United States General Accounting Office

GAO Report to the Ranking Minority Member,

Subcommittee on Oversight of

Government Management and the

District of Columbia, Committee on

Governmental Affairs, U.S. Senate

October 1995 INTERAGENCY

CONTRACTING

Controls Over

Economy Act Orders

Being Strengthened

GAO/NSIAD-96-10

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-258879 

October 20, 1995

The Honorable Carl Levin

Ranking Minority Member

Subcommittee on Oversight of Government Management

 and the District of Columbia

Committee on Governmental Affairs

United States Senate

Dear Senator Levin:

This report responds to your concerns about abuses of interagency orders

for goods and services under the Economy Act. As you requested, we

examined the early impact of the Department of Defense’s (DOD) policy

changes for interagency orders on the Department of Transportation’s

Volpe National Transportation Systems Center. We also reviewed recent

Coast Guard initiatives and legislative changes extending statutory

requirements on interagency orders to other federal agencies.

Results in Brief Because of past practices, the National Defense Authorization Act for

Fiscal Year 1994 required the Secretary of Defense to issue regulations

that strengthened controls over DOD’s interagency orders for goods and

services. In a February 1994 memorandum, and in advance of the

statutorily required regulations, the Secretary took additional steps to

increase DOD’s interagency transaction controls by requiring, among other

things, that DOD’s interagency orders be (1) as convenient and cheap as

other alternatives and (2) approved at a level no lower than senior

executive service, general officer, flag officer, or activity commander. In

November 1994, the Coast Guard independently developed reforms that

paralleled these DOD initiatives.

DOD is still adjusting to the changes introduced by Congress and the

Secretary. There is an abundance of guidance available to Air Force, Army,

and Navy contracting activities, but a sample of fiscal year 1995 Volpe

Center purchases made by the services showed that not all files contained

the information required by the Secretary’s memorandum. In addition, DOD

has not yet implemented a statutorily mandated monitoring system for its

interagency purchases. The monitoring system is currently scheduled for

implementation in October 1995.

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B-258879 

DOD contracting with the Volpe Center has been declining since fiscal year

1992. While it is difficult to pinpoint exact causes for the downward trend,

more recent declines appear to be a result of DOD’s implementation of the

more restrictive environment for interagency orders. Likewise, a similar

recent decline in Coast Guard purchases at the Volpe Center appears to be

related to the introduction of the Coast Guard reforms.

The Federal Acquisition Streamlining Act of 1994 (FASA) generally

extended the restrictive interagency transaction controls applicable to DOD

to other federal agencies. The implementing draft regulation, while

consistent with FASA, is not as stringent as the DOD or Coast Guard cost

policies.

Background The Economy Act, as amended (31 U.S.C. 1535), authorizes the head of an

agency to place an order with another agency for goods or services if,

among other requirements, a decision is made that the items or services

cannot be obtained by contract as conveniently or cheaply from a

commercial enterprise. The interagency ordering practice authorized by

the Economy Act, sometimes referred to as “contract off-loading,” can

save the government duplicative effort and costs when appropriately used.

Examples of appropriate use may include circumstances of one agency

already having a contract for goods and services similar to those needed

by another agency, or an agency having unique capabilities or expertise

that qualify it to enter into or administer a contract.

In July 1993, the Subcommittee on Oversight of Government Management,

Senate Governmental Affairs Committee, held a hearing to examine the

practice of off-loading at federal agencies and the abuses of this practice.

Its hearing record,1

 which included testimony from the Inspectors General

of DOD, the Department of Energy, and the Tennessee Valley Authority,

was critical of DOD’s and other agencies’ off-loading practices.

Subsequently, the National Defense Authorization Act for Fiscal Year 1994

required the Secretary of Defense to prescribe regulations governing DOD’s

use of the Economy Act that included specific statutory limitations

intended to rectify identified abuses.

The Volpe Center The Volpe Center is a federally owned and operated facility located in

Cambridge, Massachusetts, and was established in 1970 to fulfill the need

1

Off-loading: The Multimillion Dollar Loophole in Government Contracting, Hearing Before the

Subcommittee on Oversight of Government Management, Committee on Governmental Affairs, U.S.

Senate, July 30, 1993.

Page 2 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

of the newly formed Department of Transportation for an in-house

systems research capability. Since then, the center’s research, analysis,

and project management expertise has been applied to a wide variety of

transportation and logistics problems. Its only funding is through formal

reimbursable agreements negotiated with individual agencies for specific

tasks.

Initially, the center’s services were provided almost exclusively to the

Office of the Secretary of Transportation and the operating

administrations within the Department of Transportation. As its

capabilities evolved and its systems approach became better known,

demand grew within non-Department of Transportation agencies. Through

a formal memorandum of understanding with DOD, the Secretary

broadened the center’s mission in 1985 to include work on transportation

and logistics problems facing other agencies, including the Joint Chiefs of

Staff and the U.S. Transportation Command. Similar arrangements were

made with civilian agencies.

The Volpe Center’s current labor pool consists of about 1,500 personnel

evenly divided among 3 labor categories: federal employees, on-site

contractor employees, and off-site contractor employees. On-site

contractors provide services in computer analysis, technical information

support, and documentation support. The off-site contractor employees

comprise a “multiple contractor resource base,” which allows quick,

competitive access to a broad range of high technology capabilities and

skills needed to meet the Volpe Center’s programmatic requirements.

Volpe Center contracting is regulated by the Federal Acquisition

Regulation.

In response to an audit conducted by the Department of Transportation’s

Inspector General, the Volpe Center issued formal work acceptance

criteria in February 1995. According to Volpe Center management, the

criteria are designed to assure that the center will not accept projects

unless it can make substantive contributions derived from its status as

part of the federal government. Examples of substantive contributions

include project definition and planning in cooperation with the requesting

agency, and support of contracts awarded and administered by the Volpe

Center.

Page 3 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

DOD Cost Initiative

Expanded Statutory

Requirements

In advance of promulgating regulations, the Secretary issued a policy

memorandum in February 1994 that imposed limitations on the use of

Economy Act orders by DOD activities. The Secretary’s policy, which

addressed Economy Act orders released outside of DOD for contract

action, was, however, more stringent than either the National Defense

Authorization Act for Fiscal Year 1994 or the Economy Act in the area of

cost considerations by requiring a determination that the supplies or

services cannot be provided “as conveniently and cheaply” by contracting

directly with a private source. The Authorization Act did not address this

cost issue and the Economy Act uses the phrase “as conveniently or

cheaply.” The Secretary’s use of the “and” rather than the “or” introduces

more cost analysis into the decision-making process.

The Secretary also changed the level of approval authority for Economy

Act purchases. Instead of having contracting officers or other officials

designated by the agency head approve Economy Act transactions, the

Secretary’s memorandum placed the approval level no lower than a senior

executive service official, a general or flag officer, or an activity

commander.

Coast Guard Has

Initiated Cost

Reforms Similar to

DOD

The Coast Guard, which is a component of the Department of

Transportation, has acquired services from the Volpe Center. In

November 1994, the Coast Guard issued an instruction providing guidance

on its use of the center. The instruction established a review, justification,

and approval process to ensure that acquisition of Volpe Center services

are in the Coast Guard’s best economic interest. The instruction

designates the Director of Finance and Procurement, a senior executive

service position within the Office of the Chief of Staff, as the approving

official for all Coast Guard work performed through the center.

The guidance requires a demonstration that the cost to use the Volpe

Center is at least roughly comparable to commercial cost. To document

this comparability, Coast Guard sponsors must develop an independent

estimate of expected project costs using recognized techniques such as

engineering analysis, market research, or application of actual cost data

from prior projects.

While the Coast Guard instruction acknowledges that the Volpe Center

offers convenience, it is the Coast Guard policy that the center shall be

used when there are clear economic, technical, and mission-essential

reasons for doing so. For example, officials informed us that in one area of

Page 4 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

the country the Coast Guard is now completing 5 years of environmental

compliance and restoration work with the Volpe Center. They explained

that the center’s support was critical in the early years of this work for the

Coast Guard to gain an understanding of the various technologies involved

in restoring areas at Coast Guard installations that were contaminated.

Coast Guard officials said it has acquired the technical expertise and it is

now ready, at least in that area of the country, to transition away from the

center for this work and contract directly with private companies.

DOD Is Still Adjusting

to Contracting

Changes

The Air Force, Army, and Navy have each taken a different approach to

implementing the Secretary’s policy memorandum. Collectively, however,

they are producing similar mixed results. While there is considerable

up-to-date guidance available to contracting officials on interagency

purchases, not all DOD files on Volpe Center projects we reviewed

contained required information. In addition, DOD has not yet implemented

a statutorily mandated monitoring system for interagency purchases; the

monitoring system is currently scheduled for implementation in

October 1995.

Service Guidance Is

Abundant

The Air Force introduced the Secretary of Defense’s policy changes in

June 1994 through a revision to its Federal Acquisition Regulation

Supplement. The supplement states that the Air Force shall not place an

order with another agency unless adequate supporting documentation,

including a Determination and Finding (D&F)2

, is prepared. The D&F must

be approved at a level no lower than senior executive service, flag or

general officer, or activity commander. The activity’s contracting office is

required to retain a record copy of each D&F in a central file. The

supplement offers a model format for the D&F, which requires that 12

specific findings be listed, including 1 that states “the supplies or services

cannot be provided as conveniently and more economically by private

contractors under an Air Force contract.”

The Army implemented the Secretary’s policy changes in an August 1994

policy letter from the Office of the Assistant Secretary, Army Contracting

Support Agency. The letter states that before an Economy Act order for

supplies or services is released outside DOD for contracting action, a

written determination prepared by the requiring activity that addresses the

2

A D&F documents the findings and conclusion of the approving official and generally addresses the

following issues: legal authority, adequacy of funds, convenience, cost, expertise of the servicing

agency, contract administration compliance, and bona-fide need. Other supporting documentation,

such as an independent government estimate, is used in the preparation of the D&F.

Page 5 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

elements in the Defense Secretary’s memorandum shall be approved by

the head of the requesting agency or their designee. The D&Fs are required

to be prepared in the same format required by the Air Force, to include

that “the supplies or services cannot be provided at the time required and

more economically by contractors under an Army contract.”

In contrast to the Air Force and Army’s delegation of approval authority,

the Navy initially did not delegate approval authority below the Assistant

Secretary of the Navy for Research, Development, and Acquisition.

Toward the end of 1994, the Assistant Secretary delegated approval

authority to the Deputy for Acquisition and Business Management.3

 In

January 1995, as permitted by the Secretary of Defense’s memorandum,

the Deputy redelegated authority to approve D&Fs to eight activities with

contracting authority. However, approval authority for Economy Act

orders placed with the Volpe Center and with agencies not subject to the

Federal Acquisition Regulation was retained by the Deputy for Acquisition

and Business Management.

Some Project Files Lacked

Required Documentation

Despite efforts by the services to strengthen controls over Economy Act

purchases, our review of fiscal year 1995 Air Force, Army, and Navy

projects with the Volpe Center indicated that the controls were not fully

implemented. Of the 13 purchase requests we reviewed, 7 lacked approved

D&Fs. The results of our review are summarized in table 1.

Table 1: Summary of Fiscal Year 1995

Air Force, Army, and Navy Project File

Reviews

Air Force Army Navy Total

Dollar value of

purchases

$1,770,291 $597,890 $3,211,900 $5,580,081

Number of purchases

reviewed

6 2 5 13

Number with approved

D&Fs

3 1 2 6

Number without

approved D&Fs

3 1 3 7

In two of the three Air Force cases where a D&F was not prepared, the

project managers were not aware of the requirement to prepare a D&F; in

the other case, a draft D&F was prepared by the requiring activity, reviewed

by a contracting officer, but never completed or signed. In the Army case

where a D&F was not prepared, Army officials had no excuse other than

3

The Deputy for Acquisition and Business Management was formerly known as the Deputy for

Acquisition Policy, Integrity, and Accountability.

Page 6 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

they “just missed it.” One official suggested that some Army activities may

not have understood the August 1994 policy letter. In one of the Navy

cases without an approved D&F, ordering officials justified the transfer of

1995 funds on the basis of a D&F that covered 1993 and 1994 funding;

subsequent to the transfer of funds, reviewing officials rejected this

justification. The other two Navy cases involved purchases by a Marine

Corps ordering activity. Similar to the Army case, Marine Corps officials

explained that, regarding the preparation of D&Fs, the purchases “just fell

through the cracks.”

The documentation for services’ projects with approved D&Fs showed

different approaches to meeting the Defense Secretary’s requirement to

elevate the consideration of cost. The Air Force D&Fs mainly emphasized

that the estimated general and administrative expense rate of 9 percent

charged by the Volpe Center appeared reasonable and did not exceed the

actual cost of entering into and administering the interagency agreement

under which the order is filled. The Air Force documentation also showed

that business reviews were performed by the contracting officers; the

business reviews indicated that independent government cost estimates

had been completed.

The documentation for the approved Army project computed the dollar

value of the administrative fee and included an “information paper”

prepared for the general officer who signed the D&F. The information paper

indicated that the project would be transitioning from Volpe Center

support to the Army’s on-site contractor support in about 4 months.

The approval for the two Navy cases involved purchases by a Marine

Corps ordering activity different from the one above, which did not have

approved D&Fs. These purchases were covered by a D&F prepared shortly

after the Secretary’s memorandum, but approved under the criteria in

effect before the memorandum. Thus, the D&F did not contain a finding on

the cost comparison cited in the Secretary’s memorandum. However, Navy

officials said that they concurred with approvals such as these because, at

that time, no new detailed implementing guidance was available to

ordering activities.

DOD Monitoring System

Not Yet Established

The National Defense Authorization Act for Fiscal Year 1994 directed that

DOD establish a monitoring system for Economy Act purchases not later

than 1 year after the November 30, 1993, enactment of the act. That

monitoring system has not yet been implemented. An official from the

Page 7 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

Office of the Under Secretary of Defense for Acquisition and Technology

informed us, however, that the monitoring system has been developed and

is now awaiting approval. The monitoring system is currently scheduled

for implementation on October 1995.

Dollar Value of DOD

and Coast Guard

Orders at Volpe

Center Has Decreased

DOD Economy Act orders placed with the Volpe Center peaked in fiscal

year 1991 at $93.2 million, which accounted for about 39 percent of the

center’s budget. By fiscal year 1994, DOD funding dropped to $26.5 million,

which accounted for about only 13 percent of the center’s budget. Funding

transfers for the first 8 months of fiscal year 1995 indicate that DOD funding

will only be one-half of fiscal year 1994 funding. The funding data are

summarized in figure 1.

Figure 1: Comparison of DOD New

Obligation Authority Transferred to

Volpe Center, Fiscal Years 1990-95 (as

of May 31, 1995)

Dollars in millions

0

10

20

30

40

50

60

70

80

90

100

1990 1991 1992 1993 1994 1995 (8

months)

Fiscal years

58.3

93.2

44.4

50.8

26.5

9.1

It is difficult to pinpoint exact causes for the downward trend. However,

the more recent declines may be a result of the 1993 Subcommittee

hearing, resulting legislation, and the 1994 implementation of a more

restrictive contracting environment by the Secretary of Defense.

Page 8 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

Dollar Value of Coast

Guard Orders at Volpe

Center Has Also Decreased

Coast Guard orders placed with the Volpe Center reached their highest

levels in fiscal years 1992 and 1993 when over $21 million in new

obligation authority was transferred each year. Funding dropped by

almost half in fiscal year 1994. Fiscal year 1995 new obligation authority

may be about half of the fiscal year 1994 total. The funding data are

summarized in figure 2.

Figure 2: Comparison of Coast Guard

New Obligation Authority Transferred

to Volpe Center, Fiscal Years 1990-95

(as of May 31, 1995)

Dollars in millions

0

10

20

30

40

50

1990 1991 1992 1993 1994 1995 (8

months)

Fiscal years

7.5

15.4

21.8 21.4

12.1

1.6

As with the DOD data, it is difficult to identify exact causes for the

downward trend. However, the November 1994 instruction with its cost

and approval requirements may have been a contributing factor.

FASA Extends

Reforms to Non-DOD

Agencies

FASA required that the Federal Acquisition Regulation be revised to include

statutory requirements governing the exercise of Economy Act authority.

The requirement is virtually identical to that required of DOD by the

National Defense Authorization Act for Fiscal Year 1994. In March 1995, a

proposed draft regulation was published in the Federal Register. The

proposed regulation requires a determination that the ordered goods or

services cannot be provided by contract as conveniently or cheaply by the

Page 9 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

requesting agency from a commercial enterprise. FASA did not require the

more stringent “and” language applicable within DOD.

The regulation authorizes determination approval authority to reside with

the contracting officer or another official designated by agency regulation,

except that if the servicing agency is not covered by the Federal

Acquisition Regulation, approval authority may not be delegated below the

senior procurement executive of the requesting agency. Such procedures

are consistent with FASA.

FASA also requires that by mid-October 1995 the Administrator for Federal

Procurement Policy establish a monitoring system for Economy Act

purchases for Federal civilian agencies, similar to the requirement for DOD.

Agency Comments In commenting on a draft of this report, both the Departments of Defense

and Transportation concurred with the report. Both suggested some

technical changes to the draft, and we have incorporated them, where

appropriate. DOD’s comments are presented in appendix I. The Department

of Transportation’s comments were provided orally.

Scope and

Methodology

We interviewed management officials and examined project management

and budget documents, statements of work, cost summaries, military

interdepartmental purchase requests, project plan agreements, and other

program documentation. We performed work at the Department of

Transportation’s Volpe National Transportation Systems Center,

Cambridge, Massachusetts, and Headquarters, United States Coast Guard,

Washington, D.C. We also contacted policy representatives within the

Office of the Assistant Secretary of the Air Force for Acquisition; the

Office of the Assistant Secretary of the Army for Research, Development,

and Acquisition; and the Office of the Assistant Secretary of the Navy for

Research, Development, and Acquisition. Our review was performed in

accordance with generally accepted government auditing standards and

includes information obtained through May 1995.

We are sending copies of this report to the Chairman, Subcommittee on

Oversight of Government Management and the District of Columbia,

Senate Committee on Governmental Affairs; other interested

congressional committees; and the Secretaries of Defense and

Transportation. Copies will also be available to others on request.

Page 10 GAO/NSIAD-96-10 Interagency Contracting
B-258879 

Please contact me at (202) 512-4587 if you or your staff have any questions

concerning this report. Major contributors to this report were Charles W.

Thompson, Paul M. Greeley, and Paul G. Williams.

Sincerely yours,

David E. Cooper

Director, Acquisition Policy, Technology,

 and Competitiveness Issues

Page 11 GAO/NSIAD-96-10 Interagency Contracting
Appendix I 

Comment From the Department of Defense

(705071) Page 12 GAO/NSIAD-96-10 Interagency Contracting
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