Report to Congressional Committees

United States Government Accountability Office

GAO

July 2005 INTERAGENCY 

CONTRACTING 

Franchise Funds 

Provide Convenience, 

but Value to DOD is 

Not Demonstrated 

GAO-05-456 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-456.

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and methodology, click on the link above. 

For more information, contact David E. 

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Highlights of GAO-05-456, a report to 

congressional committees 

July 2005

INTERAGENCY CONTRACTING

Franchise Funds Provide Convenience, 

but Value to DOD Is Not Demonstrated 

GovWorks and FedSource, two of the franchise funds that DOD has relied on

for contracting services, have not always ensured fair and reasonable prices 

while purchasing goods and services. The franchise funds also may have 

missed opportunities to achieve savings from millions of dollars in 

purchases, including engineering, telecommunications, or construction 

services. In the course of its review, GAO examined $249 million worth of 

orders and work assignments from the contracts the franchise funds used to 

make purchases on DOD’s behalf. In many cases, GovWorks sought but did 

not receive competing proposals. GovWorks added substantial work—as 

much as 20 times above the original value of a particular order—without 

determining that prices were fair and reasonable. FedSource generally did 

not ensure competition for work, did not conduct price analyses, and 

sometimes paid contractors higher prices for services than established in 

contracts with no justification provided in the contract files. 

For its part, DOD—in the absence of clear guidance on the proper use of 

other agencies’ contracting services—chose to use franchise funds on the 

basis of convenience without analyzing whether using franchise funds’ 

contracting services was the best method for meeting purchasing needs. 

DOD also lacks information about purchases made through other agencies 

contracts, including franchise funds, which makes it difficult to make 

informed decisions about the use of these types of contracts. The franchise 

funds’ business-operating principles require that they maintain and evaluate 

cost and performance benchmarks against their competitors. However, the 

franchise funds did not perform analyses that DOD could have used to 

assess whether the funds deliver good value. The funds’ performance 

measures generally focus on customer satisfaction and generating revenues. 

These measures create an incentive to increase sales volume and meet 

customer demands at the expense of ensuring proper use of contracts and 

good value. 

DOD and the franchise funds—which share responsibility for ensuring value 

through sound contracting practices such as defining contract outcomes and 

overseeing contractor performance—did not adequately define 

requirements. Without well-defined requirements, DOD and the franchise 

funds lacked criteria to measure contractor performance effectively. On a 

separate oversight-related issue, GAO found that the departments of the 

Interior and the Treasury—each of which has responsibility in the successful 

operation of the respective franchise funds—and the Office of Management 

of Budget have performed little oversight of GovWorks and FedSource. 

The Department of Defense (DOD) 

is the largest user of other federal 

agencies’ contracting services. The 

availability of these contracting 

services has enabled DOD and 

other departments to save time by 

paying other agencies to award and 

administer contracts for goods and 

services on their behalf. DOD can 

access these contracting services a 

number of ways, such as ordering 

directly from interagency contracts 

for commonly needed items. DOD 

also can pay someone else to do 

the work. For example, DOD uses 

franchise funds, which are 

government-run, fee-for-service 

organizations that provide a 

portfolio of services, including 

contracting services. As part of a 

congressional mandate, GAO 

assessed whether franchise funds 

ensured fair and reasonable prices 

for goods and services, whether 

DOD analyzed purchasing 

alternatives, and whether DOD and 

franchise funds ensured value by 

defining contract outcomes and 

overseeing contractor 

performance. 

What GAO Recommends

GAO recommends that DOD, the 

departments of the Interior and the 

Treasury, and the Office of 

Management and Budget improve 

the manner in which franchise 

funds are utilized to ensure value 

and to ensure compliance with 

procurement regulations. The 

agencies concurred with GAO’s 

recommendations and identified 

actions they have taken or plan to 

take to address them. 
Page i GAO-05-456 Interagency Contracting 

Letter 1

Results in Brief 2 

Background 4 

Franchise Funds Did Not Always Ensure Fair and Reasonable 

Prices or Competitive Procedures 8 

DOD Focused on Convenience and Did Not Pay Sufficient 

Attention to Analyzing Contracting Alternatives 16 

DOD and Franchise Funds Did Not Pay Sufficient Attention to 

Defining Outcomes or Overseeing Contractor Performance 21 

Conclusions 28 

Recommendations for Executive Action 29 

Agency Comments and Our Evaluation 31 

Appendix I Scope and Methodology 36 

Appendix II Franchise Fund Operating Principles 39 

Appendix III Overview of Contract Documents Used at GovWorks 

and FedSource 40 

Appendix IV Comments from the Department of Defense 41 

Appendix V Comments from the Department of the Treasury 44 

Tables 

Table 1: Steps to Purchase Good or Service through GovWorks or 

FedSource 6 

Table 2: Contracting Methods Used by GovWorks or FedSource 7 

Table 3: GovWorks Fiscal Year 2003 Orders 10 

Table 4: FedSource Fiscal Year 2003 Projects Reviewed 13 

Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions 

of Dollars) 37 

Contents 
Page ii GAO-05-456 Interagency Contracting 

Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions 

of Dollars) 38 

Table 7: GovWorks Contract Documents Used to Define Desired 

Outcomes and Performance Criteria 40 

Table 8: FedSource Contract Documents Used to Define Desired 

Outcomes and Performance Criteria 40 

Figures 

Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues 5 

Figure 2: Example of Project for Which Army Paid FedSource 17 

Percent In Fees and Markups 19 

Abbreviations 

DOD Department of Defense 

FAR Federal Acquisition Regulation 

GSA General Services Administration 

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Page 1 GAO-05-456 Interagency Contracting 

July 29, 2005 

Congressional Committees 

In recent years, federal agencies have made increasing use of other 

agencies’ contracting services to purchase goods and services in less 

turnaround time. Use of these services, generally referred to as 

interagency contracting, has enabled federal agencies to reduce the time 

they spend awarding and administering contracts in the face of acquisition 

workforce reductions and growing workloads. Although these services 

have grown rapidly and have helped streamline purchasing, using the 

many types of contracts demands a high degree of business acumen and 

contracting knowledge. Federal agencies can obtain contracting services 

through entrepreneurial, fee-for-service organizations, which are 

government-run but operate like businesses. Franchise funds are one such 

type of organization. 

We have reported on the challenges of using other agencies’ contracting 

services and have cited the need to effectively manage this contracting 

environment. Indeed, we and the inspectors general of some federal 

agencies have found instances in which interagency contracts have been 

improperly used. Furthermore, we have reported that the agencies that 

provide and the agencies that use interagency contracting assistance—

such as franchise funds—should be subject to improved oversight and 

controls, clearer lines of accountability, and better policies, processes, and 

implementation. It is for these reasons that we have designated 

management of interagency contracting as a governmentwide high-risk 

area.1

The Department of Defense (DOD) is the largest customer for other 

agencies’ contracting services for purchases, typically ranging from office 

supplies to information technology. Use of interagency contracts has 

allowed DOD to focus more of its contracting offices’ time and attention 

on the acquisition of specialized, highly sophisticated defense equipment. 

DOD uses two franchise funds in particular to make purchases on its 

behalf—GovWorks, which is run by the Department of the Interior, and 

FedSource, run by the Department of the Treasury. In fiscal year 2004, 

 1

GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005). 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-05-456 Interagency Contracting 

DOD paid these franchise funds more than $1.2 billion for purchases of 

goods and services. (See figure 1.) 

The Conference Report accompanying the National Defense Authorization 

Act for Fiscal Year 2004 directed us to report on DOD’s use of franchise 

funds.2 We assessed (1) whether franchise funds ensured fair and 

reasonable prices for goods and services; (2) whether DOD analyzed 

alternatives to determine the best method for acquiring certain goods and 

services; and (3) whether DOD and franchise funds ensured value through 

other sound contracting practices, such as defining contract outcomes, 

and overseeing contractor performance. 

To fulfill these objectives, we examined DOD’s largest projects that 

involved contracting assistance from GovWorks and FedSource in fiscal 

year 2003, the most recent year for which complete data were available at 

the time we were planning our review. We reviewed 17 projects, including 

the interagency contracts used, and orders and work assignments 

representing $249 million in fiscal year 2003 DOD funding. We interviewed 

DOD customers and officials at the two franchise funds and reviewed 

documentation to assess the contracting practices used to place orders for 

goods and services. The results of our review cannot be generalized to all 

types of interagency contracts that DOD and the franchise funds used; 

however, we believe we have sufficient information to make informed 

judgments on the matters in this report. Appendix I provides details on our 

scope and methodology. We conducted our work from June 2004 through 

June 2005 in accordance with generally accepted government auditing 

standards. 

In providing contracting services to DOD customers, the GovWorks and 

FedSource franchise funds did not always obtain the full benefits of 

competitive procedures, did not otherwise ensure fair and reasonable 

prices, and may have missed opportunities to achieve savings on millions 

of dollars in purchases. In half of the GovWorks orders we reviewed, we 

found that GovWorks sought, but did not receive, competing proposals. In 

more than half of the orders, GovWorks requested that contractors 

perform substantial, additional work without determining that prices were 

fair and reasonable. FedSource generally did not ensure competition for 

work, did not conduct and document price analyses, and sometimes paid 

 2

H.R. Conf. Rep. No. 108-354 at 775-76 (2003). 

Results in Brief 
Page 3 GAO-05-456 Interagency Contracting 

contractors higher prices for services than were justified. In addition, 

FedSource relied on administrative personnel who were not trained as 

contracting officers to ensure that potential contractors had opportunities 

to submit offers. 

In the absence of clear guidance on the proper use of other agencies’ 

contracting services, DOD customers did not perform analyses of 

contracting alternatives and chose to use the franchise funds on the basis 

of convenience rather than as part of an acquisition plan. DOD also lacks 

basic information about purchases made through franchise funds. Without 

this data, it is difficult to assess whether franchise funds’ contracting 

services provide DOD value. For their part, although franchise funds’ 

business-operating principles require them to maintain and evaluate cost 

and performance benchmarks against their competitors, the funds did not 

perform analyses that DOD could use to assess whether the funds deliver 

good value. Their performance measures generally focus on customer 

satisfaction and generating revenues, rather than compliance with 

contracting regulations. The fee-for-service arrangement provides 

incentives to emphasize customer service to ensure sustainability of the 

contracting operation at the expense of proper use of contracts and good 

value. 

DOD, GovWorks, and FedSource paid little attention to sound contracting 

practices for which they shared responsibility to help ensure value: 

carefully defining contract outcomes and specific criteria against which 

contractor performance can be measured and providing effective 

contractor oversight. DOD customers did not provide franchise funds with 

detailed information about their needs. Without this information, the 

franchise funds did not translate DOD’s needs into well-defined contract 

requirements that contained criteria to determine whether the contractor 

performed successfully. In the absence of well-defined outcomes, DOD, 

GovWorks, and FedSource lacked criteria to provide effective contractor 

oversight. Regarding a separate oversight issue, the oversight of GovWorks 

and FedSource themselves, we found that the departments of the Interior 

and the Treasury and the Office of Management of Budget, each of which 

has responsibility in the successful operation of these franchise funds, 

have performed little oversight. 

DOD and the franchise funds have undertaken a number of corrective 

actions during the course of our review. To enhance their initiatives, we 

are making recommendations to the Secretary of Defense to develop a 

methodology for determining whether franchise funds’ contracting 

services are in the best interest of the government and to monitor and 
Page 4 GAO-05-456 Interagency Contracting 

evaluate DOD’s use of these services. We also recommend that the 

Secretaries of the Interior and the Treasury develop procedures and 

performance measures to ensure that franchise funds’ contracting officers 

fulfill the requirements of procurement regulations while maintaining their 

focus on customer service. To improve oversight of franchise funds, we 

recommend that the Director of the Office of Management and Budget 

expand its monitoring and reporting to include franchise funds’ 

contracting services and develop guidance to clarify roles and 

responsibilities of customers and franchise funds in the contracting 

process. In comments on a draft of this report, DOD, the departments of 

the Interior and the Treasury, and the Office of Management and Budget 

concurred with our recommendations and identified actions they have 

taken or plan to take to address them. Written comments from DOD and 

the Department of the Treasury are reproduced in their entirety in 

appendices IV and V, respectively. 

Franchise funds are government-run, self-supporting businesslike 

enterprises managed by federal employees. Franchise funds provide a 

variety of common administrative services, such as payroll processing, 

information technology support, employee assistance programs, public 

relations, and contracting.3

 This review focuses on DOD’s use of the 

franchise funds’ contracting services. Franchise funds are required to 

recover their full costs of doing business and are allowed to retain up to 4 

percent of their total annual income. To cover their costs, the franchise 

funds charge fees for services. The Government Management Reform Act 

of 1994 authorized the Office of Management and Budget to designate six 

federal agencies to establish the franchise fund pilot program.4

 Congress 

anticipated that the franchise funds would be able to provide common 

administrative services more efficiently than federal agencies’ own 

 3

Franchise fund enterprises are a type of intragovernmental revolving fund, all of which 

have similar legal authority and operations and are generally created to provide common 

administrative services. An intragovernmental revolving fund is established to conduct 

continuing cycles of businesslike activity within and between government agencies. An 

intergovernmental revolving fund charges for the sale of goods or services and uses the 

proceeds to finance its spending, usually without the need for annual appropriations. 

4

Between May 1996 and January 1997 pilots were designated to be established at the 

departments of Commerce, Health and Human Services, the Interior, the Treasury, and 

Veterans Affairs and at the Environmental Protection Agency. Pub. L. No. 103-356, § 403. 

The pilots were to expire after 5 years, at the end of fiscal year 1999, but have been 

extended several times—and as of December 2004—Congress extended the date to 

October 1, 2005. 

Background 
Page 5 GAO-05-456 Interagency Contracting 

personnel. The original operating principles for franchise funds included 

offering services on a fully competitive basis, using a comprehensive set of 

performance measures to assess the quality of franchise fund services, and 

establishing cost and performance benchmarks against their 

competitors—other government organizations providing the same types of 

services.5 Although there are five franchise funds currently in operation, 

DOD primarily uses two for contracting services—GovWorks, operated by 

the Department of the Interior, and FedSource, operated by the 

Department of the Treasury. Figure 1 shows the revenues for GovWorks 

and FedSource and the percentage of revenue derived from doing business 

with DOD in fiscal year 2004. 

Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues 

Note: Revenues include the cost of the goods and services acquired and the franchise funds’ service 

charges or fees. 

Effective contract management requires specialized knowledge and 

careful attention to a range of regulatory requirements and contracting 

practices designed to protect the government’s interests. In obtaining 

contracting services through a franchise fund, three main parties share 

responsibilities for ensuring that proper procedures are followed: 

• government customer—the program office or agency in need of a good 

or service; 

• franchise fund—the federal entity that provides contracting services; 

and 

 5

Appendix II lists 12 original operating principles for franchise funds. 
Page 6 GAO-05-456 Interagency Contracting 

• contractor—the vendor that provides the good or service desired by 

the government customer. 

DOD program officials are most familiar with the technical requirements 

for the goods and services they need. DOD contracting officers can place 

orders directly through many interagency contracts. Alternatively, DOD 

pays the franchise fund to assume many of the contracting responsibilities 

that normally would have been handled by DOD’s contracting officers if 

the customers had relied on them to purchase the goods or services. 

Whether DOD makes purchases directly or through another agency, 

regulatory procedures and requirements are the same, such as ensuring 

competition, determining fair and reasonable pricing, and monitoring 

contractor performance. Table 1 shows the basic steps to acquire a good 

or service through GovWorks or FedSource. 

Table 1: Steps to Purchase Good or Service through GovWorks or FedSource 

Step Organization Actions taken 

1 DOD customer Identifies need for a good or service, sometimes develops government cost estimate, prepares 

a description of the goods and services needed, and sends it to franchise fund. 

2 GovWorks or FedSource Provides DOD customer an estimated price for acquiring good or service. 

3 DOD customer Commits funds to pay franchise funds for purchase of good or service, plus fee. 

4 GovWorks or FedSource Chooses a contracting vehicle from among several types; develops order for good or service to 

be provided under an existing contract or develops a new contract, conducts competition. 

Awards contract to a winning contractor or places order against an existing contract. 

Designates a contracting officer’s representative or a contracting officer’s technical 

representative to conduct contractor oversight. GovWorks generally appoints a representative 

from the customer agency. 

5 Contractor Performs or subcontracts work for DOD according to order. 

6 DOD customer Conducts contractor oversight. 

7 Contractor Submits invoice to franchise fund for work performed. 

8 GovWorks or FedSource Pays contractor for work performed. 

Source: GAO analysis of GovWorks’ and FedSource’s procedures. 

GovWorks and FedSource can either make use of their own or other 

agencies’ contracts, or they can develop new, customized contracts to 

satisfy a DOD customer’s needs. GovWorks generally uses other agencies’ 

contracts, and FedSource generally uses its own contracts. Table 2 lists 

the various types of contracting methods the franchise funds use. 
Page 7 GAO-05-456 Interagency Contracting 

Table 2: Contracting Methods Used by GovWorks or FedSource 

Contracting method Description 

GSA schedule Under the General Services Administration (GSA) schedule program, GSA negotiates 

contracts with vendors for a wide variety of goods and services at varying prices. These 

contracts permit other agencies to place orders directly with the vendors, providing 

agencies with a simplified process of acquiring goods and services while obtaining 

volume discounts. 

Indefinite delivery/ indefinite quantity 

(ID/IQ) 

Multiple-award and single-award 

These contracts can be used to acquire goods or services when the exact date of future 

deliveries is unknown but a recurring need is likely to arise. One type of indefinite 

delivery contract is an indefinite quantity contract. Indefinite quantity contracts provide for 

an indefinite quantity, within stated limits, of supplies or services during a fixed period. 

The Federal Acquisition Regulation (FAR) states a preference for multiple-awards of 

indefinite quantity contracts, but award to a single vendor is also permitted. Almost all of 

the ID/IQ contracts we reviewed were multiple-award. 

Requirements Under a requirements contract, the government designated activity is expected to 

purchase all of its needs for specific products or services from the holder of the contract. 

Blanket purchase agreement This type of agreement provides a simplified method of filling anticipated repetitive needs 

for supplies and services, allowing agencies to establish “charge accounts” with qualified 

vendors. 

8(a) Under the 8(a) program, the Small Business Administration enters into contracts with 

federal agencies and lets subcontracts for performing those contracts to eligible firms. 

Small businesses that are owned by socially and economically disadvantaged individuals 

and certified by the Small Business Administration are eligible for these contracts. 

Source: GAO analysis 

While use of other agencies’ contracting services may offer convenience 

and efficiency, our prior work and that of some agency inspectors general 

have identified problems with the use of other agencies’ contracting 

services, including lack of compliance with federal requirements for 

competition and lack of contractor oversight. In prior work, we found that 

increasing demands on the acquisition workforce and insufficient training 

and guidance are among the causes for these deficiencies.6

 Two additional 

factors are worth noting. First, the fee-for-service arrangement creates an 

incentive to increase sales volume because revenue growth supports 

growth of the organization. This incentive can lead to an inordinate focus 

on meeting customer demands at the expense of complying with 

contracting policy and required procedures. Second, it is not always clear 

where the responsibility lies for such critical functions as describing 

requirements, negotiating terms, and conducting oversight. Several 

parties—the government customer, the agencies providing the contracting 

 6

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January 2005) 

contains a list of related products. 
Page 8 GAO-05-456 Interagency Contracting 

services, and, in some cases, the contractors—are involved with these 

functions. But, as the number of parties grows, so too does the need to 

ensure accountability. We have previously reported that ensuring the 

proper execution of the contracting process is a shared responsibility of 

all parties involved in the acquisition process and that specific 

responsibilities need to be more clearly defined. 

GovWorks and FedSource did not always obtain the full benefits of 

competitive procedures, did not otherwise ensure fair and reasonable 

prices, and may have missed opportunities to achieve savings on behalf of 

DOD customers for millions of dollars worth of goods and services. With 

limited evidence that prices were fair and reasonable, GovWorks 

sometimes added millions of dollars of work to existing orders—as high as 

20 times the original order value. In addition, we found limited and 

inconsistent evidence in the GovWorks and FedSource contract files we 

reviewed that the franchise funds sought to negotiate prices or conducted 

price analysis when required. DOD customers told us they were under the 

impression that franchise funds ensure competition and analyze prices. 

However, we found numerous cases in which these practices did not 

occur. 

The FAR states that contracting officers must purchase goods and services 

from responsible sources at fair and reasonable prices. Price competition 

is the preferred method to ensure that prices are fair and reasonable. The 

FAR also includes special competition procedures for orders placed under 

the types of contracts the franchise funds use, including GSA schedules 

and multiple-award contracts. DOD’s procurement regulations have 

additional procedures for ensuring competition when purchasing services 

from these types of contracts with certain exceptions—such as urgency or 

logical follow-on. For example, when ordering from GSA schedules, DOD 

procurement regulations require contracting officers to request proposals 

from as many contractors as practicable and receive at least three offers. 

If three offers are not received, a contracting officer must determine in 

writing that no additional contractors can fulfill the requirement. 

Alternatively, the contracting officer may provide notice to all schedule 

Franchise Funds Did 

Not Always Ensure 

Fair and Reasonable 

Prices or Competitive 

Procedures 

Criteria 
Page 9 GAO-05-456 Interagency Contracting 

holders that could fulfill the requirement.7 When prices for the specific 

services being ordered are not established in the contract, the FAR and 

GSA ordering procedures require contracting officers to analyze proposed 

prices and to document that they are determined to be fair and reasonable. 

For example, when labor rates are established in the contract, relying on 

labor rates alone is not a good basis for deciding which contractor is the 

most competitive. The labor rates do not reflect the full cost of the order 

or critical aspects of the service being provided, such as the number of 

hours and mix of labor skill categories needed to perform the work. These 

procedures are designed to ensure that the government’s interests are 

protected when purchasing goods and services. 

We reviewed 10 orders—totaling about $164 million in fiscal year 2003 

funding—in which GovWorks provided contracting services to DOD’s 

customers. With the exception of two orders, which were placed against 

GovWorks’ own contracts, the orders we reviewed were placed against 

GSA schedules. In 5 of the 10 cases, GovWorks sought, but did not receive, 

competing proposals as required for the types of contracts used. In 3 of the 

10 cases, GovWorks sought and received multiple proposals for the work. 

In the remaining 2 cases, GovWorks placed orders on a sole-source or 

single-source basis and provided relevant explanations, such as an urgent 

need for the work and an award to a small disadvantaged business. Table 3 

provides details on these 10 orders, and additional information is available 

in appendix I. 

 7

Section 803 of the National Defense Authorization Act for Fiscal Year 2002, Pub. L. No. 

107-107 (2001), requires DOD to develop regulations requiring DOD to solicit offers from all 

contractors that are offering the required services under a multiple-award contract for 

orders exceeding $100,000. For GSA schedule orders, section 803, as implemented, requires 

that DOD solicit all contractors offering the required services under the applicable 

schedule or enough contractors to ensure the receipt of three offers. If three offers are not 

received, a contracting officer must determine in writing that no additional contractors 

could be identified despite reasonable efforts to do so. Under certain circumstances, 

section 803 allows waivers of competition for multiple-award contract orders and GSA 

schedule orders. The implementing regulations in the Defense Federal Acquisition 

Regulation Supplement became effective in October 2002. Defense Federal Acquisition 

Regulation Supplement 208.404-70. 

GovWorks 
Page 10 GAO-05-456 Interagency Contracting 

Table 3: GovWorks Fiscal Year 2003 Orders 

Customer Type of service 

Contracting 

method 

Number of 

proposals 

received

Award made 

to incumbent 

contractor 

Time frame to 

submit 

proposals 

(days)

GovWorks sought but did not receive competing proposals 

Air Force Aging Landing Gear 

Life Extension Program 

Engineering GSA Schedule 1 Yes 14

Air Force Deputy Chief of Staff 

Air and Space Operations 

Professional GSA Schedule 1 Yes 4

Air Force Material Command Network hardware Interior multipleaward 1 Yes 5

Army National Guard Bureau 

Chief Information Office 

Professional GSA Schedule 1 No 13

Navy Program Executive 

Officer Information Technology 

Information technology GSA Schedule 1 Yes 8

GovWorks sought and received competing proposals 

Army Chief Technology Office Information technology GSA Schedule 2 Yes 16

Army National Guard Bureau Information technology GSA Schedule 3 No 45

Army National Guard Bureau Telecommunications GSA Schedule 7 No 28

GovWorks placed sole- or single-source orders 

Army Chief Information Office Information technology 

hardware 

Interior 8(a) 1 No Not applicable

Army Program Manager 

Signals Warfare 

Logistics GSA Schedule 1 No Not applicable

Source: GovWorks (data); GAO (analysis). 

In the five cases for which GovWorks sought competing proposals but 

received only one proposal for each order, GovWorks allowed 2 weeks or 

less for proposals to be submitted. In four of these cases, orders were 

ultimately placed with incumbent contractors to fill requirements for 

ongoing programs. For example, when the Air Force’s Office of the Deputy 

Chief of Staff Air and Space Operations sought a contractor to provide 

analytical services, GovWorks gave potential contractors 4 days—around 

Christmas—to respond. The one contractor that responded was the 

incumbent and received the order, which totaled $63.4 million. When the 

Air Force’s Aging Landing Gear Life Extension Program needed a 

contractor to provide services involving landing gear technology, 

GovWorks invited 17 contractors to submit proposals and posted the 

solicitation on the Internet allowing 14 days for proposals to be submitted. 

The incumbent contractor, which had provided services to the program 

since its inception in 1998, submitted the only proposal and received the 
Page 11 GAO-05-456 Interagency Contracting 

order, which totaled $19.8 million. Each of these 5 orders was subject to 

the standards for obtaining competing offers for DOD orders, but in only 

the case of the Aging Landing Gear Life Extension Program did contract 

documentation indicate that GovWorks had attempted to meet Defense 

procurement regulations for ordering from GSA schedules. 

Our findings at GovWorks are consistent with our previous work on DOD’s 

use of other agencies’ contracts.8

 In our prior work we found that the 

reasons only one contractor responded to opportunities to compete for 

work included a perception among potential contractors that incumbent 

contractors have an advantage in competing for ongoing work and that 

very short time frames to prepare proposals discouraged others from 

competing. In this review, we found GovWorks received multiple 

proposals for work when there was no incumbent contractor and longer 

time frames allowed for competition to occur. 

In the five cases in which competing proposals were sought but not 

obtained, we found limited evidence of price analyses in GovWorks’ 

contract files.9

 In four of these cases, orders were subject to GSA ordering 

procedures for services requiring a statement of work. In the fifth case, an 

Interior multiple-award contract, the FAR required price analysis. (See 

table 3.) Consequently, GovWorks should have determined that the total 

price was fair and reasonable. GovWorks told us that it had conducted 

analyses, but we found that the files generally included only brief 

statements that prices had been determined reasonable, and GovWorks 

generally could not provide us with documentation showing what data had 

been gathered or analyses conducted to support the conclusion for the 

cases we reviewed. 

In 6 of the 10 cases we reviewed, GovWorks added substantial work 

beyond what was originally planned without determining that prices were 

 8

GAO, Contract Management: Few Competing Proposals for Large DOD Information 

Technology Orders, GAO/NSIAD-00-56 (Washington, D.C.: March 2000); GAO, Contract 

Management: Not Following Procedures Undermines Best Pricing Under GSA’s Schedule, 

GAO-01-125 (Washington, D.C.: November 2000); and GAO, Contract Management: 

Guidance Needed to Promote Competition for Defense Task Orders, GAO-04-874

(Washington, D.C.: July 2004). 

9

GovWorks primarily used GSA schedule contracts. When ordering services that required a 

statement of work, GSA’s Multiple-Award Schedules Program Owners Manual required 

that offices placing orders consider the level of effort and mix of labor proposed to perform 

specific tasks and make a determination that task order pricing was fair and reasonable 

(app. A, 2001). 
Page 12 GAO-05-456 Interagency Contracting 

fair and reasonable. For example, GovWorks increased an original order 

20-fold by adding $45.5 million for management consulting services for the 

National Guard Bureau Chief Information Office. GovWorks modified 

another National Guard order on numerous occasions, this time increasing 

the value of the original order for an automated information system from 

$17.6 million to $44.6 million. An order for reconnaissance and 

surveillance flight support to Army combatant commands increased in 

value from $7.4 million to $34.9 million. The order was intended to provide 

support in Bosnia, for a period of 15 months with no option to renew, but 

was expanded to include operations in Colombia, and the period of 

performance was extended by more than 2 years. In each of these 

examples, GovWorks assigned the additional work without conducting 

price analyses to determine whether the prices charged were fair and 

reasonable. 

We reviewed seven FedSource projects—amounting to $85 million in fiscal 

year 2003—and found that the franchise fund did not compete orders it 

placed under multiple-award contracts or perform analyses to ensure fair 

and reasonable pricing.10 FedSource commonly used multiple-award 

contracts to make purchases for DOD. When placing orders against 

multiple-award contracts, DOD is generally required to ensure that 

contract holders have a fair opportunity to submit an offer and have that 

offer fairly considered for each order with certain exceptions—such as 

urgency or logical follow-on.11 In addition, FedSource used Blanket 

Purchase Agreements and requirements contracts for some of the projects 

we reviewed. Table 4 provides detail on the seven projects, and additional 

information is available in appendix I. 

 10We found Treasury competitively awarded the indefinite delivery contracts included in 

our review. 

11Defense Federal Acquisition Regulation Supplement 216.505-70. 

FedSource 
Page 13 GAO-05-456 Interagency Contracting 

Table 4: FedSource Fiscal Year 2003 Projects Reviewed 

 

Contracting method used to fill fiscal year 2003 

requirements 

 Indefinite delivery 

 Indefinite quantity 

Customer 

Type of 

service 

provided 

Multipleaward Single 

award Requirements 

Blanket 

purchase 

agreement 

Total number 

of fiscal year 

2003 work 

assignments

Number of 

work 

assignments 

reviewed

Walter Reed Army 

Medical Center 

Staffing 9 9 874 66

U.S. Army Fort 

McCoy 

Construction 9 187 12

Army 88th Regional 

Readiness Command 

at Fort Snelling 

Staffing and 

construction 

9 31 5

The Pentagon Information 

technology 

9 55

Navy Recruiting 

Command 

Staffing 9 273 18

Lackland Air Force 

Base 

Staffing 9 9 9 185 14

Brooke Army Medical 

Center 

Staffing 9 9 9 248 25

Source: Department of Treasury (data); GAO (analysis). 

The FedSource business model involves a two-step process of placing an 

order under previously awarded contracts and subsequently developing 

work assignments to define requirements for that order. In the first step, 

contracting officers issue orders indicating the type and approximate 

dollar value of work that FedSource anticipates will be required under 

each contract. This estimated value is based on historical usage. The 

second step is executed later when DOD identifies its needs. At this point, 

FedSource administrative personnel define tasks and outcomes and assign 

work to a contractor. In our past work, we recommended that the FAR 

clarify that agencies should not award large, undefined orders against 

multiple-award contracts and subsequently define specific tasks.12 The 

FAR was revised to encourage agencies to define work clearly so that the 

total price for work could be established at the time orders are issued.13

 12GAO/NSIAD-00-56. 

13FAR 16.505 (a). 
Page 14 GAO-05-456 Interagency Contracting 

Although this requirement was in effect for the period of our review, we 

found that FedSource routinely allowed modifications to orders through 

work assignments that substantially increased the total price of the orders. 

FedSource did not provide contractors the opportunity to submit offers 

for orders under multiple-award contracts and have their offers fairly 

considered, as required by the FAR. FedSource officials told us that their 

business model does not provide contractors the opportunity to submit 

offers on orders. Instead, FedSource officials told us that administrative 

personnel were responsible for providing contractors a fair opportunity to 

be considered for work under multiple-award contract orders when 

assigning specific work to contractors. However, we found this generally 

did not occur. Of the 120 work assignments we reviewed, 75 were for work 

under multiple-award contracts. We found that in most of the 75 work 

assignments, FedSource administrative personnel did not provide 

contractors this opportunity. For example, FedSource used one of these 

contracts to fill several individual support staff positions at Brooke Army 

Medical Center at Fort Sam Houston and generally assigned work to one 

of the three multiple-award contractors without providing the other two 

contractors an opportunity to be considered. Justifications accompanying 

these assignments stated that assigning work to more than one contractor 

might create conflict among assigned staff over variations in pay and 

benefits. The Army’s Fort McCoy used FedSource to obtain contractor 

support for a variety of construction projects, and FedSource assigned the 

work noncompetitively for all 12 work assignments we reviewed to 1 of 3 

multiple-award contract holders—totaling $7.2 million. The contract 

holder, a firm specializing in staffing, subsequently passed the work 

through to local construction companies that Fort McCoy officials had 

identified. Justifications accompanying some of the projects stated that 

the FedSource contracting officer’s representative had determined that it 

was “in the best interest of the government to award task orders to the 

vendor that solicited and brought in the business.” A FedSource quality 

review later concluded that these justifications were inadequate. Many 

months after the assignments were made, a second justification was 

placed in the contract files citing numerous reasons for selecting the 

preferred contractor. One of the reasons was that the project required 

expedited effort to support urgent requirements, which might have been 

an acceptable reason, except that the justification did not indicate that use 

of the other two contractors would have resulted in unacceptable delays. 
Page 15 GAO-05-456 Interagency Contracting 

In another example, the Navy needed to fill several administrative 

positions at its 31 regional recruiting centers around the country. Under 

another purchasing arrangement,14 FedSource assigned the work to two 

contractors, one for recruiting centers east of the Mississippi River and the 

other for centers to the west of the river. These arrangements did not 

establish prices for any of the services provided, and FedSource personnel 

told us that they accepted the prices provided by the contractors. This 

type of purchasing arrangement does not justify purchasing from only one 

source—contracting officers are still required to solicit price quotations 

from other sources. However, there was no evidence FedSource personnel 

had negotiated or analyzed these prices. 

In addition, FedSource did not always demonstrate that prices were 

reasonable.15 For example, in two of the customer projects we reviewed, 

FedSource made work assignments for construction services at the Army’s 

Fort McCoy and Fort Snelling against a contract for operational support. 

Because the original contract had a very broad and undefined statement of 

work that did not explicitly include construction, no prices for that type of 

work had been established in the contract. For the project at Fort McCoy, 

the contractor that received the assignment solicited prices from potential 

subcontractors and presented their price, including a markup, to 

FedSource. We did not find any analysis to determine that the contractor’s 

price was reasonable in FedSource’s files. FedSource officials told us that 

they have since awarded a separate contract for construction services. 

In four of the five projects involving staffing support, FedSource paid 

contractors higher prices for services than were established in the 

contract. Most of the files we reviewed contained no justifications for the 

higher prices. For example, in our review of 25 work assignments for 

staffing support services at an Army medical center, 14 of the work 

assignments were priced higher than the price established in the contracts. 

In 9 of these cases, FedSource had agreed to additional sick leave or 

vacation time as part of the hourly rate, but FedSource’s contract file 

 14FedSource filled this requirement using two blanket purchase agreements. These blanket 

purchase agreements must follow section 13.303-5 of the FAR, which requires obtaining 

quotes from other vendors. 

15The Treasury franchise fund primarily develops multiple-award contracts under section 

16.505 of the FAR. When ordering services that are not specifically established in the 

contract, ordering offices are required to establish prices using the pricing procedures of 

FAR subpart 15.4. FAR Subpart 15.402 requires that supplies and services are purchased at 

fair and reasonable prices. 
Page 16 GAO-05-456 Interagency Contracting 

contained no documentation indicating that the contractor employee 

qualified for the additional benefits. 

DOD did not follow sound management practices designed to ensure value 

while expeditiously acquiring goods and services. DOD customers chose 

to use franchise funds based on convenience, rather than as part of an 

acquisition plan. DOD conducted little analysis, if any, to determine 

whether using franchise funds’ contracting services was the best method 

for acquiring a particular good or service. For their part, although 

franchise funds’ business operating principles require that they maintain 

and evaluate cost and performance benchmarks against their competitors, 

they did not perform analyses that DOD could use to assess whether the 

franchise funds deliver good value. Their performance measures generally 

focus on customer satisfaction and generating revenues, rather than 

proper use of contracts and sound management practices. This focus on 

customer satisfaction and generating revenues provides an incentive to 

emphasize customer service rather than ensuring proper use of contracts 

and good value. 

DOD customers told us that they did not formally analyze contracting 

alternatives but generally chose to pay GovWorks and FedSource to 

provide contracting services because the franchise funds provided quick 

and convenient service. Some customers were dissatisfied with the speed 

and quality of services provided by DOD’s in-house contracting offices. 

For example, two DOD customers told us that their contracting offices 

required 9 months to respond to their purchasing needs, while the 

franchise fund required only a few weeks. The franchise fund’s ability to 

place orders quickly was valuable to DOD customers in these situations. 

DOD customers said that franchise funds’ contracting services were less 

restrictive than other DOD contracting alternatives. Some DOD customers 

told us that GovWorks and FedSource made it easier to spend funds at the 

end of a fiscal year unlike DOD’s in-house contracting offices. Two DOD 

customers said that GovWorks made it easier to spend small amounts of 

funding because GovWorks would place orders incrementally as funding 

became available. Some DOD customers mentioned that using FedSource 

meant they did not have to “live with the terms and conditions” of a long 

term contract or that it was easier to replace problem contractor 

employees. In one case, we were told that, if the organization had to fill 

positions with government employees, it would have less flexibility to hire 

the personnel it needed in a timely manner. 

DOD Focused on 

Convenience and Did 

Not Pay Sufficient 

Attention to Analyzing 

Contracting 

Alternatives 

DOD Selected Franchise 

Funds for Convenience 

with Limited Analysis of 

Alternatives 
Page 17 GAO-05-456 Interagency Contracting 

Analysis of contracting alternatives helps to ensure that purchases are 

made by the most appropriate means and are in DOD’s best interest; 

however, DOD has no clear mechanism for making this determination 

when using other agencies’ contracting services. DOD’s guidance on the 

use of these vehicles has been evolving for several years and has not yet 

been fully implemented. DOD also lacks a means to gather data on the use 

of interagency contracts on a recurring basis, although it has been subject 

over the years to various requirements to monitor interagency purchases. 

In 2003, in response to a congressional mandate,16 DOD was unable to 

compile complete data on spending through interagency contracts. DOD 

officials told us that their financial systems are not designed to collect this 

data. Without this type of data, it is difficult to make informed decisions 

about the use of other agencies’ contracting services. DOD issued 

guidance in October 2004 that requires the military departments and 

defense agencies to determine whether using interagency contracts—such 

as those the franchise funds manage—is in DOD’s best interest. While this 

guidance outlines procedures to be developed, and general factors to 

consider, it does not provide specific criteria for how to make this 

determination and does not require military departments and agencies to 

report on the use of interagency contracts. DOD has directed the military 

departments and defense agencies to develop their own guidance to 

implement this policy. Congress has also recently taken action to ensure 

DOD’s proper use of interagency contracts.17 The conference report 

accompanying this legislation established expectations that DOD’s 

procedures will ensure that any fees paid by DOD to the contracting 

agency are reasonable in relation to work actually performed. 

In 2001, Congress adopted legislation requiring DOD to establish a 

management structure and establishing savings goals for the procurement 

of services.18 The legislation also requires DOD to ensure that contracts for 

services are entered into or issued and managed in compliance with 

applicable laws and regulations regardless of whether the services are 

 16National Defense Authorization Act for Fiscal Year 2003, Pub. L. No. 107-314 § 824 (2002). 

17National Defense Authorization Act for Fiscal Year 2005, Pub. L. No. 108-375, § 854 (2004). 

The act prohibits DOD from purchasing goods or services through the use of an 

interagency contract unless the purchase is made in accordance with procedures for 

reviewing and approving the use of these contracts. These requirements take effect 180 

days after the enactment of the act. 

1810 U.S.C. § 2330 as added by section 801 of the National Defense Authorization Act for 

Fiscal Year 2002. Section 802 added a note to 10 U.S.C. § 2330 establishing savings goals. 
Page 18 GAO-05-456 Interagency Contracting 

procured by DOD directly or through a non-DOD contract or task order.19

One of the goals of this legislation was to allow DOD to improve the 

management of the procurement of services. However, DOD generally 

chose to use franchise funds for reasons of speed, convenience, and 

flexibility rather than taking a strategic and coordinated approach to 

acquiring services. We found that prior to choosing to use a franchise 

fund, DOD did not analyze costs and benefits or prepare business cases to 

determine whether the franchise fund provided better value—considering 

the fees it charges—compared with other alternatives, such as using a 

DOD contracting office or purchasing goods or services through another 

federal agency’s existing contract. As a result, DOD customers did not 

consider opportunities to leverage their buying power when using 

franchise funds. None of the DOD customers we spoke to analyzed tradeoffs between total price, including fees, and the benefits of convenience. 

For example, on a group of work assignments for construction services 

valued at $7.2 million, the Army’s Fort McCoy paid FedSource a total of 

about $1 million, or 17 percent above the subcontractor’s proposed price, 

for the contractor markup and the franchise fund fee. Most of these 

assignments were placed towards the end of the fiscal year. This may have 

led to a higher price for the services than DOD would have paid in 

contracting directly with the subcontractors. Figure 2 shows the general 

process by which the Army’s Fort McCoy used FedSource to obtain 

contractor support for construction services. 

 1910 U.S.C. § 2330. DOD began implementing these requirements in May of 2002 by 

requiring the military components to propose their own process and procedures for 

management and oversight of all acquisition services. 
Page 19 GAO-05-456 Interagency Contracting 

Figure 2: Example of Project for Which Army Paid FedSource 17 Percent In Fees 

and Markups 

The DOD customer said that FedSource made it easier than his own 

contracting office to assign work with values greater that $25,000 late in 

the fiscal year because FedSource’s deadlines were not as strict. He also 

speculated that the subcontractor probably would have charged more if 

contracting directly with the government because dealing with the 

government is cumbersome and costly. He did not have information to 

indicate what the subcontractor’s price might have been, nor did he 

perform any formal analysis to compare FedSource with other contracting 

opportunities. 

Conducting a thorough analysis also might have given DOD a better 

understanding of the fees paid to make purchases through the franchise 

funds. For example, DOD customers sometimes paid a GovWorks fee, or 
Page 20 GAO-05-456 Interagency Contracting 

service charge, on top of a fee to use another agency’s contract because 

GovWorks generally uses other agencies’ contracts to make purchases for 

DOD customers. While some customers were aware of the fees they paid, 

in two cases, DOD customers selected GovWorks because its fees were 

lower than fees charged by other agencies; however, the customers did not 

realize that GovWorks’ fees were in addition to the other agencies’ fees. 

GovWorks’ fees generally ranged from 2 percent to 4 percent of the price 

for goods and services purchased, and our analysis showed that 

FedSource fees ranged from 2 percent to 8 percent for the contracts and 

orders we reviewed. Congress has mandated that DOD agencies report 

fees paid for the use of other agencies’ contracts in the past and required 

DOD to do so again for fiscal year 2005.20

The franchise funds’ business operating principles require that they 

maintain and evaluate cost and performance benchmarks against their 

competitors. However, they did not perform analyses that DOD could use 

to assess whether the franchise funds deliver good value. FedSource 

claims that it achieves lower prices on goods and services because it 

aggregates requirements and negotiates price discounts. Further, 

FedSource claims that competition with other contracting offices provides 

an incentive to provide better quality at lower cost. However, this 

incentive may not drive costs down unless customers are sensitive to the 

cost of doing business with one agency over another and make decisions 

based on costs. Franchise fund officials told us that demonstrating these 

advantages was difficult because they lacked insight into the prices 

customers would have paid when using other contracting alternatives to 

fill their requirements. FedSource officials also explained that quantifying 

the value of the other benefits they provide—such as convenience and 

flexibility—is difficult. Instead, GovWorks and FedSource have used such 

measures as growth in total contracting activity and revenues as well as 

customer satisfaction but have little data to demonstrate that they provide 

better quality and lower price goods and services than other federal 

contracting alternatives can provide. In fact, GovWorks marketing 

materials emphasize convenience and value-added service rather than 

costs. In our prior work, we found that fee-for-service contracting 

arrangements emphasize the overall sustainability of the contracting 

 20National Defense Authorization Act for Fiscal Year 2003, Pub. L. No. 107-314 § 824 (2002), 

and § 854 National Defense Authorization Act for Fiscal Year 2005, Pub. L. No. 108-375 

(2004). The fiscal year 2005 requirement applies to all fees imposed on purchases 

exceeding the simplified acquisition threshold in fiscal years 2005 and 2006. 

Franchise Funds 

Emphasize Customer 

Service over Good Value 
Page 21 GAO-05-456 Interagency Contracting 

operation, as the fees collected are used to cover the costs of doing 

business, which may lead to a focus on customer service at the expense of 

compliance with contracting policy and procedures. 

DOD, GovWorks, and FedSource did not follow federal contracting 

procedures designed to ensure value while expeditiously acquiring goods 

and services. DOD and the franchise funds did not define desired 

outcomes and the specific criteria against which contractor performance 

could be measured and paid limited attention to monitoring contractors’ 

work. As we have reported previously, it is not always clear where the 

responsibility lies for such critical functions as describing requirements, 

negotiating terms, and conducting oversight. Although the FAR states that 

contracting officers are responsible for including appropriate quality 

requirements in solicitations and contracts and for contract surveillance, 

the franchise funds do not have sufficient knowledge about the DOD 

customers’ needs to fulfill these responsibilities without the assistance of 

the DOD customer. Recently, the franchise funds contracting operations 

performed some internal reviews that have findings similar to ours, and 

the funds are working to address the problems. These shortcomings 

mirror many of the findings of our previous work and are among the 

reasons we have designated interagency contracting as a governmentwide 

high-risk area. 

In the GovWorks and FedSource cases we reviewed, required outcomes 

were not well-defined, work was generally described in broad terms, and 

orders sometimes specifically indicated that work would be defined more 

fully after the order was placed. GovWorks and FedSource files we 

reviewed lacked clear descriptions of outcomes to be achieved or 

requirements that the contractor was supposed to meet. 

The FAR states that contracting officers are responsible for including the 

appropriate quality requirements in solicitations and contracts. Without 

these criteria, accountability becomes harder to determine and the risk of 

poor performance is increased. Clear definition of requirements promotes 

better mutual understanding of the government’s needs. In a typical 

situation, the customer—a DOD program office, for example—is best 

qualified to know what it needs. However, once a DOD program office 

chooses to pay a franchise fund to make purchases on its behalf, the office 

must then rely on the franchise fund to provide the contracting expertise. 

The two parties have to work together to ensure that requirements for 

purchases are well-defined with sufficient detail to determine whether the 

DOD and Franchise 

Funds Did Not Pay 

Sufficient Attention to 

Defining Outcomes or 

Overseeing 

Contractor 

Performance 

GovWorks and FedSource 

Did Not Clearly Define 

Outcomes or Establish 

Criteria for Quality 
Page 22 GAO-05-456 Interagency Contracting 

desired outcomes were met and the goods and services provided meet the 

government’s needs. Critical information must be documented in order to 

make these determinations. GovWorks and FedSource use different 

processes, and the tables in appendix III explain some of the pertinent 

contract documents used to define desired outcomes and criteria. 

In 7 of the 10 GovWorks orders we reviewed, statements of work were 

very broad. For example, six of these orders contained language stating 

that specific tasks could be added, deleted, or redefined throughout the 

period of performance. In some cases, DOD program officials told us that 

the statements of work were broad because they were not aware of all 

requirements when the order was placed or because they were operating 

in a constantly changing technological environment. DOD program 

officials also told us that the broad statements of work gave them 

flexibility to add requirements to existing orders as additional needs arose. 

Orders placed by FedSource against its contracts contained only a very 

general statement—generally just a few words—describing the work in 

broad terms and an anticipated dollar value. These orders did not clearly 

describe all services to be performed or supplies to be delivered so that 

the full price for the work could be established when the order was 

placed, as required by the FAR. As noted earlier, FedSource officials 

explained that in their business model, orders were not intended to 

describe specific work to be completed. Instead, FedSource administrative 

personnel issued work assignments that were intended to provide the 

clear descriptions of desired outcomes that the orders did not. However, 

we found that these work assignments were often unclear as well. Five of 

FedSource’s largest customer projects for DOD involved use of contracts 

to provide staff. Work assignments for staffing services often described 

the position to be filled, including a general outline of duties. However, the 

assignments did not contain criteria for evaluating the work performed by 

contract employees. 

In addition, when providing staffing support, FedSource uses these 

contracts to fill positions individually, rather than describing functional 

needs or desired results. For example, at an Army medical center 

FedSource filled over 200 positions individually instead of aggregating 

these positions into fewer functional requirements. This acquisition 

approach does not provide contractors with the flexibility to determine 

how best to staff a function and does not lend itself to a performance-
Page 23 GAO-05-456 Interagency Contracting 

based approach. Under performance-based contracting, the contracting 

agency specifies the outcome or result it desires and leaves it to the 

contractor to decide how best to achieve the desired outcome.21

FedSource officials said they were moving toward a more performancebased contracting approach. 

To determine whether an environment had been created that would allow 

improper personal services relationships to develop, we interviewed 

officials at five DOD program offices that used FedSource contracts to 

staff individual positions. We asked questions about the work performed 

by the contractor employees and the relationships between the DOD 

customers and the contractor employees. The DOD officials said that 

generally: the services provided by the contract employee were integral to 

agency functions or missions; the contractor employees were providing 

services comparable to those performed using civil service personnel; and 

the services were provided on site and with the use of equipment provided 

by the government. With regard to the work relationships, DOD customers 

told us that government employees assigned and prioritized daily tasks for 

the contractor employees. FedSource guidelines also state that the 

government customer is responsible for verifying contract employee hours 

worked by signing the contractor’s weekly timesheet. Further, a 

FedSource internal review found that statements of work contained 

“personal services-type language like ‘under the direction of’ or ‘oversee’ 

or ‘duties’ or ‘job description.’” Our review also found documents that had 

been edited to revise similar language. FedSource officials were aware of 

the potential that these contracts might be used for personal services and 

took various steps to clarify that personal services were not to be 

provided. For example, FedSource officials provided training for DOD 

customers on how to avoid creating a situation that had the appearance of 

personal services. Although this training is a positive step, poorly defined 

statements of work provided the opportunity for situations to arise in 

which personal services relationships could develop. 

FedSource relied on administrative staff, not contracting officers, to work 

with the customer to define and assign the specific tasks to be performed 

or the positions to be filled. A FedSource review found that trained 

contracting staff was needed for developing task order requirements and 

 21Performance-based services contracting emphasizes that all aspects of an acquisition be 

structured around the purpose of the work to be performed as opposed to the manner in 

which the work is to be performed, or broad, imprecise statements of work that preclude 

an objective assessment of contractor performance. 
Page 24 GAO-05-456 Interagency Contracting 

warranted contracting officers were required for issuing task orders. The 

FedSource administrative employees do not have the same level of 

expertise as contracting officers, who have specialized knowledge to 

ensure compliance with federal regulations and guidelines. Inadequacies 

we found in FedSource’s contracting practices pointed to the challenges of 

relying on administrative personnel rather than contracting experts to 

review statements of work, choose appropriate contracting vehicles, 

ensure adequate competition, and sign off on assignments of specific 

work. 

DOD customers, GovWorks, and FedSource often relied on methods of 

contract oversight that lacked performance measures to ensure that 

contractors provided quality goods and services in a timely manner. 

Typically, the franchise funds failed to include an oversight plan that 

contained specific quality criteria in their contracts or orders. Without this 

critical information, neither DOD nor the franchise funds could effectively 

measure contractor performance. 

The FAR and DOD’s procurement regulations require contract surveillance 

and documentation that it occurred.22 Contract surveillance, also referred 

to as oversight, is a contracting officer’s responsibility, and DOD pays the 

franchise fund to assume the responsibilities of contracting officers. The 

Office of Management and Budget’s Office of Federal Procurement Policy 

has issued policy stating that contract oversight begins with the 

assignment of trained personnel who conduct surveillance throughout the 

performance period of the contract to ensure the government receives the 

services required by the contract.23 DOD guidance states that 

documentation constitutes an official record and the surveillance 

personnel assessing performance are to use a checklist to record their 

observations of the contractor’s performance. The guidance also states 

 22FAR 37.602-2, Quality assurance, FAR 46.104, Contract administration office 

responsibilities, and Defense Federal Acquisition Regulation Supplement 246.102. 

23Office of Federal Procurement Policy (Policy Letter 93-1). When contracting for services, 

in particular highly specialized or technical services, agencies should ensure that a 

sufficient number of trained and experienced officials are available within the agency to 

manage and oversee the contract administration function. 

DOD Customers, 

GovWorks, and FedSource 

Did Not Specify Necessary 

Criteria for Contract 

Oversight 
Page 25 GAO-05-456 Interagency Contracting 

that all performance should be documented whether it is acceptable or 

not.24

The GovWorks contract files we reviewed generally did not include 

contractor monitoring plans, quality assurance surveillance plans, test and 

acceptance plans, or other evidence of monitoring activities. However, the 

files did contain evidence that a contracting officer’s representative from 

the DOD program office had been appointed to assist in performing 

contractor oversight. Although ensuring that contract oversight occurs is a 

contracting officer responsibility, GovWorks officials told us that 

surveillance plans were not usually kept in the GovWorks contracting 

officers’ contract files. Instead, these plans were maintained by the 

contracting officer’s representative at the DOD customer agency. When we 

asked about contract oversight, we found that in the absence of an agreed 

upon oversight plan, DOD customers generally ensured that there was 

some process in place for monitoring performance. Some customers 

described status meetings and regular progress reports, but generally told 

us that they had no specific criteria for monitoring contractor 

performance or established measures for determining the quality of 

services. Although GovWorks officials told us that their contracting 

officers did assist customers in measuring quality services from the 

acquisition planning stages through contract completion, we found little 

evidence that this actually took place. 

We found that FedSource generally did not ensure that contractor 

oversight occurred. As was the case with GovWorks, FedSource officials 

told us that they encouraged DOD to develop criteria for quality. However, 

FedSource allowed general information—such as job descriptions—to 

serve as requirements, even though the job descriptions contained no 

criteria for measuring quality. These descriptions did not provide 

sufficient information to establish an oversight plan. FedSource did not 

appoint trained contracting officers’ representatives from DOD to conduct 

on-site monitoring. Instead, FedSource relied on its own administrative 

personnel, who had been trained as contracting officers’ technical 

representatives but were not located on-site with the customer, to assess 

contractor performance. Because they were not on-site, they could not 

observe the quality of the contractors’ work, and FedSource generally took 

the absence of complaints from DOD customers as an indication that the 

 24DOD, Guidebook for Performance-Based Services Acquisition in the Department of 

Defense (Washington, D.C.: December 2000). 
Page 26 GAO-05-456 Interagency Contracting 

contractor was performing satisfactorily. A FedSource official explained 

that FedSource guidelines state that the customer agency’s acceptance of 

the contract employee’s time sheet indicates agreement that services have 

met quality standards and requirements. This policy lacks clear criteria 

and measures to determine whether the contractor has provided quality 

services. In place of criteria, we found DOD customers said they generally 

evaluated performance of contractor staff based on informal observation 

and customer satisfaction. 

The lack of adequate oversight is consistent with what we have reported in 

our recent work on contractor oversight for DOD service contracts, where 

we found that almost all of those that had insufficient oversight were 

interagency contracts. DOD explained that contractor oversight is not as 

important to contracting officials as awarding contracts and does not 

receive the priority needed to ensure that oversight occurs. DOD 

concurred with our recommendations to develop guidance on contractor 

oversight of services procured from other agencies’ contracts, to ensure 

that proper personnel be assigned to perform contractor oversight in a 

timely manner no later than the date of contract award, and that DOD’s 

service contract review process and associated data collection 

requirements provide information that will provide management visibility 

over contract oversight.25

Aside from monitoring the contractors’ performance, we also found that 

the departments of the Interior and the Treasury, which operate 

GovWorks and FedSource, respectively, and the Office of Management 

and Budget have conducted infrequent reviews of franchise funds’ 

procurement activities. GovWorks and FedSource have recently 

conducted internal reviews of their operations that have identified 

concerns similar to those we found. 

A GovWorks’ 2004 Management Review identified such issues as lack of 

acquisition planning for work added to existing awards, unanticipated 

increases in the amounts of orders, and inadequate documentation of 

many requirements such as competitive procedures, determinations that 

changes were within the scope of the contract, the basis of award 

decisions, and that prices were fair and reasonable. FedSource officials 

 25GAO, Contract Management: Opportunities to Improve Surveillance on Department of 

Defense Service Contracts, GAO-05-274 (Washington, D.C.: March 2005). 

Oversight of Franchise 

Funds Has Been Limited 
Page 27 GAO-05-456 Interagency Contracting 

recently started conducting “office assistance reviews.” A June 2004 

FedSource review identified lack of documentation, use of purchasing 

agreements beyond their intended parameters and dollar limits, lack of 

price analysis, lack of quality assurance plans, and the need for warranted 

contracting officers rather than administrative personnel to perform much 

of the work. 

While the operating principles for franchise funds require the funds to 

have comprehensive performance measures, these measures do not 

emphasize compliance with contracting regulations and generally focus on 

customer satisfaction, financial performance, and generating revenues to 

cover operating costs. Several customers we interviewed were unaware of 

compliance problems and told us that they believed the franchise funds 

placed orders on a competitive basis, analyzed prices, or otherwise sought 

to ensure the best deal for the government when the funds, in fact, did not. 

GovWorks has taken steps that address concerns raised in its own 

reviews, such as increased training for contracting officers, developing a 

written acquisition procedures manual, and creating a uniform system of 

contract file maintenance and sample documents to ensure adequate 

documentation. GovWorks officials also told us they are trying to improve 

competitive procedures by requiring all solicitations for DOD work to be 

posted on e-Buy, an online system to request quotes for products and 

services.26 FedSource also has taken steps toward addressing concerns 

raised in this report, such as quality assurance planning, hiring contracting 

officers, and restructuring its operations. These initiatives are underway, 

and it is too early to tell whether they will improve contracting operations 

at the franchise funds. 

The Office of Management and Budget’s oversight of franchise funds has 

been limited. The Office of Management and Budget and the Chief 

Financial Officers Council established business-operating principles as a 

foundation for effective franchise fund management and, as required by 

the Government Management Reform Act, submitted an interim report on 

the franchise fund pilot program to Congress in 1998. Among other efforts, 

the report recommended that the franchise funds should continue to seek 

opportunities to provide services at the least cost to the taxpayer, 

 26e-Buy is an online Request for Quotations tool that allows federal buyers to send requests 

and receive quotes for products and services available under the GSA multiple-award 

schedules program. Implementing regulations for section 803 in the Defense Federal 

Acquisition Regulation Supplement state that posting of a request for quotations on “e-Buy” 

is one medium for providing fair notice to all contractors as required by the regulation. 
Page 28 GAO-05-456 Interagency Contracting 

contributing to reducing duplicative administrative functions and 

consequently to the costs of those functions. The report noted that the 

franchise funds’ performance measures were in varying stages of 

development. The report recommended that the Office of Management and 

Budget should report to Congress on franchise fund activity prior to the 

expiration of the pilot authority and that the office should continue to 

develop and implement operating guidance for the franchise fund 

program. Although the Office of Management and Budget’s budget 

examiners conduct some monitoring of franchise funds as part of their 

general oversight responsibilities, Office of Management and Budget 

representatives said they have not conducted any comprehensive reviews 

of franchise funds since they submitted the required report to Congress. 

Neither have they reviewed the funds’ contracting practices. 

GovWorks and FedSource, created as a result of governmentwide 

initiatives to improve efficiency, have streamlined contracting processes 

to provide customers with greater flexibility and convenience. However, 

GovWorks and FedSource have not always adhered to competitive 

procedures and other sound contracting practices. They have paid 

insufficient attention to basic tenets of the federal procurement system—

taxpayers’ dollars should be spent wisely, steps should be taken to ensure 

fair and reasonable prices, and purchases should be made in the best 

interest of the government. One factor contributing to these deficiencies is 

that the departments of the Interior and the Treasury have not ensured 

that the franchise funds’ contracting services follow the FAR and other 

procurement policies. The franchise funds need to develop clear, 

consistent, and enforceable policies and processes that comply with 

contracting regulations while maintaining good customer service. Another 

contributing factor is that the roles and responsibilities of the parties 

involved in the interagency contracting process are not always clearly 

defined. GovWorks and FedSource are ultimately accountable for 

compliance with procurement regulations when they assume the role of 

the contracting officer. However, they often depend on the customer for 

detailed information about the customer’s needs. To facilitate effective 

purchasing and to help obtain the best value of goods and services, all 

parties involved in the use of interagency contracts have a stake in 

clarifying roles and responsibilities. Additionally, franchise funds 

sometimes face incentives to provide good customer service at the 

expense of proper use of contracts and good value. These pressures are 

inherent in the fee-for-service contracting arrangement. 

Conclusions 
Page 29 GAO-05-456 Interagency Contracting 

Because the franchise funds have not always adhered to sound contracting 

practices, DOD customers must be cautious when deciding whether 

franchise fund contracting services are the best available alternative. In 

addition to convenience and flexibility, decisions to use franchise funds 

should be grounded in analysis of factors such as price and fees. Further, 

to enhance DOD’s ability to develop sound policies related to the use of 

franchise funds, DOD needs measurable data that would allow it to assess 

whether franchise funds’ contracting services help lower contract prices, 

reduce administrative costs, and improve the delivery of goods and 

services. This information would also be useful in leveraging DOD’s 

overall buying power through strategic acquisition planning. No one 

knows the total cost of using other agencies’ contracting services. Without 

understanding total cost, value is elusive. In addition, DOD customers 

should ensure that taxpayers’ dollars are spent wisely by sharing in the 

responsibilities for developing clear contract requirements and oversight 

mechanisms. DOD customers are the best source of information about 

their specific needs and are also best positioned to oversee the delivery of 

goods and services. 

Given the incentive to focus on sustaining the franchise funds’ operations 

and the many service providers from which customers like DOD may 

choose, objective oversight would help to ensure that franchise funds 

adhere to procurement regulations and operate as intended. The Office of 

Management and Budget, which designated and has previously evaluated 

the franchise funds, is well positioned to periodically evaluate, monitor, 

and develop guidance to improve the franchise funds’ contracting 

activities. 

While a number of actions to improve DOD’s use of other agencies’ 

contracting services are already underway, to enhance these initiatives, we 

make the following eight recommendations to DOD, the Interior, the 

Treasury, and the Office of Management and Budget. 

To ensure that DOD customers analyze alternatives when choosing 

franchise funds and to provide DOD with the measurable data it needs to 

assess the value of the franchise funds’ contracting services, we 

recommend that the Secretary of Defense take the following three actions: 

• Develop a methodology to help DOD customers determine whether 

use of franchise funds’ contracting services is in the best interest of the 

government. The methodology should include analysis of tradeoffs. 

Recommendations for 

Executive Action 
Page 30 GAO-05-456 Interagency Contracting 

• Reinforce DOD customers’ ability to define their needs and desired 

contract outcomes clearly. This skill includes working with franchise 

fund contracting officers to translate their needs into contract 

requirements and to develop oversight plans that ensure adequate 

contract monitoring. 

• monitor and evaluate DOD customers’ use of franchise funds’ 

contracting services, prices paid, and types of goods and services 

purchased. Prices include franchise fund fees and fees for use of other 

interagency contracts. 

To ensure that GovWorks and FedSource adhere to sound contracting 

practices, we recommend that the Secretaries of the Interior and the 

Treasury take the following two actions: 

• develop procedures and performance measures for franchise fund 

contracting operations to demonstrate compliance with federal 

procurement regulations and policies while maintaining focus on 

customer service and 

• develop procedures for franchise fund contracting officers to work 

closely with DOD customers to define contract outcomes and effective 

oversight methods. 

To ensure that the FedSource workforce has the skills to carry out 

contracting responsibilities, we recommend that the Secretary of the 

Treasury take the following action: 

• assign warranted contracting officers to positions responsible for 

performing contracting officer functions. 

In order to provide incentives for the franchise funds to adhere to 

procurement regulations and to ensure that franchise funds operate as 

intended, we recommend that the Director of the Office of Management 

and Budget take the following two actions: 

• Expand monitoring to include franchise funds contracting operations’ 

compliance with procurement regulations and policies. These findings 

should be available to customers to ensure transparency and 

accountability to customers and the Congress. 

• Develop guidance to clarify the roles and responsibilities of the parties 

involved in interagency contracting through franchise funds. 
Page 31 GAO-05-456 Interagency Contracting 

We provided a draft of this report to DOD, the departments of the Interior 

and the Treasury, and the Office of Management and Budget for review 

and comment. We received written comments from DOD and the 

Department of the Treasury, which are reprinted in appendices IV and V 

respectively. The Department of the Interior and the Office of Management 

and Budget provided comments via e-mail. 

DOD concurred with our recommendations and identified actions it has 

taken or plans to take to address them. In response to our 

recommendation that the Secretary of Defense develop a methodology to 

help DOD customers determine whether the use of franchise funds’ 

contracting services is in the best interest of the government, DOD 

indicated that action had been taken through the issuance of a policy 

memo titled Proper Use of Non-DOD Contracts and subsequent policies 

issued by the military departments. We acknowledge the DOD policy 

memo in our report and note that this guidance describes general factors 

to consider but does not provide specific criteria for how to make this 

determination. The policies issued by the military departments establish 

procedures for review and approval of the use of non-DOD contract 

vehicles, but do not address methods of determining whether this is in the 

best interest of the government. Our recommendation takes these actions 

into account and encourages DOD to go further by developing a 

methodology to help customers assess contracting alternatives. 

In response to our recommendation that DOD reinforce DOD customers’ 

ability to define their needs and desired contract outcomes clearly, DOD 

maintained that it is the responsibility of the franchise fund contracting 

officer to decide whether or not the requirement is described accurately. 

Nonetheless, DOD committed to issue a memo by August 31, 2005, 

reinforcing the need for DOD customers to define clearly their 

requirements and articulate clearly their desired outcomes in the 

acquisition process. We believe that this memo, coupled with DOD’s 

ongoing efforts to educate DOD customers about the use of interagency 

acquisitions, are steps in the right direction. 

Finally, in response to our recommendation that DOD monitor and 

evaluate DOD customers’ use of franchise funds’ contracting services, 

DOD concurred but explained that the data capture systems that would 

provide this information are not yet in place. DOD stated that the Federal 

Procurement Data System-Next Generation would provide this capability 

in fiscal year 2006. However, data collection is just one step in the 

evaluation process. In addition to collecting data, DOD will also need to 

compare alternatives and prices in order to make more informed choices. 

Agency Comments 

and Our Evaluation 
Page 32 GAO-05-456 Interagency Contracting 

Further, the accuracy and reliability of interagency contracting data in the 

Federal Procurement Data System-Next Generation will depend heavily on 

accurate reporting by franchise funds. 

The Department of the Interior concurred with our recommendations and 

identified actions it has taken or plans to take to address them. The 

Interior highlighted 2004 accomplishments and acknowledged a need for 

better documentation to demonstrate compliance and value provided. The 

Interior also committed to ensuring an adequate contracting staff and to 

publishing information to help DOD determine the value of using the 

franchise fund. In response to our recommendation that the Department of 

the Interior develop procedures and performance measures for franchise 

fund contracting operations to demonstrate compliance with federal 

procurement regulations, the Interior highlighted a number of recent 

efforts to improve performance, including its 2004 management control 

review and performance improvement plan that will monitor compliance 

with federal procurement regulations. This plan establishes a goal of 75 

percent reduction in reportable findings. Interior also stated that it had 

revised its acquisition review process, awarded a contract for a third party 

acquisition review, and provided additional training to its staff. Interior 

committed to continue monitoring performance and creating guidance as 

needed. In response to our recommendation that the Interior develop 

procedures for franchise fund contracting officers to work more closely 

with DOD customers, the Interior highlighted efforts to train its 

contracting officers and develop policies for working with DOD 

customers. 

The Department of the Treasury concurred with our recommendations 

and identified actions it has taken or plans to take to address them, 

including centralization of FedSource’s acquisition workforce under one 

line of authority to allow for standardization and consistency. In response 

to our recommendation that FedSource develop procedures and 

performance measures for franchise fund contracting operations to 

demonstrate compliance with federal procurement regulations, the 

Treasury committed to continue to conduct reviews to measure and 

evaluate compliance with federal procurement regulations and policies. 

This is a positive step toward ensuring compliance. The Treasury also said 

that FedSource had instituted performance-based statements of work for 

its acquisitions. While this initiative focuses on some aspects of 

compliance and is important in managing contractor performance, our 

recommendation addresses the performance of the franchise fund. 

Developing performance measures related to compliance with 

procurement regulations would reinforce the agency’s commitment to 
Page 33 GAO-05-456 Interagency Contracting 

compliance and provide a means to monitor and demonstrate progress. In 

response to our recommendation that FedSource develop procedures for 

franchise fund contracting officers to work more closely with DOD 

customers, the Treasury indicated that FedSource will also develop 

procedures to provide its customers with clear guidance for defining 

contract outcomes. In response to our recommendation that FedSource 

assign warranted contracting officers to positions responsible for 

performing contracting officer functions, Treasury stated that FedSource 

has hired contracting officers to perform all contracting officer functions. 

OMB concurred with our recommendations that OMB expand its 

monitoring to include franchise funds contracting operations’ compliance 

with procurement regulations and policies and develop guidance to clarify 

the roles and responsibilities of the parties involved in interagency 

contracting through franchise funds. OMB stated that its Office of Federal 

Procurement Policy (OFPP) proposed to include the implementation of 

our recommendations in an undertaking pertaining to governmentwide 

acquisition contracts and incorporate franchise funds into that project. As 

part of that project, OMB/OFPP is asking the designated agencies to 

develop plans to ensure cost-effective and responsible contracting. The 

plans will address (1) training to contracting staff; (2) customer staff 

training; (3) management controls to ensure contracts are awarded in 

accordance with applicable laws, regulations, and policies; (4) contract 

administration; and (5) periodic management reviews. OMB acknowledged 

that this was only a part of the solution. We encourage OMB to give 

additional consideration to providing guidance that would clarify roles and 

responsibilities of the parties involved in interagency contracting through 

franchise funds. 

We are sending copies of this report to the Secretaries of Defense, the 

Interior, and the Treasury; the Director of the Office of Management and 

Budget; and interested congressional committees. We will provide copies 

to others on request. This report will also be available at no charge on 

GAO’s Web site at http://www.gao.gov. 

If you have any questions about this report or need additional information, 

please call me at (202) 512-4841 (cooperd@gao.gov). Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on 
Page 34 GAO-05-456 Interagency Contracting 

the last page of this report. Other staff making key contributions to this 

report were Amelia Shachoy, Assistant Director; Lily Chin; Lara Laufer; 

Janet McKelvey; Kenneth Patton; Monty Peters; and Ralph Roffo. 

In memory of Monty Peters (1948-2005), under whose skilled leadership 

this review was conducted. 

David E. Cooper, Director 

Acquisition and Sourcing Management 
Page 35 GAO-05-456 Interagency Contracting 

List of Congressional Committees 

The Honorable John Warner 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member 

Committee on Armed Services 

United States Senate 

The Honorable Ted Stevens 

Chairman 

The Honorable Daniel K. Inouye 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

United States Senate 

The Honorable Duncan Hunter 

Chairman 

The Honorable Ike Skelton 

Ranking Minority Member 

Committee on Armed Services 

House of Representatives 

The Honorable C. W. Bill Young 

Chairman 

The Honorable John P. Murtha 

Ranking Minority Member 

Subcommittee on Defense 

Committee on Appropriations 

House of Representatives 
Appendix I: Scope and Methodology 

Page 36 GAO-05-456 Interagency Contracting 

We reviewed legislation establishing the franchise fund pilot program, 

governmentwide guidance relating to the program, and reports 

summarizing program outcomes. We held discussions with Office of 

Management and Budget representatives responsible for overseeing and 

providing guidance for the program and with Department of Defense 

(DOD) officials responsible for oversight of procurement issues. We 

performed work at the franchise funds managed by the departments of the 

Interior and the Treasury and interviewed officials and reviewed records 

relating to Interior’s GovWorks and Treasury’s FedSource programs. The 

Interior and Treasury franchise funds accounted for about 76 percent of 

total revenues for the six franchise funds during fiscal year 2003 (the most 

recently completed fiscal year at the time we were planning our field 

work) and about 95 percent of all services the six funds provided DOD. 

Contracting services the GovWorks and FedSource programs provided 

accounted for over 95 percent of total revenues at the Interior and 

Treasury franchise funds. To gain insight into how DOD customers were 

using franchise funds and into franchise fund contracting processes, we 

reviewed documentation relating to 17 selected customer projects totaling 

$249 million in funding provided and interviewed GovWorks and 

FedSource contracting personnel responsible for these projects and 

representatives of the DOD customers. 

To determine how DOD customers determined whether franchise funds 

provided a good value, we interviewed representatives of DOD customers 

for the selected projects and reviewed available documentation relating to 

decisions to use franchise fund contracts. We also reviewed information 

available from the franchise funds that would indicate whether the 

franchise funds provided a good value, and interviewed franchise fund 

officials. 

To determine how franchise fund contracting officers worked with DOD 

customers to define measurable quality standards for goods and services 

and develop effective oversight mechanisms, we reviewed contract 

documentation for selected customer projects that would establish quality 

standards, and documentation relating to contract oversight. We also 

discussed these issues with franchise fund contracting personnel. In 

addition, we discussed these issues with representatives of DOD 

customers and reviewed available documentation. 

To determine whether franchise funds followed the contracting practices 

needed to ensure fair and reasonable prices, we reviewed contract 

documentation for selected customer projects to assess the extent to 

which contracting personnel sought competition for work and analyzed 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 37 GAO-05-456 Interagency Contracting 

proposed prices to determine whether they were fair and reasonable, and 

discussed these issues with contracting personnel. In addition, we 

discussed these issues with representatives of DOD customers and 

reviewed available documentation. 

To select customer projects for review, we obtained data files from the 

Department of the Interior’s GovWorks and the Department of the 

Treasury’s FedSource contracting programs that reflected customer 

projects active during fiscal year 2003, and the dollar value of customer 

funding provided for these projects during the year. We ranked these 

projects in terms of funding provided and selected projects representing 

the greatest dollar value of customer funding provided—10 GovWorks 

projects accounting for $164 million and 7 FedSource projects accounting 

for $85 million. Table 5 summarizes GovWorks projects, and table 6 

summarizes FedSource projects. 

Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions of Dollars) 

DOD customer Contractor 

Fiscal year 2003

funding provided 

Army Chief Technology Office Cherry Road Technology $26.1

Air Force Deputy Chief of Staff Air and Space Operations SAIC 21.3

Army National Guard Bureau Readiness Center SRA International Inc, 19.4

Air Force Material Command Lockheed Martin Inc. 17.4

Army Chief Information Office TKC Communications Inc. 15.1

Army National Guard Bureau Chief Information Office Booz Allen Hamilton Inc. 14.4

Army Program Manager for Signals Warfare Lear Siegler Services Inc. 14.0

Army National Guard Bureau Readiness Center Sprint Communications Company LP 13.6

Air Force Aging Landing Gear Life Extension Program General Atomics Inc. 12.6

Navy Program Executive Officer for Information Technology Bearing Point 10.6

Total $164.3

Source: GovWorks data. 

Note: Total may not add due to rounding. 
Appendix I: Scope and Methodology 

Page 38 GAO-05-456 Interagency Contracting 

Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions of Dollars) 

DOD customer 

Fiscal year 2003 

funding provided

Number of work 

assignments 

reviewed 

Selection process 

for work assignments 

Walter Reed Army Medical Center $27.2 66 Random selection 

U.S. Army Fort McCoy 13.2 12 Size 

Army 88th Regional Readiness Command at Fort Snelling 10.1 5 Size 

The Pentagon 9.7 5 Alla 

Navy Recruiting Command 8.4 18 Random selection 

Lackland Air Force Base 8.2 14 Random selection 

Brooke Army Medical Center at Fort Sam Houston 8.1 25 Random selection 

Total $84.9 145b 

Source: FedSource data. 

a

One project only had five work assignments, and we reviewed all five assignments for that project. 

b We eliminated 25 of these work assignments from our analyses because they used a contract that 

expired or that was discontinued by the end of fiscal year 2003. 

GovWorks contracting personnel fulfilled the requirements of each project 

selected by award of a single order, and we reviewed contract 

documentation related to the relevant order. FedSource contracting 

personnel, in contrast, fulfilled the requirements of customer projects by 

award of one or more contracts or orders. Further, FedSource personnel 

initiated multiple work assignments—in some cases several hundred—to 

define specific work what would be performed under each of the contracts 

awarded or orders placed. Accordingly, we reviewed all contracts awarded 

or orders placed to fulfill the requirements of the selected customer 

projects and a sample of work assignments initiated under these contracts 

or orders. To select sample work assignments for review, we first ranked 

the work assignments in terms of dollar value of the work to be 

performed. For those projects where a relatively small number of work 

assignments accounted for a significant share of total project value, we 

selected the highest dollar value assignments representing at least 50 

percent of total project value. For those projects where most individual 

work assignments represented only a small fraction of total project value, 

we selected all assignments valued at $150,000 or more and a sample—

selected at random—of the remaining work assignments. 

We conducted our review between June 2004 and June 2005 in accordance 

with generally accepted government auditing standards. 
Appendix II: Franchise Fund Operating 

Principles 

Page 39 GAO-05-456 Interagency Contracting 

Operating principle Description 

Services The enterprise should only provide common administrative support services. 

Organization The organization would have a clearly defined organizational structure including readily 

identifiable delineation of responsibilities and functions and separately identifiable units for the 

purpose of accumulating and reporting revenues and costs. The funds of the organization 

must be separate and identifiable and not commingled with another organization. 

Competition The provision of services should be on a fully competitive basis. The organization’s operation 

should not be “sheltered” or be a monopoly. 

Self-sustaining/ full cost recovery The operation should be self-sustaining. Fees will be established to recover the “full costs,” as 

defined by standards issued in accordance with the Federal Accounting Standards Advisory 

Board. 

Performance measures The organization must have a comprehensive set of performance measures to assess each 

service that is being offered. 

Benchmarks Cost and performance benchmarks against other “competitors” are maintained and evaluated. 

Adjustments to business dynamics The ability to adjust capacity and resources up or down as business rises or falls, or as other 

conditions dictate, if necessary. 

Surge capacity Resources to provide for “surge” capacity and peak business periods, capital investments, and 

new starts should be available. 

Cessation of activity The organization should specify that prior to curtailing or eliminating a service, the provider will 

give notice within a reasonable and mutually agreed time frame so the customer may obtain 

services elsewhere. Notice will also be given within a reasonable and mutually agreeable time 

frame to the provider when the customer elects to obtain services elsewhere. 

Voluntary exit Customers should be able to “exit” and go elsewhere for services after appropriate notification 

to the service provider and be permitted to choose other providers to obtain needed service. 

Full-time equivalents accountability Full-time equivalents would be accounted for in a manner consistent with the Federal 

Workforce Restructuring Act and Office of Management and Budget requirements, such as 

Circular A-11. 

Initial capitalization Capitalization of franchises, administrative service, or other cross-servicing operations should 

include the appropriate full-time equivalents commensurate with the level of effort the 

operation has committed to perform. 

Source: Office of Management and Budget and the Chief Financial Officers Council. 

Note: These principles were developed by the Office of Management and Budget and the U.S. Chief 

Financial Officers Council. The U.S. Chief Financial Officers Council is an organization of the chief 

financial officers and deputy chief financial officers of the largest federal agencies and senior officials 

of the Office of Management and Budget and the Department of the Treasury who work 

collaboratively to improve financial management in the U.S. government. 

Appendix II: Franchise Fund Operating 

Principles 
Appendix III: Overview of Contract 

Documents Used at GovWorks and FedSource 

Page 40 GAO-05-456 Interagency Contracting 

Table 7: GovWorks Contract Documents Used to Define Desired Outcomes and Performance Criteria 

Master contract or 

another agency’s 

contract 

Master contract contains information about the general scope of work; however, the exact dates and 

quantities of future deliveries are not known. The contract also includes additional details, such as maximum 

or minimum quantities that can be ordered under each individual order and the maximum that it may order 

during a specified period of time, and the time frame that contract remains valid. Under the GSA schedules 

(also referred to as multiple-award schedules and Federal Supply Schedules) Program, GSA establishes 

long-term governmentwide contracts with commercial firms to provide access to commercial supplies and 

services. Schedule contracts contain much of the same information as other master contracts. 

Purchase request DOD customer describes the needs for goods or services and describes desired outcomes and quality 

standards that contractors are expected to meet. 

Task or delivery orders Multiple orders can be written off of a master contract. Orders define work to be performed; location of work; 

period of performance; deliverable schedule; applicable performance standards; and any special 

requirements. Individual orders shall clearly describe all services to be performed or supplies to be delivered 

so the full cost or price for the performance of the work can be established when the order is placed. 

Source: GAO analysis of GovWorks documents and interviews with GovWorks officials. 

Table 8: FedSource Contract Documents Used to Define Desired Outcomes and Performance Criteria 

Master contract Contracting officers develop master contract based on anticipated needs. Master contract contains 

information about the general scope of work; however, the exact dates and quantities of future deliveries are 

not known. Also includes additional details, such as maximum or minimum quantities that the government 

may order under each individual order and the maximum that it may order during a specified period of time, 

and the time frame that contract remains valid. 

Order Multiple orders can be written off of master contract. FedSource contracting officers issue orders to each 

contractor based on anticipated business for the year. FedSource briefly describes types of services and 

obligates funds to cover anticipated work. At this point, FedSource does not know exact quantities or dates of 

future deliveries. 

Purchase request DOD customer describes needs for goods or services. Program office describes desired outcomes and 

quality standards that contractors are expected to meet. 

Work assignment FedSource uses work assignment to define work to be performed, location of work, period of performance, 

deliverable schedule; applicable performance standards, and any special requirements. 

Source: GAO analysis of FedSource documents and interviews with FedSource officials. 

Appendix III: Overview of Contract 

Documents Used at GovWorks and 

FedSource 
Appendix IV: Comments from the Department 

of Defense 

Page 41 GAO-05-456 Interagency Contracting 

Appendix IV: Comments from the 

Department of Defense 
Appendix IV: Comments from the Department 

of Defense 

Page 42 GAO-05-456 Interagency Contracting 
Appendix IV: Comments from the Department 

of Defense 

Page 43 GAO-05-456 Interagency Contracting 
Appendix V: Comments from the Department 

of the Treasury 

Page 44 GAO-05-456 Interagency Contracting 

Appendix V: Comments from the Department 

of the Treasury 
Appendix V: Comments from the Department 

of the Treasury 

(120357) Page 45 GAO-05-456 Interagency Contracting 
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