United States General Accounting Office

GAO Report to the Chairman, Subcommittee

on Military Readiness, Committee on

National Security

House of Representatives

March 1997 BASE OPERATIONS

Challenges Confronting

DOD as It Renews

Emphasis on

Outsourcing

GAO/NSIAD-97-86

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-276213 

March 11, 1997

The Honorable Herbert H. Bateman

Chairman, Subcommittee on Military Readiness

Committee on National Security

House of Representatives

Dear Mr. Chairman:

“Outsourcing,” or contracting out, for commercial services is a growing

practice within the government to achieve cost savings, management

efficiencies, and operating flexibility. Recent studies have noted that the

Department of Defense (DOD) could save billions of dollars by outsourcing

support functions associated with operating military bases. In response to

your request, we have developed information about outsourcing savings.

This report examines (1) the extent to which DOD and the services

emphasize the outsourcing of base support services, (2) the factors that

influence savings in the outsourcing process, and (3) impediments to DOD’s

outsourcing.

Results in Brief DOD’s efforts to outsource base support activities were constrained by

legislation and other factors in the past. Because of the continuing

budgetary and personnel limitations, the need to fund weapons

modernization, and the elimination of key legislative constraints, DOD is

now increasing its emphasis on outsourcing support activities. Senior

leadership within the Office of the Secretary of Defense (OSD) and the

services are strongly supporting renewed efforts to outsource base

support activities. From October 1, 1995, to January 15, 1997, the services

announced plans to begin outsourcing studies during fiscal years 1996 and

1997. These studies will involve over 34,000 positions, most of which were

associated with base support activities. Additional studies involving more

than 100,000 positions will be started over the next 6 years.

Although the outsourcing studies have yet to be completed, some of the

services have programmed outsourcing savings projections into their

budgets. We recognize that outsourcing can be cost-effective because

outsourcing competitions generate savings, usually through a reduction in

personnel, whether competitions are won by the government or the

private sector. However, we question the magnitude of savings projections

cited in various DOD studies, as well as the services’ current savings

projections. These estimates are heavily premised on initial savings

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estimates from previous outsourcing efforts, and such estimates change as

the scope of the work and wages change. Furthermore, continuing budget

and personnel reductions could make it difficult to sustain the levels of

previously projected savings. Thus, the extent to which the services may

achieve these savings is questionable. At the same time, two areas of

outsourcing appear to offer the potential for significant savings, but the

extent to which the services are exploring them is mixed. They involve

giving greater emphasis to (1) the use of omnibus contracts, rather than

multiple contracts, for support services and (2) the conversion of military

support positions to civilian or contractor positions.

Despite DOD’s renewed emphasis on outsourcing, impediments remain and

new challenges are emerging. Although guidance for performing

outsourcing studies has recently been changed to streamline and improve

the process, the extent to which the guidance will lead to increased

outsourcing remains to be seen. Also, federal contracting law may affect

some DOD efforts to outsource, and some services preclude some activities

from outsourcing because of military requirements. Finally, the potential

lack of resources to perform outsourcing studies and funding to pay for

outsourced activities is of growing concern to some service officials.

Background Since 1955, federal agencies have been encouraged to obtain goods and

services from the private sector through outsourcing. In 1966, the Office of

Management and Budget (OMB) issued Circular A-76, which established the

federal policy for the government’s performance of commercial activities.

In a 1983 supplemental handbook, OMB established procedures for

determining whether commercial activities should be outsourced.1

Under A-76, DOD has historically outsourced functions to provide more

cost-effective services. However, several provisions of law have

inhibited DOD’s outsourcing efforts. The first provision contained in

the National Defense Authorization Act for Fiscal Years 1988-89

(P.L. 100-180) authorized installation commanders to determine whether

to study activities for potential outsourcing. Because of disruptions to

1

To compare costs associated with in-house versus industry performance, the supplemental handbook

requires the government to conduct a management efficiency study. In this study, organizational

structure, staffing, and operating procedures are reviewed to determine the most efficient and

effective way of performing the activity with in-house staff. The resulting “most efficient organization”

is used as the basis for the in-house cost. The government also prepares a performance work

statement describing the work required, which serves as the basis for both contractor and in-house

offers. Each of the services maintains a database of all A-76 studies. This database generally includes

the function studied, the cost of the in-house workforce and contract, and the outcome of the

competition.

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their workforce, the cost of conducting studies, and a desire for more

direct control of their workforce, various officials told us that

commanders often chose not to pursue outsourcing. This law, which was

known as the “Nichols Amendment” and codified at 10 U.S.C. 2468, was

effective through September 30, 1995. Another provision contained in the

Department of Defense Appropriations Act for Fiscal Year 1991

(P.L. 101-511) and subsequent DOD appropriations acts, prohibited funding

for lengthy A-76 studies. Finally, the National Defense Authorization Acts

for Fiscal Years 1993 and 1994 contained provisions that prohibited DOD

from entering into contracts resulting from cost studies done under OMB

Circular A-76, from October 23, 1992, to April 1, 1994. These prohibitions,

along with the Nichols Amendment, had the effect of limiting outsourcing

in most services until 1996. Since then, except for the Air Force, the

services have completed few A-76 studies. In 1996, OMB revised its

supplemental handbook in an effort to streamline and improve the

outsourcing study process. (See app. I for a summary of the changes.)

As of fiscal year 1996, DOD employed about 449,000 military and civilian

personnel to do support activities such as base support, health services,

and equipment repairs in-house (see fig. 1).2

2

Other DOD-sponsored studies that take a broader view of infrastructure and support activities indicate

that the total number of DOD military and civilian personnel involved in such activities could be much

higher. The services differ in how they (1) define commercial activities and (2) determine which

activities and functions are inherently governmental, requiring that they be done in-house.

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Figure 1: In-house DOD Commercial

Activities (fiscal year 1996) 

Base support

Social services

Health services

Equipment repair

Other

Nonmanufacturing

Education/training

Property maintenance

20.2%

6.3%

21.1%

22.6%

6.2%

12.9%

6.3%

4.5%

a

b

c

Note: Percentages indicate the portion of the in-house workforce involved in commercial

activities.

aOther includes research, development, test, and evaluation support; automatic data processing;

and products manufactured in-house.

bNonmanufacturing includes functions such as storage and warehousing, engineering, and

administrative support services.

cEquipment repair includes depot and intermediate maintenance.

Source: DOD’s 1996 commercial activities inventory.

DOD estimates that base support activities such as facilities and vehicle

maintenance, food services, and local transportation will cost more than

$30 billion in fiscal year 1997. (App. II provides a more detailed list of base

support functions.) Several recent studies—DOD’s 1993 Bottom-Up Review,

the 1993 National Performance Review, DOD’s 1995 report from the

Commission on Roles and Missions of the Armed Forces, and the 1996

report of the Defense Science Board Task Force on Outsourcing and

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Privatization—concluded that DOD could realize savings of upwards to

between 20 and 40 percent by outsourcing support activities. Some further

concluded that DOD could achieve the largest savings by using a single

omnibus contract, rather than several small contracts, to encompass

multiple activities.

Over the years, we have done many reviews of federal contracting,

addressing issues associated with outsourcing and questions regarding

cost savings. A list of related GAO products is presented at the end of this

report.

DOD and Services

Have Renewed

Emphasis on

Outsourcing

After a lull in outsourcing efforts due to administrative and legislative

constraints, in August 1995, the Deputy Secretary of Defense directed the

services to make outsourcing of support activities a priority and chartered

a Privatization Integrated Policy Team to identify opportunities for

outsourcing.3

 In doing so, he was reacting to the reports recommending

outsourcing of support activities, increasing budget pressures, and the

need to free up funding for modernization. Consequently, DOD and the

services initiated a review of six support areas, including base support, to

determine where outsourcing could generate savings.4

As of the beginning of fiscal year 1996, DOD officials estimated that DOD had

outsourced about 37 percent of its overall workforce connected with

commercial activities. Based on service definitions of commercial

activities, the Air Force estimated that it had outsourced 64 percent of its

workforce performing commercial activities, and at the end of 1996, the

Air Force had 126 A-76 studies underway—significantly more than the

other services. The Army and the Navy estimated they had outsourced 32

and 31 percent, respectively.5

The Air Force plans to study up to 60,000 positions for potential

outsourcing beginning in 1996 through 2003. Air Force officials estimated

that the majority of the positions are in base support services. In

January 1997, Air Force officials announced plans to study about 14,400

3

For DOD’s purposes, outsourcing is the use of federal funds to pay a private company to do defense

work or provide a service for a defense activity; privatization is the complete transfer of ownership

and management of a function to the private sector, but DOD pays for the services associated with the

function.

4

The other five areas under review are materiel management, depot maintenance, finance and

accounting, education and training, and data centers.

5

Because each service differs in how it defines commercial activities, the totals could be increased as

the services reexamine areas previously excluded.

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positions. To organize its efforts, the Air Force formed an outsourcing and

privatization team and executive steering group in January 1996 and a new

outsourcing and privatization division in January 1997. Also, an Air Force

Center for Quality Management Innovations is expected to facilitate Air

Force-wide outsourcing and privatization efforts.

The Army plans to study about 11,000 positions during fiscal year 1997 and

about 15,000 positions during fiscal years 1998-2003 for potential

outsourcing. An Army official estimated that most of the positions are in

base support functions and that the majority are civilian positions. As of

January 1997, the Army had announced plans to begin studying about

9,600 positions for potential outsourcing, all of them in base support

functions.

Navy officials told us that they plan to study about 80,000 positions for

potential outsourcing over the next several years. These positions

represent about 50,000 civilians and 30,000 military members, and a

portion of them are involved in base support functions. In January 1997,

the Navy formally announced plans to study about 10,600 positions

beginning in fiscal year 1997. Of the 10,600, about 8,400 involve civilian

and 2,200 involve military positions. In 1996, the Navy established an

outsourcing support office to contract with industry to conduct A-76

studies and develop tools to streamline the study process. Further, the

Navy established a new outsourcing program division to identify

outsourcing candidates and fund A-76 studies. A Navy survey of

commercial activities to identify candidates for competition is underway.

The Marine Corps estimates it will study 5,000 positions for outsourcing;

however, it does not have a firm timetable for initiating or completing its

studies. In 1996, the Marine Corps established a senior staff-level

committee and working group to guide the selection of candidate

functions for outsourcing. The Marine Corps is part of the Navy’s survey of

commercial activities. Marine officials indicated that survey results are

expected to be available in the summer of 1997.

History and Current

Environment Suggest

the Need for Caution

in Projecting Savings

From Outsourcing

DOD is expecting significant savings from its current and planned

outsourcing and privatization efforts. However, DOD’s outsourcing

experience and the current operating environment suggest that projected

savings from current and planned outsourcing efforts may be overstated.

At the same time, opportunities exist for greater savings through omnibus

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contracting and military-to-civilian conversions, although they, too, have

limitations.

DOD’s Projected Savings

From Outsourcing

Initiatives

A DOD official told us that the Department expects savings from

outsourcing and privatization to grow to at least $2.5 billion annually by

the end of the future years defense plan period (fiscal year 2003); however,

he could not tell us specific savings totals for each year before 2003.

According to OSD and service officials, DOD has programmed the savings

into its 6-year budget. In February 1996, the Deputy Secretary of Defense

directed the services to identify targets for savings from outsourcing and

privatization and to transfer the anticipated savings from their operations

and maintenance accounts to their modernization accounts. Each of the

services has projected potential savings based on outsourcing programs

planned or underway. These savings projections are not as large as some

studies had suggested were possible from outsourcing; still, caution is

warranted concerning the magnitude of savings likely to be achieved in the

current operating environment.

The Air Force projects a 20-percent cost savings of up to $1.26 billion from

outsourcing mostly base support functions between fiscal year 1998 and

2003. Air Force officials told us that prior outsourcing experience

projected an average 29-percent savings; thus, they considered their

current savings projection to be conservative. The Air Force projects that

its studies will recommend outsourcing about 12,000 positions. Air Force

officials could not tell us what portion of the 12,000 were military or

civilian positions because they had not identified specific functions to be

outsourced.

Until recently, the Army was projecting a 10-percent savings from its

renewed outsourcing emphasis, and a key program official was expressing

concern about the program’s ability to produce large-scale savings. Now,

while still expressing concern about the potential savings, this official told

us the Army was raising its savings projection to 20 percent, which is more

in line with savings projections being cited by the other services.6

 He said

that the 20-percent figure represented a conservative application of Center

for Naval Analyses (CNA) study data, which estimated the Army has saved

27 percent from outsourcing studies.7

6

In neither case did Army officials provide us with a dollar amount for projected savings.

7

See DOD report to the Congress, March 1996, Improving the Combat Edge Through Outsourcing,

completed in response to section 357 of the National Defense Authorization Act for Fiscal Year 1996.

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The Marine Corps projects initial cost savings of about $10 million per

year beginning in fiscal year 1998, increasing to $110 million per year by

fiscal year 2004. Officials told us the Marine Corps estimate was based on

CNA study data. The CNA study data had projected that the Marine Corps

could save 34 percent through outsourcing, based on prior years’ savings

projections.

The Navy projects a 30-percent net cost savings from outsourcing

commercial activities, beginning in fiscal year 2000, based on the results of

CNA study data. The Navy expects savings to begin accruing in fiscal 

year 2000 and increase to $1.3 billion per year by the end of fiscal year

2003.

Competition Generates

Savings, but They May Be

Less Than Initially

Projected

Some recent studies recommending increased outsourcing within DOD

have projected cost savings of 20 to 40 percent and generally created the

impression that large savings occur only if contracts are awarded to the

private sector. Our work indicates that the magnitude of savings from

outsourcing over time is likely to be less than projected from initial cost

comparisons. Even so, competition is the key to realizing some savings,

whether the function is outsourced or remains in-house.

According to DOD data on cost comparisons done between fiscal year 1978

and 1994, savings from competed functions occurred regardless of

whether the government or a private company was awarded the work.

DOD’s data show the government won about half of the time and private

industry won the other half. DOD’s savings achieved through the

competitive process were largely personnel savings, the result of closely

examining the work to be done and determining how to do it with fewer

personnel, whether in-house or outsourced. This lesson was consistent

with an April 1996 CNA report, which stated that the Navy’s cost estimates

were lower than private industry about 40 percent of the time. CNA

concluded that competition, not outsourcing, was the key to savings

because winners of competitions, whether an in-house organization or a

contractor, generally used fewer people to do the work.

Although a number of recent studies cited the potential for outsourcing to

provide large savings, most studies we examined, including those from CNA

and the Defense Science Board, drew heavily from the initial savings

projections in DOD’s commercial activities database. This database,

individually maintained by each of the services, set forth operational

savings that represent the difference between the cost of the ongoing

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operation and the cost of the winning offer. The services are required to

track these savings for the first 3 years. However, the services’ databases

do not generally reflect savings actually attained beyond 3 years, which

are subject to change.

Service officials acknowledged that the cost of operations projected at the

time of an outsourcing competition may be subject to modification for a

variety of reasons, such as inadequate initial statements of work, other

changes to performance work statements necessitated by new missions,

and mandated increases to wages. According to various headquarters and

installation officials, inadequately crafted statements of work have

frequently necessitated changes to contracts, which usually have resulted

in cost increases.8

 Likewise, headquarters and installation officials often

cited increases in federally established wage rates—larger at times than

wage increases received by federal employees—as a source of increased

contract costs. The Service Contract Act of 1965, as amended (41 U.S.C.

351-358), requires federal contractors to pay their service employees not

less than the prevailing wage as determined by the Department of Labor,

based on the type of work and the locale. When the prevailing wage

increases, contracts must be modified to reimburse contractors for the

increased cost.

Although DOD’s commercial activities database provides an initial

projection of savings from outsourcing competitions, few studies have

been done to determine actual savings realized over time. Various

headquarters and installation officials told us that such studies are

time-consuming and costly and are difficult to do, since a common

baseline for comparison is typically lost over time. Our 1990 evaluation of

DOD savings data showed that neither DOD nor OMB had reliable data on

which to assess the soundness of savings estimates. Also, DOD and OMB did

not know the extent to which expected savings were realized because DOD

does not routinely collect and analyze cost information to track savings

after the first 3 years of a contract.9

 Furthermore, DOD does not capture

what many service officials consider to be the sizable costs associated

with conducting A-76 studies.

8

Various service initiatives are underway to improve the development of performance work statements

through the use of standard templates, expert study teams to conduct A-76 studies, and outsourcing

the entire A-76 study process. Such steps could help to mitigate, but not eliminate, the need for

contract changes.

9

OMB Circular A-76: DOD’s Reported Savings Figures Are Incomplete and Inaccurate

(GAO/GGD-90-58, Mar. 15, 1990).

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Because post-contract reviews of activities outsourced have been limited,

we do not believe they provide a basis for projecting with reliability the

magnitude of savings achieved over time. Nevertheless, they do suggest

some potential for continuing savings, since many of the reviews indicated

that savings continued over the life of the contracts. For example, a 1989

Army Audit Agency review found that 9 of 10 large contracts audited were

still saving money after several years of operation. However, the scope of

work on the 10th contract had changed so dramatically that comparative

costs of in-house and contract operation could not be identified.

According to a Navy official, Naval Audit Service reviews of selected

contracts during the mid-1980s found that savings were realized over the

life of the contracts, although not as much as initially projected.

Our prior reports have identified savings and cost increases over time

from outsourcing. For example, in 1985, we reported that from a sample of

20 functions contracted out, savings were realized on 17 functions.10

Savings were not realized on two functions, and we could not determine

whether savings were realized on the third function. Even so, all but 1 of

the 20 functions had contract cost increases. Costs increased primarily

because of added work and mandated wage increases. Further, a 1995 DOD

Inspector General audit report found cost growth in 20 commercial

activity contracts it reviewed. The increases were related to changes in

work requirements and mandated wage increases associated with the

Service Contract and Davis-Bacon acts.11 The report also noted that

increased contract requirements would have affected both in-house and

contract costs but that the increased contract work requirements could

render the original cost comparison invalid.12

Many installation officials we met with suggested that a variety of factors

associated with the current operating environment could lessen the future

potential for savings, regardless of past savings. They expressed concern

that budget reductions and civilian personnel downsizing of recent years

had eliminated much of the potential for additional personnel savings in

10DOD Functions Contracted Out Under OMB Circular A-76: Contract Cost Increases and the Effects

on Federal Employees (GAO/NSIAD-85-49, Apr. 15, 1985).

11Similar to the Service Contract Act, the Davis-Bacon Act, 40 U.S.C. 276a et. seq., requires that federal

construction contractors pay their workers not less than prevailing wages as determined by the

Department of Labor.

12Cost Growth in Commercial Activity Contracts, Mar. 31, 1995.

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new outsourcing studies.13 Some said that potential savings from

outsourcing may be minimized by increases in the scope of work. Such

increases can occur, when funding becomes available, to restore a level of

service that had been reduced due to resource constraints. For example,

various officials expressed the need or potential for increases in the work

level to redress the effects of postponing maintenance and repair

activities, a common base support-type function, due to reductions in

funding.

Various installation officials told us that one way of achieving

across-the-board personnel reductions mandated by OSD is to outsource,

which would free remaining civilian authorizations for use in other,

critically understaffed activities. One senior command official in the Army

stated that the need to reduce civilian positions is greater than the need to

save money. This view was reinforced by the DOD Inspector General’s 1995

report on cost growth, which noted that “the goal of downsizing the

Federal workforce is widely perceived as placing DOD in a position of

having to contract for services regardless of what is more desirable and

cost effective.”

Potential Areas for

Significant Savings

Both omnibus contracting and the conversion of military positions to

civilian or contractor performance appear to have the potential to yield

larger savings than those projected from current or planned DOD

outsourcing efforts. However, the services could face significant

constraints on their abilities to achieve savings in these areas.

Omnibus Contracting Despite recent studies highlighting the potential for larger savings from

omnibus contracting than from contracting piecemeal, the extent to which

the services plan to emphasize omnibus contracting is unclear. Emphasis

on omnibus contracting may be constrained by competing DOD goals, such

as the goal to provide contracting opportunities for small and

disadvantaged businesses.

Currently, few installations have omnibus support contracts. The Army’s

Fort Irwin, California, and the Navy’s submarine bases at Bangor,

13From fiscal year 1987 to 1996, total operations and maintenance (O&M) budget authority declined

25 percent in real terms, reflecting the overall decline in defense spending. The O&M funding

appropriation account provides the principal source of funds for day-to-day activities at the services’

installations and bases, including maintenance and repair of most facilities and civilian personnel pay.

Within O&M funding, even steeper reductions have occurred in obligations for facilities maintenance

and repair, a common base support function, declining 38 percent in real terms during the same

period. During the same period, DOD’s civilian workforce has declined by 27 percent and is expected

to decline by 33 percent by fiscal year 2002.

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Washington, and Kings Bay, Georgia, outsourced support services under

single contracts when the current organizations were first established.

Others, such as Vance Air Force Base, Oklahoma, outsourced in 1962 as

part of a test with another base to determine whether outsourced support

services were less costly than support services performed in-house. The

former Craig Air Force Base in Selma, Alabama, retained all support

functions in-house, while Vance Air Force Base outsourced all support.

Vance Air Force Base retained its omnibus contract because Air Force

officials concluded the contract was less costly than having services done

in-house.

While DOD’s experience with omnibus contracts has been limited, some of

the services’ outsourcing experiences suggest the potential for larger

savings and benefits from such contracts. According to officials at one

installation, significant savings are realized by competing functions that

have large numbers of workers. Although there are few examples of

omnibus contracting, Air Force and Navy contracting data showed that a

higher percentage of savings was achieved in cases where large functions

were competed. For example, Air Force data showed that functions with 

1 to 25 positions averaged 13 percent in staff savings, while functions with

over 300 positions averaged 41 percent in staff savings. The Navy data

showed that functions with 1 to 10 positions averaged 22 percent in

savings, while functions with over 200 positions averaged 35 percent in

savings.

A 1996 internal assessment by the Army’s Forces Command identified

several benefits of omnibus contracting. Examples of benefits are (1) a

single manager is held accountable for performance; (2) efficiencies, such

as reduced overhead, are more often achievable under an omnibus

contract than under separate contracts; and (3) the flexibility to change

the contract performance work statement is increased. The assessment

concluded that the greatest advantage of omnibus contracting was the

reduced effort and cost to develop and award one contract versus multiple

contracts. A 1984 government-sponsored study concluded that Vance Air

Force Base was able to implement several organizational and managerial

cost-saving initiatives because of its omnibus support contract and that

such savings would not have been possible under the usual installation

structure involving several contractors and in-house organizations.

Similarly, a 1991 Air Force report concluded that the Vance omnibus

contract resulted in an overall lower contract cost for the same service

compared to individual contracts at similar installations.

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Conversely, while omnibus contracts may produce larger savings, such

contracts do not always succeed or are sometimes viewed as having

drawbacks. For example, in 1996, the Army awarded five separate

contracts to replace its omnibus contract to provide base support services

to Fort Irwin. Army officials stated that the omnibus contract was replaced

because the contract was too large to manage and the quality of service

was not maintained for some portions of the contract.14 At installations we

visited, we encountered varying views regarding omnibus contracts. Some

officials viewed them as a more efficient way to manage, while others

cited the potential for a greater number of activities to be adversely

affected should contract problems arise.

On October 28, 1996, the Deputy Secretary of Defense issued a policy

statement concerning the consolidation of contracts. In it, the Deputy

Secretary announced that in planning to consolidate several contracts or

requirements, the services must consider the effect on small businesses.

According to the Deputy Secretary, requirements cannot preclude small

businesses as prime contractors unless a market research analysis shows

significant benefits in terms of reduced costs and services or both.

Omnibus contracts can exclude the participation of small businesses as

the prime contractor because they often do not have the capacity to fulfill

the various parts of single, large contracts. The policy statement

recognizes the balance that must be maintained between the cost benefits

that can be obtained through consolidated contracts and the loss of small

businesses’ participation. The Deputy Secretary’s statement also

recognizes the policy of fostering the participation of small business in

federal contracting embodied in statutes such as the Small Business Act

and section 2323 of title 10 as implemented by the Federal Acquisition

Regulation (FAR) and the Defense Federal Acquisition Regulation

Supplement (DFARS).

Small business policies that could affect the use of omnibus contracts

include the requirement contained in FAR 19.502-2 that an acquisition be

set aside for exclusive small business participation if there is a reasonable

expectation that offers will be obtained from at least two responsible

small businesses and that the award will be made at a fair market price. If

DOD is considering a consolidation of services currently done by small

businesses, under section 15(a) of the Small Business Act, it must also

consider alternative procurement methods that would increase small

business opportunities (15 U.S.C. 644(a)).

14Our review did not examine this contract in-depth to assess why it did not succeed.

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The use of omnibus contracting must also be consistent with the mandate

for full and open competition contained in the Competition in Contracting

Act of 1984. The use of an omnibus contract could restrict such

competition because multiple requirements are combined into one

contract. Therefore, such a contract must represent DOD’s legitimate

needs, rather than administrative convenience or unsupported claims of

economy.

Because of legislation and policy that affect the ability of an activity to

consolidate activities for outsourcing, the services’ plans to outsource

through omnibus contracts are uncertain. Officials at the Army’s Training

and Doctrine Command and U.S. Forces Command told us they are

planning to study the potential for outsourcing all logistics and public

works functions at installations under omnibus contracts. These functions

make up the majority of support activities on Army installations.15

However, according to an official at the Army’s Training and Doctrine

Command, the command has not yet dealt with the potential effect of the

policies associated with small businesses.

Conversely, various Air Force installation officials told us that they had

encountered problems with omnibus contracts for base support services

in the past, even though the contracts resulted in significant savings, and

they foresee problems in being able to use omnibus contracts in the future.

Air Force headquarters officials said that while they encourage commands

to outsource under omnibus contracts, the decision to do so is left to the

field commander.

In January 1997, the Navy directed field activities to consider omnibus

contracting where possible. Field activities decide whether to consolidate

activities for study purposes. Recently announced study plans indicate

that some activities will be combined. The Marine Corps has not yet

determined what functions it will study.

Military-to-Civilian Conversions Historical data suggest the potential for significant savings from

converting military support positions to government civilian or contractor

positions. The April 1996 CNA report concluded that competing activities

done by military personnel yielded the highest percentage

savings—50 percent, on average. Our 1996 report also illustrated the

15Army logistics functions include vehicle maintenance, supply, food service, and transportation of

military and civilian personnel. Public works functions include the maintenance and repair of buildings

and grounds.

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potential for significant cost savings from such conversions.16 The extent

to which the services’ outsourcing studies will involve military positions

remains unclear.17

At the same time, the conversions could be a time-consuming and difficult

process within DOD, since they would involve changing how funding is

provided between two different appropriation accounts—a centralized

military personnel account and an installation’s O&M account. Service

officials told us that because of the budget/appropriations process,

changing funding from the military personnel account to the O&M account

to pay for civilian or contractor functions could take up to 2 years. In

responding to our previous recommendations to convert military positions

to civilian positions, OSD stated such conversions were impeded by the

lack of consistent funding for the hiring of the civilian replacements, the

ongoing civilian personnel drawdown, and the established minimums for

military strength. The conversion of military positions to civilian or

contractor positions could result in changes to military end strength.

Without reductions to military end strength authorizations, the conversion

of military functions will not produce the expected personnel savings.

Some Historical

Impediments to

Outsourcing Have

Been Addressed, but

Others Remain

Historically, impediments to outsourcing have included institutional

resistance, extensive requirements of the A-76 process, and legislative

barriers. Changes have been made in these areas to lessen the

impediments to varying degrees; however, some impediments remain.

Institutional Effects on

Outsourcing

In the past, institutional resistance to outsourcing, and legislation that

contained prohibitions regarding the A-76 process and gave installation

commanders the authority to forgo outsourcing, served to limit efforts to

outsource commercial support activities. Recently, the strong leadership

of OSD and the services, as well as funding and personnel reductions, were

cited by various service officials as important elements to reduce the

resistance to outsourcing. Yet, some institutional barriers to outsourcing

remain.

16DOD Force Mix Issues: Converting Some Support Officer Positions to Civilian Status Could Save

Money (GAO/NSIAD-97-15, Oct. 23, 1996).

17The DOD fiscal year 1994 inventory shows almost 300,000 military performing commercial-type

activities. A Defense Science Board 1996 summer study, Achieving an Innovative Support Structure for

21st Century Military Superiority, notes that 40 percent of active duty military are in infrastructure

versus war-fighting positions.

Page 15 GAO/NSIAD-97-86 Base Operations
B-276213 

The services have for a long time set aside positions in support activities

to ensure adequate opportunities to rotate military personnel from

overseas locations or sea duty to tours of duty in the continental United

States. For activities with such military positions, the services generally

blocked the consideration of outsourcing. Over the years, the Army has

converted many of its military positions set aside for rotation purposes to

civilian positions. As such, the Army does not consider rotation

requirements a barrier to outsourcing. The Air Force and the Navy, on the

other hand, have relatively more commercial activities with positions

reserved for military rotation.

Because of the recent emphasis placed on outsourcing, the Air Force and

the Navy have begun to review ways to restructure activities with rotation

positions to compete the activities for outsourcing. Because such efforts

are in the beginning stages, however, it is uncertain to what extent these

efforts will free up commercial activities for outsourcing.

A-76 Study Process

Requirements

As discussed in appendix I, OMB recently revised its supplemental

handbook to Circular No. A-76 in an effort to streamline and improve the

A-76 study process. The effect of the revised handbook is uncertain,

however, since DOD has not yet completed any study using the new

supplement. DOD officials have expressed differing views on the revised

handbook. Some approved of the revised handbook, while others said they

would like the A-76 process to be eliminated.18

Although the revised handbook allows each service Assistant Secretary to

waive A-76 studies under certain circumstances, the services’ headquarters

have received few requests to do so. Officials said they expect more

requests as installation outsourcing programs mature. However, a

recurring provision in section 8015 of the Department of Defense

Appropriations Act for Fiscal Year 1997 (P.L. 104-208) requires DOD to

certify in-house cost estimates before converting most DOD activities with

more than 10 civilian employees to the private sector. The provision, in

essence, restricts DOD’s use of the new waiver authority.

18It should be noted that an A-76 study is not required to convert functions with 10 or fewer positions

or outsource emerging requirements, such as new functions. DOD is considering the possibility of

avoiding A-76 studies by eliminating a given function as a government activity and relying on the

private sector for its provision (privatization). Various DOD and service officials indicated that the

latter may provide the basis for greater reliance on the commercial sector in the future, unencumbered

by A-76 requirements. However, the extent to which conversions, outsourcing, or eliminations are

likely to occur is not now known.

Page 16 GAO/NSIAD-97-86 Base Operations
B-276213 

It is uncertain whether DOD will be able to complete A-76 studies within the

time frames outlined in the revised handbook. The handbook states that

studies of single activities should be completed within 18 months and

studies of multiple activities should be completed within 36 months.

According to DOD data, cost studies have averaged 2 to 4 years. In

July 1991, we reported that DOD averaged 4 years and 3 months to

complete A-76 studies during fiscal years 1987 and 1990.19 Further, service

officials told us the procurement process that typically follows the A-76

study, takes time. For example, a large-scale effort to outsource aircraft

maintenance at Altus Air Force Base, Oklahoma, took 23 months, 17 of

which involved some contracting actions. The A-76 study took place

concurrently with roughly one-half of the procurement process. The

services have various initiatives underway to streamline the A-76 process,

including using work statement templates, assembling A-76 teams of

experts to conduct studies, and outsourcing the A-76 study process to

industry. However, most officials we spoke with said that the time

involved in following the federal procurement process lengthened the

outsourcing process.

Despite changes to the factors used to cost in-house performance, such as

the costing of overhead, industry representatives testified in

September 1996 before the Senate Committee on Governmental Affairs

that cost comparisons between the public and private sectors will

continue to be difficult due to differing accounting structures and

budgeting processes. The services have some initiatives to improve

in-house cost determinations, but efforts are in the early stages.

Resources to Manage the

A-76 Program

Installation officials have expressed concern about the availability of

resources to conduct A-76 studies and manage the program. In the past,

most studies were done using in-house staff. At most installations we

visited, we were told that, as a result of downsizing, they had lost many

personnel who were experienced in the A-76 program. For example,

officials at one Navy command said that during the 1980s they had about

70 staff who administered the commercial activities program

commandwide. Since then, the command had lost all field staff and all but

two staff at headquarters to administer the program. To help alleviate this

problem, both the Navy and the Army plan to outsource parts of the A-76

study process, although portions will be retained in-house, such as costing

of the in-house organization. OSD provided $14.5 million in near-term

19OMB Circular A-76: Legislation Has Curbed Many Cost Studies in Military Services

(GAO/GGD-91-100, July 30, 1991).

Page 17 GAO/NSIAD-97-86 Base Operations
B-276213 

funding to the services for A-76 studies. Air Force officials told us they are

considering augmenting the study process with contractor personnel.

Marine Corps officials told us they have not decided how they will conduct

A-76 studies.

Legislation Affecting

Outsourcing

Various laws have affected DOD’s outsourcing efforts. Key

provisions—which allowed installation commanders to determine whether

to conduct A-76 studies and prohibited the award of contracts resulting

from such studies—have lapsed. Yet a number of provisions in chapter 146

of title 10 continue to affect outsourcing.

Chapter 146 of title 10 contains various provisions that burden or restrict

DOD’s outsourcing.20 Section 2461 of title 10 requires A-76 cost comparison

studies, congressional notification of studies involving more than 45

civilians, and annual reports to Congress on outsourcing. Section 2465 of

title 10 prohibits DOD from outsourcing civilian firefighters or security

guards at military installations. DOD’s fiscal year 1996 inventory of civilian

and military personnel involved with commercial activities shows that

about 9,600 firefighters and 16,000 security guards were exempt from

outsourcing because of the law and considerations such as mobility

requirements. Outsourcing of these positions was permitted only if

positions were outsourced before September 24, 1983. Various service

officials expressed concern about the exclusion of these functions from

the A-76 process, from an equity standpoint.

Agency Comments

and Our Evaluation

In commenting orally on a draft of this report, DOD expressed the belief

that our concern about the effect of cost growth on competition savings

was overstated. DOD stated that cost growth may indeed result from

changes in the scope of work, but changes in the scope of work can occur

to any workload, including those which DOD never subjects to competition.

We recognize that cost growth can occur under either circumstance;

however, circumstances associated with outsourcing competitions have

made this a troublesome issue for many service officials. Historically, this

has included difficulty in drafting performance work statements that fully

capture work to be done, as well as mandated wage increases that

sometimes occur under the Davis-Bacon and Service Contract acts. Our

report recognizes the importance of competition to achieving operating

efficiencies and cost savings, but at the same time expresses an

20Some of the provisions in chapter 146 apply only to depot-level maintenance and, therefore, do not

affect the outsourcing of base support services.

Page 18 GAO/NSIAD-97-86 Base Operations
B-276213 

appropriate level of caution about the potential for large-scale savings

from outsourcing competition in today’s operating environment.

DOD also pointed out that it has programmed investment funds necessary

to provide the resources to conduct the A-76 studies needed to reach the

services’ savings goals. Our report recognizes the initial provision of these

resources for the services’ recently announced studies. However,

providing initial funding to facilitate outsourcing competition studies does

not necessarily translate into achievement of the savings goals, and does

not eliminate concerns about having sufficient personnel to manage the

program over time.

DOD also provided several technical comments to enhance the accuracy

and completeness of the report and we have incorporated them in the text

where appropriate.

Our scope and methodology are discussed in appendix III.

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

Committees on Armed Services and on Appropriations, House Committees

on National Security and on Appropriations; the Secretaries of Defense,

the Air Force, the Army, and the Navy; and the Director of OMB.

Please contact me at (202) 512-5140 if you or your staff have any questions

concerning this report. Major contributors to this report were Christine

Frye, Barry Holman, and Martin Scire.

Sincerely yours,

Mark E. Gebicke

Director, Military Operations

 and Capabilities Issues

Page 19 GAO/NSIAD-97-86 Base Operations
Contents

Letter 1

Appendix I 

Summary of 1996

Changes to Circular

A-76 Handbook

22

Appendix II 

Base Operating

Support Functions

23

Appendix III 

Objectives, Scope,

and Methodology

25

Related GAO Products 27

Figure Figure 1: In-house DOD Commercial Activities 4

Abbreviations

CNA Center for Naval Analyses

DFARS Defense Federal Acquisition Regulation Supplement

DOD Department of Defense

FAR Federal Acquisition Regulation

GSA General Services Administration

O&M operations and maintenance

OMB Office of Management and Budget

OSD Office of the Secretary of Defense

Page 20 GAO/NSIAD-97-86 Base Operations
Page 21 GAO/NSIAD-97-86 Base Operations
Appendix I 

Summary of 1996 Changes to Circular A-76

Handbook

The revised supplemental handbook to Office of Management and Budget

(OMB) Circular No. A-76 expands the authority to waive studies, limits the

length of studies, standardizes the costing methodology, and encourages

the consideration of contract performance and best value.

A cost comparison study may be waived where (1) the conversion will

result in a significant financial or service quality improvement and will not

significantly reduce the level or quality of competition in the future award

or performance of work or (2) the waiver will establish why in-house or

contract offers cannot reasonably be expected to win a competition under

the cost comparison process. The revised handbook indicates that no one

lower than the service Assistant Secretary may grant a waiver.

Under the revised handbook, A-76 cost studies are to be completed within

18 months for single activities and 36 months for multiple activities.

The revised handbook includes various changes to the factors to be used

to cost in-house performance in an effort to balance the comparison of

government costs to industry. For example, under the revised handbook,

government overhead is calculated based on a standard factor of

12 percent of direct labor costs. In the past, private industry contended

that government costing was inherently unfair to industry because the

government understated its cost of in-house performance.

The revised handbook places increased emphasis on consideration, during

the review of industry offers, of the best overall value to the government.

The government may select a contractor based on the quality of past

performance, as well as cost.

Page 22 GAO/NSIAD-97-86 Base Operations
Appendix II 

Base Operating Support Functions

Base commercial activities, also called base support, are the functions

necessary to support, operate, and maintain Department of Defense (DOD)

installations. The revised supplemental handbook to OMB Circular No. A-76

defines base support as the following 29 services:

Natural resource services

Advertising and public relations

Financial and payroll services

Debt collection

Bus services

Laundry and dry cleaning

Custodial services

Pest management

Refuse collection and disposal services

Food services

Furniture repair

Office equipment maintenance and repair

Motor vehicle operation

Motor vehicle maintenance

Fire prevention and protection

Military clothing

Guard service

Electric plants and systems operation and maintenance

Heating plants and systems operation and maintenance

Water plants and systems operation and maintenance

Sewage and waste plants operation and maintenance

Air conditioning and refrigeration plants

Other utilities operation and maintenance

Supply operations

Warehousing and distribution of publications

Transportation management services

Museum operations

Contractor-operated parts stores and civil engineering supply

 stores

Other installation services

Although OMB’s supplemental handbook lists all these functions as base

support, DOD does not have a generally accepted definition of base support

activities, and the services differ in how they define base support

activities. For example, the Army’s Cost and Economic Analysis Center

identified 122 functions supporting Army installations. The Center for

Naval Analyses developed a working definition of 37 different functions

Page 23 GAO/NSIAD-97-86 Base Operations
Appendix II 

Base Operating Support Functions

supporting Navy installations. Air Force officials told us that they did not

have a definition for base operating support and that functions included as

base support may differ across the service. According to a cognizant

Marine Corps official, the Marine Corps does not have a standardized

definition for base operation support.

Without a common definition of base support, it is difficult to accurately

determine the size and cost of DOD’s base support workforce. In fiscal 

year 1994, DOD estimated it had 629,000 military and civilians involved in

commercial activities in house. In 1996, DOD revised its inventory and

estimated it had about 449,000 personnel involved in those activities. This

significant revision reflects a change in what the Air Force considered

commercial activities. According to Air Force officials, a number of

functions were deleted from the Air Force inventory because DOD

considered them inherently governmental. DOD’s inventory total also

changed, according to officials, because the services had recently

surveyed their databases and added and deleted various functions.

Some support services common to military installations are neither part of

the A-76 handbook definition nor the services’ varied definitions of base

support. For example, family housing maintenance and repair is a

common base support service. Yet, the A-76 definition of base support

does not include family housing maintenance. Further, installation

officials told us that they did not consider family housing maintenance a

part of base support for budgeting purposes.

Page 24 GAO/NSIAD-97-86 Base Operations
Appendix III 

Objectives, Scope, and Methodology

For this report, we determined (1) the extent to which DOD and the

services emphasize the outsourcing of base support services, (2) the

factors that influence savings in the outsourcing process, and

(3) impediments to DOD outsourcing. We focused our review on the

outsourcing of base support-type functions because DOD expects the

streamlining of infrastructure, of which base support is a major

component, to yield significant savings to fund weapons procurement.

To determine how current DOD and service efforts to outsource compare

with those of prior years, we analyzed DOD’s database of A-76 cost

comparison studies conducted since 1978. Due to the size and complexity

of the DOD database, we did not validate the accuracy of the data. We

determined the cost of base support activities using DOD’s definition of

base support in its budget and discussions with Office of the Secretary of

Defense (OSD) officials on what portions of base support to include. We

reviewed DOD and industry studies on DOD’s A-76 program and an extensive

number of our reports. We spoke with responsible service and OSD officials

about the environmental influences on outsourcing in DOD and current

efforts to outsource support activities. On a limited basis, we also

discussed outsourcing with industry officials.

To determine the reasonableness of DOD’s projected cost savings from

outsourcing, we selectively analyzed DOD’s database of A-76 cost

comparison studies to determine average cost savings projected and

savings trends. We also used DOD’s database to trace in-house activities to

an updated listing of installation activities. We demonstrated that

installation activities and staffing change and that tracking savings is

difficult. We discussed the various institutional, procedural, and legislative

effects on savings with responsible service headquarters, installation, and

OSD officials. On a limited basis, we discussed installation officials’

experiences with specific contracts.

To determine what factors currently constrain DOD’s outsourcing efforts,

and efforts to correct problems, we spoke with responsible service

headquarters and installation officials. We researched laws cited by

officials and discussed specific legislation, such as the Small Business Act,

with OSD officials and the services’ small business offices.

The majority of our work was done in Washington, D.C. Work was also

done at the U.S. Atlantic Fleet, Norfolk, Virginia; U.S. Army Training and

Doctrine Command, Fort Monroe, Virginia; U.S. Army Forces Command,

Atlanta, Georgia; the Air Force Air Education and Training Command, San

Page 25 GAO/NSIAD-97-86 Base Operations
Appendix III 

Objectives, Scope, and Methodology

Antonio, Texas; the Air Force Air Combat Command, Langley, Virginia;

and the Air Force Materiel Command, Wright-Patterson Air Force Base,

Ohio. We performed our review from May 1996 to February 1997 in

accordance with generally accepted government auditing standards.

Page 26 GAO/NSIAD-97-86 Base Operations
Related GAO Products

Air Force Maintenance: Privatization-in-Place Plans Are Costly While

Excess Capacity Exists (GAO/NSIAD-97-13, Dec. 31, 1996).

Navy Depot Maintenance: Cost and Savings Issues Related to

Privatizing-in-Place at the Louisville, Kentucky, Depot (GAO/NSIAD-96-202,

Sept. 18, 1996).

Army Depot Maintenance: Privatization Without Further Downsizing

Increases Costly Excess Capacity (GAO/NSIAD-96-201, Sept. 18, 1996).

Defense Depot Maintenance: Commission on Roles and Mission’s

Privatization Assumptions Are Questionable (GAO/NSIAD-96-161, July 15,

1996).

Defense Depot Maintenance: DOD’s Policy Report Leaves Future Role of

Depot System Uncertain (GAO/NSIAD-96-165, May 21, 1996).

Military Bases: Opportunities for Savings in Installation Support Costs Are

Being Missed (GAO/NSIAD-96-108, Apr. 23, 1996).

Defense Depot Maintenance: Privatization and the Debate Over the

Public-Private Mix (GAO/T-NSIAD-96-148, Apr. 17, 1996).

OMB Circular A-76: Legislation Has Curbed Many Cost Studies in the

Military Services (GAO/GGD-91-100, July 30, 1991).

OMB Circular A-76: Expected Savings Are Not Being Realized in Ft. Sill’s

Logistics Contract (GAO/GGD-91-33, Feb. 11, 1991).

OMB Circular A-76: DOD’s Reported Savings Figures Are Incomplete and

Inaccurate (GAO/GGD-90-58, Mar. 15, 1990).

Army Procurement: Fort Benjamin Harrison’s Commercial Activity Study

Should Be Redone or Updated (GAO/NSIAD-89-90, Feb. 24, 1989).

Federal Productivity: DOD’s Experience in Contracting Out Commercially

Available Activities (GAO/GGD-89-6, Nov. 28, 1988).

Army Procurement: No Savings From Contracting for Support Services at

Fort Eustis, Virginia (GAO/NSIAD-89-25, Oct. 31, 1988).

Page 27 GAO/NSIAD-97-86 Base Operations
Related GAO Products

Air Force Contracting: Contracting for Maintenance of Training Aircraft at

Columbus Air Force Base (GAO/NSIAD-88-136BR, Apr. 6, 1988).

Federal Productivity: DOD Functions With Savings Potential From Private

Sector Cost Comparisons (GAO/GGD-88-63FS, Apr. 8, 1988).

DOD Functions Contracted Out Under OMB Circular A-76: Costs and Status

of Certain Displaced Employees (GAO/NSIAD-85-90, July 12, 1985).

Information From Previous Reports on Various Aspects of Contracting Out

Under OMB Circular A-76 (GAO/NSIAD-85-107, July 5, 1985).

DOD Functions Contracted Out Under OMB Circular A-76: Contract Cost

Increases and the Effects on Federal Employees (GAO/NSIAD-85-49, Apr. 15,

1985).

Synopsis of GAO Reports Involving Contracting Out Under OMB Circular

A-76 (GAO/PLRD-83-74, May 24, 1983).

Review of DOD Contracts Awarded Under OMB Circular A-76 (GAO/PLRD-81-58,

Aug. 26, 1981).

Factors Influencing DOD Decisions to Convert Activities From In-house to

Contractor Performance (GAO/PLRD-81-19, Apr. 22, 1981).

(703156) Page 28 GAO/NSIAD-97-86 Base Operations
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