GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Technology and 

Procurement Policy, Committee on Government Reform, 

House of Representatives 

For Release on Delivery 

10:00 a.m., EDT, Tuesday,

May 22, 2001 CONTRACT 

MANAGEMENT 

Trends and Challenges 

in Acquiring Services 

Statement of David E. Cooper, Director, Acquisition and 

Sourcing Management

GAO-01-753T
Page 1 GAO-01-753T Contract Management

Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me to participate in the Subcommittee's hearing on

the challenges confronting the government's acquisition of services.

Federal agencies spend billions of tax dollars each year to buy services

ranging from clerical support and consulting services, to information

technology services such as network support, to the management and

operation of government facilities, such as national laboratories. The

amount being spent on services is growing substantially. Last year alone,

the federal government acquired more than $87 billion in services—a 24-

percent increase in real terms from fiscal year 1990.

Our work continues to show that some service procurements are not being

done efficiently, putting taxpayer dollars at risk. In particular, agencies are

not clearly defining their requirements, fully considering alternative

solutions, performing vigorous price analyses, and adequately overseeing

contractor performance. Further, it is becoming increasingly evident that

agencies are at risk of not having enough of the right people with the right

skills to manage service procurements. Consequently, a key question we

face in the government is whether we have today, or will have tomorrow,

the ability to acquire and manage the procurement of increasingly

sophisticated services the government needs.

My statement today will

• describe service contracting trends and the changing acquisition

environment,

• discuss the challenges confronting the government in acquiring services,

and

• highlight some efforts underway to address these challenges.
Page 2 GAO-01-753T Contract Management

Federal contracting began declining in the late 1980s as the Cold War drew

to a close and defense spending decreased. This decline in federal

contracting continued for most of the 1990s, reaching a low of about 

$187 billion1

 in fiscal year 1999. Spending subsequently increased to about

$204 billion in fiscal year 2000. As figure 1 shows, between fiscal year 1990

and fiscal year 2000, purchases of supplies and equipment fell by about

$25 billion, while purchases of services increased by $17 billion, or about

24 percent. Consequently, purchases for services now account for about

43 percent of federal contracting expenses—the largest single spending

category.

 1

 All dollars figures used in this section have been converted to constant fiscal year 2000

dollars. Additionally, the figures exclude actions under $25,000 and those made by

government purchase cards.

Trends in Service

Contracting and the

Changing Acquisition

Environment
Page 3 GAO-01-753T Contract Management

Figure 1: Changes in Federal Contract Spending, Fiscal Year 1990 to Fiscal Year 2000

Source: GAO analysis of data extracted from the Federal Procurement Data System for actions

exceeding $25,000.

The growth in services has largely been driven by the government's

increased purchases of two types of services:

• information technology services, which increased from $3.7 billion in

fiscal year 1990 to about $13.4 billion in fiscal year 2000; and

• professional, administrative, and management support services, which

rose from $12.3 billion in fiscal year 1990 to $21.1 billion in fiscal year

2000.

102

70

37

13

103

78

34

17

85

77

34

15

83

76

34

15

71

80

31

18

72

77

31

18

69

77

30

17

67

77

27

17

67

79

27

16

66

80

25

17

77

87

24

16

0

50

100

150

200

250

Construction

Research and development

Services

Supplies and equipment

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fiscal years

Billions of constant fiscal year 2000 dollars
Page 4 GAO-01-753T Contract Management

The increase in the use of service contracts coincided with a 21-percent

decrease in the federal workforce,2

 which fell from about 2.25 million

employees as of September 1990 to 1.78 million employees as of

September 2000.

As federal spending and employment patterns were changing, changes

were also occurring in the way that federal agencies buy services.

Specifically, there has been a trend toward agencies purchasing

professional services using contracts awarded and managed by other

agencies. For example, in 1996, the General Services Administration (GSA)

began offering information technology services under its Federal Supply

Schedule program,3

 and it now offers services ranging from professional

engineering to laboratory testing and analysis to temporary clerical and

professional support services. The use of the schedule program to acquire

services has increased significantly over the past several years.

Other governmentwide contracts have also come into use in recent years.

The Federal Acquisition Streamlining Act of 1994 authorized federal

agencies to enter into multiple award, task- and delivery-order contracts

for goods and services. These contracts provide agencies with a great deal

of flexibility in buying goods or services while minimizing the burden on

government contracting personnel to negotiate and administer contracts.

The Clinger-Cohen Act of 1996 authorized the use of multiagency

contracts and what have become known as governmentwide agency

contracts to facilitate purchases of information technology-related

products and services such as network maintenance and technical

support, systems engineering, and integration services.

 2

 Reflects the total civilian employment for executive branch agencies, excluding the U.S.

Postal Service and the Postal Rate Commission.

3

 Under the schedule program, GSA negotiates contracts with vendors for a wide variety of

mostly commercial-type products and services, and permits other agencies to place orders

under these contracts directly with the vendors. Traditionally, the program had generally

been used for common goods, such as office supplies and furniture. According to GSA, it

takes 268 days to award a contract using traditional methods, but it takes only 15 days, on

average, to award an order under the schedule program.
Page 5 GAO-01-753T Contract Management

While we have seen the environment change considerably, what we have

not seen is a significant improvement in federal agencies' management of

service contracts. Put simply, the poor management of service contracts

undermines the government's ability to obtain good value for the money

spent. This contributed to our decision to designate contract management

a high-risk area for the Departments of Defense and Energy, the two

largest purchasers within the federal government. Improving contract

management is also among the management challenges faced by other

agencies. Compounding these problems are the agencies' past inattention

to strategic human capital management. As you may know, in January

2001, we designated strategic human capital management a

governmentwide high-risk area.

Our work, as well as work by other oversight agencies, continues to

identify examples of long-standing problems in service contracting,

including poor planning, inadequately defined requirements, insufficient

price evaluation, and lax oversight of contractor performance. For

example,

• We found that the Department of Defense's (DOD) broadly defined work

descriptions for information technology services orders placed against

several governmentwide contracts prevented establishing firm prices for

the work.4

 Work descriptions defined services broadly because the orders

covered several years of effort, and officials were uncertain what support

they would need in future years. The 22 orders we reviewed—with a total

value of $553 million—typically provided for reimbursing the contractors'

costs, leaving the government bearing most of the risk of cost growth.

Further, although competition helps agencies ensure they obtain the best

value under contracts, a majority of these orders were awarded without

competing proposals having been received.

• The DOD Inspector General found problems with each of the more than

100 contract actions—with a total value of $6.7 billion—for professional,

administrative, and management support services it reviewed.5

 For

example, contracting officials typically did not use experience from prior

acquisitions of the same services to help define requirements more clearly.

In one case, officials continued to award cost reimbursement contracts—

 4 Contract Management: Few Competing Proposals for Large DOD Information

Technology Orders (GAO/NSIAD-00-56, Mar. 20, 2000).

5 Contracts for Professional, Administrative, and Management Support Services (Office

of the Inspector General, Department of Defense, Mar. 10, 2000).

Challenges Faced by

the Government

In Acquiring Services
Page 6 GAO-01-753T Contract Management

and accepted the risk of cost overruns—despite 39 years of experience

purchasing the same services from the same contractor. Further, officials

typically did not prepare well-supported independent cost estimates to

help them assess whether the costs contractors proposed were

reasonable. Finally, the Inspector General found that oversight of

contractor performance was inadequate in a majority of cases, and in

some cases DOD officials could not show that they had actually reviewed

the contractors' work.

• We found that DOD personnel sought competing quotes from multiple

contractors on only a handful of orders for information technology

services placed against GSA's federal supply schedule contracts.6 On 17

orders—valued at $60.5 million—contracting officers generally compared

the labor rates offered by their preferred contractor with labor rates of

various other contractors' supply schedule contracts instead of seeking

competing quotes. This limited analysis did not provide a meaningful basis

for assessing whether a contractor would provide high-quality, costeffective services because it did not evaluate the proposed number of

labor hours and mix of labor skill categories. Therefore, contracting

officers' ability to ensure that DOD got the best services at the best prices

was significantly undermined.

• The Inspector General at the Department of Transportation found that on

an $875-million contract for technical support services, the Federal

Aviation Administration did not develop reliable cost estimates or use

these estimates to assess whether costs the contractor proposed were

reasonable.7

 Further, the agency generally did not gather data to evaluate

the quality of contractor performance nor ensure that contractor

personnel had the education and experience required for the jobs they

were being paid to perform.

• The Inspector General at the Department of Energy reported on a

$218-million contract for security services at its Oak Ridge operations.8

This contract was intended to consolidate security services under a single

contractor and to reduce costs by reducing staffing and eliminating

duplicative management structures. Oak Ridge officials, however, did not

 6 Contract Management: Not Following Procedures Undermines Best Pricing Under

GSA's Schedule (GAO-01-125, Nov. 28, 2000).

7 Technical Support Services Contract: Better Management Oversight and Sound

Business Practices Are Needed (Office of the Inspector General, Department of

Transportation, Sept. 28, 2000).

8 The Restructure of Security Services by the Oak Ridge Operations Office (Office of the

Inspector General, Department of Energy, Oct. 31, 2000).
Page 7 GAO-01-753T Contract Management

define what security-related work the new contractor would perform and

did not analyze staffing levels or propose cost reduction measures to

promote efficient contractor performance. Consequently, the number of

security personnel actually increased from 640 prior to the consolidation

to 744 afterwards, while Oak Ridge incurred an estimated $7.5 million in

avoidable costs instead of achieving an anticipated $5 million in savings.

While these examples highlight the need for federal agencies to improve

their management of service contracts, their capacity to do so is at risk

because of past inattention to strategic human capital management. We

are concerned that federal agencies' human capital problems are eroding

the ability of many agencies—and threaten the ability of others—to

perform their missions economically, efficiently, and effectively. For

example, we found that the initial rounds of downsizing were set in motion

without considering the longer term effects on agencies' performance

capacity. Additionally, a number of individual agencies drastically reduced

or froze their hiring efforts for extended periods. Consequently, following

a decade of downsizing and curtailed investments in human capital,

federal agencies currently face skills, knowledge, and experience

imbalances that, without corrective action, could worsen given the

number of current federal civilian workers that are eligible to retire

through 2005.

I would like to use DOD's experience to illustrate this problem. As we

recently testified,9

 DOD's approach to civilian workforce reduction was

not oriented toward shaping the makeup of the force. Rather, DOD relied

primarily on voluntary turnover and retirements, freezes on hiring

authority, and its authority to offer early retirements and "buy-outs" to

achieve reductions. As a result, DOD's current workforce is not balanced

and therefore risks the orderly transfer of institutional knowledge.

According to DOD's Acquisition 2005 Task Force,10 11 consecutive years of

downsizing produced serious imbalances in the skills and experience of

the highly talented and specialized civilian acquisition workforce, putting

DOD on the verge of a retirement-driven talent drain.

 9 Human Capital: Major Human Capital Challenges at the Departments of Defense and

State (GAO-01-565T, Mar. 29, 2001).

10 Shaping the Civilian Acquisition Workforce of the Future (Final Report of the

Acquisition 2005 Task Force to the Under Secretary of Defense, Acquisition, Technology,

and Logistics and the Under Secretary of Defense, Personnel and Readiness, Oct. 2000).
Page 8 GAO-01-753T Contract Management

DOD's leadership had anticipated that using streamlined acquisition

procedures would improve the efficiency of contracting operations and

help offset the effects of workforce downsizing. However, the DOD

Inspector General reported that the efficiency gains from using

streamlined procedures had not kept pace with acquisition workforce

reductions. The Inspector General reported that while the workforce had

been reduced by half, DOD's contracting workload had increased by about

12 percent11 and that senior personnel at 14 acquisition organizations

believed that workforce reductions led to problems such as less

contractor oversight.

While I have discussed DOD's problems at length, we believe our concerns

are equally valid regarding the broader civilian agency contracting

community. For example, our analysis of personnel data maintained by the

Office of Personnel Management (OPM) shows that while DOD downsized

its workforce to a greater extent than the civilian agencies during the

1990s, both DOD and the civilian agencies will have about 27 percent of

their current contracting officers eligible to retire through the end of fiscal

year 2005. Consequently, without appropriate workforce planning, federal

agencies could lose a significant portion of their contracting knowledge

base.

Congress and the administration are taking steps to address some of these

contract management and human capital challenges, in particular by

emphasizing the increased use of performance-based service contracts and

by stressing the importance of integrating strategic human capital

management into agency planning.

Performance-based contracts describe desired outcomes rather than

direct work processes.12 According to the Office of Federal Procurement

Policy, the use of performance-based contracts should result in lower

prices and improved performance, among other benefits. To encourage

their use, in April 2000, the Procurement Executives Council—a senior

level coordinating body comprised of officials from more than 20 federal

 11 DOD Acquisition Workforce Reduction Trends and Impacts (Office of the Inspector

General, Department of Defense, Feb. 29, 2000).

12 A performance-based contract describes the government's requirements in terms of

desired results and measurable outcomes, establishes procedures to manage performance

that does not meet standards, and includes performance incentives where appropriate.

Some Efforts are

Underway to Address

Service Contracting

Challenges
Page 9 GAO-01-753T Contract Management

departments and agencies—established a goal that 50 percent of service

contracts will be performance-based by fiscal year 2005. The goal of

increasing the use of performance-based contracts was reaffirmed in a

March 9, 2001, memorandum issued by the Office of Management and

Budget (OMB). Further, as required by last year's defense authorization

act,13 the Federal Acquisition Regulation was revised on May 2, 2001, to

establish a preference for using performance-based contracting when

acquiring services.

While we support the use of performance-based approaches, it should be

recognized that performance-based contracting is not a new concept. The

Office of Federal Procurement Policy issued a policy letter in April 1991

that directed using performance-based contracting to the maximum extent

practicable. However, this approach was not widely adopted by federal

agencies, and the Procurement Executives Council's interim goal of having

10 percent of service contracts awarded in fiscal year 2001 be

performance-based is indicative of the current level of performance-based

contracting in the government. Consequently, the extent to which agencies

provide the necessary training, guidance, and tools to their workforce, and

establish metrics to monitor the results of the contracts awarded using

performance-based approaches, will affect whether this effort achieves its

intended results.

With regard to human capital management, it is clear that both OPM and

OMB have substantial roles to play. OPM has begun stressing to agencies

the importance of integrating strategic human capital management into

agency planning and has focused more attention on developing tools to

help agencies. For example, it has developed a workforce planning model

and has launched a website to facilitate information sharing about

workforce planning issues. OMB has played a more limited role; however,

OMB's role in setting governmentwide management priorities and defining

resource allocations will be critical to inducing agencies to integrate

strategic human capital into their core business processes. Toward that

end, OMB's current guidance to agencies on preparing their strategic and

annual performance plans states that the plans should set goals in such

areas as recruitment, retention, and training, among others. Earlier this

month, OMB instructed agencies to submit a workforce analysis to it by

June 29, 2001. The analysis is to include summary information on the

 13 The Floyd D. Spence National Defense Authorization Act for Fiscal Year 2001, P. L.

106-398, Oct. 30, 2000.
Page 10 GAO-01-753T Contract Management

demographics of the agencies' permanent, seasonal, and temporary

workforce; projected attrition and retirements; an evaluation of workforce

skills; expected changes in the agency's work; recruitment, training, and

retention strategies being implemented; and barriers to maintaining a highquality and diverse workforce. The information developed may prove

useful in identifying human capital areas needing greater attention.

Over the past decade, federal spending patterns changed, the federal

workforce declined, and new contracting vehicles and techniques were

introduced. Consequently, the current environment in which the

government acquires services is significantly different than the one it

operated under in 1990. However, the government's long-standing

difficulties with managing service contracts have not changed, and it is

clear that agencies are not doing all they can to ensure that they are

acquiring services that meet their needs in a cost-effective manner.

The increasing significance of contracting for services has prompted—and

rightfully so—a renewed emphasis by Congress and the executive

agencies to resolve long-standing problems with service contracts. To do

so, the government must face the twin challenges of improving its

acquisition of services while simultaneously addressing human capital

issues. One cannot be done without the other. Expanding the use of

performance-based contracting approaches and emphasizing strategic

human capital planning are welcomed and positive steps, but sustained

leadership and commitment will be required to ensure that these efforts

mitigate the risks the government currently faces when contracting for

services.

Mr. Chairman, this concludes my prepared statement. I will be happy to

respond to any questions you or other Members of the Subcommittee may

have.

Conclusion
Page 11 GAO-01-753T Contract Management

For further information, please contact David E. Cooper at (202) 512-4841.

Individuals making key contributions to this testimony included Don

Bumgardner, Ralph Dawn, Tim DiNapoli, Julia Kennon, Gordon Lusby,

Monty Peters, Ron Schwenn, and John Van Schaik.

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