GAO

United States General Accounting Office

Report to the Chairman, Subcommittee

on Military Readiness, Committee on

Armed Services, House of

Representatives

August 2000 DOD COMPETITIVE

SOURCING

Savings Are Occurring,

but Actions Are

Needed to Improve

Accuracy of Savings

Estimates

GAO/NSIAD-00-107

Page 1 GAO/NSIAD-00-107 DOD Competitive Sourcing

Contents

Letter 3

Appendixes Appendix I: Summary Information for Nine A-76 Case Studies 20

Appendix II: Objectives, Scope, and Methodology 38

Appendix III: A-76 Study Process 40

Appendix IV: Comments From the Department of Defense 44

Appendix V: GAO Contacts and Staff Acknowledgments 46

Related GAO Products 47

Tables Table 1: Competition Outcomes and Our Assessment of Whether

Savings Were Achieved in Nine Case Studies 8

Table 2: A-76 Cost Comparison Studies Reviewed 38

Figures Figure 1: Overview of the A-76 Process 41

Abbreviations

DOD Department of Defense

OMB Office of Management and Budget

OSD Office of the Secretary of Defense
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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-285302 Letr

August 8, 2000

The Honorable Herbert H. Bateman

Chairman, Subcommittee on Military Readiness

Committee on Armed Services

House of Representatives

Dear Mr. Chairman:

Since late 1995, the Department of Defense (DOD) has encouraged the

services and the Defense agencies to conduct cost comparison studies as

provided for in the Office of Management and Budget’s Circular A-76.

Under the A-76 process, otherwise known as competitive sourcing, Defense

components study commercial activities being performed by government

personnel to determine whether it would be more cost-effective to

maintain the activities in-house or to contract with the private sector for

their performance. Between fiscal year 1997 and 2005, DOD plans to study

activities involving about 203,000 positions under competitive sourcing;

studies of activities involving about 9,000 positions had been completed as

of September 30, 1999.1

1

This figure does not include approximately 2,500 positions directly converted to or from

contractor performance without a cost comparison study.
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By studying activities involving about 203,000 positions, DOD expects to

achieve about $9.2 billion in savings during the fiscal year 1997-2005 period

and $2.8 billion in annual recurring savings after fiscal year 2005, which it

plans to use to fund other priority needs such as modernization.2 We have

reported that costs for completing A-76 studies and implementing the

results can reduce savings expected in the short term. After the study and

implementation are completed, changes to operating requirements can

occur that can affect the extent to which savings are realized and, in some

cases, make tracking cost and savings estimates increasingly less practical

over time. We have also questioned the reliability of historical data DOD

uses to record costs and savings,3 however, the data are currently being

used to reduce budgets in anticipation of expected savings from current

A-76 studies.

On the basis of your request, we (1) assessed the extent to which actual

savings have been achieved or can be expected as a result of competitions

and (2) identified DOD’s efforts to improve processes for identifying and

tracking changes to cost and savings estimates. We judgmentally selected

nine A-76 studies that had been completed by the Army, the Navy, the Air

Force, and the Defense agencies between October 1995 and March 1998 for

a thorough analysis of projected savings. We judgmentally selected these

studies to provide a mix of A-76 studies won by the public and private

sectors as well as studies completed across the various Defense

components. While our sample is insufficient to identify trends, it gives

some indication of the challenges DOD faces in accurately determining

savings realized from its A-76 studies. Appendix I provides summary

information on each case study. Appendix II provides additional

information regarding our scope and methodology.

Results in Brief Available data indicated that DOD realized savings from seven of the nine

A-76 cases we reviewed, although less than the $290 million savings the

Defense components initially projected. Neither we nor DOD could

precisely quantify the extent of savings from these nine cases. Savings

2

Activities involving an additional 42,000 positions are expected to be reviewed under a

business process reengineering initiative, referred to as strategic sourcing, which is

expected to help DOD achieve a total of $11.7 billion in savings for these combined efforts

by 2005 and increase the amount of recurring savings to $3.5 billion annually thereafter.

3

DOD Competitive Sourcing: Results of Recent Competitions (GAO/NSIAD-99-44, Feb. 23,

1999). Also, a list of related products is included at the end of this report.
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estimates were imprecise for a number of reasons. Baseline cost estimates

from which savings were estimated were usually calculated using an

average cost of salary and benefits for the number of authorized positions

rather than using actual costs for the positions actually filled, which would

have been more precise. While most baseline cost estimates were based

largely on personnel costs, up to 15 percent of the costs associated with the

government’s most efficient organizations’ plans or the contractors’ offers

were not personnel costs. Because these types of costs were not included

in the baseline, a comparison of the baseline to the government’s most

efficient organization or contractor costs may have resulted in understating

the cost savings. On the other hand, savings estimates did not reflect the

study and implementation costs, which offset savings in the short term.

Data limitations made it impractical to identify precise amounts of savings.

DOD has begun efforts to revise its information management systems to

better track the estimated and actual costs of activities studied, though not

to revise previous savings estimates. DOD is also emphasizing development

of standardized baseline cost data for use in determining initial savings

estimates. As a practical matter, however, many of the cost elements that

are used in A-76 studies will continue to be estimated because DOD lacks a

cost accounting system to provide actual costs. Further, reported savings

from A-76 studies will continue to have some element of uncertainty and

imprecision and will be difficult to track in the out years because workload

requirements change, affecting program costs and the baseline from which

savings are calculated. Given that the Department is reducing its operating

budgets based on projected savings from A-76 studies, it is important that it

have as much information as possible on savings being realized, including

adjustments for up-front investment costs and other changes that may

occur over time.

We made recommendations to the Secretary of Defense to use data

obtained in tracking the implementation of A-76 study results to modify

initial savings estimates and to study the potential to use a costing

methodology to provide a better calculation of the baseline and other costs

used to estimate savings. The Department generally agreed with the report

and the recommendations.

Background In 1966, the Office of Management and Budget (OMB) issued Circular A-76,

which established policy for acquiring commercial activities. In 1979, OMB

issued a supplemental handbook to the circular that included procedures

for A-76 cost comparison studies to determine whether commercial
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activities should be performed by the government, by another federal

agency, or by the private sector. DOD currently refers to this program of

A-76 cost comparison studies as competitive sourcing.

In conducting an A-76 cost study, an agency develops a performance work

statement to identify the work to be done, prepares a government in-house

cost estimate based on the “most efficient organization” that can

accomplish the work, and compares this estimate with the lowest cost or

best value offer selected from the private sector. The most efficient

organization generally refers to a more streamlined, smaller version of the

government organization than is currently doing the work. The government

activity will be converted to performance by the private sector if the

successful private sector offer is either lower by an amount equal to

10 percent of direct personnel costs of the most efficient organization or is

$10 million less over the length of the specified performance period than

the in-house estimate. A more detailed description of the A-76 study

process is contained in appendix III.

DOD records the results of its A-76 competitions in the Commercial

Activities Management Information System. Each service and Defense

agency maintains its own version of this management information system,

but DOD requires each system to contain certain data elements for

individual A-76 cost comparison studies, including numbers and length of

individual studies, numbers of in-house military and civilian positions to be

affected, comparisons of in-house and contractor-estimated costs, contract

award dates, and changes in costs for 3 years after a contract award. We

have previously reported some concerns about the accuracy and

completeness of data contained in components’ Commercial Activities

Management Information Systems.4 Continuing concerns about the extent

to which DOD was realizing savings from its A-76 studies prompted

Congress, in the National Defense Authorization Act for Fiscal Year 1998,5

to require DOD to track cost information on the performance of

commercial activities for up to 5 years during the term of a contract or an

extension following implementation of the A-76 study results.

4

DOD Competitive Sourcing (GAO/NSIAD-99-44, Feb. 23, 1999).

5

Section 385, P.L. 105-85, amending 10 U.S.C. 2463.
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Significant Savings Are

Occurring, but

Estimates Are Not

Precise

DOD’s savings from the nine A-76 studies we reviewed appeared

significant, although available data indicated that savings were less than

the $290 million DOD initially projected. We found that savings occurred,

regardless of whether governmental organizations or private contractors

won the competitions. However, limitations in the way DOD components

calculated savings made the original savings estimates imprecise. Further,

costs for completing A-76 studies and implementing the results were not

fully recognized in savings estimates, which logically would reduce

estimated savings in the short run. After the study and implementation are

completed, changes to operating requirements can occur that, in some

cases, can affect the extent to which savings are realized and, in other

cases, make tracking cost and savings estimates increasingly less practical

over time.

Savings Resulting From

A-76 Competitions

Available data indicated that DOD realized savings as a result of A-76 cost

studies in at least seven of the nine cases, whether the in-house or private

sector organization prevailed in the cost studies. Of the remaining two

cases, data were insufficient for us to conclude whether savings were

realized in one instance, and savings for the other one appeared to be

negated by performance problems and contract termination after

20 months. Each of the cases examined presented circumstances that

complicated our review of savings likely to be realized from these studies.

In some cases, as discussed more fully in subsequent sections, we had to

make assumptions concerning how closely estimated baseline costs

approximated the actual costs. In other cases, we had to use the cost

difference between the contractor’s offer and the in-house most efficient

organization’s cost estimate as a starting point for estimated savings and

later adjusted the savings to account for study and implementation costs

and other factors. More complete observations on savings are included at

the end of each case study in appendix I. Table 1 identifies the winner of

the competitions and our assessment of the likelihood that savings

occurred in each case.
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Table 1: Competition Outcomes and Our Assessment of Whether Savings Were Achieved in Nine Case Studies

Note: Although the private sector won two-thirds of the A-76 studies we analyzed, recent data

indicated that the split between the public and private sectors was about even.

Source: Our analysis of DOD data.

Case study

Winner of the

competition

Savings likely,

although less than

original estimate

Savings

uncertain Savings unlikely

1. Missile maintenance activity, Redstone Arsenal,

Alabama

In-house

X

2. Storage and warehouse activity, Fort Riley, Kansas Private sector X

3. Child care center—Naval Medical Center, San Diego,

California

Private sector

X

4. Navy regional family services activity, San Diego,

California

Private sector

X

5. Aircraft maintenance, Altus Air Force Base,

Oklahoma

In-house

X

6. Base operating support, Laughlin Air Force Base,

Texas

Private sector

X

7. Air Force regional engine repair, Laughlin Air Force

Base, Texas

Private sector

X

8. Base operating support, Wright-Patterson Air Force

Base, Ohio

Private sector

X

9. Defense Finance and Accounting Service vendor

payments, Columbus, Ohio

In-house

X
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For the three cases where the government’s most efficient organization

prevailed, savings were achieved because fewer persons were required to

perform the work than before the studies were conducted. The clearest

example of this was the Altus Air Force Base study involving aircraft

maintenance. In initiating the study, the Air Force planned to convert its

largely military workforce to civilian personnel, either government

employees or employees of the private sector contractor, depending on the

results of the A-76 study. Either way, civilian workers were expected to be

less costly. We have previously reported that historical data suggest the

potential for significant savings from such conversions because, on

average, individual civilian positions are less costly than military positions.6

At Altus, the organization in place before the study had 1,444 authorized

positions, 1,401 of which were military.7 After the study, the government’s

most efficient organization, which won, had 735 positions—all civilian.

While this case suggests significant reductions in program costs and

provides opportunities to reassign military personnel to other positions,

the amount of budgetary savings likely in the future is unclear because the

Air Force has recently indicated it does not expect to reduce military end

strengths as a result of future A-76 cost studies. In the remaining two cases

in which the government’s most efficient organization prevailed, personnel

reductions resulted in savings, however, other factors made determining

the savings associated with these cases difficult.

In four of the six cases where contractors prevailed, savings were apparent

and continued even after some contract modifications were made. In the

other two cases, savings were not clear-cut.

6

See Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing

(GAO/NSIAD-97-86, Mar. 11 1997), DOD Force Mix Issues: Converting Some Support Officer

Positions to Civilian Status Could Save Money (GAO/NSIAD-97-15, Oct. 23, 1996), and DOD

Force Mix Issues: Greater Reliance on Civilians in Support Roles Could Provide Significant

Benefits (GAO/NSIAD-95-5, Oct. 19, 1994).

7

As discussed later, in many of the case studies examined in this report, including Altus, the

actual number of persons on board at the time of the cost comparison studies was often less

than authorized, which inflated the projected level of savings.
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Approaches Used to

Calculate Savings Limited

Precision of Estimates

Defense components used a variety of approaches in calculating savings

estimates that limited the precision of their estimates. This occurred in part

because, at the time the nine studies began, there was no official DOD

guidance on calculating estimated costs of current operations for

comparison with projected future costs, as a way of estimating savings.8

However, a calculation of estimated costs associated with the original

in-house activity is important in determining the extent of budgetary

savings resulting from the cost studies. Therefore, we sought to determine

whether and how DOD components established baseline cost estimates as

a basis for estimating savings from the cost comparison studies. For seven

of the nine cases we reviewed, the Defense components estimated savings

by subtracting the cost of the winning contractor’s offer or most efficient

organization’s cost estimate from an estimated original cost of operations,

which was largely derived from personnel costs. The approaches used in

two of the seven cases also overstated the savings estimates because

savings from other actions not related to the A-76 cost study were included.

For example, in the Redstone Arsenal case study, Army officials

incorporated in their A-76 savings estimated cost reductions resulting from

workload reductions that were unrelated to the A-76 study. Also, the

remaining two cases used different estimating methods.

In the seven cases where components used personnel reductions as a

baseline for estimating savings, several factors limited the precision of the

estimates. First, baseline costs were calculated using average salary and

benefit costs, which could be greater or less than actual costs. Second,

salary and benefit costs were computed on the number of authorized

positions versus the number of positions actually filled at the time of the

A-76 studies. Since the actual personnel levels were less than authorized in

four cases, savings estimates based on a comparison with a baseline

developed with authorized positions were overstated. (Actual personnel

levels were more than authorized in two cases and, in one case, the number

authorized and actual was not available.) Third, while most savings

estimates were based largely on personnel costs, up to 15 percent of the

costs associated with individual most efficient organization plans or

contractor offers were not personnel-related in some cases. Because no

amounts were included in the baseline cost original activity estimate for

8

OMB Circular A-76, as revised, does not require organizations to calculate the cost of

performing the original in-house activity to complete an A-76 study. The circular requires

calculating the estimated cost for the government’s proposed most efficient organization to

fulfill requirements of the new performance work statement.
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nonpersonnel-related costs, the calculated savings could be

underestimated by the amount of those costs.

Finally, initial savings estimates for two of these seven cases were inflated

by savings from other actions unrelated to determining whether the activity

should be performed by the in-house organization or by a contractor. In the

first instance, which involved the missile maintenance activity at Redstone

Arsenal, changes were occurring concurrent with, but independent of, the

study that would reduce the workload by 40 percent as well as decrease

personnel requirements. Army officials included personnel reductions from

both actions in their savings estimates from the study and, at the time of

our review, they could not readily separate or estimate reductions related

solely to the A-76 study. In the other instance, which involved the Defense

Finance and Accounting Service’s vendor payment activity at Columbus,

Ohio, reengineering savings as a result of consolidating sites were captured

as part of the A-76 study. However, according to a Defense Finance and

Accounting Service official, the consolidation would likely have taken

place regardless of whether an A-76 study was accomplished. Therefore, as

with the Redstone case, officials combined personnel reductions and

savings from these actions with those resulting from the A-76 study.

The remaining two cases at Fort Riley and San Diego used different

approaches to calculate savings. At Fort Riley, the Army subtracted the

costs associated with the winning contractor’s offer from the costs

associated with the in-house most efficient organization. On the surface,

this approach would suggest savings were understated, since the most

efficient organization would generally be expected to be more

cost-effective than the existing organization. However, as noted earlier,

performance problems resulted in the contract being terminated 20 months

after award. In the second case, which involved the San Diego child care

center, the Navy calculated savings on a per child basis by comparing the

contractor’s cost per child with the in-house cost per child. However, the

extent of actual savings over previous operations was made uncertain by

the fact that the winner of the cost study would be operating in a new

facility that was expected to be more efficient than the previous operation.

Also, the number of children actually served in the new facility was much

greater than the number used to project savings. Long-term savings from

this A-76 study became even more difficult to assess since, at the end of the

3-year contract period in September 1999, the activity was combined with

other child care activities in the region and studied under a regional A-76

study. As a result of that A-76 study, the regionalized activity was returned

in-house.
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Unrecognized Costs Reduce

Amount of Estimated

Savings

Available data suggested that savings estimates were overstated because

they did not include (1) all costs of conducting and implementing the

results of the studies and (2) contract administration costs where

applicable. In addition, some changes to the scope of work after A-76 study

results were implemented which also reduced savings. Other changes that

occur over time, unrelated to the original A-76 studies, can increasingly

make it impractical to compare current costs of operation with those at the

time of the A-76 studies.

Investment Costs Not Fully

Considered in Developing Cost

Estimates

The nine A-76 case studies we examined, like all such studies, incurred

up-front investment costs that must be offset before net savings begin to

accrue. They include costs of conducting the studies, personnel transition

costs, and contract administration, as applicable. Costs for the first two are

generally short term in nature, whereas, contract administration costs

extend over the life of a contract, typically up to 5 years. However,

components overstated savings estimates by not recognizing these costs in

estimating their savings.

Based on officials’ estimates of the costs to conduct the nine A-76 studies,

we projected the cost per position studied ranged from an estimated

$364 for the Navy child care center, San Diego, California to an estimated

almost $9,000 for the Navy regional family services center, San Diego,

California. In eight of the nine studies we reviewed, in-house personnel

conducted the A-76 studies and the study costs represented installation

officials’ estimates of the salaries of in-house staff. The Defense Finance

and Accounting Service vendor payment study was conducted with both

in-house personnel and contractor support.9

Personnel costs associated with transition to either the government’s most

efficient organization or contractor performance of an activity were also

not included in savings estimates. Agencies may incur personnel separation

costs when reductions in force are required to implement the cost study

results. These costs can include those associated with voluntary separation

incentives or severance pay associated with involuntary reductions in

force, and can sometimes be reduced by placing affected employees in

vacant government positions. For the nine cases examined, personnel

reduction cost estimates ranged from none at the Redstone Arsenal, where

9

Available data indicated that all agencies are now using contractor personnel to help

facilitate the completion of the studies.
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personnel were placed in other comparable jobs, to a high of $3 million at

Wright-Patterson Air Force Base, where about 500 employees were

affected by the decision to contract for the base operating support

function. Further, for example, at the Altus Air Force Base aircraft

maintenance activity, the Laughlin Air Force Base operating support

activity, and the Wright-Patterson Air Force Base operating support activity,

reduction-in-force procedures were used and affected personnel moved to

lower graded positions. These employees retained the pay of their previous

pay grades (known as “save pay”). Each of these costs served to reduce the

savings expected in the short term and some, such as the save pay, had the

potential to carry over into succeeding years.

When cost studies resulted in work being contracted with the private

sector, the affected agencies also incurred costs to administer and oversee

individual A-76 contracts. For the cases reviewed, the cost estimates

ranged from an average of about $12,000 per year for the San Diego child

care contract to over $635,000 per year for the Wright-Patterson Air Force

Base operating support contract in fiscal year 1999. These costs were not

factored into the cost savings estimates.

Changes in Work Scope After the

A-76 Competition Is

Implemented Can Affect Savings

Scope of work changes after A-76 study results have been implemented can

reduce the extent to which the original estimates of savings are realized

over the long term. In some cases, changes may include work that was

incorrectly or inadvertently omitted from the statement of work used for

the A-76 study. This type of change, which may increase operating costs, is

logical to consider as reducing original savings estimates. In other cases,

changes to work requirements, such as required by additional missions,

could not have been anticipated at the time of the study and would have

arisen regardless of who won the A-76 study. These changes may increase

current operating costs but are unrelated to any calculation of savings. As

the latter type occurs over time, it renders meaningless any attempt to

compare costs of operation with those that existed before the A-76 study.

Among the six cases where work was awarded to contractors, two

contracts had modifications to correct work statement omissions that,

according to government officials, should have been included in the

original statement of work. One modification to the Wright-Patterson Air

Force Base statement added about $92,000, or less than 1 percent, to the

total contract and the other to the Fort Riley statement added $187,000, or

6 percent. Changes in the scope of work or mission after the studies were

completed increased the work statement for one most efficient

organization at Altus Air Force Base by $3.4 million, or 2 percent, and one
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for the base operating support contractor at Laughlin Air Force Base by

$830,000, or 3 percent. In three other cases, contracts were subsequently

modified to reflect increases in Department of Labor wage rates—$116,000,

$334,000, and $440,000, or about 1 percent of the total cost of each

contract.

Savings, However

Imprecise, Remained

Following Adjustments for

Unrecognized Costs

Once weaknesses in the components’ savings estimates were taken into

account and adjustments were made for unrecognized costs, available data

indicated that savings remained in most instances. At the same time, each

of the cases examined presented unique circumstances that complicated

our review of savings likely to be realized from these studies. Neither we

nor DOD could precisely quantify the extent of savings from these nine

cases.

In some instances, we had to make assumptions concerning how closely

estimated baseline costs approximated the actual costs. In other instances,

we had to use the difference between a contractor’s offer and an in-house

most efficient organization cost estimate as a starting point for estimated

savings and make subsequent adjustments to account for study and

implementation costs and other factors. However, to the extent we could

account for these cost factors, it appeared that savings, however imprecise,

were realized in seven of the cases (as shown in table 1).

Improvements Still

Required in DOD’s

Efforts to Track Costs

and Savings From

Competitive Sourcing

DOD officials are in the process of improving the Commercial Activities

Management Information Systems to address previously identified

weaknesses, as well as developing mechanisms intended to better track

costs in response to legislative requirements.10 However, DOD does not

have plans for updating projected savings data initially recorded in

components’ Commercial Activities Management Information Systems.

Having precise savings estimates is important because of the Department’s

efforts to reduce operating budgets in anticipation of savings.

1010 U.S.C. 2463.
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Improved Guidance to

Standardize Cost

Comparison Data

The Office of the Secretary of Defense (OSD) is working to update its

overall commercial activities program guidance dated September 1985.

Department officials told us that they expect to issue the guidance later this

year. DOD issued procedural guidance in September 1999 to standardize

the database used for capturing the results of A-76 cost comparison

studies. The guidance emphasized that the original cost of an activity

should be determined by the estimated total cost (expressed in work years)

before the development of the government’s most efficient organization.

Guidance issued on April 3, 2000, expanded the guidelines to state that

estimates of annual work years should be determined by the number of

actual civilian work years required to perform the work being studied

during the 12 months prior to the cost comparison study. According to an

OSD official, savings estimates will be based on the difference between this

baseline estimate of personnel costs and the costs associated with either

the winning contractor’s offer or the government’s most efficient

organization cost estimate over the life of the contract or specified term.

Improvements in Tracking

Costs Planned

An official responsible for the DOD’s A-76 program told us that they expect

to issue additional guidance that focuses on tracking operating costs after

A-76 cost studies are completed and the results are implemented. They

project that mechanisms for tracking this cost information will be in place

by July 2000. The official also told us that under the new guidance, when

changes cause costs to change, the reason for the changes will be reflected

in the components’ Commercial Activities Management Information

Systems. The involved installation will maintain supporting documentation

for the changes. However, even when a change affects the initial savings

estimate, the Department currently does not plan to adjust the estimates

recorded in its Commercial Activities Management Information System.

However, absent adjusting the savings estimates in this system or

elsewhere, the Department lacks an effective basis for systematically

assessing the extent to which projected savings are being realized. Since

the Department is reducing future operating budgets in anticipation of

savings, we believe having more accurate savings estimates to review

during the annual budget process would be useful in reassessing whether

or not the initial savings projections were accurate.
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Despite the planned information system improvements, many of the

database cost elements will continue to be estimated because, as we have

previously reported, DOD lacks reliable financial and cost data to establish

actual baseline costs and determine the effectiveness of its reforms.11 In

1995, the Federal Accounting Standards Advisory Board12 developed a set

of managerial cost accounting standards that require federal agencies to

provide reliable and timely information on the full cost of federal programs,

their activities, and outputs, and to report costs continuously, routinely, and

consistently.13 The standards did not require the use of a particular type of

costing system or methodology. While acknowledging that several costing

methodologies have been successful in the private sector and in some

government entities, federal entities were encouraged to evaluate the

potential of activity-based costing as an effective managerial tool.

Activity-based costing focuses on the activities of a production cycle and

uses cost drivers (such as length of time an activity is performed) to assign

costs through activities to outputs. In 1999, we reported that Defense

components had begun to develop some activity-based costing models,

primarily to promote better business practices.14 We found little effort,

however, had been devoted to building costing models for the purpose of

providing a more accurate indication of baseline costs, which should

provide better savings estimates for A-76 cost studies. Further, no other

costing methodology is being promoted for use in A-76 studies, an OSD

official said.

11DOD has been attempting to improve its financial data for many years and in October 1998

issued to Congress a Biennial Financial Management Improvement Plan. The plan provided

a first-ever vision of DOD’s future financial management environment and identified an

array of improvement initiatives. See Financial Management: Analysis of DOD’s First

Biennial Financial Management Improvement Plan (GAO/AIMD-99-44, Jan. 29, 1999) for our

assessment of the plan. Also see Department of Defense: Progress in Financial Management

Reform (GAO/T-AIMD/NSIAD-00-163, May 9, 2000).

12The Federal Accounting Standards Advisory Board was created in October 1990 by the

Secretary of the Treasury, the Director of OMB, and the Comptroller General to consider

and recommend accounting principles for the federal government.

13Statement of Federal Financial Accounting Standards No. 4, Managerial Cost Accounting

Standards (July 31, 1995).

14DOD Competitive Sourcing: Lessons Learned System Could Enhance A-76 Study Process

(GAO/NSIAD-99-152, July 21,1999).
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Conclusions Most of the A-76 cases we examined showed that DOD attained savings

although weaknesses in baseline cost data and the omission of

implementation costs meant the savings were not as great as initially

projected. Data limitations, such as imprecise baseline costs, and

mitigating factors that affected individual cases made it impractical for us

to attempt to determine revised savings estimates that would be considered

precise. The Department likewise will be unable to develop more reliable

estimates of savings from its A-76 studies until it improves its initial cost

estimates and includes study and implementation costs, and other factors

that may reduce expected savings over time. Until DOD implements a

financial management system capable of producing accurate and reliable

cost data, the use of a costing methodology, such as activity-based costing,

as an interim measure may help to provide more accurate baseline and

other costs and provide better savings estimates for A-76 studies. Improved

estimates are important because of the Department’s practice of reducing

operating budgets that are based on expected savings. The guidance

recently provided or planned, if fully implemented, can be an important

step in the right direction toward addressing this problem. However, we

believe additional actions are needed to ensure that changes in costs and

savings are tracked on an ongoing basis and that efforts are made to

systematically track changes in savings estimates and to use the data to

periodically reassess planned reductions in operating budgets based on

projected savings.

Recommendations To improve the precision of savings estimates resulting from A-76 studies,

we recommend that the Secretary of Defense (1) develop an appropriate

mechanism for assessing changes in A-76 savings in a systematic manner

and require components to use data obtained in tracking the

implementation of A-76 study results to update initial savings and projected

savings estimates during the annual budget process and (2) study the

potential to use a costing methodology as an interim measure to provide a

better estimation of baseline and other costs used to estimate savings from

A-76 studies.

Agency Comments and

Our Evaluation

The Deputy Under Secretary of Defense (Installations) provided written

comments on a draft of this report. The Department generally agreed with

the report and its recommendations. The Department also provided some

technical comments, which were incorporated in the report as appropriate.

The Department’s comments are included in appendix IV.
B-285302

Page 18 GAO/NSIAD-00-107 DOD Competitive Sourcing

The Department agreed with our recommendation in our draft report that

Defense components use data obtained in tracking the implementation of

A-76 study results to modify initial savings estimates in their Commercial

Activities Management Information Systems, although it emphasized that

these information systems capture actual costs, not savings. It plans,

however, to improve savings estimates based on the actual data captured in

these systems for use during the budget process. While the Department’s

response in our discussions with Defense officials suggested that these

systems may not provide the optimum mechanism to track changes in

savings, we believe it is important to have some mechanism to capture

savings on an ongoing basis. Scope of work changes, necessitated due to

omissions, after A-76 study results have been implemented can reduce the

extent to which original estimates of savings are realized over the long

term. We modified our recommendation to emphasize the importance of

generating reliable savings data to use in the budget decision process.

The Department also agreed with our recommendation to study the

potential to use a costing methodology as an interim measure to provide

better baseline and other cost data to estimate savings from A-76 studies.

According to the Department, the services have efforts underway to

develop activity-based cost accounting systems it believes will improve

management oversight.

We are sending copies of this report to Representative Solomon Ortiz,

Ranking Minority Member, Subcommittee on Military Readiness, House

Committee on Armed Services; and Senator James M. Inhofe, Chairman,

and Senator Charles Robb, Ranking Minority Member, Subcommittee on

Readiness and Management Support, Senate Committee on Armed

Services. We are also sending copies of this report to the Honorable William

S. Cohen, Secretary of Defense; the Honorable Louis Caldera, Secretary of

the Army; the Honorable Richard Danzig, Secretary of the Navy; the

Honorable F.W. Peters, Secretary of the Air Force; General James L. Jones,

Commandant of the Marine Corps; and the Honorable Jacob J. Lew,
B-285302

Page 19 GAO/NSIAD-00-107 DOD Competitive Sourcing

Director, Office of Management and Budget. Copies will be made available

to others upon request. GAO contacts and other key contributors are listed

in appendix V.

Sincerely yours,

David R. Warren, Director

Defense Management Issues
Page 20 GAO/NSIAD-00-107 DOD Competitive Sourcing

Appendix I

Summary Information for Nine A-76 Case Apendxies

Studies ApendxiI

The following provides key information surrounding the nine A-76 case

studies included in this report. In general, the results of the A-76 studies

indicated there are savings. In all but one of the nine cases, the winner of

the competition was determined by selecting the lowest cost option

between the selected private sector offer and the government’s most

efficient organization. In the one case, the higher cost government’s most

efficient organization won the competition because the private sector’s

offer was not either lower by an amount equal to 10 percent of direct

personnel costs of the most efficient organization or at least $10 million

less over the length of the performance period than the in-house estimate.

In all cases, the most efficient organization contained fewer personnel than

the previous in-house organization. This would suggest that regardless of

the winner, cost studies resulted in a more streamlined, cost-efficient

operation and savings may be assumed. However, in one case, while the

lowest cost option was selected, serious performance problems ensued,

and the contract was terminated.

In an effort to make a more precise determination of savings, we focused

on determining whether and how baseline costs were established as a basis

for projecting savings in the Department of of Defense (DOD) components’

Commercial Activities Management Information Systems. When baseline

data were not established, we focused on the differences between costs

projected for in-house most efficient organizations and contractor

proposals. We also examined what costs were associated with conducting

the studies and implementing the results, what changes that may have

occurred following implementation of the results that could affect costs

and savings, and collectively what these data indicated about the level of

projected savings. In selected instances, we identified unanticipated

factors that adversely affected the ability to determine savings.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 21 GAO/NSIAD-00-107 DOD Competitive Sourcing

Missile Maintenance

Activity—Redstone

Arsenal, Alabama

Overview: The Army performs maintenance operations on various missile

systems and related equipment at its Redstone Arsenal. In fiscal year 1998,

after an A-76 cost study in which the in-house organization prevailed, the

Army converted its missile maintenance activity to the government most

efficient organization. According to the Army’s Commercial Activities

Management Information System, estimated savings were $2 million per

year, representing a 65-percent savings over the original cost of operations,

for a total of about $6 million over a 3-year period.1 Of the costs identified

in the government’s most efficient organization estimate, about 89 percent

were personnel-related and an Army installation official stated that about

90 percent of the costs identified in the competing contractor’s offer were

personnel-related.

Basis for Initial Savings Projection: In completing this A-76 study, Army

officials did not calculate a baseline cost for their existing maintenance

activity. Army officials predicated their savings on the elimination of all 13

military positions and 21 of the 39 civilian positions actually performing

this activity—a 65-percent reduction in the 52 authorized positions. Savings

were calculated using an average cost per position. However, as noted

later, some unspecified portion of the reduction was tied to workload

reductions unrelated to the A-76 study.

Study and Implementation Costs: Redstone Arsenal officials estimated

that they incurred in-house staff costs of almost $63,000 in fiscal year 1998

to conduct the A-76 study. No contractor support was used to conduct the

study. Officials identified no civilian transition assistance costs because all

affected personnel were placed in other positions at the arsenal.

Changes in Work Requirements Following Implementation of Study

Results: We identified no significant changes to work requirements after

completion of the cost study that might have affected the level of savings

initially projected.

1

This figure differs from the $100,000 in estimated multiyear savings we reported in an

earlier report. An Army headquarters official said the estimates differ because installation

officials originally calculated savings based on an average salary of $50,000 per position.

Army headquarters revised the estimated savings figure in its management information

system to reflect fringe benefits in the average salary used in the most efficient organization

estimate. The later reflects a more accurate estimate, the official said.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 22 GAO/NSIAD-00-107 DOD Competitive Sourcing

Other Mitigating Factors: At about the same time that Redstone Arsenal

officials were studying their missile maintenance activity, the Army was

removing missile systems from its inventory so the systems no longer

needed maintenance support. This change was expected to reduce the

activity’s workload hours by about 40 percent. Accordingly, a reduction in

personnel was planned before the A-76 study began and reductions began

during the study.

The revised workload provided the basis for developing the government’s

most efficient organization estimate and contractor proposals and ensured

a common basis for comparison. However, in calculating the savings

resulting from the A-76 study, Army officials included personnel reductions

associated with both the workload reduction and the study because DOD

did not require that calculations be adjusted to reflect A-76 savings only.

Officials said they could not separate out or estimate reductions related

solely to the A-76 study.

Although the government’s most efficient organization estimate of almost

$3.2 million exceeded the contractor’s nearly $3 million offer, the most

efficient organization was selected because, as provided in Office of

Management and Budget (OMB) Circular A-76 guidelines, the contractor’s

offer was not lower by an amount equal to 10 percent of the direct

personnel costs of the most efficient organization or at least $10 million

less over the length of the performance period than the in-house estimate.

Summary Observations Regarding A-76 Savings: Available data

indicated savings were achieved, but the precise amount could not be

determined since baseline operating costs were not established and many

of the personnel reductions were not related to the A-76 study. Redstone

Arsenal officials said their accounting systems did not provide the level of

detail necessary to determine activity costs, including the cost to maintain

various missile systems before or after conversion to the most efficient

organization. Therefore, we could not determine actual costs, and we had

to use an estimated cost to adjust the government’s projected net savings to

reflect the effect of up-front A-76 study costs. However, assuming an

approximate correlation between the percentage change in workload

(missiles to be maintained) of 40 percent and the 65 percent in personnel

reductions, a majority of the projected savings could have resulted from

the study. Thus, study and implementation costs of about $63,000 appeared

to play a limited role in reducing the remaining projected savings.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 23 GAO/NSIAD-00-107 DOD Competitive Sourcing

Army Storage and

Warehousing

Activity—Fort Riley,

Kansas

Overview: In fiscal year 1996, after completing an A-76 study, Fort Riley

awarded a firm fixed price contract for its storage and warehousing

activity. The Army’s commercial activities database showed $1.2 million in

annual savings were estimated, representing a 66-percent savings over the

most efficient organization estimate, for a total of almost $6 million over a

5-year period.2 The contract was terminated after 20 months because of

performance problems. Costs identified in the government’s most efficient

organization were 98 percent personnel-related and, according to a Fort

Riley official, costs identified in the contractor’s offer were 98 to

100 percent personnel-related.

Basis for Initial Savings Projection: Army officials estimated savings

based on the difference between the cost projected for its most efficient

organization and the competing contractor’s proposal. Assuming the same

level of work as previously performed, using this method could result in

understating the expected savings because an A-76 study usually results in

performing the work with less personnel.

Study and Implementation Costs: Costs associated with the A-76 study

and its implementation totaled $524,000. Fort Riley officials estimated it

cost $147,000 to conduct the A-76 study in fiscal years 1995 and 1996 using

in-house personnel. The study resulted in eliminating all 29 government

positions, including some temporary workers. While the study was

ongoing, most of the employees found other jobs; only eight permanent

employees remained by the time the study was completed. During a

reduction in force held to implement the results of this study, four of the

eight employees were placed in comparable government jobs and four

were placed in lower graded positions, although they retained their

previous pay levels under “save pay” provisions. Fort Riley officials,

however, could not provide the specific costs associated with the reduction

in force of these eight employees because this action was included in a

basewide reduction in force unrelated to the A-76 study. Officials also

estimated contract administration costs were $126,000 and $251,000 in

fiscal years 1996 and 1997, respectively.

2

As discussed, the savings figure in the Army’s Commercial Activities Management

Information System database is higher from what we reported previously. The Army’s

revised estimated savings figure is based on the average salary and fringe benefits in the

most efficient organization estimate and, according to an Army headquarters official, the

$1.2 million figure is more accurate.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 24 GAO/NSIAD-00-107 DOD Competitive Sourcing

Changes to Work Requirements Following Implementation of Study

Results: During the 20-month contract period, modifications to the

contract were made that increased the contract costs by about $453,000 for

that period. Contract payments substantially exceeded the offer price by

about $238,000 during the 8 months the contract was in effect in fiscal year

1996 and by $215,000 in fiscal year 1997. Roughly three-quarters of the 1996

cost increase was due to a requirement added to the work statement that

added $187,000 (or 6 percent) to the total cost of the contract. The

remaining contract cost increases for both fiscal years 1996 and 1997 were

due to the addition of work because of a change in mission and to resolve

workload backlogs and disputes.

Other Mitigating Factors: Contracting officials stated that there were

numerous performance problems with contractor operations since the

beginning of the contract. Officials stated that the contractor significantly

underbid the requirement and that there was no way to quantify the cost of

the lack of service and support provided the customer. This contract was

terminated at the conclusion of fiscal year 1997, and the contractor was

paid about $828,000 to settle disputed costs.

Summary Observations Regarding A-76 Savings: Given the difficulties

that occurred under this contract and the early termination, we did not

attempt to calculate any savings for the period the contract was in effect,

given that savings were likely not achieved.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 25 GAO/NSIAD-00-107 DOD Competitive Sourcing

Navy Child Care

Center—Naval Medical

Center, San Diego,

California

Overview: In fiscal year 1997, as the result of its simplified A-76 cost

study,3 the Navy contracted for its child care activity at the Naval Medical

Center in San Diego using a firm fixed price contract. The contract price

was on a per child basis tied to age and the number of children actually

enrolled. The Navy estimated that it would realize savings of about $3,400

per child annually, a savings of 55 percent from costs per child in the

government’s most efficient organization developed for the cost study

(which was the same cost per child of the previous activity). Installation

officials projected savings of about $1 million over a 3-year period based on

serving an average of 100 children over that time period.4 Officials

estimated the costs identified in the most efficient organization and the

original organization were 100-percent personnel−related. The competing

contractor’s offer did not identify what percentage was personnel-related

costs because it was based on a per child fixed price.

Basis for Initial Savings Projection: In determining the expected level

of savings, Navy officials used a baseline cost of existing operations as the

basis for the proposed most efficient organization, even though the most

efficient organization was using a low capacity, obsolete, and more costly

facility than the new facility the winning organization would occupy. They

projected savings of about 55 percent based on the difference between the

cost of service per child included in the government’s most efficient

organization ($6,200) estimate and the winning contractor’s proposal

($2,800) multiplied against an expected caseload of 100 children in the new

facility. The cost comparison was based on serving 79 children; however,

the initial savings estimate was projected for an average of 100 children per

year.

Study and Implementation Costs: Navy officials estimated study costs

of $12,000 using in-house personnel. The study resulted in eliminating 33

government positions; however, all personnel, except one, obtained

3

OMB Circular A-76 Revised Supplemental Handbook provides simplified cost comparison

procedures that may be used for activities involving 65 full-time equivalent positions or less.

4

The Navy’s Commercial Activities Management Information System reports a smaller 3-year

savings figure ($700,000). According to a Navy headquarters official, the estimate provided

by installation officials was more accurate. Once data are entered into the Navy’s system,

the headquarters official said, entries such as estimated savings are not changed or revised.

Further, the installation officials’ figure was more reliable because the installation has

current information and, since this contract is no longer in effect, reconstructing the basis

for the savings figure in the system would be difficult, the official said.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 26 GAO/NSIAD-00-107 DOD Competitive Sourcing

comparable positions in the area. That one individual, according to Navy

officials, was separated subject to the reduction in force at a cost of $2,600.

The officials reported costs of $11,000 to administer the contract in fiscal

year 1997. In the following 2 years, the government incurred costs of about

$12,000 each year for contract administration.

Changes in Work Requirements Following Implementation of Study

Results: Government costs for the contract increased from initial

estimates because more children (about 170 per year) were enrolled each

year of the contract than the number used to calculate estimates (100). The

increased population served would also suggest a higher cost avoidance

between the contractor’s proposal and the government’s most efficient

organization estimate. Costs to run the child care center were based on a

combination of costs per child (variable based on the child’s age) and a

parent co-payment. The contract called for the contractor to subtract the

co-payment from the fixed rate for the child and bill the government for the

remaining amount. The average cost per child actually averaged about

$3,400 based on varying age groups and parent co-payments.

Other Mitigating Factors: An original baseline cost per child was used,

even though the government had built a new, larger child care facility to

replace the original center, which was obsolete. The Navy estimate did not

make any adjustments to estimate the cost efficiencies to be gained from

occupying a modern and higher capacity facility. Not adjusting for possible

efficiencies may have overstated the government’s estimated cost per child

and thus the savings per child compared with the contractor’s cost per

child. Both the in-house organization’s estimate and the contractor’s price

were based on serving 79 children in the new facility. Navy officials based

their initial savings estimate on an enrollment of 100 children. However, as

noted, the number of children actually enrolled was greater than

anticipated, averaging about 170 over the 3-year contract. The Navy may

have understated the total savings because it underestimated the children

to be served.

By the end of the 3-year contract in September 1999, however, the activity

had been combined with other child care activities in the region, studied

under another A-76 cost comparison, and implemented under a regional

government most efficient organization. Therefore, no additional savings or

cost avoidance was attributable to this single study after September 1999.

Any subsequent savings would be reported as part of the new A-76 regional

child care study.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 27 GAO/NSIAD-00-107 DOD Competitive Sourcing

Summary Observations Regarding A-76 Savings: Determining a

precise level of savings was not possible because of the factors that

clouded the savings calculation. Since baseline operations changed, it was

not possible to determine how savings would have been affected if

adjustments would have been made during the A-76 study for cost

efficiencies based on the new, higher capacity facility and a more accurate

count of children served. Nevertheless, available data indicated contractor

operations were significantly less costly than the proposed in-house

operation and, the difference was not significantly reduced by the cost of

conducting and implementing the study. A subsequent A-76 study of

providing child care services on a regional basis identified the potential for

additional savings and returned the function in-house.

Navy Regional Family

Services Activity—San

Diego, California

Overview: In fiscal year 1998, the Navy consolidated its family services

activity at three locations in San Diego, California, and contracted for it

using a firm fixed price plus award fee contract. The family service activity

provides personal support services, such as marital and financial

counseling. Installation officials said that about $1.8 million in annual

savings were estimated, or savings of 35 percent over existing operations

(based on authorized positions), for a total of $9 million over a 5-year

contract period.5 Officials estimated that, historically, about 84 percent of

in-house costs were personnel-related. During fiscal years 1998 and 1999,

roughly 96 percent of contract costs were personnel-related.

Basis for Initial Savings Projection: Navy officials calculated the

projected savings by comparing an estimate of baseline costs for fiscal year

1996 with the contractor’s offer. The estimated baseline costs were

calculated by multiplying the number of authorized positions for the

existing activity by the salary and fringe benefit costs projected on the

average mid-point in each affected grade. Using this approach, officials

identified a baseline cost of about $5 million for the 79 civilian and 10

military positions, representing authorized positions at the three

consolidated activities. However, according to a Navy official, the actual

number of personnel performing the activity totaled 117, plus about 40

volunteers. Navy officials pointed out that the additional personnel were

5

The Navy’s Commercial Activities Management Information System includes a higher

estimated savings figure ($10.3 million). However, a Navy headquarters official said the

$9 million revised figure provided by installation officials was more reliable because the

installation has access to current information.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 28 GAO/NSIAD-00-107 DOD Competitive Sourcing

predominately military that were temporarily placed at the center awaiting

a change in duty or a release from service and there was no specific

requirement that military personnel operate the center. The difference

between the authorized positions and the actual suggested the baseline

costs were understated. At the same time, another perspective on savings is

found in the difference between the total costs associated with the most

efficient organization used in the cost study and the winning contractor’s

price, which was about $3 million less over a 5-year contract period.

Study and Implementation Costs: Costs to conduct the A-76 study using

in-house personnel were estimated at about $800,000 and $51,000 in costs

associated with implementing a reduction in force at one of the three

locations. We could not determine if similar costs were incurred at the

other two locations because a Navy official said data from the locations

were not tracked and could not be reconstructed. Navy officials said

contract administration cost about $148,000 annually.

Changes in Work Requirements Following Implementation of Study

Results: We identified no changes in statement of work nor any mandated

wage increases during the period covered by our review.

Other Mitigating Factors: Navy officials estimated that during the

8 months of fiscal year 1998 that the contract was in place and for all of

fiscal year 1999, contract payments were 83 and 95 percent of projected

costs, respectively. The decrease occurred because the contractor did not

earn all award fees. Award fee criteria included the results of customer

satisfaction surveys.

Summary Observations Regarding A-76 Savings: This cost study

appears to have produced sizeable savings over previous operating costs,

yet the precise amount of those savings remains unclear given limitations

in baseline costs and uncertainties over the number of personnel

previously required to perform the work. Additionally, the government’s

most efficient organization indicated about 14 percent of its costs were

nonpersonnel-related. Precisely how much this will affect the initial

projection of about $1.8 million in annual savings is unclear. However, data

suggested a majority of the savings would remain, or increase, if those

costs were fully accounted for. The savings would then be reduced by

about $1.6 million in study, implementation, and contract administration

costs, but those reductions represent less than a year’s projected savings.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 29 GAO/NSIAD-00-107 DOD Competitive Sourcing

Air Force Aircraft

Maintenance—Altus

Air Force Base,

Oklahoma

Overview: In fiscal year 1996, following an A-76 study, Altus Air Force

Base converted its aircraft maintenance activity performed predominately

by military personnel to a government most efficient organization

performed by civilian personnel only. According to the Air Force’s

Commercial Activities Management Information System, annual savings of

almost $100 million over a 5-year period were estimated: a savings of

38 percent over existing operations. This case represents the largest

estimated savings amount of the nine A-76 studies reviewed. Of the costs

identified in the most efficient organization, about 97 percent were

personnel-related. An Air Force official estimated that about 92 percent of

the competing contractor’s offer consisted of personnel-related costs.

Basis for Initial Savings Projection: The Air Force developed its

savings projection by taking the difference between its estimated 5-year

baseline cost for the existing operation of $265 million and the in-house

most efficient organization of $166 million. The baseline cost was

developed using an estimated cost of 1,401 authorized military and 43

authorized civilian positions. The actual number of total personnel

assigned was 1,248 (1,206 military and 42 civilians), according to Air Force

officials, or 14 percent less than the 1,444 authorized. The most efficient

organization was based on an estimated average cost for 735 authorized

civilian positions, about 97 percent of the total cost reflected personnel

costs. Air Force officials said they could not determine whether

non-personnel costs were included in the original operating cost figure.

Study and Implementation Costs: Air Force officials reported that they

incurred estimated costs of about $948,000 to perform the study and about

$2.2 million of that was related to civilian personnel reductions for “save

pay” through the end of fiscal year 1999. Estimated costs for save pay for

fiscal years 1996 to 2001 were about $3.7 million or almost $706,000 per

year. We can expect that some of these costs can continue for some time

unless the affected employees leave government service or are promoted to

their previous pay grades.

Changes in Work Requirements Following Implementation of Study

Results: Costs for the period we reviewed increased by about $3.4 million

after implementation of the most efficient organization due to a change in

mission. The mission change was unanticipated and was not an omission

from the original performance work statement.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 30 GAO/NSIAD-00-107 DOD Competitive Sourcing

Other Mitigating Factors: The government’s most efficient organization

was scheduled to be fully implemented by December 1996; however, hiring

problems delayed implementation until April 1998. During conversion to

the government most efficient organization, Altus Air Force Base officials

experienced problems recruiting fully qualified aircraft mechanics. Lower

wage scales at Altus Air Force Base compared to bases located in areas

with higher wage scales caused retention problems. In addition, during the

time Altus Air Force Base officials were trying to hire qualified personnel,

the Air Force centralized its hiring office at Randolph Air Force Base,

further slowing the hiring process. Also during this time, some aircraft

were maintained at other installations, military personnel were brought to

or retained at Altus Air Force Base to maintain aircraft, and the Air Force

began an intensive aircraft mechanic training program. As a result, Air

Force officials told us they encountered unanticipated transition costs of

about $2.4 million. By April 1998, according to officials, the most efficient

organization was fully operational and accomplishing its mission.

According to available data, the activity spent, in total, about $5 million less

than budgeted amounts during the last 3 months of fiscal year 1996 and

fiscal years 1997 to 1999.

Summary Observations Regarding A-76 Savings: The initial savings

estimate was overstated because it was based on the cost of authorized

personnel (includes salary and fringe benefits), whereas the actual number

of personnel on board was about 14 percent less. Also, officials said they

did not have documentation that other nonpersonnel costs were not

accounted for. Even so, the magnitude of savings likely to be realized from

going from an organization of 1,248 military and civilian positions to 793

authorized civilian positions (a revised authorization figure reflecting the

workload increases) still represents a sizeable savings, even after

accounting for study and implementation costs.

Air Force Base

Operating Support—

Laughlin Air Force

Base, Texas

Overview: In fiscal year 1997, Laughlin Air Force Base contracted for its

base operating support activity on a firm fixed price basis. Base operating

support encompasses the civil engineering, supply, and transportation

functions. According to the Air Force’s Commercial Activities Management

Information System, almost $6 million in annual savings were estimated, a

savings of about 50 percent over existing operations, for a total of almost

$30 million over a 5-year contract period. According to a Laughlin official,

about 92 percent of the winning contractor’s offer represented

personnel-related costs. Available data indicated estimated costs under the

most efficient organization were nearly all personnel-related.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 31 GAO/NSIAD-00-107 DOD Competitive Sourcing

Basis for Initial Savings Projection: The Air Force developed its

savings projection by taking the difference between its estimated baseline

costs for the existing operation compared with the contract price. The

baseline costs were developed by calculating an average cost of 278

authorized positions (including salary and fringe benefits). The actual

number of personnel assigned as of the date the A-76 study was completed

was 121. (The number of actual personnel assigned as of the date the A-76

study was announced was unavailable.)

Study and Implementation Costs: In fiscal year 1997, the Air Force

incurred about $1.2 million in A-76 study costs, about $1.2 million for

transition costs, and almost $203,000 in save pay costs. Save pay costs of

almost $195,000 and $198,000 were also incurred in fiscal years 1998 and

1999, and some unspecified portion of the save pay costs could continue

into subsequent years of the contract unless the affected workers leave

government service or again attain their previous pay grades. Additionally,

the Air Force identified annual recurring costs for contract

administration—more than $320,000 for fiscal year 1997, $323,000 for fiscal

year 1998, and $378,000 for fiscal year 1999.

Changes in Work Requirements Following Implementation of Study

Results: We identified no changes in work requirements that should have

been known at the time the performance work statement was developed

for the A-76 study. However, contract payments increased by about

$830,000—about $207,000 in fiscal year 1997, $583,000 in fiscal year 1998,

and $40,000 in fiscal year 1999—due to increased workload.

Other Mitigating Factors: Contract costs increased by $334,000, or

$71,000 in fiscal year 1998 and $263,000 in fiscal year 1999, reflecting

Department of Labor mandated wage increases. Actual contract payments

were 4 percent, 11 percent, and 3 percent greater than original estimates

for fiscal years 1997, 1998, and 1999, respectively, because of the mandated

wage increases and workload changes.

Summary Observations Regarding A-76 Savings: Available data

indicated savings were realized from this A-76 study, but less than initially

projected. If one assumes identified costs provide a rough approximation

of previous costs, the contractor’s proposal represents a significant savings

over prior operations. However, there were some limitations in the

accuracy of the estimated baseline costs from which savings projections

were developed because personnel costs were developed on an average
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 32 GAO/NSIAD-00-107 DOD Competitive Sourcing

basis. Also, the $6 million in projected annual savings would have to be

offset by study and implementation costs.

Regional Engine

Repair—Laughlin Air

Force Base, Texas

Overview: In fiscal year 1997, Laughlin Air Force Base contracted for its

engine regional repair center under a fixed price with award fee contract.

The center repairs aircraft engines that used to be repaired in-house and

under contracts at Randolph, Sheppard, Vance, and Laughlin Air Force

Bases. According to the Air Force’s Commercial Activities Management

Information System, savings of $25.5 million over a 51-month period were

estimated, a savings of about 45 percent over its existing operations. The

contractor’s offer was 92-percent personnel-related costs, and the

government’s most efficient organization estimate was 89-percent

personnel-related costs.

Basis for Initial Savings Projection: The Air Force projected

$25.5 million in savings by taking the difference between $56.9 million, the

estimated original cost of operations, and $31.4 million, the contractor

price. The savings calculation was based on consolidating and competing

workload at six Air Force Bases—Randolph, Sheppard, Vance, Laughlin,

Columbus, and Reese—however, workload at just four bases was, in fact,

consolidated. The Air Force did not have data readily available breaking

out projected savings for these four bases.

Study and Implementation Costs: The Air Force estimated almost

$1.4 million in A-76 study, implementation, and contract administration

costs for fiscal years 1997 to 1999. Specifically, Air Force officials reported

estimated costs of (1) $377,000 to conduct the A-76 study and (2) $159,000

in fiscal year 1997 to pay for personnel retained during the transition from

the in-house activity to the contractor. They also reported $70,000 for

separation incentive pay in fiscal year 1997. Officials said they incurred a

total of $81,000 for save pay between fiscal year 1997 and 1999 due to

reduction-in-force actions. While the amounts declined each year, some

amount of save pay costs are likely to continue for unspecified subsequent

years. The officials reported contract administration costs of about $72,000

in fiscal year 1997, $282,000 in fiscal year 1998, and $340,000 in fiscal year

1999.

Changes in Work Requirements Following Implementation of Study

Results: We identified no changes in work requirements that should have

been known at the time the performance work statement was developed

for the A-76 study.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 33 GAO/NSIAD-00-107 DOD Competitive Sourcing

Other Mitigating Factors: According to Air Force officials, savings

estimates were based on an original cost of operations reflecting

authorizations at one location only, although the activity was also being

performed at the other locations by contractor personnel. Officials said the

cost of contract personnel was included in the estimates, but yet they could

not provide documentation supporting the calculation. Additionally, the Air

Force originally planned to consolidate the engine repair function at six

bases into one. However, it never consolidated the engine work at one base

because it closed. Engine work from a second base was also not

consolidated because of transition problems and the Air Force decided to

retain a separate repair contract at the second base. Yet, the savings

projection in the commercial activities database reflected the expected

savings from consolidating workload at all six bases.

Actual contract payments exceeded estimates by about 11 percent in fiscal

year 1997, 25 percent in fiscal year 1998, and 17 percent in fiscal year 1999,

largely because the contractor had to hire additional personnel to address

work backlogs. Backlogs occurred because the contractor was unable to

hire skilled personnel quickly due to the installation’s remote location.

Further, personnel that worked in the activity when it was in-house

transferred to other installation activities when the activity converted to

contract and, as a result, were unavailable to work for the contractor. The

contractor hired workers from the original in-house activity on a temporary

basis to meet repair requirements. Actual costs also exceeded estimates

due to mandated wage increases. There was one contract cost increase in

1998 of almost $116,000 to pay for Department of Labor mandated wage

increases.

Summary of Observations Regarding A-76 Savings: We could not

determine whether savings were achieved from this cost comparison

because the baseline data were inaccurate, overstating the savings

estimate. The baseline consisted of the costs of performing the function at

six bases, but two of the six bases were never consolidated into Laughlin.

Air Force Base

Operating Support—

Wright-Patterson Air

Force Base, Ohio

Overview: At the end of fiscal year 1998, Wright-Patterson Air Force Base

contracted for its base operating support activity under a firm fixed price

plus award fee contract. Wright-Patterson’s base operating support

multifunction activity includes base supply, transportation, maintenance, a

laboratory, and a laboratory supply function. According to the Air Force’s

Commercial Activities Management Information System, $14 million in

annual savings was estimated, for a total of almost $58 million over
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 34 GAO/NSIAD-00-107 DOD Competitive Sourcing

49-month contract period, or a savings of about 59 percent over its

previously existing operating costs. About 86 percent of the costs identified

in the government’s most efficient organization estimate were for

personnel. Officials could not estimate the contractor’s personnel

percentage because the offer did not break down the contractor’s costs.

Basis for Initial Savings Projection: The Air Force developed its

savings projection by taking the difference between its estimated baseline

costs for the existing operation and the contract price. The baseline costs

included personnel costs for the 499 authorized positions based on an

estimated average cost per position, including salary and fringe benefits.

The actual number of personnel assigned when the study was announced

was 503—the additional 4 positions being filled by military personnel

temporarily assigned to the organization.

Study, Implementation, and Contract Administration Costs: Study,

personnel reduction, and contract administration costs totaled about

$6 million. Of this amount, according to officials, about $2.2 million was to

conduct the A-76 study. During fiscal years 1998 and 1999, the officials

indicated they had incurred a total personnel reduction cost of about

$3 million (about $691,000 for reduction-in-force actions, $641,000 for

priority placement, $1.3 million for separation incentive payments, $10,000

for career transition assistance, and $381,000 for save pay associated with

reduction-in-force actions). Contract administration costs were $163,539

and $635,399 for fiscal years 1998 and 1999.

Changes in the Contract Following Implementation of Study

Results: We identified one small change to the performance work

statement to add a task previously omitted; however, the amount was about

$92,000 or less than one percent of total contract costs.

Other Mitigating Factors: Actual contract payments exceeded estimates

for fiscal year 1998 by $1.3 million because the cost of the 2-month

transition period was not included in the cost comparison estimates for

either the contractor or the most efficient organization. The cost was

excluded because Air Force officials said they believed it would be about

the same for the contractor and the most efficient organization. During our

review, a contract change occurred due to a Department of Labor

mandated wage increase of about $440,000, which increased costs by about

1 percent.
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 35 GAO/NSIAD-00-107 DOD Competitive Sourcing

Summary Observations Regarding A-76 Savings: This cost study

appears to have produced sizeable savings over previous operating costs,

yet the precise amount of those savings remains unclear given limitations

in baseline costs—these costs were estimated based on average personnel

costs. The government’s most efficient organization indicated about

14 percent of its costs were not personnel-related. Precisely how much this

would affect the initial projection of about $14 million in annual savings is

unclear, but the data suggest a majority of the savings would remain if

those costs were fully accounted for. The savings would then be reduced by

about $6 million in study, implementation, and contract administration

costs, but those reductions represent less than a year’s projected savings.

Defense Finance and

Accounting Service

Vendor Payments—

Columbus, Ohio

Overview: In 1998, after completing an A-76 study, the Defense Finance

and Accounting Service retained its vendor payment activity in-house but

implemented the most efficient organization used in the cost comparison

study. The activity processes payments to Defense Commissary Agency

vendors. The agency estimated it would realize $10 million in annual

savings, for a total of $50 million in savings over 5 years. This total

suggested an estimated savings of 79 percent over previous operations. For

the costs identified in the most efficient organization estimate, about

87 percent were personnel-related, whereas about 69 percent of the costs

associated with the contractor’s offer were personnel-related.

Basis for Initial Savings Projection: The Defense Finance and

Accounting Service developed its savings projection based on a reduction

from 240 to 75 authorized positions. However, only 206 personnel were

actually assigned at the beginning of the A-76 study, about 14 percent less

than the authorized level. The 165 authorized positions eliminated were

multiplied by a $61,000 average cost of salary and fringe benefits to arrive

at the $10 million annual savings.

Study and Implementation Costs: Agency officials indicated that they

incurred costs of $828,000 to complete their A-76 study, including in-house

personnel and contracted support. They identified implementation costs in

fiscal year 1998 of about $419,000, which included separation incentives,

retaining staff to assist in the conversion, and the priority placement

program. Additional costs of almost $16,000 were incurred in fiscal year

1999 for remaining priority placement program costs. About $117,000 of the

fiscal year 1998 implementation cost was for implementing

reduction-in-force actions. Officials said they could not provide separate
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 36 GAO/NSIAD-00-107 DOD Competitive Sourcing

costs for administration and oversight of the most efficient organization

because these costs are considered overhead.

Changes in Work Requirements Following Implementation of Study

Results: There were no cost increases associated with changes to the

performance work statement. However, changes to the grade structure and

a reassessment of tasks allowed the activity to reduce nine positions in

1999, saving an estimated $452,000 between 1999 and 2002, or about

$158,000 per year.

Other Mitigating Factors: As part of the A-76 study, Defense Finance and

Accounting Service officials decided to consolidate the workload from

three locations into one, and savings from this effort were included in the

A-76 savings calculation. This action, however, was unrelated to

determining whether the activity should be performed by the in-house

organization or by a contractor. According to a Defense Finance and

Accounting Service official, the consolidation would likely have taken

place regardless of whether an A-76 study was accomplished. Also, as

mentioned before, not all of the 240 authorized positions were filled. Thus,

the A-76 estimated savings were overstated. Columbus Center officials

estimated that the savings from the A-76 study would have been about

$25 million or about $5 million annually, if the savings from the

consolidation action were not included. However, according to a senior

Defense Finance and Accounting Service official, the consolidation

decision was made as part of the A-76 study and, therefore, the agency’s

projected savings estimate will remain at $50 million.

Actual operating costs of $2.5 million roughly equaled estimated costs for

fiscal year 1999. Actual operating costs for fiscal year 1998 were

$2.3 million, just under the $2.6 million estimated cost for the year.

Summary Observations Regarding A-76 Savings: According to

available data, savings realized from this A-76 study were much less than

initially projected by the Agency because savings from unrelated

management efforts were combined with results of the A-76 study. Also,

data indicated that a certain amount of previously existing operating costs

were not identified since the savings calculation was based only on

personnel costs (the most efficient organization data indicated that about

13 percent of the costs were nonpersonnel-related.) In addition, actual

personnel on board was 14 percent lower than the authorized level used to

calculate the savings, which would further tend to overstate savings.

However, available data indicate that savings would remain, even after
Appendix I

Summary Information for Nine A-76 Case

Studies

Page 37 GAO/NSIAD-00-107 DOD Competitive Sourcing

accounting for short-term offsets to account for study and implementation

costs.
Page 38 GAO/NSIAD-00-107 DOD Competitive Sourcing

Appendix II

Objectives, Scope, and Methodology ApendxiI

Based on a request from the Chairman of the Subcommittee on Military

Readiness, House Committee on Armed Services, we conducted this review

to assess the extent of savings being realized from completed A-76 studies.

We followed a case study approach, examining the results of 9 of the 53

A-76 studies completed between October 1995 through March 1998, where

projected savings from the 9 represented over half of projected savings

from the 53 studies ($290 million out of a total of $528 million.) We selected

this time frame with the expectation that documentation of costs and any

changes to workload or mission would be more readily available and that

sufficient time would have elapsed since implementation of the study

results to permit examination of savings. We judgmentally selected cost

comparison studies to provide a mix of activities converted to a

government most efficient organization and those converted to a

contractor. We also included studies that were done by the Army, the Navy,

the Air Force (the Marine Corps had not completed any studies) and the

Defense Finance and Accounting Service. The sample we reviewed was

insufficient to identify trends and was not projectable to the universe of

A-76 studies. However, the sample gives some indication of the challenges

DOD faces in characterizing savings from A-76 studies. See table 2 for the

A-76 studies we reviewed.

Table 2: A-76 Cost Comparison Studies Reviewed

Service/Defense

agency Location Function

Positions studied

(authorized) Winner

Army Redstone Arsenal, Ala. Missile maintenance 52 Government

organization

Fort Riley, Kans. Storage and warehouse 29 Contractor

Navy San Diego, Calif. Child care center 33 Contractor

San Diego, Calif. Family service centers 88 Contractor

Air Force Altus Air Force Base,Okla. Aircraft maintenance 1,444 Government

organization

Laughlin Air Force Base, Tex. Base operating support 278 Contractor

Laughlin Air Force Base, Tex. Regional jet engine

maintenance

50 Contractor

Wright-Patterson Air Force

Base, Ohio

Base operating support 499 Contractor

Defense Finance and

Accounting Service

Columbus, Ohio Defense Commissary

Agency vendor payment

240 Government

organization
Appendix II

Objectives, Scope, and Methodology

Page 39 GAO/NSIAD-00-107 DOD Competitive Sourcing

To determine whether the DOD’s A-76 studies had achieved savings, we

assessed the validity of DOD’s savings projections for individual studies

and compared actual costs with projections for each of the nine A-76

studies selected. We interviewed installation-level officials and reviewed

supporting documentation to determine whether and what original

baseline cost estimates had been established or how savings were

otherwise estimated. Since most A-76 studies result in personnel

reductions, we also sought to determine the number of personnel

authorized and actually on-board when the cost studies began. We also

sought to obtain and compare available information concerning costs

associated with the government’s most efficient organization estimate used

in the cost comparisons as well as costs associated with the private sector

proposals. Likewise, we also obtained information concerning costs

associated with conducting the studies, as well as civilian personnel

transition and contract administration and oversight costs.

In general, officials were able to provide supporting documentation for

most of the cost information we requested. However, a significant portion

of the figures were reconstructed estimates based on available

documentation and cognizant officials’ assumptions, such as the cost of the

original in-house organization and the conduct of the A-76 study. In some

cases, we estimated costs based on documentation provided by DOD

officials. Further, in a few instances, cost figures were based on an official’s

best guess because documentation could not be found. We did not

independently verify the data provided.

To identify DOD’s efforts to improve processes for tracking changes to

costs and savings estimates, we interviewed officials from the Office of the

Secretary of Defense; the Departments of the Army, the Navy, and the Air

Force; and the Defense Finance and Accounting Service. We also reviewed

OSD and service guidance on the competitive sourcing program.

We conducted our review from July 1999 through May 2000 in accordance

with generally accepted government auditing standards.
Page 40 GAO/NSIAD-00-107 DOD Competitive Sourcing

Appendix III

A-76 Study Process ApendxiI

In general, the A-76 process consists of six key activities—(1) developing a

performance work statement and quality assurance surveillance plan;

(2) conducting a management study to determine the government’s most

efficient organization; (3) developing an in-house government cost estimate

for the most efficient organization; (4) issuing a Request for Proposals or

Invitation for Bids; (5) evaluating the proposals or bids and comparing the

in-house estimate with a private sector offer or interservice support

agreement and selecting the winner of the cost comparison; and

(6) addressing any appeals submitted under the administrative appeals

process, which is designed to ensure that all costs are fair, accurate, and

calculated in the manner prescribed by the A-76 handbook.

Figure 1 shows an overview of the process. The solid lines indicate the

process used when the government issues an Invitation for Bids or Request

for Proposals requesting bids or proposals on the cost of performing a

commercial activity. This type of process is normally used for more routine

commercial activities, such as grass-cutting or cafeteria operations, where

the work process and requirements are well defined. The dotted lines

indicate the additional steps that take place when the government wants to

pursue a negotiated, “best value” procurement. This type of process is often

used when the commercial activity involves high levels of complexity,

expertise, and risk.
Appendix III

A-76 Study Process

Page 41 GAO/NSIAD-00-107 DOD Competitive Sourcing

Figure 1: Overview of the A-76 Process

Source: Air Force Air Education and Training Command documents.

The Circular A-76 requires the government to develop a performance work

statement. This statement, which is incorporated into either the Invitation

for Bids or Request for Proposals, serves as the basis for both government

estimates and private sector offers. If the Invitation for Bids process is

used, each private sector company develops and submits a bid, giving its

price for performing the commercial activity. While this process is taking

 re are in ouse

cost estimate

 E 

management stud 

 re are tec nica 

 ro osa 

 e ise

 E 

 e ise

in ouse

cost estimate

Conduct tec nica 

e a uation o E 

Com are se ected

 est a ue and E 

tec nica ro osa s

Acce t

contractor

 id ro osa s

Conduct tec nica 

e a uation o 

 ids ro osa s

Com are

costs se ect

contractor

Se ect o est

cost a ternati e

 ssue er ormance

 or statement and

 F or F 

 ost E icient rgani ation E acti ities

 o ernment tec nica e a uation acti ities

 rocess or n itation or id F 

Additions ste s re uired or e uest or ro osa s F 
Appendix III

A-76 Study Process

Page 42 GAO/NSIAD-00-107 DOD Competitive Sourcing

place, the government activity performs a management study to determine

the most efficient and effective way of performing the activity with

in-house staff. Based on this “most efficient organization,” the government

develops a cost estimate and submits it to the selecting authority. The

selecting authority concurrently opens the government’s estimate along

with the bids of all private sector firms.

If the Request for Proposals—best value process—is used, the Federal

Acquisition Regulation and the A-76 supplemental handbook require

several additional steps. The private sector offerors submit proposals that

often include a technical performance proposal and a price. The

government prepares an in-house management plan and a cost estimate

based strictly on the performance work statement. On the other hand,

private sector proposals can offer a higher level of performance or service.

The government’s selection authority reviews the private sector proposals

to determine which one represents the best overall value to the government

based on such considerations as (1) performance levels, (2) proposal risk,

(3) past performance, and (4) price. After the completion of this analysis,

the selection authority prepares a written justification supporting its

decision. This includes the basis for selecting a contractor other than the

one that offered the lowest price to the government. Next, the authority

evaluates the government’s most efficient organization and determines

whether it can achieve the same level of performance and quality as the

selected private sector proposal. If not, the government must then make

changes to its most efficient organization to meet the performance

standards accepted by the authority. This is intended to ensure that the

in-house cost estimate is based upon the same scope of work and

performance levels as the best value private sector offer. After the

authority determines that the most efficient organization and the private

sector proposal are based on the same level of performance, the cost

estimates are compared.

According to Office of Management and Budget’s A-76 guidance, the

activity will be converted to performance by the private sector if the private

sector offer is either lower by an amount equal to 10 percent of the direct

personnel costs of the in-house estimate or is $10 million less over the

performance period than the in-house estimate, whichever is less. The

Office of Management and Budget established this minimum cost

differential to ensure that the government would not convert performance

for marginal estimated savings.
Appendix III

A-76 Study Process

Page 43 GAO/NSIAD-00-107 DOD Competitive Sourcing

Participants in the process—for either the Invitation for Bids or Request for

Proposals process—may appeal the selection authority’s decision if they

believe the costs submitted by one or more of the participants were not

fair, accurate, or were not calculated in the manner prescribed by the A-76

handbook. Appeals must be submitted in writing and within 20 days after

the date that all supporting documentation is made publicly available. The

appeal period may be extended to 30 days if the cost comparison is

particularly complex. Appeals are supposed to be adjudicated within

30 days after they are received.
Page 44 GAO/NSIAD-00-107 DOD Competitive Sourcing

Appendix IV

Comments From the Department of Defense ApendxiIV
Appendix IV

Comments From the Department of Defense

Page 45 GAO/NSIAD-00-107 DOD Competitive Sourcing
Page 46 GAO/NSIAD-00-107 DOD Competitive Sourcing

Appendix V

GAO Contacts and Staff Acknowledgments ApendxiV

GAO Contacts Barry Holman (202) 512-5581

Marilyn Wasleski (202) 512-8436

Acknowledgments In addition to those named above, Christine Frye, Thad Rytel, and

Jonathan Silverman made key contributions to this report.
Page 47 GAO/NSIAD-00-107 DOD Competitive Sourcing

Related GAO Products

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Page 48 GAO/NSIAD-00-107 DOD Competitive Sourcing

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