services help lower contract prices, reduce administrative costs, and
improve the delivery of goods and services. This information would also
be useful in leveraging DOD's overall buying power through strategic
acquisition planning. No one knows the total cost of using other
agencies' contracting services. Without understanding total cost, value
is elusive. In addition, DOD customers should ensure that taxpayers'
dollars are spent wisely by sharing in the responsibilities for
developing clear contract requirements and oversight mechanisms. DOD
customers are the best source of information about their specific needs
and are also best positioned to oversee the delivery of goods and
services.
Given the incentive to focus on sustaining the franchise funds'
operations and the many service providers from which customers like DOD
may choose, objective oversight would help to ensure that franchise
funds adhere to procurement regulations and operate as intended. The
Office of Management and Budget, which designated and has previously
evaluated the franchise funds, is well positioned to periodically
evaluate, monitor, and develop guidance to improve the franchise funds'
contracting activities.
Recommendations for Executive Action:
While a number of actions to improve DOD's use of other agencies'
contracting services are already underway, to enhance these
initiatives, we make the following eight recommendations to DOD, the
Interior, the Treasury, and the Office of Management and Budget.
To ensure that DOD customers analyze alternatives when choosing
franchise funds and to provide DOD with the measurable data it needs to
assess the value of the franchise funds' contracting services, we
recommend that the Secretary of Defense take the following three
actions:
* Develop a methodology to help DOD customers determine whether use of
franchise funds' contracting services is in the best interest of the
government. The methodology should include analysis of tradeoffs.
* Reinforce DOD customers' ability to define their needs and desired
contract outcomes clearly. This skill includes working with franchise
fund contracting officers to translate their needs into contract
requirements and to develop oversight plans that ensure adequate
contract monitoring.
* monitor and evaluate DOD customers' use of franchise funds'
contracting services, prices paid, and types of goods and services
purchased. Prices include franchise fund fees and fees for use of other
interagency contracts.
To ensure that GovWorks and FedSource adhere to sound contracting
practices, we recommend that the Secretaries of the Interior and the
Treasury take the following two actions:
* develop procedures and performance measures for franchise fund
contracting operations to demonstrate compliance with federal
procurement regulations and policies while maintaining focus on
customer service and:
* develop procedures for franchise fund contracting officers to work
closely with DOD customers to define contract outcomes and effective
oversight methods.
To ensure that the FedSource workforce has the skills to carry out
contracting responsibilities, we recommend that the Secretary of the
Treasury take the following action:
* assign warranted contracting officers to positions responsible for
performing contracting officer functions.
In order to provide incentives for the franchise funds to adhere to
procurement regulations and to ensure that franchise funds operate as
intended, we recommend that the Director of the Office of Management
and Budget take the following two actions:
* Expand monitoring to include franchise funds contracting operations'
compliance with procurement regulations and policies. These findings
should be available to customers to ensure transparency and
accountability to customers and the Congress.
* Develop guidance to clarify the roles and responsibilities of the
parties involved in interagency contracting through franchise funds.
Agency Comments and Our Evaluation:
We provided a draft of this report to DOD, the departments of the
Interior and the Treasury, and the Office of Management and Budget for
review and comment. We received written comments from DOD and the
Department of the Treasury, which are reprinted in appendices IV and V
respectively. The Department of the Interior and the Office of
Management and Budget provided comments via e-mail.
DOD concurred with our recommendations and identified actions it has
taken or plans to take to address them. In response to our
recommendation that the Secretary of Defense develop a methodology to
help DOD customers determine whether the use of franchise funds'
contracting services is in the best interest of the government, DOD
indicated that action had been taken through the issuance of a policy
memo titled Proper Use of Non-DOD Contracts and subsequent policies
issued by the military departments. We acknowledge the DOD policy memo
in our report and note that this guidance describes general factors to
consider but does not provide specific criteria for how to make this
determination. The policies issued by the military departments
establish procedures for review and approval of the use of non-DOD
contract vehicles, but do not address methods of determining whether
this is in the best interest of the government. Our recommendation
takes these actions into account and encourages DOD to go further by
developing a methodology to help customers assess contracting
alternatives.
In response to our recommendation that DOD reinforce DOD customers'
ability to define their needs and desired contract outcomes clearly,
DOD maintained that it is the responsibility of the franchise fund
contracting officer to decide whether or not the requirement is
described accurately. Nonetheless, DOD committed to issue a memo by
August 31, 2005, reinforcing the need for DOD customers to define
clearly their requirements and articulate clearly their desired
outcomes in the acquisition process. We believe that this memo, coupled
with DOD's ongoing efforts to educate DOD customers about the use of
interagency acquisitions, are steps in the right direction.
Finally, in response to our recommendation that DOD monitor and
evaluate DOD customers' use of franchise funds' contracting services,
DOD concurred but explained that the data capture systems that would
provide this information are not yet in place. DOD stated that the
Federal Procurement Data System-Next Generation would provide this
capability in fiscal year 2006. However, data collection is just one
step in the evaluation process. In addition to collecting data, DOD
will also need to compare alternatives and prices in order to make more
informed choices. Further, the accuracy and reliability of interagency
contracting data in the Federal Procurement Data System-Next Generation
will depend heavily on accurate reporting by franchise funds.
The Department of the Interior concurred with our recommendations and
identified actions it has taken or plans to take to address them. The
Interior highlighted 2004 accomplishments and acknowledged a need for
better documentation to demonstrate compliance and value provided. The
Interior also committed to ensuring an adequate contracting staff and
to publishing information to help DOD determine the value of using the
franchise fund. In response to our recommendation that the Department
of the Interior develop procedures and performance measures for
franchise fund contracting operations to demonstrate compliance with
federal procurement regulations, the Interior highlighted a number of
recent efforts to improve performance, including its 2004 management
control review and performance improvement plan that will monitor
compliance with federal procurement regulations. This plan establishes
a goal of 75 percent reduction in reportable findings. Interior also
stated that it had revised its acquisition review process, awarded a
contract for a third party acquisition review, and provided additional
training to its staff. Interior committed to continue monitoring
performance and creating guidance as needed. In response to our
recommendation that the Interior develop procedures for franchise fund
contracting officers to work more closely with DOD customers, the
Interior highlighted efforts to train its contracting officers and
develop policies for working with DOD customers.
The Department of the Treasury concurred with our recommendations and
identified actions it has taken or plans to take to address them,
including centralization of FedSource's acquisition workforce under one
line of authority to allow for standardization and consistency. In
response to our recommendation that FedSource develop procedures and
performance measures for franchise fund contracting operations to
demonstrate compliance with federal procurement regulations, the
Treasury committed to continue to conduct reviews to measure and
evaluate compliance with federal procurement regulations and policies.
This is a positive step toward ensuring compliance. The Treasury also
said that FedSource had instituted performance-based statements of work
for its acquisitions. While this initiative focuses on some aspects of
compliance and is important in managing contractor performance, our
recommendation addresses the performance of the franchise fund.
Developing performance measures related to compliance with procurement
regulations would reinforce the agency's commitment to compliance and
provide a means to monitor and demonstrate progress. In response to our
recommendation that FedSource develop procedures for franchise fund
contracting officers to work more closely with DOD customers, the
Treasury indicated that FedSource will also develop procedures to
provide its customers with clear guidance for defining contract
outcomes. In response to our recommendation that FedSource assign
warranted contracting officers to positions responsible for performing
contracting officer functions, Treasury stated that FedSource has hired
contracting officers to perform all contracting officer functions.
* OMB concurred with our recommendations that OMB expand its monitoring
to include franchise funds contracting operations' compliance with
procurement regulations and policies and develop guidance to clarify
the roles and responsibilities of the parties involved in interagency
contracting through franchise funds. OMB stated that its Office of
Federal Procurement Policy (OFPP) proposed to include the
implementation of our recommendations in an undertaking pertaining to
governmentwide acquisition contracts and incorporate franchise funds
into that project. As part of that project, OMB/OFPP is asking the
designated agencies to develop plans to ensure cost-effective and
responsible contracting. The plans will address (1) training to
contracting staff; (2) customer staff training; (3) management controls
to ensure contracts are awarded in accordance with applicable laws,
regulations, and policies; (4) contract administration; and (5)
periodic management reviews. OMB acknowledged that this was only a part
of the solution. We encourage OMB to give additional consideration to
providing guidance that would clarify roles and responsibilities of the
parties involved in interagency contracting through franchise funds.
We are sending copies of this report to the Secretaries of Defense, the
Interior, and the Treasury; the Director of the Office of Management
and Budget; and interested congressional committees. We will provide
copies to others on request. This report will also be available at no
charge on GAO's Web site at http://www.gao.gov.
If you have any questions about this report or need additional
information, please call me at (202) 512-4841 (cooperd@gao.gov).
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. Other staff
making key contributions to this report were Amelia Shachoy, Assistant
Director; Lily Chin; Lara Laufer; Janet McKelvey; Kenneth Patton; Monty
Peters; and Ralph Roffo.
In memory of Monty Peters (1948-2005), under whose skilled leadership
this review was conducted.
Signed by:
David E. Cooper, Director:
Acquisition and Sourcing Management:
List of Congressional Committees:
The Honorable John Warner:
Chairman:
The Honorable Carl Levin:
Ranking Minority Member:
Committee on Armed Services:
United States Senate:
The Honorable Ted Stevens:
Chairman:
The Honorable Daniel K. Inouye:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
United States Senate:
The Honorable Duncan Hunter:
Chairman:
The Honorable Ike Skelton:
Ranking Minority Member:
Committee on Armed Services:
House of Representatives:
The Honorable C. W. Bill Young:
Chairman:
The Honorable John P. Murtha:
Ranking Minority Member:
Subcommittee on Defense:
Committee on Appropriations:
House of Representatives:
[End of section]
Appendix I: Scope and Methodology:
We reviewed legislation establishing the franchise fund pilot program,
governmentwide guidance relating to the program, and reports
summarizing program outcomes. We held discussions with Office of
Management and Budget representatives responsible for overseeing and
providing guidance for the program and with Department of Defense (DOD)
officials responsible for oversight of procurement issues. We performed
work at the franchise funds managed by the departments of the Interior
and the Treasury and interviewed officials and reviewed records
relating to Interior's GovWorks and Treasury's FedSource programs. The
Interior and Treasury franchise funds accounted for about 76 percent of
total revenues for the six franchise funds during fiscal year 2003 (the
most recently completed fiscal year at the time we were planning our
field work) and about 95 percent of all services the six funds provided
DOD. Contracting services the GovWorks and FedSource programs provided
accounted for over 95 percent of total revenues at the Interior and
Treasury franchise funds. To gain insight into how DOD customers were
using franchise funds and into franchise fund contracting processes, we
reviewed documentation relating to 17 selected customer projects
totaling $249 million in funding provided and interviewed GovWorks and
FedSource contracting personnel responsible for these projects and
representatives of the DOD customers.
To determine how DOD customers determined whether franchise funds
provided a good value, we interviewed representatives of DOD customers
for the selected projects and reviewed available documentation relating
to decisions to use franchise fund contracts. We also reviewed
information available from the franchise funds that would indicate
whether the franchise funds provided a good value, and interviewed
franchise fund officials.
To determine how franchise fund contracting officers worked with DOD
customers to define measurable quality standards for goods and services
and develop effective oversight mechanisms, we reviewed contract
documentation for selected customer projects that would establish
quality standards, and documentation relating to contract oversight. We
also discussed these issues with franchise fund contracting personnel.
In addition, we discussed these issues with representatives of DOD
customers and reviewed available documentation.
To determine whether franchise funds followed the contracting practices
needed to ensure fair and reasonable prices, we reviewed contract
documentation for selected customer projects to assess the extent to
which contracting personnel sought competition for work and analyzed
proposed prices to determine whether they were fair and reasonable, and
discussed these issues with contracting personnel. In addition, we
discussed these issues with representatives of DOD customers and
reviewed available documentation.
To select customer projects for review, we obtained data files from the
Department of the Interior's GovWorks and the Department of the
Treasury's FedSource contracting programs that reflected customer
projects active during fiscal year 2003, and the dollar value of
customer funding provided for these projects during the year. We ranked
these projects in terms of funding provided and selected projects
representing the greatest dollar value of customer funding provided--10
GovWorks projects accounting for $164 million and 7 FedSource projects
accounting for $85 million. Table 5 summarizes GovWorks projects, and
table 6 summarizes FedSource projects.
Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions of
Dollars):
DOD customer: Army Chief Technology Office;
Contractor: Cherry Road Technology;
Fiscal year 2003 funding provided: $26.1.
DOD customer: Air Force Deputy Chief of Staff Air and Space Operations;
Contractor: SAIC;
Fiscal year 2003 funding provided: $21.3.
DOD customer: Army National Guard Bureau Readiness Center;
Contractor: SRA International Inc,;
Fiscal year 2003 funding provided: $19.4.
DOD customer: Air Force Material Command;
Contractor: Lockheed Martin Inc;
Fiscal year 2003 funding provided: $17.4.
DOD customer: Army Chief Information Office;
Contractor: TKC Communications Inc;
Fiscal year 2003 funding provided: $15.1.
DOD customer: Army National Guard Bureau Chief Information Office;
Contractor: Booz Allen Hamilton Inc;
Fiscal year 2003 funding provided: $14.4.
DOD customer: Army Program Manager for Signals Warfare;
Contractor: Lear Siegler Services Inc;
Fiscal year 2003 funding provided: $14.0.
DOD customer: Army National Guard Bureau Readiness Center;
Contractor: Sprint Communications Company LP;
Fiscal year 2003 funding provided: $13.6.
DOD customer: Air Force Aging Landing Gear Life Extension Program;
Contractor: General Atomics Inc;
Fiscal year 2003 funding provided: $12.6.
DOD customer: Navy Program Executive Officer for Information
Technology;
Contractor: Bearing Point;
Fiscal year 2003 funding provided: $10.6.
Total;
Fiscal year 2003 funding provided: $164.3.
Source: GovWorks data.
Note: Total may not add due to rounding.
[End of table]
Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions of
Dollars):
DOD customer: Walter Reed Army Medical Center;
Fiscal year 2003 funding provided: $27.2;
Number of work assignments reviewed: 66;
Selection process for work assignments: Random selection.
DOD customer: U.S. Army Fort McCoy;
Fiscal year 2003 funding provided: $13.2;
Number of work assignments reviewed: 12;
Selection process for work assignments: Size.
DOD customer: Army 88th Regional Readiness Command at Fort Snelling;
Fiscal year 2003 funding provided: $10.1;
Number of work assignments reviewed: 5;
Selection process for work assignments: Size.
DOD customer: The Pentagon;
Fiscal year 2003 funding provided: $9.7;
Number of work assignments reviewed: 5;
Selection process for work assignments: All[A].
DOD customer: Navy Recruiting Command;
Fiscal year 2003 funding provided: $8.4;
Number of work assignments reviewed: 18;
Selection process for work assignments: Random selection.
DOD customer: Lackland Air Force Base;
Fiscal year 2003 funding provided: $8.2;
Number of work assignments reviewed: 14;
Selection process for work assignments: Random selection.
DOD customer: Brooke Army Medical Center at Fort Sam Houston;
Fiscal year 2003 funding provided: $8.1;
Number of work assignments reviewed: 25;
Selection process for work assignments: Random selection.
Total;
Fiscal year 2003 funding provided: $84.9;
Number of work assignments reviewed: 145[B].
Source: FedSource data.
[A] One project only had five work assignments, and we reviewed all
five assignments for that project.
[B] We eliminated 25 of these work assignments from our analyses
because they used a contract that expired or that was discontinued by
the end of fiscal year 2003.
[End of table]
GovWorks contracting personnel fulfilled the requirements of each
project selected by award of a single order, and we reviewed contract
documentation related to the relevant order. FedSource contracting
personnel, in contrast, fulfilled the requirements of customer projects
by award of one or more contracts or orders. Further, FedSource
personnel initiated multiple work assignments--in some cases several
hundred--to define specific work what would be performed under each of
the contracts awarded or orders placed. Accordingly, we reviewed all
contracts awarded or orders placed to fulfill the requirements of the
selected customer projects and a sample of work assignments initiated
under these contracts or orders. To select sample work assignments for
review, we first ranked the work assignments in terms of dollar value
of the work to be performed. For those projects where a relatively
small number of work assignments accounted for a significant share of
total project value, we selected the highest dollar value assignments
representing at least 50 percent of total project value. For those
projects where most individual work assignments represented only a
small fraction of total project value, we selected all assignments
valued at $150,000 or more and a sample--selected at random--of the
remaining work assignments.
We conducted our review between June 2004 and June 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Franchise Fund Operating Principles:
Operating principle: Services;
Description: The enterprise should only provide common administrative
support services.
Operating principle: Organization;
Description: The organization would have a clearly defined
organizational structure including readily identifiable delineation of
responsibilities and functions and separately identifiable units for
the purpose of accumulating and reporting revenues and costs. The funds
of the organization must be separate and identifiable and not
commingled with another organization.
Operating principle: Competition;
Description: The provision of services should be on a fully competitive
basis. The organization's operation should not be "sheltered" or be a
monopoly.
Operating principle: Self-sustaining/full cost recovery;
Description: The operation should be self-sustaining. Fees will be
established to recover the "full costs," as defined by standards issued
in accordance with the Federal Accounting Standards Advisory Board.
Operating principle: Performance measures;
Description: The organization must have a comprehensive set of
performance measures to assess each service that is being offered.
Operating principle: Benchmarks;
Description: Cost and performance benchmarks against other
"competitors" are maintained and evaluated.
Operating principle: Adjustments to business dynamics;
Description: The ability to adjust capacity and resources up or down as
business rises or falls, or as other conditions dictate, if necessary.
Operating principle: Surge capacity;
Description: Resources to provide for "surge" capacity and peak
business periods, capital investments, and new starts should be
available.
Operating principle: Cessation of activity;
Description: The organization should specify that prior to curtailing
or eliminating a service, the provider will give notice within a
reasonable and mutually agreed time frame so the customer may obtain
services elsewhere. Notice will also be given within a reasonable and
mutually agreeable time frame to the provider when the customer elects
to obtain services elsewhere.
Operating principle: Voluntary exit;
Description: Customers should be able to "exit" and go elsewhere for
services after appropriate notification to the service provider and be
permitted to choose other providers to obtain needed service.
Operating principle: Full-time equivalents accountability;
Description: Full-time equivalents would be accounted for in a manner
consistent with the Federal Workforce Restructuring Act and Office of
Management and Budget requirements, such as Circular A-11.
Operating principle: Initial capitalization;
Description: Capitalization of franchises, administrative service, or
other cross- servicing operations should include the appropriate full-
time equivalents commensurate with the level of effort the operation
has committed to perform.
Source: Office of Management and Budget and the Chief Financial
Officers Council.
Note: These principles were developed by the Office of Management and
Budget and the U.S. Chief Financial Officers Council. The U.S. Chief
Financial Officers Council is an organization of the chief financial
officers and deputy chief financial officers of the largest federal
agencies and senior officials of the Office of Management and Budget
and the Department of the Treasury who work collaboratively to improve
financial management in the U.S. government.
[End of table]
[End of section]
Appendix III: Overview of Contract Documents Used at GovWorks and
FedSource:
Table 7: GovWorks Contract Documents Used to Define Desired Outcomes
and Performance Criteria:
Master contract or another agency's contract: Master contract contains
information about the general scope of work; however, the exact dates
and quantities of future deliveries are not known. The contract also
includes additional details, such as maximum or minimum quantities that
can be ordered under each individual order and the maximum that it may
order during a specified period of time, and the time frame that
contract remains valid. Under the GSA schedules (also referred to as
multiple-award schedules and Federal Supply Schedules) Program, GSA
establishes long-term governmentwide contracts with commercial firms to
provide access to commercial supplies and services. Schedule contracts
contain much of the same information as other master contracts.
Purchase request: DOD customer describes the needs for goods or
services and describes desired outcomes and quality standards that
contractors are expected to meet.
Task or delivery orders: Multiple orders can be written off of a master
contract. Orders define work to be performed; location of work; period
of performance; deliverable schedule; applicable performance standards;
and any special requirements. Individual orders shall clearly describe
all services to be performed or supplies to be delivered so the full
cost or price for the performance of the work can be established when
the order is placed.
Source: GAO analysis of GovWorks documents and interviews with GovWorks
officials.
[End of table]
Table 8: FedSource Contract Documents Used to Define Desired Outcomes
and Performance Criteria:
Master contract: Contracting officers develop master contract based on
anticipated needs. Master contract contains information about the
general scope of work; however, the exact dates and quantities of
future deliveries are not known. Also includes additional details, such
as maximum or minimum quantities that the government may order under
each individual order and the maximum that it may order during a
specified period of time, and the time frame that contract remains
valid.
Order: Multiple orders can be written off of master contract. FedSource
contracting officers issue orders to each contractor based on
anticipated business for the year. FedSource briefly describes types of
services and obligates funds to cover anticipated work. At this point,
FedSource does not know exact quantities or dates of future deliveries.
Purchase request: DOD customer describes needs for goods or services.
Program office describes desired outcomes and quality standards that
contractors are expected to meet.
Work assignment: FedSource uses work assignment to define work to be
performed, location of work, period of performance, deliverable
schedule; applicable performance standards, and any special
requirements.
Source: GAO analysis of FedSource documents and interviews with
FedSource officials.
[End of table]
[End of section]
Appendix IV: Comments from the Department of Defense:
OFFICE OF THE UNDER SECRETARY OF DEFENSE:
ACQUISITION, TECHNOLOGY AND LOGISTICS:
3000 DEFENSE PENTAGON:
WASHINGTON, DC 20301-3000:
JUL 22 2005:
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G. Street, NW:
Washington, DC 20548:
Dear Mr. Cooper:
This is the Department of Defense (DoD) response to the GAO draft
report, "INTERAGENCY CONTRACTING: Franchise Funds Provide Convenience,
but Value to DoD is not Demonstrated," dated June 30, 2005, (GAO Code
120357/GAO-05-456).
The report recommends that the Secretary of Defense develop a
methodology to help DoD customers determine whether use of franchise
funds' contracting services is in the best interest of customers
ability to define their needs and desired contract outcomes early and
that the Secretary of Defense monitor and evaluate DoD customers' use
of franchise funds' contracting services, prices paid and types of
goods and services purchased.
The Department concurs with the recommendations. Our comments on the
report are enclosed. Thank you for the opportunity to review and
comment on the subject draft report. For any questions concerning this
response, please contact Mike Canales, on 703-695-8571 or via e-mail at
Michael.Canales@osd.mil.
Sincerely,
Signed by:
Deidre A. Lee:
Director, Defense Procurement and Acquisition Policy:
Enclosure: As stated:
DoD COMMENTS ON GAO DRAFT REPORT - DATED JUNE 30, 2005 GAO CODE
120357/GAO-05-456:
"INTERAGENCY CONTRACTING: FRANCHISE FUNDS PROVIDE CONVENIENCE, BUT
VALUE TO DOD IS NOT DEMONSTRATED"
DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS:
RECOMMENDATION 1: The GAO recommended that the Secretary of Defense
develop a methodology to help DoD customers determine whether use of
franchise funds' contracting services is in the best interest of the
government-the methodology should include analysis of tradeoffs. (p.
29/GAO Draft Report):
DoD Response: Concur. Actions have already been taken at both DoD and
Military Department (MILDEP) levels that address this recommendation.
The OSD policy memo of October 29, 2004, entitled, "Proper Use of Non-
DoD Contracts," and companion policy memos from the MILDDES including
Air Force policy memo dated December 6, 2004, the Navy policy memo
dated December 20, 2004, and the Army policy memo dated July 12, 2005
(interim policy memo previously issued) were issued to provide
direction to program managers, requirements personnel, financial
management personnel and contracting personnel. The OSD memo places
primary responsibility for compliance on acquisition Program
Managers/Requirements personnel. It also identifies that a team
approach, involving Contracting and Financial Management personnel, is
best to ensure that acquisition strategies comply with policy and that
the use of a non-DoD contract is in the best interest of the
government. The DoD policy was jointly signed by the Acting Under
Secretary of Defense for Acquisition, Technology, and Logistics and the
Principal Deputy Under Secretary of Defense (Comptroller). All MILDEP
policy memos implement the policy and provide a framework of the key
aspects needed for compliance.
RECOMMENDATION 2: The GAO recommended that the Secretary of Defense
reinforce DoD customers' ability to define their needs and desired
contract outcomes clearly. This skill includes working with franchise
fund contracting officers to translate their needs into contract
requirements and to develop oversight plans that ensure adequate
contract monitoring. (p. 29/GAO Draft Report):
DoD Response: Concur. DoD will issue a memo to reinforce the need for
DoD "customers" to clearly define their requirements and clearly
articulate their desired outcomes in the acquisition process. The
expected date for issuance of the memo is August 31, 2005. If the
decision has been made to use a franchise fund activity, it is the
responsibility of the franchise fund contracting officer to ensure the
DOD customers' needs and desired outcomes. are defined in a way that
allows for proper solicitation, evaluation, award, performance and post
award administration. Ultimately the franchise fund Contracting Officer
must make a decision on whether or not the requirement is described
adequately. In the same vein, the franchise fund and requiring activity
must work together to perform appropriate contract monitoring.
RECOMMENDATION 3: The GAO recommended that the Secretary of Defense
monitor and evaluate DoD customers' use of franchise funds' contracting
services, prices paid, and types of goods and services purchased.
Prices include franchise fund fees and fees for use of other
interagency contracts. (p. 29/GAO Draft Report):
DoD Response: Concur. However, current data capture systems are not in
place that will provide this information easily and consistent with
policy requirements. The functionality to support this reporting will
be established in the Federal Procurement Data System-Next Generation
(FPDS-NG). The target date for implementation is Fiscal Year 2006. DoD
is working with the MILDEPS to satisfy the requirements of Section 854
of the FY05 National Defense Authorization Act, which may provide some
of this information sooner.
[End of section]
Appendix V: Comments from the Department of the Treasury:
DEPARTMENT OF THE TREASURY:
WASHINGTON, D.C. 20220:
JUL 25 2005:
Mr. David E. Cooper:
Director, Acquisition and Sourcing Management:
U.S. Government Accountability Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Cooper:
I am writing to provide the Treasury Department's comments on the
Government Accountability Office's draft report, entitled Interagency
Contracting: Franchise Funds Provide Convenience, but Value to DOD is
Not Demonstrated.
I would like to state that prior to your GAO audit, the FedSource
centralized their acquisition workforce into a new Acquisition Center.
This action was taken to address weaknesses identified through internal
compliance evaluations and validated during this audit. Placing the
FedSource contracting officers and other related acquisition personnel
under one line of authority will allow for standardization and
consistency.
The following comments below address your recommendations in the
report.
Recommendation: The FedSource should develop procedures and performance
measures for franchise fund contracting operations to demonstrate
compliance with federal procurement regulations and policies while
maintaining focus on customer service:
I agree and the FedSource and their contracting office are conducting
joint compliance reviews to measure and evaluate compliance with
federal procurement regulations and policies. On all recent work,
FedSource has instituted performance-based statements of work and
quality assurance surveillance plans to ensure proper solicitation,
evaluation, award, performance and post award administration.
Recommendation: The FedSource should develop procedures for franchise
fund contracting officers to work closely with DOD customers to define
contract outcomes and effective oversight methods.
I agree and the FedSource will be putting procedures in place to
provide customers with clear guidance to define contract outcomes.
FedSource has instituted performance-based statements of work and
quality assurance surveillance plans to ensure proper solicitation,
evaluation, award, performance and post award administration.
Recommendation: The GAO recommends FedSource assign warranted
contracting officers to positions responsible for performing
contracting officer functions.
I agree and the FedSource has hired Contracting Officers to perform all
contracting officer functions. FedSource is conducting joint compliance
reviews with their contracting office to measure and evaluate
compliance with federal procurement regulations and policies.
Thank you for the opportunity to respond to this draft GAO report. If
you have any questions or wish to discuss these comments further,
please contact me at (202) 622-0750.
Sincerely,
Signed for:
Barry K. Hudson:
Acting Chief Financial Officer:
cc: Martin Davis, Managing Director, Treasury Franchise Fund:
FOOTNOTES
[1] GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005).
[2] H.R. Conf. Rep. No. 108-354 at 775-76 (2003).
[3] Franchise fund enterprises are a type of intragovernmental
revolving fund, all of which have similar legal authority and
operations and are generally created to provide common administrative
services. An intragovernmental revolving fund is established to conduct
continuing cycles of businesslike activity within and between
government agencies. An intergovernmental revolving fund charges for
the sale of goods or services and uses the proceeds to finance its
spending, usually without the need for annual appropriations.
[4] Between May 1996 and January 1997 pilots were designated to be
established at the departments of Commerce, Health and Human Services,
the Interior, the Treasury, and Veterans Affairs and at the
Environmental Protection Agency. Pub. L. No. 103-356, § 403. The pilots
were to expire after 5 years, at the end of fiscal year 1999, but have
been extended several times--and as of December 2004--Congress extended
the date to October 1, 2005.
[5] Appendix II lists 12 original operating principles for franchise
funds.
[6] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005) contains a list of related products.
[7] Section 803 of the National Defense Authorization Act for Fiscal
Year 2002, Pub. L. No. 107-107 (2001), requires DOD to develop
regulations requiring DOD to solicit offers from all contractors that
are offering the required services under a multiple-award contract for
orders exceeding $100,000. For GSA schedule orders, section 803, as
implemented, requires that DOD solicit all contractors offering the
required services under the applicable schedule or enough contractors
to ensure the receipt of three offers. If three offers are not
received, a contracting officer must determine in writing that no
additional contractors could be identified despite reasonable efforts
to do so. Under certain circumstances, section 803 allows waivers of
competition for multiple-award contract orders and GSA schedule orders.
The implementing regulations in the Defense Federal Acquisition
Regulation Supplement became effective in October 2002. Defense Federal
Acquisition Regulation Supplement 208.404-70.
[8] GAO, Contract Management: Few Competing Proposals for Large DOD
Information Technology Orders, GAO/NSIAD-00-56 (Washington, D.C.: March
2000); GAO, Contract Management: Not Following Procedures Undermines
Best Pricing Under GSA's Schedule, GAO-01-125 (Washington, D.C.:
November 2000); and GAO, Contract Management: Guidance Needed to
Promote Competition for Defense Task Orders, GAO-04-874 (Washington,
D.C.: July 2004).
[9] GovWorks primarily used GSA schedule contracts. When ordering
services that required a statement of work, GSA's Multiple-Award
Schedules Program Owners Manual required that offices placing orders
consider the level of effort and mix of labor proposed to perform
specific tasks and make a determination that task order pricing was
fair and reasonable (app. A, 2001).
[10] We found Treasury competitively awarded the indefinite delivery
contracts included in our review.
[11] Defense Federal Acquisition Regulation Supplement 216.505-70.
[12] GAO/NSIAD-00-56.
[13] FAR 16.505 (a).
[14] FedSource filled this requirement using two blanket purchase
agreements. These blanket purchase agreements must follow section
13.303-5 of the FAR, which requires obtaining quotes from other
vendors.
[15] The Treasury franchise fund primarily develops multiple-award
contracts under section 16.505 of the FAR. When ordering services that
are not specifically established in the contract, ordering offices are
required to establish prices using the pricing procedures of FAR
subpart 15.4. FAR Subpart 15.402 requires that supplies and services
are purchased at fair and reasonable prices.
[16] National Defense Authorization Act for Fiscal Year 2003, Pub. L.
No. 107-314 § 824 (2002).
[17] National Defense Authorization Act for Fiscal Year 2005, Pub. L.
No. 108-375, § 854 (2004). The act prohibits DOD from purchasing goods
or services through the use of an interagency contract unless the
purchase is made in accordance with procedures for reviewing and
approving the use of these contracts. These requirements take effect
180 days after the enactment of the act.
[18] 10 U.S.C. § 2330 as added by section 801 of the National Defense
Authorization Act for Fiscal Year 2002. Section 802 added a note to 10
U.S.C. § 2330 establishing savings goals.
[19] 10 U.S.C. § 2330. DOD began implementing these requirements in May
of 2002 by requiring the military components to propose their own
process and procedures for management and oversight of all acquisition
services.
[20] National Defense Authorization Act for Fiscal Year 2003, Pub. L.
No. 107-314 § 824 (2002), and § 854 National Defense Authorization Act
for Fiscal Year 2005, Pub. L. No. 108-375 (2004). The fiscal year 2005
requirement applies to all fees imposed on purchases exceeding the
simplified acquisition threshold in fiscal years 2005 and 2006.
[21] Performance-based services contracting emphasizes that all aspects
of an acquisition be structured around the purpose of the work to be
performed as opposed to the manner in which the work is to be
performed, or broad, imprecise statements of work that preclude an
objective assessment of contractor performance.
[22] FAR 37.602-2, Quality assurance, FAR 46.104, Contract
administration office responsibilities, and Defense Federal Acquisition
Regulation Supplement 246.102.
[23] Office of Federal Procurement Policy (Policy Letter 93-1). When
contracting for services, in particular highly specialized or technical
services, agencies should ensure that a sufficient number of trained
and experienced officials are available within the agency to manage and
oversee the contract administration function.
[24] DOD, Guidebook for Performance-Based Services Acquisition in the
Department of Defense (Washington, D.C.: December 2000).
[25] GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.:
March 2005).
[26] e-Buy is an online Request for Quotations tool that allows federal
buyers to send requests and receive quotes for products and services
available under the GSA multiple-award schedules program. Implementing
regulations for section 803 in the Defense Federal Acquisition
Regulation Supplement state that posting of a request for quotations on
"e-Buy" is one medium for providing fair notice to all contractors as
required by the regulation.
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
