COMPETITIVE

CONTRACTING

Agencies Upheld Few

Challenges and

Appeals Under the

FAIR Act

United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Government Management,

Information, and Technology

House Committee on Government

Reform

September 2000

GAO/GGD/NSIAD-00-244

United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

B-283779

September 29, 2000

The Honorable Stephen Horn, Chairman

Subcommittee on Government Management,

 Information, and Technology

Committee on Government Reform

House of Representatives

Dear Mr. Chairman:

The Federal Activities Inventory Reform (FAIR) Act of 1998 directs

agencies to develop annual inventories of the activities performed by their

employees that are not inherently governmental.1

 Interested parties, as

defined by the act, may challenge agencies’ inventories based on “an

omission of a particular activity from, or an inclusion of a particular

activity on” an inventory, and appeal adverse agencies’ decisions. 2 In

essence, the FAIR Act codified a requirement already set forth in the Office

of Management and Budget’s (OMB) Circular A-76 for agencies to

inventory their commercial activities. The FAIR Act provided for,

beginning in 1999, public notice of these inventories’ availability;

challenges by interested parties over the inclusion or exclusion of

activities on inventories; and agency heads’ reviews of these inventories.

Agencies’ responses to the issues interested parties raised in their

challenges and appeals, as well as the usefulness of FAIR Act inventory

information, will affect the future implementation of this act and the

extent to which the inventories might provide information to agencies that

they could use to help improve how efficiently they perform their

activities.

The first FAIR Act inventories were due to OMB in June 1999. Responding

to your request for information on agencies’ handling of appeals and

 

1

 Section 5 of the FAIR Act, Public Law No. 105-270, 31 U.S.C. § 501 note (1998), defines an inherently

governmental function as “a function that is so intimately related to the public interest as to require

performance by Federal Government employees.”

2

 An interested party is (1) a private sector source that is a prospective or actual offeror for any

contract who has a direct economic interest in performing the activity and would be adversely affected

by a determination not to procure the performance of the activity from a private sector source; (2) a

representative of any business or professional association whose membership includes private sector

sources described in (1) above; (3) an officer or employee of an organization within the executive

agency that is an actual or prospective offeror to perform the activity; or (4) the head of a labor

organization, referred to in 5 U.S.C. 7103 (a)(4), that includes members who are officers or employees

within an executive agency involved in performing the activity.
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Page 2 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

challenges within the broader context of the initial implementation of the

FAIR Act, this report provides information on (1) the 24 Chief Financial

Officer (CFO) Act agencies’ inventories and the number of challenges and

appeals that interested parties filed;3

 (2) issues raised in challenges and

appeals by interested parties (such as industry or employees) and

agencies’ responses to them; and (3) six agencies’ plans for reviewing or

using their inventories, and, while not required by the FAIR Act, how

agencies could use information contained in the inventories to help ensure

that activities are effectively aligned and efficiently performed.

The 24 CFO Act agencies identified about 900,000 full-time equivalent

(FTE) positions in their inventories as performing commercial activities,

but over one half (about 513,000 FTEs) were exempted from consideration

for competition at the time that the inventories were compiled.4

 These

agencies received and responded to a total of 332 challenges and 96

appeals to their 1999 FAIR Act inventories from interested parties. Of

those submitted, 20 challenges (about 6 percent) and 3 appeals (about 3

percent) were successful. Private companies or industry representatives

(hereafter referred to as industry) filed most of their 145 challenges and

appeals at civilian agencies, while employees and labor unions (hereafter

referred to as employees) filed most of their 283 challenges and appeals at

the Department of Defense (DOD), as shown in table 1.

Agency

Number of challenges

and appeals filed by

industry

Number of

challenges and

appeals filed by

employees Total

DOD 33 230 263

Civilian agencies 112 53 165

Total 145 283 428

Source: GAO analysis of agency information.

Many of the issues that industry raised in their challenges and appeals

went beyond the provisions of the FAIR Act because they concerned

issues other than the inclusion or omission of an activity from an agency’s

 

3

 CFO Act agencies include the Departments of Agriculture, Commerce, Defense, Education, Energy,

Health and Human Services, Housing and Urban Development, Interior, Justice, Labor, State,

Transportation, Treasury, Veterans Affairs; the Environmental Protection Agency; the National

Aeronautical and Space Administration; the Agency for International Development; the Federal

Emergency Management Agency; the General Services Administration; the National Science

Foundation; the Nuclear Regulatory Commission; the Office of Personnel Management; the Small

Business Administration; and the Social Security Administration.

4

 FTEs are used to measure federal civilian employment. One FTE is equal to 1 work year of 2,080

hours.

Results in Brief

Table 1: Summary of Industry and

Employee Challenges and Appeals to

Agencies
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inventory. For example, industry challenged agencies that indicated that

they did not plan to consider many of the commercial activities on their

inventories for competition. In contrast, almost all of the employees’

challenges and appeals were within the provisions of the act, because they

concerned the inclusion of activities that the employees contended should

have been omitted because they were inherently governmental. Although

the challenge and appeal process did not result in significant changes to

agencies’ inventories, the process served a broader purpose by identifying

the need for greater clarity in agencies’ inventories for use by both

interested parties and agencies. OMB revised its guidance on the format

and organization of agencies’ inventories based on the first year’s

experience with the FAIR Act.

The six agencies’ plans for reviewing or using their FAIR Act inventories

varied considerably between the civilian and defense agencies. The

civilian agencies have begun to review their inventories to identify ways to

improve their inventories or to use the information on them to make more

informed management decisions. In contrast, DOD has used its

inventories of commercial activities to identify activities, currently

performed by federal personnel, for possible competition. It will require a

sustained leadership effort on the part of OMB to help ensure that agencies

review their inventories and identify opportunities for better using agency

resources by, for example, subjecting activities to competition. Even so,

inventories only provide a portion of the information that agency

management could use in making decisions about how all of its activities

(inherently governmental, commercial, and contracted) are carried out and

whether the activities are being performed in the most efficient and costeffective manner. To enhance the usefulness of inventories in informing

decisions about improving efficiencies, we recommend that OMB, as part

of its ongoing effort to implement the FAIR Act, undertake a sustained

effort to help improve the clarity of inventories and help ensure that

agencies review them.

The three agencies that provided comments on a draft of this report

generally agreed with its characterization of the issues involved in

implementing the challenge and appeal provisions of the FAIR Act. In

addition, four agencies did not provide official comments on the draft

report.

OMB Circular A-76 and its accompanying supplemental handbook provide

guidance on what types of activities are commercial as well as guidelines

for conducting cost-comparison studies to determine whether it is more

cost effective to have commercial activities performed in-house by federal

Background
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employees, through inter-service support agreements (ISSA), or contracted

to the private sector. Before Congress enacted the FAIR Act, there had

been considerable debate about agencies’ efforts under the circular to

ensure that they relied on the private sector for commercial goods and

services to the extent that it was cost effective. Our work evaluating

competitive sourcing studies in DOD has found that savings can result

regardless of whether the competitions are won by the government or

private sector. 5 The FAIR Act provides a process for executive agencies to

identify activities that are not inherently governmental and that thus may

be considered for competitive sourcing.

FAIR Act inventories are due to OMB no later than June 30 each year, and

the first set of inventories was due in June 1999. Following OMB’s review

of the inventories and consultation with the agencies, OMB is to publish a

notice of public availability in the Federal Register, and agencies are to

make the inventories available to the public. Notices of availability for the

first year’s inventories were published in the fall and winter of 1999. In

April 2000, we reported on the initial implementation of the FAIR Act and,

based on our review of selected inventories, the need for inventories to be

clear and understandable.6

Interested parties are to submit any challenges within 30 days after

publication of the notice of public availability. An agency has 28 days to

respond after receipt of a challenge. The act also allows an interested

party to appeal an adverse decision on its challenge within 10 days after

receiving notification of the agency’s decision, and agencies have 10 days

to respond after receiving an appeal. The act directs that agencies are to

include, in their responses to both challenges and appeals, the rationale for

their decisions. If an agency’s inventory changes as a result of a challenge

or appeal, the agency is to publish notice in the Federal Register.

OMB’s Circular A-76 guidance contains function codes, initially developed

by the Department of Defense, for agencies’ use in classifying the various

types of commercial activities their employees perform. An example of a

function code is “Installation Services: Museum Operations.” OMB’s A-76

guidance also contains “reason codes” for agencies to categorize whether

 

5

 Competitive sourcing refers to the reinvention of government through the conversion of recurring

commercial activities to or from in-house, contract, or ISSA performance. It does not refer to simply

contracting with the private sector for the provision of goods or services. Rather, it is the competition

that is key to ensuring that the government obtains the same or higher quality of goods or services at

lower prices, regardless of the source.

6

 Competitive Contracting: The Understandability of FAIR Act Inventories Was Limited (GAO/GGD-00-

68, Apr. 14, 2000).
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Page 5 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

the commercial activities they list in their inventories should or should not

be subject to consideration for competition at the present time. Reason

code A, for example, designates activities that are performed by federal

employees that the agencies have exempted from OMB Circular A-76 cost

comparison requirements. Reason code B indicates that the activity

performed by federal employees is subject to the cost comparison or direct

conversion requirements. Reason code C designates activities that are

performed by federal employees that Congress, Executive Order, or OMB

has exempted from Circular A-76 provisions. (Appendix I contains a

listing of OMB’s reason codes.)

The FAIR Act also requires that agencies review their inventories within a

“reasonable period of time.” Further, it requires agencies to use a

competitive process when they consider contracting with the private

sector.

To provide information on the 24 CFO Act agencies’ inventories, we

reviewed the inventories and the number of challenges and appeals that

interested parties filed. We identified the number of FTEs that the

agencies categorized under OMB reason codes.

To address our second objective of determining the nature of issues raised

in interested parties’ challenges and appeals and agencies’ responses to

them, we analyzed the challenges and appeals submitted to the 24 CFO Act

agencies. We also interviewed agencies’ FAIR Act contacts to discuss the

general nature of challenges and appeals they received. We met with

industry representatives that filed the majority of industry’s challenges and

appeals to obtain their views on agencies’ implementation of the FAIR Act.

We also met with two of the six employee unions that submitted the bulk

of the employee challenges and appeals to obtain their views.

To examine the issues raised in agencies’ responses to interested parties,

we collected and analyzed the agencies’ responses to challenges and

appeals of their 1999 FAIR Act inventories. We did not verify the

substance of agencies’ rationales that supported whether they sustained or

denied challenges or upheld or reversed appeals. We also obtained

documentation from six agencies (the Departments of Agriculture (USDA),

Education, Housing and Urban Development (HUD), and Labor; DOD; and

the National Aeronautics and Space Administration (NASA)) about the

procedures they used to respond to the first round of FAIR Act challenges

and appeals. We selected these 6 agencies, following our discussions with

all 24 CFO Act agencies, because of the variety of their procedures for

responding to challenges and appeals and because the agencies’

Scope and

Methodology
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Page 6 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

organizations and missions differed. We interviewed these agencies’ FAIR

Act contacts to provide the context for how the agencies were organized

to respond to challenges and appeals.

To address our third objective of identifying six agencies’ plans for

reviewing or using their FAIR Act inventories, and how information on

their inventories might assist them in ensuring that activities are carried

out in the most cost-effective manner, we obtained agencies’ plans for

using their inventories. Agencies were to submit these plans to OMB in

June 2000 for OMB’s review. We also interviewed agency FAIR Act

contacts and asked whether, and if so how, the agencies were using their

inventories. We requested data on the extent to which these agencies

already contracted for activities, or were studying activities under Circular

A-76. In addition, we reviewed the 24 CFO Act agencies’ inventories to

determine the number of activities they identified as in the process of

being cost compared or converted directly to contract or inter-service

support agreements.

We conducted our work between December 1999 and July 2000 in

accordance with generally accepted government auditing standards. We

also relied on work conducted at the Department of Defense (DOD)

beginning in June 1999 at the request of the House Armed Services

Committee.7

 We provided a draft of this report for review and comment to

the Director of OMB and the Administrator of NASA, and to the Secretaries

of USDA, DOD, Education, HUD, and Labor. Their comments are reflected

in the agency comments section of the report.

The 24 CFO Act agencies’ FAIR Act inventories identified a total of about

900,000 FTEs as performing commercial activities. These agencies

identified about 513,000 of those FTEs as performing activities that were

exempt from consideration for competition (i.e., that would not be studied

under OMB Circular A-76). The agencies identified about one-third of their

FTEs as performing activities that could be considered for competition.

As the largest of the CFO Act agencies, DOD identified the largest number

of FTEs performing commercial activities, as well as the largest number

performing commercial activities that could be considered for

competition. (See appendix II for summary information on the CFO Act

agencies’ 1999 FAIR Act inventories.) Compared with prior efforts under

Circular A-76 to identify commercial activities performed by executive

branch agencies, the initial implementation of the FAIR Act has increased

 

7

 The results of this work are reported in DOD Competitive Sourcing: More Consistency Needed in

Identifying Commercial Activities (GAO/NSIAD-00-198, Aug. 11, 2000).

Agencies Received

Numerous Challenges

and Appeals
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Page 7 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

the number of inventories developed by those agencies, and the number of

FTEs identified as performing commercial activities.

Interested parties filed 332 challenges at the 24 CFO Act agencies

concerning these inventories.8

 Most (88 percent) of the 213 challenges

filed at DOD were from employees, as shown in table 2. In contrast, most

(67 percent) of the 119 challenges filed at civilian agencies were from

industry.

Agency

Number of

industry

challenges

Number of

employee

challenges Total

Agriculture 7 2 9

Commerce 7 1 8

DODa 25 188 213

Education 4 0 4

Energy 3 1 4

Environmental Protection Agency 7 1 8

Federal Emergency Management

Agency 1 0 1

Health and Human Services 7 3 10

HUD 3 0 3

General Services Administration 5 1 6

Interior 11 2 13

Justice 1 5 6

Labor 1 1 2

NASAb 8 0 8

National Science Foundation 1 0 1

Nuclear Regulatory Commissionb 2 0 2

Office of Personnel Management 0 1 1

Small Business Administration 0 0 0

Social Security Administration 3 1 4

State 1 0 1

Transportation 2 2 4

Treasury 1 5 6

U.S. Agency for International

Development 2 0 2

Veterans Affairs 3 13 16

Total 105 227 332

a

Excludes one challenge that DOD's Defense Logistics Agency had not responded to as of September

20, 2000.

b

Includes those filed at the agency's Office of Inspector General.

Source: GAO analysis of agency information.

 

8

 This total excludes one challenge made to DOD’s Defense Logistics Agency that had not been

responded to as of September 20, 2000.

Table 2: Number of Industry and

Employee Challenges Filed at CFO Act

Agencies
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Page 8 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

Agencies sustained 20 of the 332 challenges (about 6 percent), as shown in

table 3; they denied the remainder. Of the 96 appeals, 3 (about 3 percent)

were successful.

Number of challengesaNumber of appealsa

Agency Received Denied Sustained ReceivedUnsuccessful Successful

Agriculture 9 6 3 12b 12 0

Commerce 8 8 0 2 1 1

DODc 213 203 10 50 50 0

Education 4 4 0 1 1 0

Energy 4 4 0 1 0 1

Environmental Protection Agency 8 8 0 3 3 0

Federal Emergency Management Agency 1 1 0 1 1 0

Health and Human Services 10 9 1 2 2 0

HUD 3 3 0 1 1 0

General Services Administration 6 6 0 1 1 0

Interior 13 13 0 4 3 1

Justice 6 2 4 1 1 0

Labor 2 2 0 1 1 0

NASA 8 8 0 4 4 0

National Science Foundation 1 1 0 0 0 0

Nuclear Regulatory Commission 2 2 0 1 1 0

Office of Personnel Management 1 0 1 0 0 0

Small Business Administration 0 0 0 0 0 0

Social Security Administration 4 4 0 2 2 0

State 1 1 0 1 1 0

Transportation 4 4 0 2 2 0

Treasury 6 6 0 3 3 0

U.S. Agency for International Development 2 2 0 0 0 0

Veterans Affairs 16 15 1 3 3 0

Total 332 312 20 96 93 3

a

The term “denied” indicates that an agency did not agree with any issue raised in an interested

party's challenge, while the term “sustained” indicates that an agency agreed with at least one issue

raised and made revisions to its inventory as a result of the challenge. The term “unsuccessful”

indicates that an agency did not agree with any issue raised in an interested party's appeal, while the

term “successful” indicates that an agency agreed with at least one issue raised and revised its

inventory as a result of the appeal.

b

The number of appeals exceeds the number of challenges because Agriculture forwarded challenges

to its component agencies and directed them to respond, and interested parties appealed several

component agencies' denials.

c

Excludes one challenge and three appeals that DOD’s Defense Logistics Agency had not responded

to as of September 20, 2000.

Source: GAO analysis of interested parties’ challenges and appeals, and agencies’ responses.

Table 3: Agency Decisions on Challenges and Appeals
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Interested parties’ challenges raised several issues that have the potential

to improve the clarity of future inventories, even though they did not meet

the FAIR Act provisions that allow for challenges of activities omitted from

or included on agencies’ inventories. OMB has revised its guidance for

preparing the 2000 inventories—by, for example, suggesting a standard

format for inventories and providing additional explanatory material

concerning the reason codes—in an attempt to address some of these

concerns. Although the six agencies we reviewed used a variety of

procedures for responding to challenges and appeals, their responses to

the interested parties were generally provided within the time frames

specified in the act and addressed the issues that were raised. (See

appendix III for a description of the six agencies’ procedures.)

About one-third of industry’s challenges cited the omission of activities

from agencies’ inventories, with many of the remainder citing issues that

went beyond the provisions of the FAIR Act because they did not involve

either the inclusion of an activity on or its omission from an inventory.

Industry submitted 105 challenges to agencies, and of those, 38 contended

that the agency omitted activities from its inventory. The act, which

provides for this type of challenge, further states that an interested party

must identify the omission or inclusion of particular activities. Thus, while

some challenged the exclusion of specific activities, other were quite

broad in nature and did not identify particular activities. For example:

• In its challenge to NASA, an association stated that NASA appeared to

have omitted entire categories of activities from its list. NASA, in its

denial, stated that the association did not cite a particular commercial

activity performed by civil servants at specific locations, and thus the

association did not have a challenge within the meaning of the act.

Because of this, NASA stated that the issues raised by the association

would have to be handled outside of the challenge process.

In contrast, some challenged particular activities. For example:

• An association challenged the potential omission of forest service

campground management activities from USDA’s inventory. In its denial,

USDA stated that even though it did not consider campground

management as an inherently governmental function and that much of it

was contracted out, decisions to do so were made on a case-by-case basis.

Some of industry’s challenges demonstrated the difficulties industry had in

identifying specific activities on inventories because inventories did not

Interested Parties

Raised Issues That Can

Improve Future

Inventories

Most of Industry’s

Challenges and Appeals

Reflected Broad FAIR Act

Implementation Concerns
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include all activities performed by an agency. The FAIR Act only requires

inventories to include non-inherently-governmental activities performed by

federal employees. For example:

• One association challenged the Department of Education on the basis that

it omitted information and data processing activities from its inventory.

Education, in its denial, stated that while it employed 171 information

technology professionals and included 152 information technology FTEs

on its inventory, the remainder of its information technology work was

performed under contract. It stated that it spent over $400 million

annually for information technology services under its contracts, and that

over 2,000 contractor FTEs were employed.

Industry’s challenges that inventories did not include particular activities

also demonstrated the difficulty that industry had with understanding what

activities were categorized under OMB’s function codes, and the need for

additional information. For example:

• An association obtained information from the Office of Personnel

Management (OPM) on the number of employees classified under position

classification codes associated with mapping, charting, or surveying at the

Department of Interior. In its challenge to Interior, it stated that the

number of employees under those position classification codes did not

match the number of FTEs listed on Interior’s inventory under comparable

function codes. In its denial, Interior responded that the number of FTEs

on its inventory did not coincide with OPM data because of the diverse

nature of some employees’ duties. As a result, Interior officials stated,

some FTEs appeared on the inventory under other function codes, while

some work performed by other FTEs was classified as inherently

governmental (and thus would not be included on its inventory).

DOD also excluded activities from its inventory when uniformed military

personnel were performing them, even though the activities could be

considered commercial in nature. OMB agreed with DOD’s omission of

military personnel from its FAIR Act inventory. For example:

• An association’s challenge stated that it appeared that many of the

positions performed by military personnel were not included on DOD’s

inventory. In its denial, DOD responded that military members are not

covered under the FAIR Act, and thus those FTEs were not included on its

inventory.
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The remaining issues raised by industry did not meet the challenge

provisions of the FAIR Act. As shown in table 4, these issues included (1)

the agency’s use of OMB’s reason codes for categorizing commercial

activities, (2) the format of the agency’s inventory, (3) the agency’s use of

OMB’s function codes, and (4) a general dissatisfaction with OMB

guidance or the act, or agency compliance with either.

Issue raised

Number of challenges

raising this issue

The agency’s use of OMB reason codes 84

Format of the agency’s inventory 72

The agency’s use of OMB function codes 36

Dissatisfaction with OMB guidance or the act 30

Source: GAO analysis of industry challenges.

The most frequently cited issue (raised by 84 of the 105 industry

challenges) was the agencies’ use of OMB’s reason codes, particularly the

fact that these reason codes indicated agencies did not plan to consider

competing many of the commercial activities listed on their inventories.9

Industry representatives cited the fact that the FAIR Act does not direct

the use of, and categories for, reason codes. OMB, they stated, developed

these. Industry representatives said that they disliked the reason codes

because the codes allow agencies to protect commercial functions and

positions from competition. Industry challenges contended that agencies

(1) categorized activities under reason codes that indicated that the

activities were not subject to consideration for competition, (2) did not

specify why particular reason codes were used, and (3) coded the same

function codes under different reason codes. For example:

• An association that represents companies providing a wide array of

services to government agencies challenged the General Services

Administration’s (GSA) inventory on the basis that functions and activities

were categorized in a confusing and often contradictory fashion. It

asserted that similar functions appeared multiple times, often classified

under different reason codes, and that it was impossible to identify

functions that crosscut several agency locations or to determine why the

same function was coded differently either at the same or different

locations. GSA denied the challenge. In its response, GSA explained that

the FAIR Act’s challenge and appeal provisions only provide for challenges

of whether FTEs are classified as commercial or inherently governmental,

 

9

 As discussed in appendix II, agencies exempted 57 percent of their commercial activities from

consideration for competition under reason codes A and C.

Table 4: Issues Raised by Industry That

Were Not Within the Provisions of the

FAIR Act
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as opposed to challenges of any further distinctions an agency chose to

make within the commercial classification. GSA stated, however, that it

would be available to discuss any concerns the association might have that

were outside of the scope of the FAIR Act challenge and appeal process.

• One company that provides facility management services submitted

challenges to the Navy and Air Force. The company questioned certain

activities on the Navy’s and Air Force’s inventories (such as motor vehicle

maintenance, building maintenance, and supply operation positions)

because few of the activities were coded as reason code B (indicating they

could be considered for competition). In its denial, the Air Force replied

that because the activities performed by civilians were integrated with

those activities performed by the military, which was tasked for wartime

deployments or combat, it was not possible to sever the civilian workload

to allow for contractor performance.

The next most frequently raised issue in the challenges from industry was

the format of the agency’s inventory. Almost all of these 72 challenges

stated that the agency’s inventory was vague, incomplete, or ambiguous.

For example:

• An association representing independent laboratories challenged USDA’s

Forest Service on the basis of its inventory’s format. In its challenge, it

asserted that the inventory was ambiguous and did not identify functions

in a reasonable manner for interpretation by outside parties. In its denial,

the Forest Service stated that the format of the inventory was not an area

covered under the challenge portion of the FAIR Act.

• An association challenged the Nuclear Regulatory Commission’s (NRC)

inventory on the basis that the inventory was ambiguous and did not

identify activities or functions in a cogent manner that allowed for a

reasonable interpretation by outside parties. It further asserted that the

format made it impossible to “set forth the activity being challenged with

as much specificity as possible,” as OMB guidance suggested. In its denial,

NRC stated that the inventory cited the appropriate information required

by OMB.

Another 36 industry challenges cited the agency’s use of OMB’s function

codes to classify activities. Industry representatives stated that the

function codes were essentially flawed because they did not convey

sufficient information to determine what the nature of work performed by

agency personnel was. In its challenges, industry contended that OMB’s

function codes did not clearly identify activities and cited the lack of any
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additional descriptions or examples of what activities the function codes

entailed. In addition, some industry challenges stated that agencies did not

properly use the function codes to categorize their FTEs. For example:

• An industry trade association stated in its challenge to the Environmental

Protection Agency (EPA) that the function codes bore no discernable

relationship to any particular activities that agencies perform. It also

asserted that EPA did not properly use OMB’s function codes. In its

denial, EPA stated that its inventory complied with the FAIR Act and

OMB’s guidance and pointed out that its inventory had been subject to

OMB’s review and consultation. Because OMB voiced no objections to the

structure or format of the inventory, and because OMB published a notice

of the availability of the agency’s inventory, EPA concluded that its

inventory was structured and formatted in a satisfactory manner.

Industry representatives we spoke with said that the FAIR Act itself is

quite brief in that it does not provide detailed instructions on the format or

content of inventories. Because of this, they said, it required strong

leadership on the part of OMB to implement the statute. They stated that

OMB’s use of its Circular A-76 to implement the act was one of the primary

reasons why inventories were unclear. The function codes were flawed

and did not make agencies’ activities as transparent as industry said the

FAIR Act intended. They also contended that some agencies did not

comply with the act or OMB’s guidance, and that OMB could have more

closely reviewed agencies’ inventories to ensure greater consistency.

Their challenges, as a result, registered industry’s general dissatisfaction

with OMB guidance, the act, or agency compliance. For example:

• In its challenge to the Department of Transportation (DOT), an industry

association challenged that DOT failed to submit a list that, by content,

format, form, and substance, was in conformance with the requirements of

the act because the association could not identify the nature of work

performed under the function codes, and the inventory did not provide

sufficient descriptive information to mount challenges. DOT, in its

response, stated that it complied with the FAIR Act and OMB guidance.

Officials from the agencies we spoke with said that they seriously

implemented the FAIR Act and followed OMB guidance. They said that

agencies devoted time and resources to implement the FAIR Act. For

example, USDA officials estimated that well over 100 people spent several

thousand hours compiling its inventory. Similarly, Labor officials

estimated that staff spent about 45 days reviewing guidance, and

developing procedures and other guidance for its component agencies, in
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Page 14 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

addition to the time spent by its 16 component agencies to develop

guidance and inventories.

Because most of industry’s challenges and appeals did not involve either

the inclusion, or omission of, an activity from an agency’s inventory,

agencies dismissed them. Of the 145 challenges and appeals made by

industry to the CFO Act agencies, USDA sustained three challenges, and

the Department of Commerce agreed to revise its inventory as a result of

one successful appeal.

One of the three challenges USDA sustained was from a business

federation that contended that USDA’s inventory did not contain sufficient

information to support the assignment of multiple reason codes to the

same function codes. Even though the basis for this challenge was beyond

the provisions of the FAIR Act, USDA’s Farm Services Agency (FSA)

agreed that it used multiple reason codes to classify computer support

FTEs and activities. In reviewing its classification on the inventory, FSA

removed these FTEs and activities because it determined that they were

performing inherently governmental activities.

USDA also sustained two industry association challenges that contended

that it excluded some information-technology-related activities from its

inventory. As a result of these challenges,

• USDA concurred that it would include 6 positions involved in developing

contract requirements, supervision, and oversight of information

technology functions, and

• USDA’s Grain Inspection, Packers and Stockyards Administration agreed

to include 28 FTEs performing information technology functions on the

inventory.

USDA subsequently published a notice of the revisions in the Federal

Register, as required by the FAIR Act.

The Department of Commerce agreed to revise its inventory as a result of a

successful appeal from an association representing firms engaged in

mapping, charting, and related imaging services that challenged the

omission of mapping and charting activities at several Commerce agencies,

including the Bureau of the Census. Initially, Commerce denied the

challenge on the basis that map compilation activities at the Bureau were

limited and involved no original compilations because its geographic data

base for producing maps to support field operations was updated through

Agencies Dismissed Most of

Industry’s Challenges and

Appeals
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Page 15 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

state and local government input. In its appeal, the association stated that

Commerce did not deny that the Census Bureau was involved in

cartographic activities and that, in fact, Commerce specifically identified

them in its response to its challenge. Commerce agreed to include 60

commercial cartographer and cartographic positions on its inventory.

While an official said that Commerce did not publish a notice that it was

revising its 1999 inventory as a result of this appeal, she said that

Commerce revised its 2000 FAIR Act inventory to reflect the change.

Almost all (219 of the 227) employee challenges contended that the agency

erroneously included an inherently governmental function on its inventory,

when it should have been omitted. For example:

• Employees at the Public Affairs Office at the U.S. Military Academy stated

that the public affairs function should not be included on the Army’s

inventory because OMB’s guidance on the types of activities considered

commercial did not cite “public affairs.” In support of their position, they

argued that public affairs personnel make decisions on behalf of the

federal government. DOD denied the challenge, stating that the purposes

of the public affairs function were to provide official information to the

public and to foster good relations—neither of which suggested an

application of governmental authority or the making of value judgments on

behalf of the government.

• An employees union challenged Treasury’s inventory of the Bureau of

Alcohol, Tobacco, and Firearms’ (BATF) activities. The union said that

certain financial and accounting technician positions should have been

omitted because the positions involved inherently governmental work,

such as directing and controlling federal employees, determining federal

program priorities or budget requests, or determining agency policy.

BATF denied the challenge. It responded that those positions were part of

financial service support functions that it considered commercial, and that

FTEs in these positions did not make budget decisions or set policy as a

matter of practice.

• An employees union challenged the Department of Transportation’s

Maritime Administration’s (MA) inventory on the basis that decisions on

who should perform the work should not be based solely on the lowest

bid. It stated that personnel working at MA’s Beaumont Reserve Fleet had

additional qualifications that should be taken into account. For example,

some personnel were certified electricians, riggers, or mechanics, and

some were emergency medical technicians. On this basis, the union

argued, the positions and FTEs should be excluded from the inventory. In

Employees and Unions

Challenged Inventories That

May Have Included

Inherently Governmental

Activities
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Page 16 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

its denial, MA stated that these issues called attention to important

considerations for the A-76 process. However, the issues did not bring into

question the nature of the work performed, which was the basis for

inclusion on or exclusion from the inventory.

Union officials stated that they experienced the same frustrations as

industry did in understanding agencies’ inventories. According to an

official with one employees union, function codes were not clear and some

agencies miscategorized personnel into the wrong function codes. This

official said that the function codes had little resemblance to the work that

employees performed, and that it was difficult for an employee to

determine whether his or her position was on an inventory. Officials from

another employees union agreed. This union obtained additional

information in order to identify what positions were included on agencies’

inventories, and to support its challenges. National Treasury Employees

Union (NTEU) officials, for example, said that they obtained position

descriptions from the agencies to determine whether any of the FTEs on

the inventories performed activities that could be considered inherently

governmental. In instances where NTEU found language in the position

descriptions that appeared to support inherently governmental work,

NTEU then filed challenges.

Other issues, such as an agency’s use of OMB’s function or reason codes or

the format of the inventory, were raised in a relatively small number of the

employee challenges, as shown in table 5.

Issue raised

Number of challenges

raising this issue

Format of the agency’s inventory 47

The agency’s use of OMB function codes 40

The agency’s use of OMB reason codes 13

Dissatisfaction with OMB guidance or the act 7

Source: GAO analysis of employee challenges.

For example:

• An employees union stated in its challenge to the Department of Treasury’s

Financial Management Service (FMS) that the FMS inventory was both

limited and ambiguous, thereby inhibiting the union’s efforts to challenge

in sufficient detail the positions designated as commercially competitive.

Because of this, the union challenged every position that was coded under

Table 5: Issues Raised by Employees

That Were Not Within the Provisions of

the FAIR Act
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Page 17 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

reason code B as being commercial competitive. In its denial, FMS

reiterated the FAIR Act’s provision that an interested party may challenge

the omission or inclusion of a particular activity on an inventory. It used

as a basis for its denial of the union’s challenge the fact that the union

challenged the inclusion of positions and FTEs, as opposed to activities, on

its inventory, and that positions and activities were not synonymous.

• An employees union challenge to the Department of Justice stated that it

was unclear which locations were included on the inventory for several

positions. It stated that if the number of positions for functions at any one

location fell below OMB’s threshold level of 10, the positions were exempt

from the cost comparison requirement. It said that such positions should

be classified as exempt or removed from the inventory. Justice, in its

response, stated that it coded functions at locations having fewer than 10

FTEs as exempt under reason code A (exempted by the agency). It stated

that in future inventories, it would use reason code C, as directed by OMB

(exempted by Executive Order).

• An employees union challenge to DOT stated that it was not notified of any

contracting studies or planned studies and that such failure to notify the

union of these studies violated the union’s agreement with the agency. It

also stated that because it was not notified, it was prevented from being

afforded the opportunity to properly prepare a challenge. In its denial,

DOT stated that the listing required by the FAIR Act was not a study or a

planned study to determine whether work performed by union members

would be contracted. It also stated that if a study was planned or

eventually undertaken, it would comply with the agreement. DOT also told

the union that its challenge was filed in a timely manner following OMB’s

notice in the Federal Register that DOT’s inventory was available to the

public, and that it believed the union was afforded the opportunity to

properly prepare the challenge.

Agencies agreed to revise their inventories as a result of 7 percent of the

employee challenges and appeals, compared with 3 percent of those from

industry. Seven of the CFO Act agencies sustained 17 of the 227 employee

challenges, while 2 of the 56 appeals were successful.10 For example:

• Justice sustained four challenges filed by two employees and two unions.

For example, a union challenged that some positions involved access to

extremely sensitive information that, if disclosed to unauthorized persons

 

10 These seven agencies were DOD; the Departments of Energy, Health and Human Services, Interior,

and Justice; the Office of Personnel Management; and the Veterans Administration.

Agencies Sustained Some

Employee Challenges and

Appeals
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Page 18 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

or misused, would significantly affect the life, liberty, or property of

private persons. Justice agreed to remove certain Immigration and

Naturalization Service activities performed by law enforcement

communications assistants, electronics technicians, and administrative

support staff from the inventory.

• DOD components sustained 10 employee challenges. The Army

determined, for example, that functions involving about 3,800 FTEs were

inherently governmental and should not have been on the FAIR Act

inventory of commercial activities.

According to agency officials, the seven agencies that sustained challenges

or had successful appeals revised their inventories.

The six agencies we reviewed used a mixture of centralized and

decentralized processes to handle challenges and appeals, but we found

that agencies’ responses were generally timely and addressed the issues

raised regardless of the approaches used. (The procedures six agencies

used are described in greater detail in appendix III.) However, we

identified two instances where agencies were not timely in their responses.

Although the FAIR Act calls for agencies to respond to appeals 10 days

after receiving them, USDA’s responses to appeals submitted in December

1999 were not sent to interested parties until June 2000. Officials said that

USDA’s responses had undergone extensive internal review, in part

because of the nature of issues raised by interested parties and USDA’s

desire to fully explore the basis for them.

DOD’s Defense Logistics Agency (DLA), which received four challenges to

its FAIR Act inventory, had not responded to one as of September 20, 2000.

A DLA official explained that this challenge (submitted in January 2000)

remained unresolved because of differences of opinion among the

functional offices that are involved in issues related to the challenge.

Further, DLA, which received appeals from each of the challengers that it

responded to, had not yet responded to them as of September 20, 2000.

Not only did interested parties have difficulties with the clarity and

understandability of the 1999 FAIR Act inventories, the agencies also noted

limitations in their usefulness. After meeting with groups of interested

parties and agency officials and identifying areas for improvement, OMB

revised its guidance for the 2000 inventories.

Agencies’ Procedures

Varied, but Agencies Were

Generally Timely and

Responsive to Issues Raised

Agencies Identified the

Need for Improved Clarity

on Their Inventories
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Page 19 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

Officials from the six agencies stated that they did not find their 1999 FAIR

Act inventories as useful as they potentially could have been because the

inventories provided only limited information about the nature of the

activities that federal employees perform. According to the HUD official

responsible for compiling and reviewing the 1999 inventory, similar

organizations performing the same functions were commonly reported

under different function codes due, in part, to the lack of definition

associated with many of these codes. This official said that the different

organizations applied the reason codes differently. In view of the limited

amount of time that he had had to review the inventory, given the

reporting deadline, he said that there was little that could have been done

to improve consistency either within or across HUD’s component

organizations. This lack of consistency in how the organizations used

OMB’s function codes, according to this official, could preclude

identification of good candidates for cost comparison studies and

adversely affect the inventory’s usefulness as a management tool.

According to HUD, while its internal review did disclose some

inconsistencies in reporting, which were addressed and changed prior to

submitting its inventory to OMB, it believes that better defined function

codes would reduce the number of inconsistencies.

According to a Department of Labor official, Labor aligned the federal

government’s occupational series designations with OMB function codes

as an internal organizational approach to assist its managers in

determining agency functions. This official stated that because, in 1999,

OMB function codes were descriptive of such a broad range of activities,

interested parties could not determine with any precision the true nature

of commercial activities as delineated in the agency inventory. Because of

this, she stated, occupational series designations were preferable in

determining job functions, as opposed to OMB function codes. While

Labor determined that this was a viable option for its agency, the extent to

which an agency’s personnel perform the duties specified by their

occupational series may dictate how viable this option is for other

agencies.

Education officials also said that the usefulness of the inventory was

limited. Reasons for this included the fact that (1) many in-house

employees perform multiple activities on OMB’s list of function codes, (2)

many in-house employees perform some commercial and some inherently

governmental functions, (3) generic function codes without detailed

definitions limited Education’s ability to accurately classify some of its

activities under OMB’s codes, and (4) some activities performed by

Education did not easily fit into the activity codes OMB provided. Because
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Page 20 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

of this, Education stated that it would like to see function codes further

defined and clarified. Detailed definitions, it stated, would aid the public

in determining the nature of activities performed by Education’s FTEs.

Detailed definitions would also assist Education staff responsible for

preparing inventories in ensuring that activities were properly categorized.

Without such definitions and clarifications, Education stated, it anticipated

receiving challenges, to future inventories, alleging that its inventory was

vague or that it did not identify functions in a reasonable manner.

NASA stated that the usefulness of its inventory was limited because it

categorized the predominant activity performed by each of the branches at

its centers under a single OMB function and reason code, as opposed to

under the activity or activities performed by individuals at those branches.

OMB’s revised Circular A-76 Handbook, which provides guidance for

compiling inventories, states that OMB anticipates issuing additional

guidance on the structure and format of future submissions, based upon

the experience gained from the first annual review and consultation

process. After its review, and following meetings with agency officials and

interested parties, OMB issued revised guidance in April 2000 that OMB

officials said will address several of the issues cited in challenges made in

the first year’s implementation of the FAIR Act. For example, to address

the issue of the agency’s use of OMB reason codes, OMB developed

additional explanatory material concerning the codes. To address the

issue of the format of the agency’s inventory, OMB proposed a standard

format and recommended that each agency’s inventory be accompanied by

a cover letter summarizing the inventory in terms of total agency and

commercial FTE and contract support information. To address the

agency’s use of OMB function codes, OMB expanded its list of approved

codes.

The FAIR Act requires agencies to review the activities on their

inventories. Whenever agencies consider contracting with the private

sector to perform an activity on their inventories, they are required to use

a competitive process unless otherwise authorized by law, executive order,

or regulation. Based on our review of DOD’s competition program and the

five civilian agencies’ plans for reviewing their inventories, we found that,

beyond the FAIR Act requirements, the inventories have the potential to

help inform management decisions about how to more efficiently perform

activities and effectively align agencies’ operations. The extent to which

agencies will ultimately use their inventories to identify activities for

competitive sourcing or for other purposes remains to be seen. To date,

DOD has been the principal federal agency aggressively encouraging the

Inventories Provide a

Tool for Reexamining

How Goods or

Services Are Obtained
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Page 21 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

use of competitive sourcing. As we have noted in the past, savings are

possible when agencies undertake a disciplined approach, such as

public/private competitions called for under Circular A-76—regardless of

whether the competitions are won by governmental organizations or by

the private sector. Data on the full range of agencies’ activities, whether

performed by federal personnel or by contract, could inform managers and

other decision makers about how they are performing their mission and

mission support activities, and how they have currently allocated their

resources.

Since 1995, DOD has been a leader among federal agencies in focusing on

competitive sourcing as a means of achieving economies and efficiencies

in operations and freeing up funds for other priority needs, such as

weapons modernization. DOD has established aggressive competitive

sourcing goals of studying over 200,000 positions between 1997 and 2005

under its OMB Circular A-76 program and thereby saving an estimated $9.2

billion.11

In January 1998, to help the military services and DOD agencies identify

commercial activities that could be candidates for competition, the Deputy

Secretary of Defense required DOD’s military services and DOD agencies

to (1) review all authorized military and civilian positions to determine

whether the functions performed were inherently governmental,

commercial but exempt from competition, or commercial and eligible for

competition; (2) develop consistent guidelines for doing so; and (3)

compile an inventory of all categorized positions.

In response to the FAIR Act, DOD adapted the civilian commercial portion

of its 1998 reform initiative inventory to meet the reporting requirements

of the act and OMB’s guidance. DOD revised its internal coding to

correspond to OMB’s reason codes for classifying commercial functions

and updated its inventory to reflect any significant changes. While DOD

encountered problems with the function and reason codes that OMB

directed agencies to use in compiling their FAIR Act inventories, DOD

officials said that the process of compiling the reform initiative inventory

should provide them more complete information to help identify areas for

competition. DOD officials have taken some steps to improve the process,

such as developing function code definitions. Officials said that DOD

plans to update its reform initiative inventory on an annual basis to meet

 11 In our report entitled DOD Competitive Sourcing: Some Progress, but Continuing Challenges Remain

in Meeting Program Goals (GAO/NSIAD-00-106, Aug. 8, 2000), we reported that the military

departments have had difficulty finding activities to study for competition.

DOD Used Its Inventory to

Identify Competitive

Sourcing Opportunities
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Page 22 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

its competitive sourcing goal and comply with the requirements of the

FAIR Act.

Whether DOD will meet its goals of studying over 200,000 positions by

2005 and saving $9.2 billion is uncertain. In our August 2000 report on

DOD’s competitive sourcing program, we reported that DOD does not

expect to compete all the commercial activities and associated positions

that appear on its inventory.12 DOD officials cited factors, such as the (1)

geographic dispersion of its positions and (2) difficulty in separating

commercial and inherently governmental work within the same activity,

that limited the number of FTEs that could be studied. Nevertheless, DOD

leadership has aggressively encouraged its components to pursue

competitive sourcing as a means of reducing costs and improving the

efficiency and effectiveness of its operations.

The five civilian agencies in our review were among those that submitted

plans to OMB in June 2000 that described ways they use or could use

information from their FAIR Act inventories.13 The Department of Labor’s

plan, for example, stated that its FAIR Act inventory is part of a “twopronged” approach to identify opportunities for obtaining goods or

services from the private sector. According to its plan for using its FAIR

Act inventory, Labor cross-referenced commercial competitive activities

on its FAIR Act inventory with requirements delineated in its acquisition

plan for purchasing from the private sector, which it compiles annually, to

identify common requirements. Where common requirements exist, Labor

said that it plans to expedite the privatization process, consistent with

federal acquisition regulations and guidance. Labor also stated that its

inventory significantly assisted it in complying with, and more accurately

administering, the Business Opportunities Development Reform Act of

1988 by providing it more timely and up-to-date commercial activities

data.14

HUD said that it plans to use the inventory to help ensure that agency

decisions to exempt FTEs from consideration for competition are justified.

HUD said that it also plans to use its inventory to identify possible

candidates for cost comparison studies. It pointed out that the data in the

inventory can provide a new source of information by, for example,

 

12 DOD Competitive Sourcing (GAO/NSIAD-00-198, Aug. 11, 2000).

13 OMB’s revised Circular A-76 Handbook instructs agencies to report annually on the management of

their commercial activities. In its April 2000 guidance, OMB instructed agencies to include in these

reports a description of the agencies’ review processes.

14 Public Law 100-656.

Other Agencies’ Plans to

Use FAIR Act Information
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Page 23 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

combining it with workload data to allow more informed judgments and

decisions to be made regarding organizational performance and resource

allocation.

USDA stated that its inventory is an integral part of its review process

which is designed to ensure that USDA’s component agencies follow

OMB’s A-76 guidance in determining whether activities should remain inhouse or be performed by contract. Similarly, the Department of

Education’s plan states that managers and senior officials will review the

commercial activities on its inventory to facilitate decisions on competing

activities, to determine whether activities should be performed under

contract or in-house. According to NASA, revisions to its 1999 inventory

contributed to a better understanding of the scope of work performed at

its centers, as well as an increased understanding of the commercial

components of its civil service workforce.

The A-76 process has not been a high priority within OMB or civilian

agencies since the late 1980s, and as we testified in 1998, it appeared that

the A-76 process is still not a high priority. 15 This may still be the case.

Even though the five agencies have plans for using their inventories, none

of the five has a competitive sourcing program as significant as DOD’s.

According to officials at the five civilian agencies, none of the five agencies

is currently conducting A-76 studies. Further, the remainder of the civilian

CFO Act agencies’ 1999 FAIR Act inventories indicate that only about 580

FTEs are associated with activities undergoing study or direct conversion

to contract or inter-service support agreements. This is an early indication

that, unless OMB leads efforts to help ensure that civilian agencies

seriously review their inventories, the initial progress the FAIR Act

achieved in increasing the number of FTEs agencies identify as performing

commercial activities may be of limited usefulness.

While the FAIR Act does not direct that agencies use the information on

their inventories for any specified purpose, we have reported in the past

that information on all activities an agency performs—whether through

contracts or in-house--is key to providing decisionmakers with a more

complete picture of all of an agency’s activities. Complete information on

who is performing specific activities—whether by federal personnel or by

contract—and how these activities are integrated to accomplish an

agency’s mission, can inform agency managers’ assessments about

whether an agency is aligning its activities and distributing resources in the

most efficient manner.

 

15 OMB Circular A-76: Oversight and Implementation Issues (GAO/T-GGD-98-146, June 4, 1998).

Agencies Agree That

Comprehensive Data on All

Their Activities Could Help

Inform Management
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In our discussions with agency officials, however, we found that not all

agencies have a complete picture of their activities, how these activities

are performed, and whether these activities are integrated efficiently to

accomplish their agencies’ missions. While some of the agencies we

reviewed can provide information on contract dollars spent on specific

contracts, agency officials told us that it is difficult to compare the extent

and nature of activities performed under contract with those performed inhouse. For example, Education stated that while Education has extensive

information on, among other things, the amount of contract dollars spent,

items bought, and activities performed under contract, because of the

difficulties in comparing in-house and contract activities, it continues to

work on a better assessment of activities performed by contract. NASA

officials said that they have conducted extensive work to compile rough

indicators of what types of activities are performed by contract and the

cost of some of these contracts. In 1999, they estimated that

approximately 87 percent of NASA’s funding was dispersed through

contracts. According to Labor officials, they have access to limited

contractor information through the Federal Procurement Data System.

In addition, not all of the agencies compile or maintain data on inherently

governmental work performed by federal employees or personnel.

Officials from Labor and HUD agreed that, although not currently required

under the FAIR Act, a comprehensive inventory of all of an agency’s

commercial and inherently governmental activities--whether by contract or

in-house employees---may enhance the management of those resources

and help ensure that the agency’s resources are used in the most costeffective and efficient manner.

In contrast, as noted previously, DOD does have an inventory of all

positions performed that are inherently governmental, commercial but

exempt from competition, or commercial and eligible for competition.

DOD is also required to provide Congress information on contractor

support for the agency.16 In its 1998 Commercial Activities Report, it

estimated that contractors performed about 40 percent of DOD’s work

years. The accuracy of DOD’s estimates of the number of contract

personnel performing commercial activities, however, has been

questioned. In the fiscal year 2000 Defense Authorization Act, Congress

included a requirement for more detailed reporting. 17 By no later than

 

16 10 USC 2461(g) requires DOD to submit to Congress each fiscal year a report estimating the

percentage of commercial activities or functions performed by contractors as compared with the

percentage performed by DOD employees.

17 Fiscal Year 2000 Department of Defense Authorization Act (P.L. 105-65, section 343).
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Page 25 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

March 2001, DOD is also required to provide Congress a report

summarizing the number of direct and indirect labor work year equivalents

performed by contractors providing services in fiscal year 2000. The

Department of the Army is testing the feasibility and benefits of requiring

contractors to provide needed information electronically. According to an

Army official directing the program, the Army requires contractors to enter

labor hour information in conjunction with requests for payment and has

had cooperation from contractors participating in the program.

Prior to the FAIR Act, there had been considerable debate that agencies,

with some exceptions, were not making a serious effort under Circular A76 to ensure that they relied on a competitive process to determine

whether it would be more cost effective to keep a commercial activity inhouse or contract with the private sector. Compared with prior efforts

under the Circular to inventory commercial activities, the first year’s

implementation of the FAIR Act has increased the number of executive

agency inventories and the number of FTEs identified as performing

commercial activities. This is important, as our prior work has shown that

savings are possible when agencies undertake a disciplined approach, such

as that called for under Circular A-76, to review their operations and

implement any necessary changes to become more efficient in the use of

their resources.

The successful implementation of the FAIR Act depends on several things,

however, such as clear and understandable inventories that provide useful

information to agency management and interested parties. Our review of

agencies’ inventories and challenges and appeals suggests that there are

ample opportunities to improve the clarity and understandability of some

agencies’ inventories. OMB revised its guidance for the 2000 inventories,

but it will require a sustained and continuing commitment of OMB

leadership and agency management to improve the clarity of agencies’

FAIR Act inventories.

Although the FAIR Act does not direct agencies to use their inventories as

a basis for competitive sourcing, DOD’s program has shown that the

inventories do have the potential to provide some useful information.

Under its program, DOD has compiled inventories of commercial activities

and developed a process for reviewing these to identify activities for

competitive sourcing consideration, such as for study under OMB Circular

A-76. As noted, our work has found that savings can result from

competitive sourcing studies, regardless of whether the competitions are

won by the government or the private sector. Whether civilian agencies

will use their inventories in a similar manner is unknown. Based on the

Conclusions
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Page 26 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

number of activities currently being studied by civilian agencies for

competition, early indications are that, unless OMB takes steps to help

ensure that agencies undertake a sustained commitment to review

inventories and then identify appropriate activities for competition,

opportunities for savings may be missed.

The inventories also have the potential to help inform agency management

about that portion of their workforce that performs non-inherentlygovernmental activities. This information could be useful for management

decisions about whether agency resources are efficiently aligned to

properly execute an agency’s mission. It must be recognized, however,

that FAIR Act inventories only provide agencies with a piece of the

information that management needs to ensure that all activities are carried

out in the most efficient and cost-effective manner. Information on

inherently governmental and contracted activities is also needed to help

managers ensure that their agencies’ activities are integrated and are

performed in the most efficient and cost-effective manner.

Consistent with OMB’s ongoing efforts, but in light of the historical

difficulty of maintaining a governmentwide commitment to consistently

develop useful inventories of commercial activities, the Director of OMB

should undertake a sustained effort to help improve the clarity of agencies’

FAIR Act inventories and lead efforts to help ensure that agency heads

review their commercial activities within a reasonable time, as required by

the FAIR Act.

We requested comments on a draft of this report from the Secretaries of

USDA, DOD, Education, HUD, Labor; the Administrator of NASA; and the

Director of OMB. The Chief Financial Officer, Department of Education;

the Deputy Chief Financial Officer, HUD; and the Associate Administrator

for Human Resources and Education, NASA, provided written comments

that are included in appendixes IV, V, and VI, respectively. In their written

comments, the agencies generally agreed with the draft report’s

characterization of the issues involved with implementing the challenge

and appeal provisions of the FAIR Act. Officials from four agencies

(USDA, DOD, Labor, and OMB) said that these agencies had no comments,

but they provided some technical revisions that we have incorporated as

appropriate to clarify information pertaining to their agencies.

We are sending copies of this report to Senator John Breaux, Senator Bill

Frist, Senator Phil Gramm, Senator Tom Harkin, Senator James Jeffords,

Senator Edward Kennedy, Senator Carl Levin, Senator Richard Luger,

Senator Paul Sarbanes, Senator John Warner, Representative Dan Burton,

Recommendation for

Executive Action

Agency Comments and

Our Evaluation
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Page 27 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

Representative William Clay, Representative Larry Combest,

Representative Barney Frank, Representative William Goodling,

Representative Ralph Hall, Representative Rick Lazio, Representative

James Sensenbrenner, Jr., Representative Ike Skelton, Representative

Floyd Spence, Representative Charles Stenholm, Representative Jim

Turner, and Representative Henry Waxman in their capacities as Chair or

Ranking Minority Members of Senate and House Committees and

Subcommittees. We are also sending copies to the Honorable Jacob J.

Lew, Director of OMB; the Honorable Dan Glickman, Secretary of USDA;

the Honorable Richard Riley, Secretary of Education; the Honorable

Andrew Cuomo, Secretary of HUD; the Honorable Alexis Herman,

Secretary of Labor; the Honorable William Cohen, Secretary of DOD; and

the Honorable Daniel Goldin, Administrator of NASA. We will also make

copies available to others on request.

Major contributors to this report are listed in appendix VII. If you have any

questions about this report or would like to discuss it further, please

contact either Christopher Mihm on (202) 512-8676 or Barry Holman on

(202) 512-5581.

Sincerely yours,

J. Christopher Mihm,

Associate Director

Federal Management and Workforce Issues

Barry Holman

Associate Director

Defense Management Issues

National Security and International Affairs Division
Page 28 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

Contents

1 Letter

Appendix I 30

Background

Appendix II 32

Overview of Agencies’

FAIR Act Inventories

34

Agencies’ Procedures for Responding to Challenges and

Appeals Varied

34

Agencies Were Generally Timely and Responsive to

Issues Raised

35

Appendix III

Agencies’ Procedures

for Responding to

Challenges and

Appeals

37

GAO Comment 39 Appendix IV

Comments from the

Department of

Education

40

GAO Comments 42 Appendix V

Comments from the

Department of

Housing and Urban

Development

Appendix VI 43

Comments from the

National Aeronautics

and Space

Administration
Contents

Page 29 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

Appendix VII 44

GAO Contacts and

Staff

Acknowledgments

Table 1: Summary of Industry and Employee Challenges

and Appeals to Agencies

2

Table 2: Number of Industry and Employee Challenges

Filed at CFO Act Agencies

7

Table 3: Agency Decisions on Challenges and Appeals 8

Table 4: Issues Raised by Industry That Were Not Within

the Provisions of the FAIR Act

11

Table 5: Issues Raised by Employees That Were Not

Within the Provisions of the FAIR Act

16

Table I.1: Reason Codes Contained in OMB Circular A-76

Guidance

31

Table II.1: Number of FTEs Associated With Commercial

Activities on CFO Act Agencies’ Inventories for 1999

32

Tables
Appendix I

Background

Page 30 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

It is the general policy of the federal government that it will rely on the

private sector for goods and services that are not inherently governmental.

Reasons an activity might be considered inherently governmental include

the fact that it might

• bind the United States to take or not take some action by contract, policy,

regulation, authorization, order, or otherwise;

• determine, protect, and advance economic, political, territorial, property,

or other interests by military or diplomatic action, civil, or criminal justice

proceedings, contract management, or otherwise;

• significantly affect the life, liberty, or property of private persons;

• commission, appoint, direct, or control officers or employees of the United

States; or

• exert ultimate control over the acquisition, use, or disposition of the

property (real or personal, tangible, or intangible) of the United States.

The policy that the federal government will rely on the private sector for

those goods and services that are not inherently governmental has been in

place for 45 years and is currently embodied in the Office of Management

and Budget’s (OMB) Circular A-76.

OMB implemented the FAIR Act by revising Circular A-76 and the

handbook and incorporating FAIR Act requirements that

• agencies annually prepare and submit to OMB inventories of commercial

activities;

• OMB review the inventories and publish notices of public availability;

• interested parties can lodge administrative challenges and appeals of an

agency’s decisions to include or exclude a particular activity from the

agency’s inventory; and

• agency heads review the activities on the inventories within a reasonable

time after the publication of their notice of availability. Each time that an

agency head considers contracting with a private sector source for the

performance of an activity, the agency head will use a competitive process

to select the source.

Not all of an agency’s commercial activities are subject to OMB’s A-76 cost

comparison study requirements. For example, cost comparisons are not

required to convert commercial activities to or from in-house or contract,

or to an inter-service support agreement when these activities are for

• ensuring the national defense or national intelligence security,
Appendix I

Background

Page 31 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

• maintaining the quality of patient care at government-owned hospitals or

health facilities,

• ensuring the government has the necessary capabilities to fulfill its mission

responsibilities or meet emergency requirements, or

• supporting research and development.

Cost comparisons are also not required under Circular A-76 for activities

involving 10 or fewer FTEs, or when no satisfactory commercial source is

available to perform them. OMB’s A-76 guidance contains “reason codes”

for agencies to use to categorize their activities, as shown in table I.1.

Reason

code Explanation

A

The activity is performed by federal employees and is specifically exempted by

the agency from the cost comparison requirements of the Circular and the

Supplemental Handbook.

B

The activity is performed by federal employees and is subject to the cost

comparison or direct conversion requirements.

C

The activity is performed by federal employees but has been specifically made

exempt from the provisions of the Circular and the Supplemental Handbook by

Congress, Executive Order, or OMB.

D

The activity is currently performed by in-house federal employees and is in the

process of being cost compared or converted directly to contract or inter-service

support agreement performance.

E The activity is retained in-house as a result of a cost comparison.

F

The activity is currently performed by federal employees, but a review is pending

a force-restructuring decision (i.e., base closure, realignment, consolidation, etc.).

G The activity is prohibited from conversion to contract because of legislation.

H Waiver issued.

I

The activity is performed in-house as a result of a cost comparison resulting from

a decision to convert from contract to in-house performance.

Source: OMB Circular A-76 Supplemental Handbook.

The FAIR Act, in addition to requiring that agencies annually compile

inventories, also requires agencies to review them. In an effort designed to

improve the understandability of agencies’ 2000 FAIR Act inventories,

OMB (1) instructed agencies to use a standard format; (2) provided

additional explanatory material on the use of reason codes; (3) developed

additional function codes to facilitate the development of inventories; (4)

required that agencies post their inventories on their internet sites; and (5)

instructed that agencies provide, in their annual management of

commercial activity reports to OMB, a description of the agency’s plans to

review activities identified as commercial on their FAIR Act inventories.

Table I.1: Reason Codes Contained in

OMB Circular A-76 Guidance
Appendix II

Overview of Agencies’ FAIR Act Inventories

Page 32 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

The number of FTEs that the 24 Chief Financial Officer Act agencies

identified as performing commercial activities ranged from 16 FTEs at the

National Science Foundation to 504,417 at the Department of Defense

(DOD) (as shown in table II.1). DOD identified the largest number of FTEs

performing activities that could be competed, or about 48 percent of its

commercial FTEs. Six agencies did not identify any FTEs performing

activities that could be considered for competition.

Recognizing that agencies may have legitimate reasons for not studying

certain commercial activities under OMB Circular A-76, the Office of

Management and Budget (OMB) instructed agencies to classify activities

under reason code A when they determined that the activities were

specifically exempt from the cost comparison requirements of the Circular

and the Supplemental Handbook. Agencies classified a total of 208,423

FTEs, or 23 percent, as performing commercial activities categorized

under reason code A. Agencies were instructed to list activities under

reason code B when they determined that the activity was subject to the

cost comparison or direct conversion requirements of the Circular and

Supplemental Handbook. Agencies categorized 294,802 FTEs, or 33

percent, as performing commercial activities under reason code B and thus

as being competitive. OMB instructed agencies to categorize activities

under reason code C when the activity had been specifically made exempt

from the provisions of the Circular and Supplemental Handbook by

Congress, Executive Order, or OMB. Agencies identified a total of 304,307

FTEs, or 34 percent, performing activities classified under reason code C.

Agencies identified few FTEs performing activities under other reason

codes. These reasons include the agencies’ determinations that the

activities (1) are prohibited from conversion to contract because of

legislation, (2) had been or are in the process of being subject to cost

comparison studies, (3) are pending force restructuring decisions, or (4)

are subject to a waiver. A total of 87,233 FTEs were categorized as

performing activities under other codes.

Agency Reason code A Reason code B Reason code C Other Total FTEs

Agriculture 6,612 16,132 25,648 116 48,508

Commercea N/A N/A N/A N/A N/A

DOD 121,970 241,420 74,174 66,853 504,417

Education 0 0 3,624 0 3,624

Energy 9,586 619 1,560 0 11,765

Environmental Protection Agency 775 30 24 0 829

Federal Emergency Management Agency 2,302 22 0 0 2,324

Table II.1: Number of FTEs Associated With Commercial Activities on CFO Act Agencies’ Inventories for 1999
Appendix II

Overview of Agencies’ FAIR Act Inventories

Page 33 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

Agency Reason code A Reason code B Reason code C Other Total FTEs

Health and Human Services 21,154 2,506 8,971 246 32,877

HUD 290 231 5,785 0 6,306

General Services Administrationb 874 4,556 0 1,819 7,249

Interior 5,043 2,834 10,119 0 17,996

Justice 3,034 1,198 0 59 4,291

Labor 402 523 1,870 23 2,818

NASA 7,957 0 0 0 7,957

National Science Foundation 16 0 0 0 16

Nuclear Regulatory Commissionc 783 0 0 0 783

Office of Personnel Management 1,760 0 363 0 2,123

Small Business Administration 287 49 1,126 0 1,462

Social Security Administration 9,094 721 990 0 10,805

State 908 489 0 0 1,397

Transportation 7,332 3,163 1,390 911 12,796

Treasury 7,426 932 1,351 17,197 26,906

U.S. Agency for International Development 430 0 0 9 439

Veterans Affairs 387 19,377 167,313 0 187,077

Total 208,423 294,802 304,307 87,233 894,765

a

FTE's were not clearly designated in Commerce's FAIR Act inventory.

b

The General Services Administration’s (GSA) categories of commercial exempt, competitive, and inhouse corresponded to, according to GSA officials, reason codes A, B, and F, respectively. Reason

code F indicates that a review of the activities performed by those FTEs is pending a force

restructuring decision (such as base closure, realignment, consolidation, etc.).

c

Excludes the agency's Office of Inspector General.

Source: Agency information and GAO analysis.
Appendix III

Agencies’ Procedures for Responding to

Challenges and Appeals

Page 34 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

The Departments of Agriculture (USDA), Housing and Urban Development

(HUD), and Defense (DOD) delegated much of the responsibility for

responding to challenges and appeals to their component agencies.

Education and Labor both retained responsibility at the department level,

while the National Aeronautics and Space Administration (NASA) used a

centralized but organizationally independent approach. Even though the

procedures these six agencies developed differed, we found that agencies

were generally responsive to issues raised in both the challenges and

appeals.

• USDA and HUD delegated responsibility for responding to challenges to

each of their operating agencies. According to USDA officials,

responsibility was decentralized because of the diverse nature of USDA’s

missions and because the department believed that the operating agencies

should be aware of the nature of challenges to USDA’s inventory, given the

components’ responsibilities for compiling USDA’s inventory. A HUD

official said that responsibility was delegated within that department

because of the belief that the operating agencies would be more

knowledgeable about their positions and FTEs. Officials from both USDA

and HUD said that responsibility for responding to appeals was centralized

to retain independence. In addition, USDA officials said that, because

OMB’s guidance states that responsibility for responding to appeals be

retained at the assistant secretary level, it was necessary to do so.

• DOD delegated responsibility for responding to challenges and appeals to

the military services and DOD agencies, which used a variety of

approaches to respond to challenges and appeals. The Army, for example,

designated a central point of contact for all of Army’s challenges and

appeals. The Air Force, however, delegated responsibility for responding

to challenges and appeals to its major commands.

• Education and Labor both retained responsibility at the department level.

Within Education, the Chief Financial Officer was authorized to respond to

challenges. This official reports to the Deputy Secretary, who was

authorized to respond to appeals. Within Labor, the Procurement

Executive was authorized to respond to challenges. This official reports to

the Assistant Secretary for Administration and Management, who was

authorized to respond to appeals.

• NASA used a centralized but organizationally independent approach to

responding to challenges and appeals. According to NASA officials,

authority for responding to challenges and appeals was retained at NASA

headquarters, but was delegated to separate Associate Administrators to

ensure that the process was as independent as possible within the agency.

Agencies’ Procedures

for Responding to

Challenges and

Appeals Varied
Appendix III

Agencies’ Procedures for Responding to Challenges and Appeals

Page 35 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

We found that the differences in procedures the six agencies used to

respond to challenges and appeals did not appear to result in differences in

how timely or responsive agencies were. According to FAIR Act officials

at the six agencies, the agencies tried to respond to interested parties

within the time frames set forth in the act and as defined by OMB’s

guidance. In its guidance, OMB defined the time frame for responding to

challenges as 28 calendar days and that for responding to appeals as 10

working days.1

We found that the six agencies generally met OMB’s time frames, with few

exceptions. Of the six agencies, USDA was more frequently late than the

five other agencies in responding to challenges. It was also late in

responding to appeals. According to USDA officials, its operating agencies

did not always meet the time frames for responding to challenges because

of the delays caused by forwarding the challenges to appropriate agency

officials. The size and geographic dispersion of some agencies also

resulted in delays in obtaining information necessary to be responsive to

issues raised in the challenges.

USDA also did not meet time frames for responding to appeals because,

according to USDA officials, many of the challenges raised issues that

went beyond the provisions set forth in the FAIR Act. Because many of

the appeals reiterated these same issues, USDA officials said that USDA

wanted to ensure that it further explored the basis for the issues, and was

fully responsive. Thus, responses underwent extensive review at the

department level prior to being finalized. Responses to appeals, most of

which were submitted by interested parties to USDA in December 1999,

were not sent out to interested parties until June 2000. These officials

acknowledged that the amount of time to respond was extensive, but they

said that they notified interested parties that they would be late in

responding and, further, because it was USDA’s belief that an interested

party would not be financially injured by the delay, its caution was

believed to be justified.

DOD’s Defense Logistics Agency (DLA) also was not timely in responding

to its challenges and appeals. DLA received four challenges to its FAIR

Act inventory, but as of September 20, 2000, it had responded to only three

 1

 To assist agencies in responding to challenges to their 2000 inventories, OMB is proposing to change

the 28-day time frame from calendar to working days, providing agencies with some additional time to

prepare their responses.

Agencies Were

Generally Timely and

Responsive to Issues

Raised
Appendix III

Agencies’ Procedures for Responding to Challenges and Appeals

Page 36 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

of them. One challenge, dated January 28, 2000, remains unresolved. An

agency official explained that the challenge remains unresolved because of

differences in opinion among the functional offices that are involved in

issues related to the challenge. Further, DLA received appeals to each of

the three challenges to which it responded. All remain unresolved.
Appendix IV

Comments from the Department of Education

Page 37 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

See pp. 19

and 20.

See p. 10.

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.
Appendix IV

Comments from the Department of Education

Page 38 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

See p. 24.
Appendix IV

Comments from the Department of Education

Page 39 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

The following is GAO’s comment on the Department of Education’s letter

dated September 15, 2000.

1. The Department of Education agreed that the usefulness of FAIR Act

inventories was limited and that OMB must undertake a sustained effort to

help improve the clarity of inventories and help ensure that agencies

review them. We revised the section of the report entitled “Most of

Industry’s Challenges and Appeals Reflected Broad FAIR Act

Implementation Concerns” to include additional information about

Education’s response to a challenge, and the section entitled “Agencies

Identified the Need for Improved Clarity on Their Inventories” to reflect

Education’s desire to have function codes defined and Education’s

concerns over future challenges it may receive should such definitions not

be developed. We revised the section entitled “Agencies Agree That

Comprehensive Data on All Their Activities Could Help Inform

Management” to further explain the extent of contract information

Education obtains.

GAO Comment
Appendix V

Comments from the Department of Housing

and Urban Development

Page 40 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

See comment 1.

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.
Appendix V

Comments from the Department of Housing and Urban Development

Page 41 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

See comment 2.
Appendix V

Comments from the Department of Housing and Urban Development

Page 42 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

The following are GAO’s comments on the Department of Housing and

Urban Development’s (HUD) letter dated September 15, 2000.

1. HUD was concerned that the draft was misleading because it appeared

we based a statement about the clarity of its inventory on its “Annual

Report on Management of Commercial Activities.” However, this was not

the case. We obtained information about the clarity of HUD’s inventory for

1999 from HUD’s FAIR Act official who was responsible for ensuring that

HUD compiled an inventory that met statutory and OMB reporting

requirements. This official reviewed and compiled HUD component

organizations’ lists of commercial activities for submission to OMB. We

revised the report to reflect that HUD’s review identified and corrected

inconsistencies but that HUD believes that better defined function codes

would aid in this effort.

2. We agree that the FAIR Act does not require agencies to compile

inventories of activities performed by contract that are comparable to its

inventories of commercial activities performed in-house, and the report

notes this in the section entitled “Agencies Agree That Comprehensive

Data on All Their Activities Could Help Inform Management.” We further

clarified this distinction and deleted one reference to HUD from the report.

GAO Comments
Appendix VI

Comments from the National Aeronautics and

Space Administration

Page 43 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals
Appendix VII

GAO Contacts and Staff Acknowledgments

Page 44 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals

J. Christopher Mihm, (202) 512-8676

Barry W. Holman, (202) 512-5581

In addition to those named above, Marcia McWreath, Margaret Morgan,

Steven Boyles, Robert Poetta, Susan Ragland, Jerry Sandau, Jim Turkett,

and Marilyn Wasleski made key contributions to this report.

GAO Contacts

Acknowledgments
Page 45 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals
Page 46 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals
Page 47 GAO/GGD/NSIAD-00-244 FAIR Act Challenges and Appeals
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