GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Committee on Armed 

Services, House of Representatives

February 1999 FUTURE YEARS 

DEFENSE PROGRAM

How Savings From 

Reform Initiatives 

Affect DOD’s

1999-2003 Program

GAO/NSIAD-99-66

United States

General Accounting Office

Washington, D.C. 20548 Letr

Page 1 GAO/NSIAD-99-66 Future Years Defense Program

GAO

National Security and

International Affairs Division Letr

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February 25, 1999

The Honorable Floyd D. Spence

Chairman

The Honorable Ike Skelton

Ranking Minority Member

Committee on Armed Services

House of Representatives

In its report on the National Defense Authorization Act for Fiscal Year 1999, 

the House Committee on Armed Services1

 noted that prior Department of 

Defense (DOD) reform initiatives had not generated the anticipated savings 

and had created difficulties because of premature budget reductions.2

 

Accordingly, the report directed that we provide answers to a series of 

questions pertaining to the support for savings and personnel reductions 

contained in DOD’s fiscal year 1999 budget request and out-year budget 

plans. This report addresses the following questions:

• What savings in DOD’s fiscal years 1999-2003 Future Years Defense 

Program (FYDP)3 were the result of the Department’s Defense Reform 

Initiatives (DRI)?

• To what extent were the savings and personnel reductions from 

competitive sourcing4

 in the 1999-2003 FYDP based on ongoing or 

planned studies of functions specifically identified under Office of 

Management and Budget (OMB) Circular A-76, and what percentage of 

the current costs of performing those functions were included from the 

projected savings from these studies?

• Did Defense components outsource activities that included inherently 

governmental functions, without allowing civilian employees to 

1

Formerly the House National Security Committee.

2

House Report 105-532, May 12, 1998.

3The FYDP is an authoritative record of current and projected force structure, costs, and personnel 

levels approved by the Secretary of Defense. In its annual FYDP documents, which in accordance with 

10 U.S.C. 221 have been provided to the Congress since 1988, DOD presents its estimated expenditures 

and appropriations needs for the budget year for which funds are being requested, for the previous

2 years, and for at least the following 4 years. The fiscal year 1999 FYDP supports the President’s fiscal 

year 1999 budget request. 

4

While the phrase outsourcing is sometimes used, we chose to use competitive sourcing to reflect 

competition between the public and private sector.
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compete under Circular A-76 procedures, or without following the study 

and notification requirements of 10 U.S.C. 2461?

Results in Brief DOD expects savings from individual Defense Reform Initiatives, but has 

not incorporated specific savings in the 1999-2003 FYDP from these 

initiatives, except in the areas of competitive sourcing and estimates 

relating to future base realignment and closure (BRAC) decisions. DOD’s 

1999-2003 FYDP incorporated $6.2 billion of estimated savings from 

competitive sourcing between fiscal year 1997 and 2003, but these 

estimated savings do not fully account for up-front investment costs, which 

could reduce the amount of actual savings in the short term. The FYDP 

does provide a fuller estimate of the impact of investment costs associated 

with BRACs. For example, the 1999-2003 FYDP offsets estimated BRAC 

savings with implementation costs and comes up with net costs of

$832 million for fiscal year 2002 and $1.45 billion for fiscal year 2003. While 

DOD has requested additional BRAC rounds, the Congress has not 

authorized them.5

 The Office of the Secretary of Defense expects its DRIs 

to reduce personnel requirements but has not required the services to link 

specific reductions with individual initiatives. Some services, however, 

have linked projected personnel reductions with their competitive sourcing 

studies.

Savings from competitive sourcing reflected in the 1999 FYDP were not 

linked to specific functions under study or targeted for future studies. In 

addition, DOD does not yet have the systems in place that can provide 

reliable cost information needed to precisely identify savings. 

Consequently, it is not feasible to accurately identify current costs of 

functions to be studied or the potential savings as a percentage of these 

costs. According to DOD, savings estimates incorporated in the FYDP 

represented broad projections based on the numbers of positions expected 

to be studied and historic savings data.6

 Our work has shown that historic 

savings estimates may have important limitations and may not accurately 

5DOD included an estimate of the net of future BRAC costs and savings in its 1999-2003 FYDP, as it was 

seeking authority from the Congress for additional BRAC rounds. 

6

The number of positions has generally increased over time, but appears to have fluctuated much more 

than the projected savings. For example, the projected cumulative savings of approximately $6 billion 

has remained in that range for the past 2 years, while the number of positions expected to be studied 

has ranged from a low of about 171,000 to a high of 237,000 and was only recently changed to 229,000 by 

fiscal year 2005.
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indicate likely current and future savings. Study plans of most Defense 

components have evolved over time, but in many cases they have not 

linked positions to be studied to specific functions and locations. Firm 

savings estimates probably will not be possible until individual studies are 

completed. Even then, these estimates would be subject to change. 

Procurement and commercial activities data systems do not identify the 

extent to which Defense components may be outsourcing functions 

without complying with Circular A-76 procedures or 10 U.S.C. 2461 

congressional reporting requirements. Currently, such cases can be 

identified only when they are specifically raised by affected parties.

Background In May 1997, DOD completed a comprehensive review of national security 

threats, risks, and opportunities facing the United States to 2015. This 

review, known as the Quadrennial Defense Review (QDR), was intended to 

examine America’s defense needs and provide a blueprint for a strategybased, balanced, and affordable defense program. The QDR noted that 

DOD had reduced active duty personnel by 32 percent between 1989 and 

1997 while reducing personnel performing infrastructure functions by only 

28 percent. The report called for additional reductions in both military and 

civilian personnel. Our July 1998 report on the 1999-2003 FYDP noted that 

the services planned to reduce military and civilian personnel by 175,000 

and save $3.7 billion by 2003. Our recent reviews of planned Defense 

personnel reductions resulting from the QDR and the 1999-2003 FYDP 

raised questions about DOD’s ability to achieve some of these reductions 

and savings.7

The changes in military strategy and capabilities enunciated in the QDR 

and other reports have often been referred to as a revolution in military 

affairs. However, the QDR also recognized that DOD must undergo a 

similar revolution in its business affairs. To that end, the Secretary of 

Defense chartered a study effort that resulted in the November 1997 DRI 

report. The report emphasized the need to reduce excess Cold War 

infrastructure to free up resources for modernization. The report identified 

numerous initiatives to reengineer business practices, consolidate 

organizations, eliminate unneeded infrastructure through additional base 

7

Quadrennial Defense Review: Some Personnel Cuts and Associated Savings May Not Be Achieved

(GAO/NSIAD-98-100, Apr. 30, 1998) and Future Years Defense Program: Substantial Risks Remain in 

DOD’s 1999-2003 Plan (GAO/NSIAD-98-204, July 31, 1998).
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closures, and conduct public/private competitive sourcing studies for 

commercial activities. Most of the potential savings identified in the report 

were expected to result from BRACs and competitive sourcing studies. 

Future BRAC actions were contingent on the Congress enacting legislation 

authorizing additional closures, while competitive sourcing studies were to 

be completed under the policy guidance of OMB.

The concept of competitive sourcing is not new. Through the 1980s, DOD 

encouraged the services and Defense agencies to conduct competitions 

between the public and private sectors to determine who would be 

responsible for performing selected functions that were being provided by 

in-house staff. These competitions were to be done under OMB Circular

A-76. Although DOD’s use of Circular A-76 was limited from the early to 

mid-1990s, in 1995 DOD reestablished the competition program in the hope 

of obtaining significant savings that could be used to fund modernization 

and other priority needs.

Circular A-76 and its supplemental handbook specify a process to develop a 

statement that defines the work to be done and a comparison of in-house 

costs with contractor costs to determine who should perform the work. 

Circular A-76 is limited to competitions for the conversion of recurring 

commercial activities. The handbook identifies circumstances under 

which detailed cost studies may not be required, such as for the conversion 

from performance by military personnel to contractor performance or if 

the number of affected civilian positions is below a specific threshold. It 

also indicates instances in which Circular A-76 may not apply, such as for 

restructured or reengineered functions. Appendix I contains a more 

detailed description of the A-76 process.

In addition, several laws affect competitive sourcing. Some, such as

10 U.S.C. 2461 and 2462, affect the process of transferring work currently 

being performed by civilian government employees to the private sector. 

Section 2461, as amended by the National Defense Authorization Act for 

Fiscal Year 1999 (P.L. 105-261), requires an analysis of the activity and a 

comparison of the costs of having the activity performed by DOD civilian 

employees and by a contractor to determine whether changing to 

contractor performance will save money. It also requires that DOD notify 

the Congress of this analysis and provide other information before making 
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a change in performance.8 Section 2462 requires the Secretary of Defense 

to obtain needed supplies or services from the private sector, if a

private-sector source can provide the supply or service at less cost, and 

establishes criteria for conducting the cost comparison. 

FYDP Shows Partial 

Costs and Savings 

Estimates From BRAC 

and Competitive 

Sourcing

DOD expects savings from individual DRIs but has not incorporated 

specific savings from these initiatives in the FYDP, except in the areas of 

potential BRAC and competitive sourcing. Both have significant up-front 

investment costs that can limit net savings in the short term. The 1999-2003 

FYDP shows a more complete accounting of these investment costs for 

potential BRACs than it does for competitive sourcing, but the latter 

provides the majority of DRI savings incorporated in the FYDP. While 

personnel reductions are programmed in the 1999-2003 FYDP and are 

expected to represent a portion of savings from DRIs, DOD has not 

required the services to link specific personnel reductions to individual 

initiatives. Some services, however, have projected personnel reductions 

in conjunction with competitive sourcing studies.

FYDP Shows Net Costs for 

Early Years of Implementing 

Any New BRAC Rounds

We previously reported that BRAC actions can provide the basis for 

significant savings in infrastructure costs.9

 However, while savings can 

begin to accrue even as costs are being incurred to implement BRAC 

decisions, it can take several years for net savings to begin accruing on an 

annual recurring basis. The 1999-2003 FYDP reflects this situation, 

showing a net cost for projected BRAC decisions between fiscal year 1999 

and 2003.

The 1999-2003 FYDP incorporated some savings from future BRAC rounds, 

but these savings were offset by implementation costs, resulting in net 

costs of $832 million for fiscal year 2002 and $1.45 billion for fiscal

year 2003. DOD showed these net costs in the FYDP as a Department-level 

contingency account but did not allocate them to individual services. 

Beyond the FYDP period, DOD expects the two additional rounds of base 

8Section 8014 of the DOD Appropriations Act for Fiscal Year 1999 (P.L. 105-262) requires that DOD 

certify its in-house estimate to congressional committees before converting any activity performed by 

more than 10 DOD civilian employees to contractor performance.

9

Military Bases: Review of DOD’s 1998 Report on Base Realignment and Closure (GAO/NSIAD-99-17, 

Nov. 13, 1998) and Military Bases: Status of Prior Base Realignment and Closure Rounds

(GAO/NSIAD-99-36, Dec. 11, 1998).
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closures to result in about $3.4 billion in annual savings after the closures 

are completed and implementation costs have been offset.10

We reported in November that DOD’s method of estimating costs and 

savings for future BRAC rounds was limited, principally because it 

assumed that savings from future base closures would closely resemble 

savings from the 1993 and 1995 BRAC rounds, adjusted for inflation. While 

DOD’s estimate may be appropriate for planning purposes, its precision is 

limited because the costs of future BRAC rounds might not parallel those of 

the prior two rounds. Previous base closures frequently involved facilities 

that were of low military value and were the least costly to implement. 

Often those closures required the shortest time for savings to offset 

implementation costs. Generally, DOD did not choose to close facilities 

that required higher implementation costs or longer periods to recover 

savings. More precise cost estimates will probably not be available until 

DOD actually studies implementation scenarios for specific BRAC actions 

and puts in place more reliable cost accounting systems. However, BRAC 

history suggests that future implementation costs could be greater than 

those in previous rounds and the closures could thus take longer to 

produce net recurring savings.

Projected Competitive 

Sourcing Savings Are 

Significant but Do Not Fully 

Account for Investment 

Costs

DOD’s 1999-2003 FYDP projected $6.2 billion in savings from competitive 

sourcing between fiscal year 1997 and 2003. However, as we previously 

reported, the projected savings do not fully account for the up-front 

investment costs associated with completing the studies and implementing 

the results. Though recurring savings from competitive sourcing could be 

substantial in the long term, it will take longer to begin achieving these 

savings than DOD has projected, and net savings during the 1999-2003 

period will be less than projected.

In formulating their fiscal year 1999 budget, Defense components identified 

over 200,000 positions that would be subjected to competitive sourcing 

studies between 1997 and 2003. Table 1 shows the projected savings and 

the number of positions to be studied by fiscal year as summarized in 

documents supporting the President’s fiscal year 1999 budget submission.

10Future BRAC savings are expressed in fiscal year 1999 dollars and represent savings expected to 

recur annually for fiscal year 2012 and beyond, when the two proposed future rounds are projected to 

be completed. DOD estimated future savings on the assumption that future costs and savings will be 

similar to those of the 1993 and 1995 rounds.
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Table 1: Programmed Savings and Positions to be Studied for Competitive Sourcing, Fiscal Years 1997-2003

aIncludes savings for individual services and Defense agencies.

bThe President’s Fiscal Year 2000 budget request adjusted the number of positions to be studied to 

229,000 and extended the years of study out to 2005.

Source: DOD

Our February 1999 report on competitive sourcing goals noted that, like 

BRACs, competitive sourcing studies and implementing actions require

up-front investments that should be considered when estimating net 

savings.11 We also reported that the estimates of competition savings 

provided to the Congress in 1998 had limitations and that several factors 

were likely to reduce savings in the short term. We further noted that DOD 

had not fully identified the resources associated with the studies or the 

personnel separation costs likely to be needed for implementation. The 

Navy was the only component that had deducted some estimated 

investment costs when calculating the savings presented to the Congress in 

DOD’s April 1998 report on competitive sourcing.

Linkage of Specific 

Personnel Reductions With 

Individual Defense Reform 

Initiatives Is Limited

Personnel reductions are programmed in the 1999-2003 FYDP and are 

expected to represent a portion of savings from DRIs. DOD officials told us 

that they had not required the services to target specific personnel 

reductions to individual initiatives. 

The Army programmed a reduction of 9,600 civilian staff on the assumption 

that 20 percent of the positions studied would be eliminated. The Army 

programmed the 20-percent reduction based on the assumption that the

20-percent savings would result whether the government or a contractor 

won the A-76 competitions. Army officials said they made this assumption 

because they did not want to be seen as preselecting the winner. The Army 

recognizes, however, that it will likely separate more personnel based on 

Dollars in millions

Fiscal year

1997 1998 1999 2000 2001 2002 2003 Total

Projected savings $24 $59 $205 $532 $1,184 $1,831 $2,320 $6,155a

Positions to be studied 26,200 55,300 59,600 45,400 25,400 1,100 1,100 214,100b

11DOD Competitive Sourcing: Questions About Goals, Pace, and Risks of Key Reform Initiative

(GAO/NSIAD-99-46, Feb. 22, 1999).
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the historical trends of contractors winning about 50 percent of the 

competitions. The Army did not program any reductions in military 

positions as a result of competitive sourcing and planned to make up for 

military personnel shortages elsewhere by transferring the military 

personnel from positions competed to other military duties.

The Navy and the Marine Corps did not program any potential military or 

civilian personnel cuts as a result of competitive sourcing. According to 

Navy officials, the Navy’s overall objective is to achieve savings through 

competition, and personnel savings are a consequence and not a goal of the 

program. Further, Navy officials said they believed that establishing a goal 

for personnel reductions would send a negative message to staff and would 

affect morale.

The Air Force was more aggressive in identifying personnel reductions 

from competitive sourcing and programmed about 26,000 military and 

19,300 civilian position reductions between fiscal year 1997 and 2003, 

according to its final budget submission. The Air Force’s programmed 

reduction of all military positions to be competed was based on the belief 

that if a position could be competed, it did not have to be staffed by military 

personnel. Generally, the Air Force programmed reductions in civilian 

positions on the assumption that private contractors would win 60 percent 

of the competitions and that the competitions would last 2 years.

Officials at the Office of the Secretary of Defense (OSD) were aware that 

the services used different methods to show the effects of competitive 

sourcing on personnel and funding and that the fiscal year 1999 FYDP 

reflects these different approaches. The Deputy Under Secretary for 

Industrial Affairs and Installations established a task force to ensure that 

consistent and comparable approaches are used to estimate personnel and 

dollar savings in future budget submissions. Subsequently, the Acting 

Director of the Office of the Secretary of Defense’s Program Analysis and 

Evaluation Office issued guidance incorporating the task force’s 

recommendations, which required Defense components to program both 

dollar savings and personnel reductions for the 2000-2005 FYDP. Further, 

the DOD Comptroller required Defense components to specifically identify 

investment and transition costs and report both gross and net savings in 

their fiscal year 2000 budget submissions.
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Competitive Sourcing 

Savings Were Projected 

Using Historic 

Experience But Were 

Not Linked to Specific 

Study Plans

Savings from ongoing and future competitive sourcing studies as projected 

in the 1999 FYDP were the result of broad-based estimates drawn from 

previous experience. When the FYDP was being prepared, the projections 

were not linked to specific functions then under study or planned for future 

study. Consequently, it is not feasible to link projected savings with the 

current cost of individual functions. In previous reports, we urged caution 

in the use of historical savings assumptions in the absence of any efforts to 

adjust these assumptions for changes that can occur over time and that

may reduce savings. The 1999-2003 FYDP was not based on detailed 

competitive sourcing plans developed by the services and other Defense 

components. These plans continue to evolve, and specific functions to be 

studied by location are mostly yet to be determined.

Historic Data Used to 

Project Future Savings 

The estimated competitive sourcing savings included in the 1999-2003 

FYDP were largely based on numbers of positions expected to be studied, 

average personnel costs per position, and average savings rates estimated 

by using historical data from prior competitions. Savings rates varied 

among the services. Our previous work has already shown that there are 

important limitations to using historical savings estimates because they 

may not provide an accurate indication of likely future savings. 

The services’ cost savings estimates ranged between 20 and 30 percent; the 

Navy projected savings of more than 30 percent where functions performed 

by military personnel would be competed. These estimates, as shown in 

table 2, represented what the services believed to be conservative 

achievable savings based on historical experience. 
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Table 2: Comparison of Programmed Savings Rates Used by the Services in the 

1999-2003 FYDP 

aThe Navy’s programmed savings rate is a composite rate based on the projection that competing 

functions currently performed by civilian personnel would yield 25-percent savings and competing 

functions currently performed by military personnel would yield 50-percent savings.

Sources: Military services’ data.

While we believe that competitive sourcing competitions are likely to 

produce savings, we have previously urged caution when estimating the 

amount of savings likely to be achieved.12 The estimates used in the FYDP 

are based on savings estimates calculated at the end of competitive 

sourcing competitions. These estimates can change over time because of 

changes in the scope of the work or mandated wage increases. We 

previously noted that continuing budget and personnel reductions could 

make it difficult to sustain the levels of previously projected savings. We 

also recognized that larger savings are likely to occur when positions filled 

by military personnel are converted to civilian or contractor performance.

Finally, we previously noted limitations in DOD’s efforts and capabilities to 

track changes in program costs and savings after the results of 

competitions are implemented. Actual savings data has not been captured. 

Our February 1999 report noted the need for improvements in the 

databases used to record the results of competitive sourcing 

competitions.13

Service Programmed rate of cost savings (percent)

Air Force 25

Army 20

Marine Corps

• Contractor wins

• Remains in-house

30

20

Navy 31a

12Base Operations: Challenges Confronting DOD as It Renews Emphasis on Outsourcing

(GAO/NSIAD-97-86, Mar. 11, 1997), Defense Outsourcing: Challenges Facing DOD as It Attempts to Save 

Billions in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar. 12, 1997), and Defense Management: 

Challenges Facing DOD in Implementing Defense Reform Initiatives (GAO/T-NSIAD/AIMD-98-122,

Mar. 13, 1998). 

13DOD Competitive Sourcing: Results of Recent Competitions (GAO/NSIAD-99-44, Feb. 23, 1999).
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Specific Study Plans 

Continue to Evolve

Study plans of most Defense components linking the number of positions 

to be studied with specific functions and locations are still evolving, and 

estimated savings will not be known until the studies are completed. 

Consequently, it is not feasible to identify the current costs of functions to 

be studied and their potential savings rates. In our February 1999 report, 

we concluded that clearer indications of actual savings will require that 

Defense components develop mechanisms to track actual savings over 

time in order to validate continuing savings from completed competitions.

None of the services based fiscal year 1999 budgets or 1999-2003 FYDP 

submissions on a completed multiyear study plan for their competitive 

sourcing program, although the Air Force was furthest along. Our 

February 1999 report on competitive sourcing goals noted that most 

Defense components lacked detailed plans identifying the numbers of 

positions by function expected to be studied over the next few years. 

Detailed planning to implement the program has been largely delegated to 

components and field activities. These activities are responsible for 

determining which specific functions are suitable candidates for 

competitions and whether there are sufficient positions to meet overall 

competition goals. In addition, according to service officials, some or all of 

the major commands were given numbers of positions to compete and 

savings goals, and it is up to them to determine how best to meet the goals. 

OSD on December 9, 1998, directed each component to develop multiyear 

competition plans consistent with and presented at the same time as their 

fiscal year 2001-2005 Program Objective Memorandum. OSD directed that 

these plans should include, by fiscal year, the functions and numbers of 

positions to be competed.

Perceived Efforts to 

Bypass Circular A-76 

and Related Legislation 

Difficult to Identify

The Committee questioned whether Defense components may have 

outsourced some activities, possibly even some involving inherently 

governmental functions, without following the procedures of OMB

Circular A-76 or meeting the 10 U.S.C. 2461 requirements for congressional 

notification. Other than specific cases brought to our attention, 

procurement and commercial activities data systems do not identify the 

extent to which Defense components may be outsourcing functions 

without complying with these procedures or requirements. 

Circular A-76 does not apply to inherently governmental activities. Defense 

components are currently reviewing to what extent the functions 
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performed by DOD personnel are inherently governmental or otherwise 

exempted from A-76 competitive sourcing. DOD expects to report the 

results to the Congress early this year, but the results were not available for 

our review when we completed our work. 

We have been asked to review two reengineering cases, one in the Army 

and one in the Air Force, in which affected parties expressed the belief that 

Circular A-76 procedures and 10 U.S.C. 2461 requirements should have 

been followed. We are currently studying these cases and expect to report 

on them in the near future.

Conclusions The costs and savings associated with Defense Reform Initiatives 

incorporated in DOD’s 1999-2003 FYDP include partial costs and savings 

from competitive sourcing and additional BRAC initiatives. While savings 

are expected from other initiatives, DOD has not required the services to 

calculate the specific savings to be obtained from them. Likewise, while 

personnel reductions are included in the FYDP and some are expected to 

result from DRIs, DOD has not required the components to link any 

personnel reductions with specific DRI elements. Also, questions exist 

about the precision of savings expected from BRAC and competitive 

sourcing. DOD assumed there would be additional base closures; however, 

the required legislative authorization has not been given. Further, the 

BRAC savings estimate, should future rounds occur, has limitations in 

terms of projecting short-term savings that might be realized. Competitive 

sourcing savings incorporated in the 1999-2003 FYDP were determined 

using broad estimates based on prior competitive sourcing experience, but 

they were not linked to specific positions and functions currently under 

study or planned for study at specific locations.

There is no systematic way to identify whether components outsource 

functions without following the requirements of OMB Circular A-76 or the 

procedures of 10 U.S.C. 2461. Such cases can be identified only when they 

are specifically raised.

We are currently reviewing two such allegations and expect to report on 

them individually in the near future.

We recently recommended that the Secretary of Defense require Defense 

components to assess whether available resources are sufficient to execute 

the numbers of planned competitions within the envisioned time frames 

and make the adjustments needed to ensure adequate program execution. 
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We also recommended that the Secretary require Defense components to 

reexamine and adjust competitive sourcing study targets, milestones, 

expected net short-term savings, and planned operating budget reductions 

as necessary. Accordingly, we are not making additional recommendations 

in this report.

Agency Comments and 

Our Evaluation

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

Defense. On February 4, 1999, Department and service representatives 

from their respective competitive sourcing offices provided us with the 

following comments on the draft. 

The representatives generally concurred with the information presented in 

the report. DOD officials reiterated their previously stated position that 

they have developed an aggressive competitive sourcing program by 

planning to compete nearly 229,000 positions by fiscal year 2005. They 

acknowledged that their program has met a number of challenges; 

however, they believe none of these challenges are insurmountable. They 

stated that through the program and budget review process, the 

Department reviews the competitive sourcing study targets, milestones, 

and objectives of the program to measure advancement toward its goals 

and that adjustments are made to the program as necessary. Further, they 

stated that several important improvement and oversight tools are being 

worked into the competitive sourcing program during calendar year 1999 

that will address our concerns. More specifically, according to these 

officials, the DOD Competitive Sourcing Master Plan will, among other 

things, identify by fiscal year the functions and number of component 

positions to be competed by fiscal year 2005. Also, they stated each 

component is undertaking a series of program improvement initiatives that 

includes (1) identifying best practices, (2) assisting installation/activity 

execution, (3) developing internal communications and training, and

(4) improving management information systems. DOD officials also stated 

that the components have not completed enough studies, thus far, to 

establish a baseline that would necessitate the reevaluation of their 

milestones and objectives and that as more studies are conducted, they will 

be able to better refine and adjust their study savings objectives.

While we support DOD’s efforts to institute more comprehensive oversight 

tools and program improvement initiatives, we did not review any of these 

efforts because they have not yet been fully implemented, and we are 

therefore not in a position to comment on them. However, as we 

previously reported, we continue to believe that DOD needs to reassess the 
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competitive sourcing study targets, milestones, expected short-term 

savings, and planned operating budget reductions now. The issues involve 

more than the number of competitions completed; they also involve the 

extent the planned announcements of competitions have been made and 

whether there are sufficient resources to complete them. This is of 

concern especially because of the large number of studies planned for 

announcement in fiscal years 1998 and 1999 and the delays encountered in 

getting the fiscal year 1998 studies under way. If similar delays are 

encountered in fiscal year 1999, they could seriously affect future program 

execution and DOD’s ability to achieve results in a timely manner. 

In addition, officials reiterated the Department’s disagreement with our 

statement that the precision of its future base closure costs was limited and 

that average net costs of future BRAC rounds will be higher than DOD 

estimated by using the cost experience of previous rounds. As we 

previously reported, our intent was to suggest that there are reasons to 

expect greater costs to close bases during any future implementation 

period than during the previous BRAC rounds because many bases with 

lower implementation costs and quicker offsets of closure costs have 

already been realigned or closed. Thus, the higher costs likely to be 

incurred in the future could reduce the net savings achieved during the 

implementation period. Nevertheless, we believe that future BRAC rounds 

can still result in significant savings. 

DOD also provided technical comments on our report, which we have 

incorporated as appropriate.

Scope and 

Methodology

To determine the savings included in the 1999-2003 FYDP that were the 

result of DRIs, we reviewed budget documents and discussed the issue 

with representatives from the DOD Comptroller’s office and the Army, the 

Navy, and the Air Force. We also drew on other work that we had 

underway or completed relating to competitive sourcing and the DRI.

To determine the basis used to project competitive sourcing savings and 

personnel reductions in the 1999-2003 FYDP and whether they were based 

on studies of specific functions, we reviewed competitive sourcing budget 

submissions and the assumptions underlying the savings calculations. We 

also held discussions with service officials responsible for budget 

formulation and competitive sourcing program management. Further, we 

drew on work we had previously performed to evaluate DOD’s competitive 
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sourcing plans and programs, and to review the results of recently 

completed competitions.

To determine whether Defense components outsourced inherently 

governmental functions without allowing civilian employees to compete or 

did not meet the requirements of 10 U.S.C. 2461, we reviewed pertinent 

laws and other directives and discussed the issue with cognizant service 

officials. 

We conducted our review from November 1998 to January 1999 in 

accordance with generally accepted government auditing standards.

We are sending copies of this report to the Chairmen of the Senate 

Committees on Armed Services and on Appropriations and the House 

Committee on Appropriations; the Secretaries of Defense, the Army, the 

Navy, and the Air Force; the Commandant of the Marine Corps; the 

Director, Office of Management and Budget; and other interested 

congressional committees. Copies will be made available to others upon 

request.

Please contact me at (202) 512-8412 if you or your staff have any questions 

concerning this report. Major contributors to this report are listed in 

appendix II.

o

David R. Warren, Director

Defense Management Issues
Page 16 GAO/NSIAD-99-66 Furture Years Defense Program

Contents

Letter 1

Appendix I

The A-76 Process

18

Appendix II

Major Contributors to 

This Report

22

Tables Table 1: Programmed Savings and Positions to be Studied for

Competitive Sourcing, Fiscal Years 1997-2003 7

Table 2: Comparison of Programmed Savings Rates Used by the

Services in the 1999-2003 FYDP 10

Figures Figure I.1: Overview of the A-76 Process 19

Abbreviations

BRAC Base Realignment and Closure

DOD Department of Defense

DRI Defense Reform Initiative

FYDP Future Years Defense Program

OMB Office of Management and Budget

OSD Office of the Secretary of Defense

QDR Quadrennial Defense Review
Page 17 GAO/NSIAD-99-66 Furture Years Defense Program
Page 18 GAO/NSIAD-99-66 Future Years Defense Program

Appendix I

The A-76 Process ApIexndi

In general, the A-76 process consists of six key activities: (1) developing a 

performance work statement and quality assurance surveillance plan; (2) 

conducting a management study to determine the government's most 

efficient organization (MEO); (3) developing an in-house government cost 

estimate for the MEO; (4) issuing a Request for Proposals or Invitation for 

Bids; (5) evaluating the proposals or bids and comparing the in-house 

estimate with a private-sector offer or interservice support agreement and 

selecting the winner of the cost comparison; and (6) addressing any 

appeals submitted under the administrative appeals process, which is 

designed to ensure that all costs are fair, accurate, and calculated in the 

manner prescribed by the A-76 handbook. 

Figure I.1 shows an overview of the process. The solid lines indicate the 

process used when the government issues an Invitation for Bids, requesting 

firm bids on the cost of performing a commercial activity. This type of 

process is normally used for more routine commercial activities, such as 

grass-cutting or cafeteria operations, where the work process and 

requirements are well defined. The dotted lines indicate the additional 

steps that take place when the government wants to pursue a negotiated, 

"best value" procurement. While it may not be appropriate for use in all 

cases, this type of process is often used when the commercial activity 

involves high levels of complexity, expertise, and risk.
Appendix I

The A-76 Process

Page 19 GAO/NSIAD-99-66 Future Years Defense Program

Figure I.1: Overview of the A-76 Process

Source: Air Force Air Education and Training Command documents.

Issue performance 

work statement 

and RFP or IFB

Compare selected 

Best Value and MEO

technical proposals

Prepare in-house 

cost estimate

Revise

MEO 

Revise 

in-house 

cost estimate 

Compare 

costs/select 

contractor

Most Efficient Organization (MEO) activities

 Government technical evaluation activities

MEO

management study

Select lowest

cost alternative

Additional steps required for request for 

proposals (RFP)

Process for invitation for bid (IFB)

Prepare technical

proposal

Conduct technical 

evaluation of MEO

Conduct technical

evaluation of 

bids/proposals

Accept 

contractor

bids/proposals
Appendix I

The A-76 Process

Page 20 GAO/NSIAD-99-66 Future Years Defense Program

The circular requires the government to develop a performance work 

statement. This statement, which is incorporated into either the Invitation 

for Bids or Request for Proposals, serves as the basis for both government 

estimates and private sector offers. If the Invitation for Bids process is 

used, each private sector company develops and submits a bid, giving its 

firm price for performing the commercial activity. While this process is 

taking place, the government activity performs a management study to 

determine the most efficient and effective way of performing the activity 

with in-house staff. Based on this "most efficient organization," the 

government develops a cost estimate and submits it to the selecting 

authority. The selecting authority concurrently opens the government's 

estimate along with the bids of all private sector firms. 

According to the Office of Management and Budget’s (OMB) A-76 guidance, 

the government's in-house estimate wins the competition unless the private 

sector's offer meets a threshold of savings that is at least 10 percent of 

direct personnel costs or $10 million over the performance period. This 

minimum cost differential was established by OMB to ensure that the 

government would not contract out for marginal estimated savings. 

If the Request for Proposals--best value process--is used, the Federal 

Procurement Regulation and the A-76 supplemental handbook require 

several additional steps. The private sector offerors submit proposals that 

often include a technical performance proposal and a price. The 

government prepares an in-house management plan and cost estimate 

based strictly on the performance work statement. On the other hand, 

private sector proposals can offer a higher level of performance or service. 

The government's selection authority reviews the private sector proposals 

to determine which one represents the best overall value to the government 

based on such considerations as (1) higher performance levels, (2) lower 

proposal risk, (3) better past performance, and (4) cost to do the work. 

After the completion of this analysis, the selection authority prepares a 

written justification supporting its decision. This includes the basis for 

selecting a contractor other than the one that offered the lowest price to 

the government. Next, the authority evaluates the government's offer and 

determines whether it can achieve the same level of performance and 

quality as the selected private sector proposal. If not, the government must 

then make changes to meet the performance standards accepted by the 

authority. This ensures that the in-house cost estimate is based upon the 

same scope of work and performance levels as the best value private sector 

offer. After determining that the offers are based on the same level of 
Appendix I

The A-76 Process

Page 21 GAO/NSIAD-99-66 Future Years Defense Program

performance, the cost estimates are compared. As with the Invitation for 

Bids process, the work will remain in-house unless the private offer is

(1) 10 percent less in direct personnel costs or (2) $10 million less over the 

performance period. 

Participants in the process--for either the Invitation for Bids or Request for 

Proposals process--may appeal the selection authority's decision if they 

believe the costs submitted by one or more of the participants were not 

fair, accurate, or calculated in the manner prescribed by the A-76 

handbook. 
Page 22 GAO/NSIAD-99-66 Future Years Defense Program

Appendix II

Major Contributors to This Report ApIexndi

National Security and 

International Affairs 

Division, Washington, 

D.C.

Barry W. Holman, Associate Director

Marilyn K. Wasleski, Assistant Director

David B. Best, Senior Evaluator

Chicago Field Office Neal H. Gottlieb, Evaluator-in-Charge

(709379)
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