United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Defense, 

Committee on Appropriations, House of 

Representatives

DOD ACQUISITIONS

Contracting for Better 

Outcomes 

Statement of David M. Walker 

Comptroller General of the United States 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Thursday, September 7, 2006 

 

GAO-06-800T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

September 7, 2006

DOD ACQUISITIONS

Contracting for Better Outcomes 

Highlights of GAO-06-800T, a testimony 

before the Subcommittee on Defense, 

Committee on Appropriations, House of 

Representatives 

The Department of Defense’s 

(DOD) spending on goods and 

services has grown significantly 

since fiscal year 2000 to well over

$250 billion annually. Prudence

with taxpayer funds, widening 

deficits, and growing long-range 

fiscal challenges demand that DOD 

maximize its return on investment,

while providing warfighters with 

the needed capabilities at the best 

value for the taxpayer. DOD needs 

to ensure that its funds are spent 

wisely, and that it is buying the

right things, the right way.

In this testimony, GAO discusses 

(1) recent trends in DOD 

contracting activity and the 

environment in which this activity

takes place, and (2) practices 

which undermine its ability to 

establish sound business

arrangements, particularly those 

involving the selection and 

oversight of DOD’s contractors and

incentivizing their performance. 

This statement is based on work

GAO has completed over the past 

6 years covering a range of DOD 

acquisition and contracting issues. 

Some of these issues are longstanding. GAO has identified DOD

contract management as a high-risk

area for more than decade. With 

awards to contractors large and

growing, DOD will continue to be

vulnerable to contracting fraud,

waste or misuse of taxpayer 

dollars, and abuse. 

DOD obligated nearly $270 billion on contracts for goods and services in 

fiscal year 2005, an 88 percent increase over the amount obligated in fiscal 

year 2000. All indications are that this upward trend will continue. Aside 

from growth in dollar value there have also been changes in what DOD is 

buying. DOD’s new weapons system programs are expected to be the most 

expensive and complex ever and will consume an increasingly large share of 

its budget. In the last 5 years DOD has doubled its commitment to major 

weapon systems from $700 billion to $1.4 trillion, and DOD is counting on 

these efforts to fundamentally transform military operations. As overall 

obligations have increased so has its reliance on the private sector to 

provide services to fulfill DOD’s missions and support its operations. 

Additionally, in recent years DOD has increased its use of existing contracts 

awarded by other agencies (i.e. interagency contracts). While this approach 

provides a number of benefits, our work, and that of some agency inspector 

generals, revealed instances of improper use, including issuing orders that 

were outside the scope of the underlying contract as well as failing to 

establish clear lines of accountability and responsibility. While the amount, 

nature, and complexity of DOD contract activity have increased, its 

acquisition workforce has remained relatively unchanged in size. At the 

same time, the acquisition workforce faces certain skills gaps and serious 

succession planning challenges. 

There are a number of DOD practices which undermine its ability to 

establish sound business arrangements. For example, with regard to 

competition and pricing, we recently found that the Army acquired guard 

services under authorized sole-source contracts at 46 of 57 Army 

installations, despite the Army’s recognition that it was paying about 

25 percent more for its sole-source contracts than for those it previously 

awarded competitively. Another element of a sound business arrangement is 

the fee mechanism used to incentivize excellent contractor performance. In 

December 2005, we reported that DOD gives its contractors the opportunity 

to collectively earn billions of dollars through monetary incentives. 

Unfortunately, we found DOD programs routinely engaged in practices that 

failed to hold contractors accountable for achieving desired outcomes and 

undermined efforts to motivate results-based contractor performance. As a 

result, DOD paid out an estimated $8 billion in award fees on contracts in 

our study population, regardless of whether acquisition outcomes fell short 

of, met, or exceeded DOD’s expectations. DOD also increased its risk of 

poor acquisition outcomes by not assuring that another element of a sound 

business arrangement, contractor oversight, was sufficient. For example, in 

2005 we reported that DOD’s oversight on nearly a third of 90 service 

contracts reviewed was insufficient, in part because DOD failed to assign 

www.gao.gov/cgi performance monitors. -bin/getrpt?GAO-06-800T.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Katherine V. 

Schinasi at (202) 512-4841 or 

schinasik@gao.gov. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss challenges that the Department of 

Defense (DOD) faces to achieving better acquisition outcomes. With DOD 

spending well over $250 billion annually to acquire products and services, 

prudence with taxpayer funds, widening deficits, and growing long-range 

fiscal challenges demand that DOD maximize its return on investment and 

provide the warfighter with needed capabilities at the best value for the 

taxpayer. DOD needs to ensure that its funds are spent wisely, and, in 

doing so, it needs to ensure that it is buying the right things, the right way.

Several elements are essential to achieving this objective, including a

sound business case supporting executable programs, sound business 

arrangements, and clear lines of responsibility and accountability. 

My testimony today is based on work we have completed over the past 

6 years that covered a range of acquisition and contracting issues and 

which was conducted in accordance with generally accepted government 

auditing standards. My testimony will focus on (1) DOD’s recent 

contracting trends, such as the spending on goods and services and the

environment in which this activity takes place; and (2) selected practices 

which undermine DOD’s ability to establish solid business arrangements, 

particularly those involving the selection and oversight of DOD’s 

contractors and incentivizing their performance. As requested, we have

included briefing slides that we previously gave to your staff regarding 

these issues and I will make reference to specific slides during the course 

of my testimony. 

First, I would like to reiterate the broader context. Given current policies, 

in the next few decades the nation will face large and growing structural 

deficits due to known demographic trends, rising healthcare costs and 

current revenue-to-expenditure gaps. At the same time, weapons programs 

are commanding more and more resources as DOD undertakes 

increasingly ambitious efforts to transform its ability to confront current 

and potential threats. Further, managing DOD is a challenge as it is one of 

the world’s largest and most complex organizations, spending billions of 

dollars each year to sustain key business operations that support our 

forces. While DOD has embarked on a series of efforts to reform its 

business operations, serious challenges and inefficiencies remain. In fact, 

eight individual areas that GAO considers to be high risk because of their 

greater vulnerabilities to fraud, waste, abuse and mismanagement are 

Page 2 GAO-06-800T Contracting for Better Outcomes 
specific to DOD. Some of these issues are long-standing; for example, we 

have identified DOD weapon systems acquisition and contract

management as high-risk areas for more than a decade.

1

 In a report issued 

in July,2

 we concluded that, with awards to contractors large and growing,

DOD will continue to be vulnerable to contracting fraud, waste or misuse 

of taxpayer dollars, and abuse. While DOD has acknowledged its 

vulnerabilities and taken some actions to address them, many of the 

initiatives are still in their early stages and it is too soon to tell what 

impact they may have. 

Further, there are numerous factors that can contribute to poor 

acquisition outcomes, which in turn erode DOD’s buying power. We list 

some of these factors on slide 2. This list is illustrative and not intended to 

be exhaustive, and the risk these factors pose may manifest itself 

differently depending on the nature of the acquisition. To start, DOD’s 

tendency to look for revolutionary solutions that depend on the 

maturation and availability of critical technologies often results in 

programs taking longer, costing more and delivering less capability than 

originally promised to the warfighter. Further, DOD wants often do not 

reflect “true” requirements—in other words, based on credible threats and 

risk-based needs—resulting in a mismatch between wants, needs, 

affordability and sustainability. Once true requirements are established, 

they need to be stable. At times, DOD has allowed new requirements to be 

added well into the acquisition cycle, significantly stretching technology 

and creating design challenges, and exacerbating program budget 

overruns. Of course, defining requirements, managing contracts and 

overseeing contractors requires a capable workforce that is up to meeting 

these challenges, adheres to sound contracting practices, and provides 

contractors with incentives that are based on results, rather than attitudes 

and efforts. 

With this context in mind, I would like to turn now to recent trends in 

DOD’s contracting activities. If you would turn to slide 4, DOD’s spending 

on goods and services has increased by 88 percent since fiscal year 2000.

In fiscal year 2005, DOD obligated nearly $270 billion on contracts for 

Recent Contracting 

Trends 

 1

 GAO, GAO’s High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 15, 2006); and 

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

2

 GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud, Waste, and 

Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006).

Page 3 GAO-06-800T Contracting for Better Outcomes 
products, research and development efforts, and services, such as for 

information technology and management support. 

All indications are that this upward trend will continue. Aside from growth 

in dollar value, there have also been changes in what DOD is buying. 

DOD’s new weapon system programs are expected to be the most 

expensive and complex ever, and will consume an increasingly large share 

of DOD’s budget. To illustrate, in the last 5 years DOD has doubled its 

commitment to major weapon systems from $700 billion to $1.4 trillion. 

DOD is counting on these efforts to fundamentally transform military 

operations. The Army, for example, is undertaking the Future Combat 

Systems program—a family of weapons, including 18 manned and 

unmanned ground vehicles, air vehicles, sensors and munitions, that will 

be linked by an information network—to enable its combat force to 

become lighter, more agile, and more capable. Future Combat Systems’ 

procurement will represent 60 to 70 percent of Army procurement from 

fiscal years 2014 to 2022. 

The Army, however, is not alone in pursuing complex and costly systems. 

For example, the Air Force is modernizing its tactical aircraft fleet as part

of the $200 billion Joint Strike Fighter program and the F-22A Raptor 

aircraft, which is expected to cost more than $65 billion. Similarly, the 

Navy’s Virginia class submarine is expected to cost about $80 billion, while 

the DDG-51 class of destroyer is expected to cost some $70 billion. DOD’s 

development of such systems requires more funds than may reasonably be

expected to be available. For example, we testified in April 2006 that the 

Navy’s shipbuilding plan projects a supply of shipbuilding funds that will 

double by 2011 and will stay at high levels for years to follow.3

As overall obligations have increased, so has DOD’s reliance on the private 

sector to provide services to fulfill DOD’s missions and support its 

operations. In some cases, the growth in services reflects that DOD is 

using a different acquisition approach to support its missions. For 

example, DOD is now buying launch services, rather than rockets. Service 

contracts pose a number of challenges in terms of defining requirements, 

establishing expected outcomes, and assessing contractor performance. 

 3

 GAO, Defense Acquisitions: Actions Needed to Get Better Results on Weapons Systems 

Investments, GAO-06-585T (Washington, D.C.: April 5, 2006). 

Page 4 GAO-06-800T Contracting for Better Outcomes 
Additionally, in recent years, federal agencies including DOD have moved 

away from using in-house contracting capabilities and are making greater 

use of existing contracts awarded by other agencies. If you would turn 

now to slide 7, these interagency contracts are intended to 

• leverage the government’s buying power; 

• provide a faster and easier method for procuring commonly used goods 

and services, and 

• reduce initial contracting administrative costs. 

DOD is the largest user of these interagency contracting vehicles, and their 

availability has enabled DOD to save time by paying other agencies to 

award and administer contracts for goods and services on its behalf. DOD, 

however, lacks complete information about purchases made through other 

agencies’ contracts. Moreover, our work and that of some agency 

inspectors general have uncovered instances of improper use of 

interagency contracts, including issuing orders that were outside the 

scope of the underlying contract, failing to follow procedures intended to 

ensure best pricing, and failing to establish clear lines of accountability 

and responsibility. Further, in some instances fee-for-service arrangements 

may have led to an inordinate focus on meeting customer demands at the 

expense of complying with sound contracting policy and required ordering 

procedures. These and other issues led us to designate management of 

interagency contracting a governmentwide high-risk issue in January 2005. 

Ensuring the proper use of interagency contracts must be viewed as a 

shared responsibility which requires that agencies clearly define 

responsibilities and adopt clear, consistent, and enforceable policies and 

processes that balance the need for customer service with the 

requirements of contract regulations.

At the same time that the amount, nature, and complexity of contract 

activity has increased, DOD’s acquisition workforce has remained 

relatively unchanged in size and faces certain skill gaps and serious 

succession planning challenges. DOD’s acquisition workforce must have 

the right skills and capabilities if it is to effectively implement best 

practices and properly manage the goods and services it buys. We noted in 

a report issued in 2003, and again in July 2006, however, that procurement 

reforms, changes in staffing levels, workload, and the need for new skill 

Page 5 GAO-06-800T Contracting for Better Outcomes 
sets have placed unprecedented demands on the acquisition workforce.4

Moreover, DOD’s current civilian acquisition workforce level reflects the 

considerable downsizing that occurred in the 1990s. DOD’s approach to 

acquisition workforce reduction during the 1990s was not oriented toward 

shaping the makeup of the workforce; rather, DOD relied primarily on 

voluntary turnover and retirements, freezes on hiring authority, and its 

authority to offer early retirements and buyouts to achieve reductions. 

Indeed, during our work on the early phases of DOD downsizing, some 

DOD officials voiced concerns about what was perceived to be a lack of 

attention to identifying and maintaining a balanced, basic level of skills 

needed to maintain in-house capabilities. 

I would like to turn now to briefly discuss some of DOD’s practices in 

three areas—(1) competition and sound pricing; (2) incentivizing 

contractors; and (3) contract oversight—that increase risks and 

undermine DOD’s ability to establish sound business arrangements. 

Sound Business

Arrangements 

Competition and Sound 

Pricing 

Our work has identified a number of issues related to competition and 

pricing in DOD’s efforts to obtain needed goods and services. Under the 

Competition in Contracting Act of 1984, DOD contracting officers are, with 

certain exceptions, to solicit offers and award contracts using full and 

open competition, in which all responsible sources are permitted to 

compete. As shown on slide 10, DOD reports that only forty-one percent 

of its contract obligations in fiscal year 2005 were made on contracts that 

were awarded using full and open competition. The impact of not using 

full and open competition is reflected in one recent example involving the 

Army’s award of sole-source contracts for security guards. In this case, we

found that the Army devoted twice as many contract dollars—nearly $495 

million—to sole-sourced contracts for security guards at 46 of 57 Army 

installations, despite the Army’s recognition that it was paying about 

25 percent more for its sole-source contracts than for those it previously

awarded competitively.

 4

 GAO, Federal Procurement: Spending and Workforce Trends, GAO-03-443 (Washington,

D.C.: April 30, 2003); and GAO, Contract Management: DOD Vulnerabilities to 

Contracting Fraud, Waste, and Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006). 

6

 GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees 

Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec. 19, 2005); and

GAO, Defense Acquisitions: DOD Wastes Billions of Dollars through Poorly Structured 

Incentives, GAO-06-409T (Washington, D.C.: April 5, 2006).

Page 6 GAO-06-800T Contracting for Better Outcomes 
Another element of a sound business arrangement is the fee mechanism 

used to incentivize excellent contractor performance. In December 2005,

we reported that DOD gives its contractors the opportunity to collectively 

earn billions of dollars through monetary incentives. 6 Unfortunately, we 

found DOD programs routinely engaged in practices that failed to hold 

contractors accountable for achieving desired outcomes and undermined 

efforts to motivate results-based contractor performance, such as 

• evaluating contractor performance on award-fee criteria that are not 

directly related to key acquisition outcomes (e.g., meeting cost and 

schedule goals and delivering desired capabilities to the warfighter); 

• paying contractors a significant portion of the available fee for what 

award-fee plans describe as “acceptable, average, expected, good, or 

satisfactory” performance, which sometimes did not require meeting 

the basic requirements of the contract; and 

• giving contractors at least a second opportunity to earn initially 

unearned or deferred fees. 

As a result, DOD has paid out an estimated $8 billion in award fees on 

contracts in our study population, regardless of whether acquisition 

outcomes fell short of, met, or exceeded DOD’s expectations. On slide 15, 

we have included four cases in which contractors that were behind 

schedule and over cost were paid between 74 and 100 percent of the 

available award fee. 

Despite paying billions of dollars in award and incentive fees, DOD has not 

compiled data or developed performance measures to evaluate the validity 

of its belief that award and incentive fees improve contractor performance 

and acquisition outcomes. DOD’s strategies for incentivizing its 

contractors, especially on weapon system development programs, are 

symptomatic of a lack of discipline, oversight, transparency, and 

accountability in DOD’s acquisition process. 

Incentivizing Contractors 

Contract Oversight I would like to briefly discuss the third element of sound business 

arrangements, DOD’s oversight of its service contracts. Government 

monitoring and inspection of contractor activity, if not done well, can 

contribute to a lack of accountability and poor acquisition outcomes. In 

2005, we reported that DOD’s monitoring of nearly a third of the 90 service 

Page 7 GAO-06-800T Contracting for Better Outcomes 
contracts we reviewed was insufficient.7

 In these cases, we identified a 

number of contributing factors, including DOD’s failure to assign 

government performance monitors and the fact that personnel are usually 

assigned such duties on a part-time basis and not evaluated on how well 

they performed their duties. DOD and senior military acquisition policy 

officials acknowledged that the priority of contracting offices is awarding 

contracts, not ensuring that trained performance monitors are assigned 

early so that contract oversight can begin upon contract award. Ultimately,

however, if appropriate monitoring is not being done, DOD is at risk for 

paying contractors more than the value of the services they performed. 

In closing, these three illustrative business arrangement issues, along with

those we have identified in DOD’s acquisition and business management 

processes, present a compelling case for change. In short, it takes a myriad 

of things to go right for acquisitions to be successful, but only a few things 

to go wrong to cause major problems. Slide 17 provides examples of the 

impact that these problems can have on reducing the government’s buying 

power. Such examples illustrate the outcomes of poor acquisition 

executions. The debate now centers on future investments and what 

return on investment will be realized. 

Finally, on slide 18 you will find a number of actions that can and should 

be taken to improve acquisition outcomes. By implementing the 

recommendations we have made on individual issues, DOD can improve 

specific processes and activities and save huge amounts of taxpayer 

dollars. At the same time, by working more broadly to improve its 

acquisition practices, DOD can set the right conditions for becoming a 

smarter buyer, getting better acquisition outcomes, and making more 

efficient use of its resources in what is sure to be a more fiscally 

constrained environment. DOD’s written acquisition policies reflect many 

of our recommendations and often incorporate best practices. As such, 

the policies provide the basis for sound decisions and actions. The 

policies, however, are not consistently manifested on decisions made on 

individual acquisitions. In these cases, officials are rarely held accountable

when acquisitions go astray. It is essential to create an environment 

conducive to changing behaviors and to recognize that achieving sound 

acquisition outcomes are a shared responsibility between the Congress, 

DOD, and the contractor community. Unless changes are made, DOD will 

 7

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

Defense Service Contracts, GAO-05-274 (Washington, D.C.: Mar. 17, 2005).

Page 8 GAO-06-800T Contracting for Better Outcomes 
continue on a path where wants, needs, affordability and sustainability are 

mismatched, with predictably and recurring unsatisfactory results. 

- - - - 

Mr. Chairman and members of the subcommittee, this concludes my 

testimony. I would be happy to answer any questions you may have. 

In preparing for this testimony, we relied principally on previously issued 

GAO reports. We also obtained data on DOD’s contract activity from 

DOD’s DD350 database and from the General Services Administration’s 

Federal Procurement Data System. We have previously expressed 

concerns about the accuracy of the data contained in the Federal 

Procurement Data System. We determined, however, that the data were 

sufficiently reliable for the purposes of this testimony. We also obtained 

data from the Office of Personnel Management regarding DOD’s 

acquisition workforce. For the purposes of this report, we selected 

14 occupation series including contracting, business, purchasing, quality 

assurance and supply and inventory management personnel. We 

conducted our work in April and July 2006 in accordance with generally

accepted government auditing standards. 

Scope and 

Methodology 

For further information regarding this testimony, please contact Katherine

V. Schinasi at (202) 512-4841 or schinasik@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on the 

last page of this testimony. Key contributors to this report were Lily Chin, 

David E. Cooper, Brendan Culley, Thomas Denomme, Timothy DiNapoli,

Paul Francis, Alan Frazier, Christopher Kunitz, Michele Mackin, 

William Russell, Adam Vodraska, and Karen Zuckerstein. 

Contact and Staff 

Acknowledgments 

(120568) Page 9 GAO-06-800T Contracting for Better Outcomes 
Appendix I 

DOD Acquisitions:

Contracting for Better Outcomes

House Appropriations Committee

Subcommittee on Defense

September 2006

Page 10 GAO-06-800T Contracting for Better Outcomes 
2

Factors Contributing to Poor Acquisition Outcomes

DOD’s buying power eroded due to:

• Historical preference for grand, revolutionary solutions that depend on immature 

technology

• Frequent mismatch between wants, needs, affordability, and sustainability

• Unrealistic and continually changing requirements

• Undisciplined management of programs once started

• Lack of competition and adherence to sound contracting practices that adequately 

allocates risk between the contractor and taxpayer

• Incentives and fees based on attitudes and efforts rather than results

• Workforce capabilities strained to meet 21st century challenges

Page 11 GAO-06-800T Contracting for Better Outcomes 
3

Conducting the Business of Government

• Among the 21st century challenges faced by the government is determining who will

do the business of government.

• The work of the government is increasingly performed by the private sector under 

contract.

• DOD’s spending on goods and services has grown significantly since fiscal year

2000, and all indications are the trend will continue. 

• DOD’s weapon systems acquisition and contract management processes have been

on GAO’s high-risk list for more than a decade.

• GAO designated the management of interagency contracting a governmentwide 

high-risk issue in January 2005; DOD is the largest user of interagency contracting 

vehicles.

Page 12 GAO-06-800T Contracting for Better Outcomes 
4

DOD Contract Obligations and Acquisition Workforce 

Trends Since Fiscal Year 2000

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005

Obligations

Workforce

Dollars in billions/

Personnel in thousands

Fiscal Year

Source: Contract obligations: DD350 database.

Workforce: GAO analysis of OPM data of 14 acquisition-related job series.

Acquisition-related workforce

generally unchanged

Obligations

increased by

88 percent

Page 13 GAO-06-800T Contracting for Better Outcomes 
5

Obligations Increased Across Goods and Services 

Categories 

19 21

27

33

33

37

53

56

65

85

94

104

61 67 78 90 102 117

0

50

100

150

200

250

300

2000 2001 2002 2003 2004 2005

Other services

Research, development, test and evaluation

Products

Contract obligations

Dollars in billions

Fiscal Year

Source: DD350 database, actions over $25,000.

Page 14 GAO-06-800T Contracting for Better Outcomes 
6

Growth in Contracting for Services Poses New 

Challenges

• New missions and approaches contribute to increased spending on services:

• Following the terrorist attacks of September 11, 2001, increased security

requirements and deployment of active duty and reserve personnel resulted in 

DOD having fewer military personnel to protect domestic installations. The U.S. 

Army awarded contracts worth nearly $733 million to acquire contract guards at 

57 installations.

• The Air Force historically bought space launch vehicles, such as the Delta and 

Titan rockets, as products; under the Evolved Expendable Launch Vehicle 

program, the Air Force purchases launch services using contractor-owned

launch vehicles. Projected program cost is $28 billion.

• Defining requirements, establishing expected outcomes, and assessing contractor 

performance is often more complicated compared with contracting for supplies and 

equipment.

Page 15 GAO-06-800T Contracting for Better Outcomes 
7

Rapid Growth of Interagency Contracting

• While total sales of

GSA’s Multiple Award 

Schedule are available, 

data on the full extent of

interagency contracting 

were not available.

4.0 4.5 4.4 4.9 5.0

6.6 7.7

11.4

14.7

17.6

22.4

25.6

32.5

0

5

10

15

20

25

30

35

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Multiple Award Schedule Sales, Fiscal Year 1992 through 2004

Dollars in billions

Year

Source: GSA

Page 16 GAO-06-800T Contracting for Better Outcomes 
8

Interagency Contracting Designated a 

Governmentwide High-Risk Area 

• Rapid growth in use of these contracts in terms of amount spent

• Lack of transparency and reliable data regarding extent and details of use of

interagency contracting

• Increasing demands on the acquisition workforce, coupled with insufficient training 

and guidance

• Fee-for-service arrangements in interagency contracting, which may have led to an

inordinate focus on meeting customer demands at the expense of proper use and 

good value

• Lack of a meaningful “fair opportunity” process when selecting contractors for 

individual task orders

• Lack of clearly established lines of accountability between agencies that award 

umbrella contracts and agencies that issue individual orders under those umbrella

contracts

Page 17 GAO-06-800T Contracting for Better Outcomes 
9

Lack of Fully Defined Requirements Increases DOD

Cost Risk

• Lack of fully defined requirements in DOD acquisitions contributes to numerous

changes to the scope and cost of the work. 

• Use of task order contracts and time-and-materials contracts provides DOD flexibility

to add work to contracts once needs are defined but may pose additional 

management and oversight risks.

• DOD may authorize contractors to begin work before reaching agreement on terms

and conditions, including scope of work, specifications, and price, under agreements

termed letter contracts or undefinitized contract actions.

• DOD obligated nearly $6.5 billion under letter contracts in fiscal year 2004. 

• Allows DOD to initiate work quickly to meet urgent operational needs, but

contract incentives to control costs are likely to be less effective.

Page 18 GAO-06-800T Contracting for Better Outcomes 
10

Competition

• The Competition in Contracting Act of

1984 requires that contracting officers

promote and provide for full and open 

competition—i.e. all responsible

sources are permitted to compete—

when soliciting offers and awarding

government contracts.

• This enables the government to

rely on competitive market forces

to obtain needed goods and 

services at fair and reasonable 

prices.

• Use of other than full and open 

competition must be justified in

writing and must cite specific

statutory authority.

Fiscal Year 2005 DOD

Competition Statistics

Other than full

and open

competition

50%

Full and open 

competition

41%

Not reported

9%

Source: GAO analysis of DOD data.

Page 19 GAO-06-800T Contracting for Better Outcomes 
11

Examples of Competition and Pricing Issues

• Army’s approach to acquire contract guard services under sole-source contracts at

46 of 57 installations resulted in the Army paying 25 percent more for its sole-source 

contracts than for those it previously awarded competitively.

• February 2005 review of sole-source AWACS spare parts found that DOD did not

• obtain or evaluate appropriate pricing information, such as sales data for items

asserted to be commercial, or

• adequately consider analyses conducted by the Defense Contract Audit 

Agency or Defense Contract Management Agency.

• In the absence of adequate price competition, the Truth-in-Negotiations Act enables

DOD to obtain certified cost and pricing data for negotiated contracts exceeding 

$550,000 that are not for commercial items.

• GAO reviewed 20 contract actions valued at $4.4 billion in which DOD waived 

the requirement for cost and pricing data.

• DOD lacked guidance to help contracting officers determine whether a waiver 

should be granted, what constitutes acceptable data and analyses, or the need 

for assistance.

Page 20 GAO-06-800T Contracting for Better Outcomes 
12

Impact of Multiple Contractor Levels on Costs 

Uncertain

• Evidence suggests DOD is increasingly relying on contractors to manage a greater 

range of responsibilities than traditional prime contractors. Examples include:

• The Army’s $200 billion Future Combat Systems, in which the contractor is

acting as a lead system integrator. Contractor is assuming greater responsibility

for requirements development, design, and source selection of major system 

and subsystem contractors, and trade-off decisions.

• In an interagency contract for construction services, DOD paid 7 percent to

Treasury to award a contract to a staffing company, which then subcontracted 

to a construction firm. In combination, Army paid 17 percent more than

subcontractor’s proposed price.

• Historically, DOD has limited visibility over the cost impact associated with using

multiple layers of contractors to perform work.

Page 21 GAO-06-800T Contracting for Better Outcomes 
13

Award- and Incentive-Fee Structures

• To encourage innovative, efficient, and effective performance, DOD provides its

contractors the opportunity to collectively earn billions of dollars through monetary

incentives known as award and incentive fees.

• On award-fee contracts, DOD personnel conduct periodic evaluations of the

contractor’s performance against specified criteria and recommend the amount

of fee to be paid. Criteria and evaluations tend to be subjective.

• Incentive-fee contracts typically apply a formula, specified in the contract, that

adjusts the fee based on an objective evaluation of the contractor’s

performance.

• DOD reports it obligated more than $75 billion on award- and incentive-fee contracts

in fiscal year 2004.

Page 22 GAO-06-800T Contracting for Better Outcomes 
14

DOD Practices Undermine Award- and Incentive-Fee

Objectives

• December 2005 analysis of 93 award- or incentive-fee contracts found that DOD

programs engaged in practices that undermined efforts to motivate contractor

performance and that did not hold contractors accountable for achieving desired 

outcomes. DOD

• frequently paid most of available award fees regardless of whether acquisition 

outcomes fell far short of, met, or exceeded expectations; 

• allowed contractors at least a second opportunity to earn initially unearned or 

deferred fees; and

• paid significant amount of fee for “acceptable, average, expected, good, or

satisfactory” performance.

• Contracts with incentive fees provided a clearer link to acquisition outcomes;

however, about half of the contracts failed or are projected to fail to complete the

acquisition at or below the target price.

• Despite paying billions in fees, DOD has little evidence to support its contention that

these fees improved contractor performance.

Page 23 GAO-06-800T Contracting for Better Outcomes 
15

Award Fee Decisions Not Tied to Acquisition 

Outcomes

74 percent

$160.4 million

100 percent

$494.0 million

91 percent

$848.7 million

85 percent

$202.5 million

paid through 2004

Percentage and total

award fee paid to prime

systems contractor

(adjusted for rollover)*

11 months More than 12 months

5.9 percent

27 months

13.3 percent

33 months

14.8 percent

Acquisition cycle time

increase over baseline

$3.7 billion

99.5 percent

$10.1 billion

30.1 percent

$10.2 billion

47.3 percent

$3.7 billion

41.2 percent

Research and

development cost 

increase over baseline

Space-Based

Infrared System High

Joint Strike Fighter

tactical fighter

aircraft

F-22A Raptor

tactical fighter

aircraft

Comanche

reconnaissance 

Acquisition outcomes attack helicopter

Program Performance and Award-Fee Payments on Selected DOD Development Programs

Sources: DOD submissions to GAO, and GAO-05-301 (data); GAO (analysis).

*When calculating the percentage of award fee paid (i.e. percentage of award paid = total fee paid

to date/ (total fee pool – remaining fee pool)), we included rolled-over fees in the remaining fee

pool when those fees were still available to be earned in future evaluation periods.

Page 24 GAO-06-800T Contracting for Better Outcomes 
16

Insufficient Oversight on DOD Service Contracts

• Monitoring and inspection of contractor performance is a key oversight mechanism.

• If monitoring and inspection is not performed, not sufficient, or not well 

documented, DOD is at risk of

• being unable to identify and correct poor contractor performance in a timely

manner, and 

• paying contractors more than the value of the services performed.

• DOD personnel performed insufficient monitoring on nearly a third of the 90 service 

contracts reviewed in March 2005 report.

• DOD personnel failed to assign personnel to perform monitoring or did not 

document monitoring and some monitoring personnel were not formally trained;

• Monitoring is not perceived as important as awarding contracts; and

• Personnel are usually assigned monitoring duties as a part-time responsibility and 

are not evaluated on how well duties were performed.

Page 25 GAO-06-800T Contracting for Better Outcomes 
17

Examples of Programs With Reduced Buying Power

Page 26 GAO-06-800T Contracting for Better Outcomes 
18

Improving Acquisition Outcomes

• Reconcile the differences between wants, needs, affordability and sustainability on 

an enterprise-wide basis, considering current and future threats and resources levels

• Nail down system requirements and ensure the maturity of technology to improve 

performance and enhance accountability

• Ensure that acquisitions are performance- and outcome-based, with appropriate

risk-sharing contracts in place

• Limit pay for performance-based contract incentives to positive acquisition outcomes

• Make it acceptable to pull the plug or reduce quantities of weapon systems and 

information systems projects when facts and circumstances warrant

• Ensure a capable acquisition workforce and accountable leadership

• Create an environment conducive to behavioral change; sound acquisition outcomes 

are a shared responsibility between Congress, DOD, and the contractor community

• Assure that individual decisions are consistent with sound acquisition policies and 

practices

Page 27 GAO-06-800T Contracting for Better Outcomes 
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 

Page 28 GAO-06-800T Contracting for Better Outcomes 
GAO’s Mission The Government Accountability Office, the audit, evaluation and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost

is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts 

newly released reports, testimony, and correspondence on its Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go 

to www.gao.gov and select “Subscribe to Updates.” 

The first copy of each printed report is free. Additional copies are $2 each. 

A check or money order should be made out to the Superintendent of 

Documents. GAO also accepts VISA and Mastercard. Orders for 100 or 

more copies mailed to a single address are discounted 25 percent. Orders 

should be sent to: 

U.S. Government Accountability Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, D.C. 20548 

Paul Anderson, Managing Director, AndersonP1@gao.gov (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Mail or Phone 

To Report Fraud,

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Public Affairs 

PRINTED ON RECYCLED PAPER