United States Government Accountability Office

GAO Report to the Ranking Member, 

Committee on Oversight and 

Government Reform, House of 

Representatives 

February 2007 TELECOMMUNICATIONS 

GSA Has Accumulated 

Adequate Funding for 

Transition to New 

Contracts but Needs 

Cost Estimation 

Policy 

 

GAO-07-268 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

February 2007

TELECOMMUNICATIONS 

GSA Has Accumulated Adequate Funding 

for Transition to New Contracts but 

Needs Cost Estimation Policy 

Highlights of GAO-07-268, a report to the 

Ranking Member, Committee on 

Oversight and Government Reform, 

House of Representatives

The General Services 

Administration (GSA) and its 

customer agencies are preparing to 

transition new governmentwide

telecommunications contracts 

known as the Networx program.

GSA estimated the costs for which 

it is responsible to be $151.5

million. This report addresses (1) 

the soundness of the analysis GSA 

used to derive the estimate of

funding that would be required for 

the transition and (2) whether GSA 

will have accumulated adequate

funding to pay for transition costs.

In performing this work, GAO 

reviewed cost estimation best

practices, analyzed relevant GSA

documents, and performed an

uncertainty analysis on GSA’s 

estimate. 

What GAO Recommends

GAO recommends that the GSA 

Administrator establish a cost 

estimation policy that reflects best 

practices. In addition, GAO 

recommends that the 

Administrator revise the transition 

cost estimate using best practices

after the award of the Networx 

contracts and reassess the funding

needed to meet its commitments. 

GSA concurred with these 

recommendations but questioned

the way GAO characterized the 

soundness of GSA’s analysis and 

whether this transition was 

comparable with the previous one.

GAO clarified its characterization

of GSA’s analysis. 

GSA did not use sound analysis when estimating the amount of funding 

needed to meet its transition-related commitments. Specifically, its analysis 

was not sufficiently accurate, comprehensive, documented, or validated. A 

primary weakness is that the estimate is largely based an assumption—

known as the transition traffic factor—that 76 percent of the services 

provided under the current contracts would be moved to a different provider 

under the Networx contracts. However, according to program officials, this 

assumption is intentionally conservative and represents a worst-case 

scenario that is unlikely to occur. Additionally, GSA may have 

double-counted a cost and did not update its analysis to reflect a nearly 

2-year delay. Finally, GSA did not document significant assumptions and 

data sources used in its analysis, or validate it. These weaknesses can be 

attributed in part to the lack of a cost estimation policy that reflects best 

practices. While GSA’s intentionally conservative approach minimizes the 

risk that it would have inadequate funds to pay for committed transition 

costs, it increases the risk that GSA will retain excess funds that could be 

used for other purposes. 

GSA has accumulated adequate funding to support its anticipated transition 

costs. As of fiscal year-end 2006, GSA had approximately $142 million in a 

transition reserve. GAO analysis of the estimate indicates it is unlikely that 

GSA will need more than it has already accumulated to fund the transition. 

Specifically, the $142 million already retained will be adequate to cover

anticipated costs 96 percent of the time. The recent merger of two GSA 

funds gives the agency additional flexibility that reduces its need to 

accumulate the entire $151.5 million it estimated would be needed (see

table). With Networx contracts scheduled to be awarded starting in March 

2007, GSA will soon have the information necessary to reassess the main 

assumption underlying its estimate—the transition traffic factor—and 

address the weaknesses GAO identified. Once this has been accomplished, 

GSA can reevaluate the funding needed to meet anticipated commitments. 

GSA’s Transition Cost Estimate 

Dollars in millions

Cost element Estimated cost

GSA contractor support $35.0 

Certain agency transition costs 116.5

Total $151.5 

Source: GSA. 

www.gao.gov/cgi-bin/getrpt?GAO-07-268.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Linda Koontz at

(202) 512-6240 or koontzl@gao.gov. 
Contents 

Letter 1

Results in Brief 2 

Background 3

GSA’s Analysis Was Not Sound 7 

GSA Has Accumulated Adequate Funding for the Transition 13 

Conclusions 14

Recommendations 15

Agency Comments and Our Evaluation 16 

Appendix I Objectives, Scope, and Methodology 18 

Appendix II Uncertainty Analysis for GSA’s Transition Estimate 20 

Appendix III Comments from the GSA Administrator 21 

Appendix IV GAO Contact and Staff Acknowledgments 23

Tables 

Table 1: GSA Transition Cost Estimate 6 

Table 2: Cumulative Effect of Quantifiable Weaknesses 11 

Table 3: Risk Adjusted Factors 20 

Figures 

Figure 1: Estimated Cost of Transition Using Various Percents of 

Transition Traffic 12 

Figure 2: Confidence That Certain Amounts of Funding Will 

Account for Actual Costs 13 

Page i GAO-07-268 Telecommunications
Abbreviations 

GSA General Services Administration 

IMC Interagency Management Council 

IT Information Technology 

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reproduce this material separately. 

Page ii GAO-07-268 Telecommunications
United States Government Accountability Office

Washington, DC 20548 

February 23, 2007 

The Honorable Tom Davis 

Ranking Member 

Committee on Oversight and Government Reform 

House of Representatives 

Dear Mr. Davis: 

As innovations in telecommunications services continue to transform the 

way the federal government conducts business, the General Services 

Administration’s (GSA) governmentwide telecommunications acquisition 

programs offer federal agencies the opportunity to apply innovative 

services and solutions to their operations. With the current set of 

governmentwide telecommunications contracts approaching expiration,

GSA and its customer agencies will have to transition the services 

acquired under these contracts to their replacements, known collectively 

as Networx. 

GSA will incur program management costs associated with planning and 

executing this transition. It has also made a commitment to absorb certain 

agency transition costs. To ensure it would have the funds necessary to 

pay for these costs, GSA estimated that it would need to set aside 

approximately $151.5 million. 

This report responds to your request that we determine (1) the soundness 

of the analysis GSA used to derive the estimate of funding that would be 

required for the transition and (2) whether GSA will have accumulated 

adequate funding to pay for its transition management costs. To 

accomplish the first objective, we conducted a search of over 250 

documents from both government and industry1

 for examples of best 

practices in the field of cost estimation and identified common 

characteristics among them. We determined that high-quality, reliable 

estimates should be accurate, comprehensive, well-documented, and 

validated. Using these characteristics, we analyzed transition estimate 

 1

These documents included published literature on cost estimation from the Society of 

Cost Estimating and Analysis, the Department of the U.S. Army, the Office of the Secretary 

of Defense, the National Aeronautics and Space Administration, and the Department of 

Energy. 

Page 1 GAO-07-268 Telecommunications
documentation developed by GSA, documentation provided by GSA on the 

previous transition, the Networx Request for Proposals, and other relevant 

documents. To accomplish the second objective, we analyzed financial

and operational documents from related GSA programs. In addition, we 

interviewed GSA program officials about both objectives and conducted

an analysis of GSA’s estimate to examine the effects of varying the main 

cost driver in the estimate. We conducted our work at GSA’s Washington, 

D.C., area headquarters between June 2006 and January 2007 in 

accordance with generally accepted government auditing standards. A 

detailed discussion of our objectives, scope, and methodology can be

found in appendix I. 

GSA did not use sound analysis when estimating the amount of funding 

needed to meet its transition-related commitments. Specifically, its 

analysis was not sufficiently accurate, comprehensive, documented, or 

validated. A primary weakness is that the estimate is largely based on the 

assumption that 76 percent of the services provided under the current 

contracts will transition to a different provider under the Networx 

contracts. However, according to program officials, this assumption is 

intentionally conservative and represents a worst-case scenario that is 

unlikely to occur. Additionally, GSA may have double-counted a cost, did 

not update its analysis to reflect a nearly 2-year delay, and did not 

adequately document or validate its analysis. The weaknesses we 

identified can be attributed in part to the lack of a policy requiring cost 

estimates to be developed using best practices. Without such a policy, 

GSA’s future cost estimates could exhibit similar weaknesses, increasing 

the risk that it will retain excess funds that could be reallocated for other 

purposes. 

Results in Brief 

GSA has accumulated adequate funding to support its anticipated 

transition costs. As of fiscal year-end 2006, GSA had approximately $142 

million in a transition reserve to be used to pay for its costs associated 

with the transition. Our analysis of the estimate indicates that it is unlikely 

that GSA will need to accumulate the entire $151.5 million it estimated and 

that the funds it has already accumulated should be sufficient to fund the 

transition. Specifically, the $142 million already retained will be adequate 

to cover anticipated costs 96 percent of the time. Further, the recent 

merger of two GSA funds increases the agency’s flexibility and could 

provide additional money, if needed. With Networx contracts scheduled to

be awarded starting in March 2007, GSA will soon have the information 

necessary to reassess the main cost driver underlying its estimate and 

address the weaknesses we identified. Once it has a current, accurate

Page 2 GAO-07-268 Telecommunications
estimate, GSA can reevaluate the funding needed to meet anticipated 

commitments. 

To ensure that future cost estimates by GSA are sound and can be used as

a reliable basis for decisions, we recommend that the GSA Administrator 

establish an agencywide policy requiring that cost estimates be developed 

using best practices. In addition, we recommend that the Administrator 

revise the transition cost estimate using best practices after the award of 

contracts under the Networx program and, if feasible, reallocate any 

excess funds for other purposes or return them to the Treasury. 

In written comments on a draft of this report, the GSA Administrator 

concurred with our recommendations and emphasized the importance of 

supporting a successful governmentwide telecommunications transition. 

Her comments also state that GSA’s transition cost estimate was within 2 

percent of our independent analysis using the same assumptions. 

However, while we identified only $3 million in quantifiable errors 

(roughly 2 percent of GSA’s total estimate), we also determined that if the

extent of transitioning services is significantly lower than GSA’s 

intentionally conservative assumption, actual costs could be more than 

$110 million less than GSA’s estimate. 

In addition, the Administrator presented two main objections to our draft. 

First, she questioned whether our reported findings were balanced given

the facts and results presented. We clarified our report to ensure that our 

findings better reflect the information we discuss. Second, she stated that

we incorrectly suggested comparability between the pending Networx 

transition and the prior transition. We maintain that the two transitions are 

comparable, particularly because GSA’s analysis is based, in part, on the 

results of the previous transition. Appendix III provides the full text of 

GSA’s comments. GSA also provided technical comments that have been 

incorporated in our report as appropriate. 

As part of its mission of providing federal agencies with acquisition 

services and solutions at best value, GSA’s technology programs offer 

agencies options to acquire needed telecommunications services. An 

option chosen by more than 135 agencies is the FTS2001 program, which 

consists of two large governmentwide telecommunications contracts—one 

Background 

Page 3 GAO-07-268 Telecommunications
awarded to Sprint2

 in December 1998 and the other to MCI3 in January 

1999—and FTS2001 crossover contracts.4

GSA is planning to replace the FTS2001 contracts, FTS2001 crossover 

contracts, and separate wireless contracts with a new set of contracts. 

Collectively known as the Networx program, these new contracts are to 

provide governmentwide telecommunications services through two 

indefinite-delivery/indefinite-quantity acquisitions—Networx Universal 

and Networx Enterprise. The Universal acquisition is expected to satisfy 

the requirements for a full range of national and international network 

services and, according to GSA, to ensure the continuity of broad-ranging

services with global geographic coverage rendered under expiring 

contracts. The Enterprise acquisition is expected to offer agencies 

leading-edge services and solutions with less extensive geographic and 

service requirements than Universal. The services required in these 

contracts focus on Internet-based offerings and related security and 

management services. 

GSA expects the transition to begin when Networx Universal awards are 

made in March 2007 and to continue until fiscal year 2010. Because the 

FTS2001 contracts with Sprint Nextel Corporation and Verizon Business 

expired in December 2006 and January 2007, respectively, GSA and the 

incumbent vendors negotiated separate sole-source contracts that 

essentially extend the terms of the FTS2001 contracts for 42 months.5

These sole-source contracts were awarded to ensure uninterrupted service 

and allow agencies adequate time to complete the transition to Networx. 

GSA is working with representatives of federal agencies to prepare for the 

upcoming transition to Networx, both directly and through the 

Interagency Management Council (IMC), a group of senior federal 

information resource officials who advise GSA on issues related to 

 2

Sprint Corporation merged with Nextel Communications, Inc., to form Sprint Nextel 

Corporation in August 2005. 

3

MCI merged with Verizon to form Verizon Business in January 2006. 

4

In August 2001, GSA allowed contractors that had been awarded local telecommunications

contracts in selected metropolitan areas, through GSA’s Metropolitan Area Acquisition 

program, to offer long-distance services on the FTS2001 contracts. This process is termed 

“crossover.” 

5

GSA negotiated sole-source contracts for a 24-month base period with three 6-month 

optional periods, for a total of 42 months. 

Page 4 GAO-07-268 Telecommunications
telecommunications contracts. The IMC has worked with GSA to 

document lessons learned from the transition to FTS2001 that began in the

late 1990s, GSA’s most recent governmentwide telecommunications 

transition. One important lesson learned was that GSA and agency plans 

for funding transition expenses should be determined early to allow 

agencies to gauge the impact of transition expenses on their budgets. 

Specifically, the lessons-learned document recommended that guidelines 

be established to allow agencies to complete the financial planning 

required to ensure that the resources needed for transition were available. 

This led the IMC and GSA to develop a Taxonomy and Allocation of 

Transition Costs document that identified which Networx transition costs 

would be borne by GSA and which would be borne by transitioning 

agencies. 

This taxonomy document indicated that GSA will incur or reimburse 

agencies, including: 

• GSA contractor support costs to, for example, aid in planning for the 

transition and oversight of Networx contractors. GSA officials also 

indicated that contractor support will be used to develop a methodology 

for tracking transition progress and the establishment of a transition 

coordination center; and 

• certain costs incurred by agencies during transition. 

In 2004, following the development of the taxonomy document, GSA 

generated an estimate of its costs for the transition. GSA’s methodology 

for its estimate was to: 

• develop assumptions for the estimate, 

• define and develop a baseline for the estimate based on experiences and

lessons learned from the previous transition, 

• determine the network growth as well as the total business volume 

projections for fiscal year 2006 based on historical traffic and cost trends, 

• define the transition cost elements, 

• define and develop a formula for calculating an estimate for each cost 

element, and 

Page 5 GAO-07-268 Telecommunications
• design and develop the estimated transition cost model for sensitivity 

analysis. 

Using this methodology, GSA estimated that it would need a total of $151.5 

million for a 30-month transition, most of which would be used to 

reimburse agencies’ transition costs. Table 1 below details the transition 

costs GSA expects to pay. 

Table 1: GSA Transition Cost Estimate 

Dollars in millions 

Cost element Estimated cost

GSA contractor support $35.0 

Certain agency transition costs 116.5

Total $151.5 

Source: GSA.

GSA planned to pay for its costs and the reimbursement of certain agency

costs using its Information Technology (IT) Fund.

6

 The IT Fund was a fullcost recovery revolving fund7

 whereby GSA fully recovered all costs of its 

technology programs and its operations via estimated fee rates. The fees, 

which are charged to agencies for the use of GSA contracts cover the 

direct costs of its operations—such as the development and management 

of contract vehicles—and indirect costs associated with its headquarters, 

such as support for the Offices of the Chief Information Officer and the 

Chief Financial Officer. The IT Fund allowed GSA to stabilize rates for its 

services when expenses varied and was used to provide funding for the 

previous transition to FTS2001. The IT Fund also contained a working 

capital reserve that was used to offset losses due to fluctuations in 

business volumes and other unexpected contingencies. At each fiscal yearend, the uncommitted balance of funds remaining was to be transferred to 

the general fund of the treasury as miscellaneous receipts. 

 6

The IT Fund was authorized by the Paperwork Reduction Reauthorization Act of 1986, 

Public Law 99-500 and 99-691; 40 U.S.C. 322. 

7

A revolving fund is established by Congress to finance a cycle of businesslike operations

through amounts received by the fund. A revolving fund charges for the sale of products or

services and uses the proceeds to finance its spending, usually on a self-sustaining basis. 

Instead of recording the collections in receipt accounts, the budget records the collections 

and the outlays of revolving funds in the same account. A revolving fund is a form of 

permanent appropriation. 

Page 6 GAO-07-268 Telecommunications
Recently, a new law changed the structure of the IT Fund and GSA’s 

organization. On October 6, 2006, the General Services Administration 

Modernization Act8

 combined the IT Fund with another GSA revolving 

fund—the General Supply Fund—to create the Acquisition Services Fund. 

This legislation, which also merged GSA’s technology and supply 

programs,9 made all capital assets and balances remaining in the IT and 

General Supply Funds available for the purposes of the Acquisition 

Services Fund. According to GSA, the Federal Acquisition Service will 

increase agency savings, enhance GSA’s capability to meet customer 

requirements for excellence, and improve internal efficiencies. 

The analysis GSA used to derive its estimate of $151.5 million was not 

sound because it was not sufficiently accurate, comprehensive, 

documented, or validated. The analysis was not sufficiently accurate 

because it is largely based on the assumption that agencies will transition 

76 percent of the services acquired under the current FTS2001 contracts to

a different provider under Networx—an intentionally conservative 

scenario that GSA program officials believe is unlikely to occur. Further, 

the analysis has not been updated after a nearly 2-year delay in the 

contract award. While GSA appears to have included all pertinent costs, it

may have double-counted a cost, calling into question the 

comprehensiveness of its analysis. In addition, GSA did not document 

significant assumptions and data. Finally, GSA’s analysis was not validated

by an independent cost estimate nor was an uncertainty analysis 

performed that would allow GSA to quantify the level of confidence it has

in its estimate. These weaknesses can be attributed in part to the lack of a

cost estimation policy that would help to ensure that such estimates are 

developed using best practices. While an intentionally conservative 

approach minimizes the risk that GSA would have inadequate funds to pay 

for committed transition costs, it increases the risk that GSA will retain 

excess funds that could be used for other purposes. 

Estimates are accurate when they are not overly conservative, based on an 

assessment of the most likely costs, and adjusted properly for inflation. 

GSA’s Analysis Was 

Not Sound 

GSA’s Analysis Was Not 

Sufficiently Accurate 

 8

General Services Administration Modernization Act, Pub. L. No. 109-313, 120 Stat. 1734 

(2006). 

9

GSA’s supply programs provide agencies a source for commercial products and services

such as office supplies, vehicle purchasing, travel, and furniture. 

Page 7 GAO-07-268 Telecommunications
Best practices further dictate that as schedules change, cost estimates 

should be revised to provide management with insight into the current 

program status, effective control of the program, and the ability to balance 

resources and the budget. 

The analysis GSA used to derive the estimate, however, was not 

sufficiently accurate. First, the estimate’s main cost driver is based on the

assumption that agencies will transition 76 percent of the services 

acquired under the current FTS2001 contracts to a different provider 

under Networx—60 percent due to agencies being forced to change 

providers and 16 percent due to voluntary changes. However, according to

program officials, the 76 percent “transition traffic factor” is intentionally 

conservative and represents a worst-case scenario that is unlikely to 

occur. 

The 76 percent transition traffic factor is also overly conservative when 

compared with the previous transition. Then, approximately 60 percent of 

services were shifted from an incumbent to a different provider under 

FTS2001, the bulk being forced to change providers when an incumbent 

providing more than half of the services (AT&T) was not awarded an 

FTS2001 contract. This forced shift happened in part because GSA limited 

the FTS2001 awards to only two vendors. In contrast, GSA has placed no 

such limit on the number of Networx vendors, and therefore, all 

incumbent FTS2001 vendors could potentially be awarded a Networx 

contract. Further, because the most-used FTS2001 incumbent (Verizon 

Business) provides approximately 50 percent of the services under the 

current FTS2001 contracts, the assumption of a 60 percent forced shift 

would only be realized if no awards were made to Verizon Business and at 

least one other incumbent. Finally, GSA’s assumption of a 16 percent 

voluntary shift is significantly higher than the 3 percent that voluntarily 

changed providers during the previous transition. 

Program officials could not identify any basis for the assumption that 

voluntary changes will reach 16 percent. However, the officials stated that 

the percentage of voluntary changes could be higher because agencies will 

likely have more options when selecting vendors and because of improved 

guidance on federal requirements regarding the fair opportunity process, 

which is intended to give each awardee an equal opportunity to compete 

for agencies’ telecommunications services requirements based on 

agency-established selection criteria. 

Second, the analysis has not been updated to reflect schedule changes. 

When the estimate was developed in 2004, GSA expected to award the first 

Page 8 GAO-07-268 Telecommunications
Networx Universal contracts in mid-2005. Since that time, delays have 

pushed the time frame back almost 2 years. Universal awards are now 

expected in March 2007. GSA’s analysis has not been adjusted to reflect 

additional inflation during this period, which could increase the estimates 

total by as much as $9 million. 

Finally, GSA has not revised its analysis to reflect an assessment of most 

likely costs using currently available information. The analysis assumes 

that reimbursable agency transition costs would be greater than during the 

previous transition due to growth in the volume of services ordered. While 

GSA estimated that service levels would grow 60 percent over the previous 

transition by the time of contract award, as of August 2006, service levels 

had actually grown by 55.9 percent and are now expected to remain stable. 

The overestimation of service growth added approximately $1.7 million to

the estimate. 

Estimates are comprehensive when their level of detail ensures that all 

pertinent costs are included and no costs are double-counted. It is 

important to ensure the completeness, consistency, and realism of the 

information contained in the cost estimate. 

GSA appears to have included all pertinent costs in its analysis; however, 

according to officials, a specific agency cost valued at $4.3 million may 

have been double-counted. For several of the transition costs estimated, 

GSA based its calculations on the actual charges incurred during the 

previous transition. However, officials indicated that a specific agency 

cost that is estimated separately in its current estimate may have already 

been included in a more general category of its previous costs. Despite this 

uncertainty, GSA calculated the separate total for this specific agency cost 

based on current service levels and added it to its estimate. As a result, it 

is likely this specific agency cost is double-counted and therefore 

overstated. 

Cost estimates are well-documented when they can be easily repeated or 

updated and can be traced to original sources through auditing. Rigorous 

documentation increases the credibility of an estimate and helps support 

an organization’s decision-making process. The documentation should 

explicitly identify the primary methods, calculations, results, rationales or 

assumptions, and sources of the data used to generate each cost element. 

GSA’s Analysis May Not Be 

Comprehensive 

GSA’s Analysis Was Not 

Adequately Documented 

Page 9 GAO-07-268 Telecommunications
GSA provided us documentation of its methodology, the calculations it 

used to derive each cost element, results, and many of the previous 

transition costs.10 However, it did not document significant assumptions. 

Specifically, GSA did not document the rationale behind its 76 percent 

transition traffic factor or why it used a 30-month time period for the 

transition—two key assumptions of its analysis. 

GSA also did not provide documentation of certain data sources. 

Specifically, program officials could not provide supporting data used to 

estimate an agency transition cost valued at $4.7 million. In addition, GSA 

could not document the data sources used to estimate costs for contractor

support in planning and implementing the transition. While many costs in 

its estimate are based on the charges incurred during the previous 

transition, GSA officials stated that it was not appropriate to use previous 

costs as a basis for the contractor cost element. These officials explained 

that unlike the previous transition, GSA would not provide agencies with 

on-site contractor support. Officials made this decision, in part, because 

the 21⁄2 years of transition planning that has occurred to date is expected to

result in better preparation by agencies and the ability for them to 

facilitate their transitions without direct assistance from GSA or its 

contractors. Instead of basing their projection of contractor costs on prior 

charges, program officials told us that GSA management decided that 

contractor support costs should not exceed $35 million. Program officials 

could not provide any data or analysis to support this decision. 

Estimates are adequately validated when they have been cross-checked 

with an independent cost estimate, and when a level of uncertainty 

associated with the estimate is identified. An independent cost estimate 

provides the estimator with an unbiased test of the reasonableness of the 

estimate and reduces the cost risk associated with the project by 

demonstrating that alternate methods generate similar results. In 

performing an uncertainty analysis, an entity examines the effects of 

varying multiple elements and, as a result, is able to express a level of

confidence in its estimate. 

GSA’s Analysis Was Not 

Validated 

 10For example, GSA provided data on contractor support costs incurred during the previous

transition. 

Page 10 GAO-07-268 Telecommunications
GSA did not validate its analysis against an independent cost estimate or 

perform an uncertainty analysis. GSA program officials could not provide 

a rationale of why these activities were not performed. 

The cumulative effect of the quantifiable weaknesses we identified in 

GSA’s analysis is relatively small, resulting in an underestimation of $3 

million, or roughly 2 percent of the total $151.5 million estimate (as shown 

in table 2). The underestimation of costs, related to inflation during the 

extended delay in making award, was offset by the overestimation of 

service growth and the possible double-counting of a specific agency 

transition cost. 

Table 2: Cumulative Effect of Quantifiable Weaknesses 

Quantifiable Weaknesses 

Are Small, but Effect of 

Estimate’s Intentionally 

Conservative Assumption 

Could Be Significant 

Dollars in millions 

Issue identified

Aspect of estimate 

affected Approximate effect 

The estimate has not been adjusted to 

reflect schedule changes 

Calculation of inflation +$9.0

The estimate does not reflect an 

assessment of most likely costs due to 

currently available information

Actual growth in

services 

-1.7

The estimate may have double-counted

a cost 

Agency transition 

costs 

-4.3

Cumulative effect +$3.0

Source: GAO analysis of GSA information. 

In contrast, if the actual level of services transitioning to a different vendor 

is lower than the 76 percent transition traffic factor assumed by GSA, the 

effect will be greater. Because this factor is the primary cost driver in the 

estimate, significant changes in transitioning traffic result in similarly 

significant changes in total costs. This effect can be illustrated using GSA’s 

transition cost estimate model (see fig. 1). For example, if a transition 

traffic factor of 66 percent is used (GSA’s assumption of 16 percent for a 

voluntary transition plus a forced shift of 50 percent that would occur if 

Verizon Business is not awarded a Networx contract), the total estimated 

cost of the transition falls to about $136 million. Similarly, if all 

incumbents are awarded Networx contracts and only GSA’s assumption of

a 16 percent voluntary transition occurs, the total estimated cost of the 

transition is reduced to approximately $40 million. GSA officials explained 

that they used a risk-averse transition traffic factor to minimize the 

possibility of underestimating costs. 

Page 11 GAO-07-268 Telecommunications
Figure 1: Estimated Cost of Transition Using Various Percents of Transition Traffic 

The weaknesses in GSA’s analysis can be attributed in part to the lack of a

policy requiring cost estimates to be developed using best practices. 

Officials from the Offices of the Chief Acquisition Officer, the Chief 

Information Officer, and the program office’s Controller confirmed that 

GSA does not have centralized policy or guidance on cost estimation. 

Instead, the officials that prepared the estimate stated that they based 

their work loosely on best practices learned as a result of past experiences 

and were comfortable with the estimate. Officials believe there is no 

reason to revise their estimate to address the issues we raised in this 

report because their purpose in producing it was to minimize the risk of 

underestimating costs. While GSA’s approach minimized the risk of having 

inadequate funds to fulfill its commitments, it increased the risk that GSA 

will retain excess funds that could be used for other purposes. 

Millions of dollars Percent of traffic

Source: GSA cost estimate model.

Percent of traffic

Percent of traffic transitioning to a new vendor 

Total estimated cost (approximate, in millions)

0

20

40

60

80

100

120

140

160

16 50 66 76

0

10

20

30

40

50

60

70

80

90

100

$39.7

$111.6

$136.2

$151.5

GSA Does Not Have a 

Policy to Ensure That Cost 

Estimates Are Sound 

Page 12 GAO-07-268 Telecommunications
GSA has accumulated adequate funding to support its anticipated 

commitments related to the Networx transition. As of fiscal year-end 2006, 

GSA accumulated approximately $142 million in a reserve dedicated to

costs associated with the transition from FTS2001 to Networx. The 

uncertainty analysis we performed on GSA’s cost estimate indicates that 

the funding GSA has already accumulated will most likely be adequate to 

pay for expected transition costs. By varying the transition traffic factor, 

our analysis indicates that the $142 million already retained should be 

adequate to cover expected expenses 96 percent of the time. Figure 2 

illustrates the probability that a particular level of funding will be adequate 

to account for the total actual costs incurred. For example, the $151.5 

million estimate represents a confidence level of 100 percent: there is 

almost no chance that costs will exceed the estimate. The full detail of our 

methodology is detailed in appendix II. 

Figure 2: Confidence That Certain Amounts of Funding Will Account for Actual

Costs 

GSA Has 

Accumulated 

Adequate Funding for 

the Transition 

Source: GAO analysis of GSA data.

Confidence level Amount of funding

$151.5

$142.0

$97.8

100%

96%

50%

Page 13 GAO-07-268 Telecommunications
The merger of the IT and General Supply Funds provides GSA with 

additional flexibility, further reducing the need to retain the entire amount 

of the estimate. As discussed, legislation11 combined the two funds into an 

Acquisition Services Fund, making their capital assets and balances 

available for the purposes of the new Federal Acquisition Service. The 

legislation also allows the Federal Acquisition Service to establish a 

reserve to retain surplus revenues from GSA’s technology and service 

programs specifically for the purpose of offsetting losses and other 

unexpected contingencies. Further, at the end of each year, the statute 

requires GSA to return to the Treasury any funds not expended or held in a 

working capital reserve. During fiscal year 2006, GSA’s technology 

programs experienced losses, but its supply programs reported overall 

positive earnings of approximately $126 million. If operations continue in

this fashion, excess revenue will be available in the combined fund to 

offset losses or account for contingencies, such as the Networx transition, 

be retained within the Acquisition Services Fund, or be returned to the 

Treasury. 

With Networx contracts scheduled to be awarded starting in March 2007,

GSA will soon be in a position to reassess its main assumption, the 

transition traffic factor, and the resulting level of funding needed to meet 

anticipated commitments. Unless GSA revises its estimate, it risks 

unnecessarily retaining funds that could be reallocated to other agency 

priorities or returned to the Treasury.

While GSA achieved its goal of minimizing the risk that it would have 

inadequate funds to pay its transition commitments, the analysis used to 

develop the transition cost estimate was not sound because it was not 

sufficiently accurate, comprehensive, documented, or validated. The 

weaknesses can be attributed in part to a lack of a policy at GSA to ensure 

that such estimates are developed using best practices and make the best 

use of agency resources. While the quantifiable effect of the weaknesses in

accuracy and comprehensiveness is small, the effect of potential 

inaccuracies resulting from the intentional use of an overly conservative 

assumption about a main cost driver could be more significant. Without 

the use of a cost estimation policy that reflects best practices, GSA could 

continue to produce similarly unsound estimates, increasing the risk that it 

Conclusions 

 11Public Law No. 109-313. 

Page 14 GAO-07-268 Telecommunications
will unnecessarily retain funds that could be reallocated for other 

purposes. 

Despite the weaknesses in its analysis, GSA has accumulated adequate 

funding to support its anticipated commitments related to the Networx 

transition. Our analysis indicates that it is highly unlikely that GSA will 

need more than the $142 million it has already accumulated. In addition, 

the merger of two revolving funds gives it increased flexibility in meeting 

costs. Once Networx contracts are awarded beginning in March 2007, GSA 

will be able to forecast the number of forced transitions more accurately, 

and, if necessary, reduce the amount of funding it plans to accumulate in 

the future or free already accumulated funds for other purposes. This 

reassessment will also be an opportunity for GSA to address the other 

weaknesses in its analysis that resulted from its deviation from best 

practices. 

To improve GSA’s program management, we are making two 

recommendations. First, to ensure that future cost estimates are sound 

and can be used as a reliable basis for decisions, we recommend that the

GSA Administrator establish a policy for cost estimation efforts at GSA. 

Specifically, this policy should reflect best practices by requiring that 

estimates are: 

Recommendations 

• accurate (not overly conservative, based on an assessment of the most 

likely costs, and adjusted properly for inflation); 

• comprehensive (their level of detail ensures that all pertinent costs are 

included and no costs are double-counted); 

• well-documented (can be easily repeated or updated and can be traced to

original sources through auditing); and 

• validated (they have been cross-checked with an independent cost 

estimate and a level of uncertainty associated with the estimate has been

identified.)

Second, to ensure the most efficient use of federal funds, we recommend 

that the Administrator revise the transition cost estimate following the 

award of contracts under the Networx program. Specifically, this revision 

should reflect best practices, include a more precise transition traffic 

factor, and address the overestimation of service growth, the possible 

double-counting of a nonrecurring charge, and the effects of inflation 

Page 15 GAO-07-268 Telecommunications
during the extended delay in making awards. If the results of this new 

estimate indicate that the full $151.5 million is not needed to reasonably 

support the transition effort, GSA should reallocate any excess funds for 

other purposes allowable within the Acquisition Services Fund or return 

them to the Treasury. 

In written comments on a draft of this report, the GSA Administrator 

concurred with our recommendations and emphasized the importance of 

supporting a successful governmentwide telecommunications transition. 

To address our recommendations, she stated that GSA will issue improved 

policy guidance on cost estimating and review and adjust the cost estimate 

as additional information becomes available. 

The Administrator also commented that GSA’s transition cost estimate 

was within 2 percent of our analysis using the same assumptions. 

However, while we identified only $3 million in quantifiable errors 

(roughly 2 percent of GSA’s total estimate), our report also states that if 

the extent of transitioning services is significantly lower than GSA’s 

intentionally conservative assumption, the actual costs of the transition 

could be considerably less than GSA’s estimate. Specifically, if all 

incumbents are awarded Networx contracts and only GSA’s assumption of

a 16 percent voluntary transition occurs, the total cost of the transition 

could be reduced to approximately $40 million—over $110 million less 

than GSA’s estimate. 

In addition, the Administrator stated that GSA does not concur with the 

entirety of the draft report. She presented two main objections. First, she 

questioned whether our reported findings were balanced given the facts 

and results presented. We clarified our report to ensure that our findings 

better reflect the information we discussed. Second, she raised a concern 

that we incorrectly suggested comparability between the pending Networx 

transition and the prior transition. We maintain that the two transitions are 

comparable, particularly because GSA’s analysis is based, in part, on the 

results of the previous transition. Specifically, GSA’s analysis relied on 

experiences and lessons learned from the previous transition to establish 

costs for the current estimate. 

Appendix III provides the full text of GSA’s comments. GSA also provided 

technical comments that have been incorporated in this report, as 

appropriate.

Agency Comments 

and Our Evaluation 

Page 16 GAO-07-268 Telecommunications
As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time, we will send copies of this report to the GSA 

Administrator and interested congressional committees. We will also make 

copies available to others upon request. In addition, the report will be 

available at no charge on the GAO Web site at http://www.gao.gov. 

Should you or your offices have any questions about matters discussed in 

this report, please contact me at (202) 512-6240 or by e-mail at 

koontzl@gao.gov. Contact points for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

GAO staff who made major contributions to this report are listed in 

appendix IV.

Sincerely, 

Linda D. Koontz 

Director, Information Management Issues 

Page 17 GAO-07-268 Telecommunications
Appendix I: Objectives, Scope, and Appendix I: Objectives, Scope, and Methodology 

Methodology 

Our objectives were to determine (1) the soundness of the analysis the 

General Services Administration (GSA) used to derive the estimate of 

funding that would be required for the transition and (2) whether GSA will 

have accumulated adequate funding to pay for its transition management 

costs. 

To determine the soundness of GSA’s analysis, we conducted an intensive 

search of over 250 source documents of both government and industry 

literature for examples of best practices in the field of cost estimation. 

This included literature on cost estimation from the Society of Cost 

Estimating and Analysis, the Department of the U.S. Army, the Office of 

the Secretary of Defense, the National Aeronautics and Space 

Administration, and the Department of Energy. This indicated that high 

quality, reliable cost estimates are: 

• accurate (not overly conservative, based on an assessment of the most 

likely costs, and adjusted properly for inflation); 

• comprehensive (their level of detail ensures that all pertinent costs are 

included and no costs are double-counted); 

• well-documented (can be easily repeated or updated and can be traced to

original sources through auditing); and 

• validated (they have been cross-checked with an independent cost 

estimate and a level of uncertainty associated with the estimate has been

identified). 

To determine the extent to which GSA followed these practices, we 

analyzed documentation supporting the transition estimate, 

documentation provided by GSA on the previous transition estimate, and 

the Networx Request for Proposals. We also interviewed GSA Networx 

program managers and attended a GSA sponsored transition conference 

and meetings of the Interagency Management Council Transition Working

Group.1

To address whether GSA has accumulated adequate funding to pay for its 

transition management costs, we obtained and analyzed Cost and Capital 

Requirements Plans for the Information Technology Fund submitted to the 

 1

This included documentation available on a Transition Manager Web site established by

GSA, such as presentations, meeting minutes, and FTS2001 lessons learned.

Page 18 GAO-07-268 Telecommunications
Appendix I: Objectives, Scope, and 

Methodology 

Office of Management and Budget and legislation for GSA’s Information 

Technology, General Supply, and Acquisition Services Funds. In addition, 

to determine the extent of funding held in GSA’s related accounts, we 

analyzed financial statements for GSA’s technology and service programs. 

To verify the reliability of these records, we obtained and analyzed the 

results of the most recent GSA financial audits and audit reports from 

GSA’s Inspector General, and we interviewed GSA’s independent financial 

auditor regarding the quality control procedures in place. The independent

auditor did not specifically review the dollar amounts in the Information 

Technology or General Supply Funds for accuracy but did test the controls

in place for compliance with laws and regulations. This auditor stated that

there were no reportable findings associated with either fund, and it was 

reasonable to assume that these accounts were fairly stated. As a result, 

we determined the data were sufficiently reliable for the purposes of this 

report. We also interviewed officials from the Office of Management and 

Budget and officials from GSA’s technology and service programs, Office 

of the Chief Acquisition Officer, Office of the Chief Financial Officer, and 

Office of the Chief Information Officer. 

To assess the adequacy of the level of funding already accumulated by 

GSA, we performed an uncertainty analysis for GSA’s estimate using a 

Monte Carlo simulation.2

 A Monte Carlo simulation provides a perspective 

on the potential variability of the cost estimate should the facts, 

circumstances, or assumptions change. We chose to vary only the 

transition traffic factor because it is the main driver of the costs in GSA’s 

estimate. To carry out this simulation, we identified a minimum, 

maximum, and median value for the transition traffic factor based on 

information received from GSA. 

We conducted our work between May 2006 and January 2007 in 

accordance with generally accepted government auditing standards. 

 2

A Monte Carlo simulation allows the model’s parameters to vary according to their 

associated probability distribution. The result is a set of estimated probabilities of 

achieving alternative outcomes, given the uncertainty in the underlying parameters.

Page 19 GAO-07-268 Telecommunications
Appendix II: Uncertainty 

Analysis for GSA’s Transition Appendix II: Uncertainty Analysis for GSA Estimate 

’s 

Transition Estimate 

An uncertainty analysis provides decision makers with a perspective on 

the potential variability of the estimate should the facts, circumstances, 

and assumptions change. By examining the effects of varying the estimates 

elements, a degree of uncertainty about the estimate can be expressed, 

possibly as an estimated range or qualified by some factor of confidence. 

For example, an estimate that produces a 100 percent confidence level 

indicates that, based on the methodology used to create that estimate, 

there is almost no chance that costs will exceed the estimate.

We performed our uncertainty analysis on GSA’s estimate using a Monte 

Carlo simulation.1

 We chose to vary only the transition traffic factor 

because it is the main driver of the costs in GSA’s estimate. To carry out 

this analysis, we identified a minimum, maximum, and median value for 

the transition traffic factor, based on information received from GSA. 

The transition traffic factor represents the possible percentage of services

under FTS2001 that may transition to a different provider under the 

Networx contracts. For this factor, we chose a minimum of 3 percent,

which represents the voluntary shift to a different vendor that occurred 

during GSA’s previous transition to FTS2001. For the maximum, we used 

76 percent, as this value was chosen by GSA officials as a worst-case 

scenario in an effort to mitigate the risks of underestimating costs. The 

median of these two numbers is 39.5 percent. Table 3 shows the variations 

of each factor used in our uncertainty analysis. 

Table 3: Risk Adjusted Factors 

GSA estimate Minimum Median Maximum

Transition traffic factor 76% 3% 39.5% 76%

Source: GAO analysis of GSA data. 

 1

See appendix I, footnote 2, for a description of Monte Carlo simulation. 

Page 20 GAO-07-268 Telecommunications
Appendix III: Comments from the GSA Administrator Appendix III: Comments from the GSA 

Administrator 

Page 21 GAO-07-268 Telecommunications
Appendix III: Comments from the GSA Administrator 

Page 22 GAO-07-268 Telecommunications
Appendix IV: 

A

GAO Contact and Staff 

cknowledgments 

Page 23 GAO-07-268 

Appendix IV: GAO Contact and Staff 

Acknowledgments 

Linda D. Koontz (202) 512-6240 or koontzl@gao.gov

In addition to the contact named above, James R. Sweetman, Jr., Assistant 

Director; Jamey A. Collins; Neil J. Doherty; Jennifer K. Echard; Wilfred B. 

Holloway; Ethan J. Iczkovitz; Frank Maguire; Karen A. Richey; Glenn D. 

Slocum; and Amos A. Tevelow made key contributions to this report. 

Telecommunications

GAO Contact 

Staff 

Acknowledgments 

(310761) 
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