59

were way over their bid. Since then, it is my understanding
through word of mouth that they are now under their bid in turn-
around time and cost.

I think that we can compete with that, but the problem is, they
can spend 12 to 18 months to close their books on an aircraft.
When they sell a bureau a number of aircraft, it could take as
much as 12 to 18 months for them to close the books financially.
It’s very difficult to monitor, and I think that’s something that real-
ly needs to be looked at, because internally where I work, we're
now trying to close our financial books within 30 days once the air-
craft is turned back over to the customer.

So we’re doing a lot internally to speed up the processes so that
we know as we go through the process what our costs are and we
very quickly know what the cost was when we compare that to
what our competitors are doing. They need to be held accountable
in the same way that we are.

In regard to bidding, the Government is continually trying to get
better at bidding now that we are in such a posture to have to com-
pete. But our bidding process—in comparing it to the private sec-
tor, the private sector can bid based on their labor as separate
business units; they do not have to include their overhead in their
bid. For us within a depot or within a corporation, we have to in-
clude in our bid not only our labor cost but our overhead, general
and administrative cost, our production overhead cost; and we now
have the comp adjustments and surcharges. These are things we're
trying to work with the corporation to get better at.

But I think we will get there and we want to compete and we
think that we can bring down costs and win a good part of the bid-
ding. But we really need to work on the cost accountability and get-
ting everyone to close their books about the same time so that we
can compare.

Mr. Mica. I would like to now recognize the ranking member,
who has returned, for any questions.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

Ms. Armstrong, how does this affect—you said you're partnering
with, you mentioned one corporation you’re doing that with.

Ms. ARMSTRONG. Yes, McDonnell Douglas.

Mr. CUMMINGS. How does that affect morale? They are working
with folks who, I guess, have already taken some Jobs away. Iam
just wondering, how does that affect the morale of the people who
are still there?

Ms. ARMSTRONG. For our internal work force at the depot, it does
impact morale when we bring in contractors to work side by side
on the aircraft. Right now, we have no contractors working in the
depot as far as working on the aircraft. We do have a lot of other
contracts, as far as engineering, logistics support, a_whole lot of
contracts within the depot. But as far as on the shop floor, the pro-
duction employees, it does impact them because of the mere uncer-
tainty about the whole contracting-out issue.

They blend in well. In our particular area in eastern North Caro-
lina, we have taken a lot of people who have retired from the depot
that stayed in the community. We had the voluntary separation in-
centive pay in the last couple of years; a lot of those employees
have stayed in the community and have gone to work with the con-


123

Mr. Chairman. My name is Alfred K. Whitehead, and I serve as the
General President of the International Association of Fire Fighters
representing more than 225,000 professional fire fighters and

emergency medical personnel throughout the nation. I appreciate
this opportunity to present our views on the federal government's

process for contracting out.

After working on issues involving contracting out fire protection for
a number of years, we have come to the conclusion that the process
is deeply flawed. Quite simply, current law is not working when it

comes to fire protection issues.

Before delineating the problems with the current system, I wish to
make a comment about my membership. The IAFF represents
approximately one-third of all federal government fire fighters, but
fepresents over 95% of fire fighters employed by state and local
governments. When the federal government contracts out fire
protection, the IAFF gets more members. In short, I am not here to
make a parochial plea to save my members’ jobs. Rather, I am
deeply concerned that the current federal policy toward contracting
out is severely damaging fire safety and protection at federal

facilities.

The IAFF primarily represents fire fighters working for two agencies:
the Department of Defense and the Department of Veterans Affairs.
While the situation faced by the employees of these two agencies


25

SPENDING BILLIONS AND BILLIONS OF DOLLARS IN CONTRACTING OUT
SERVICES, IT COULD NOT “CONVINCINGLY PROVE NOR DISPROVE THAT THE
RESULT OF FEDERAL AGENCIES CONTRACTING-OUT DECISIONS HAVE BEEN
BENEFICIAL AND COST-EFFECTIVE." GAO/T-GGD-95-131. IT IS FOR THIS
REASON AND OTHERS THAT NAGE IS OPPOSED TO HR 716.

TODAY, THE FEDERAL GOVERNMENT IS ENGAGED IN THE LARGEST
PRIVATIZATION AND OUTSOURCING EFFORT IN ITS HISTORY. OVER 40,000
FULL TIME EMPLOYEE (FTE) POSITIONS ARE BEING EXAMINED FOR
CONTRACTING, AND MANY MORE ARE BEING IDENTIFIED FOR OUTRIGHT
PRIVATIZATION. IN FISCAL YEAR 1996, THE FEDERAL GOVERNMENT SPENT
OVER $114 BILLION ON COMMERCIAL SUPPORT SERVICE CONTRACTS,
INCLUDING CUSTODIAL, WAREHOUSING, BUILDING MAINTENANCE,
TRANSPORTATION AND COMPUTER SUPPORT SERVICES. THIS COMPARES TO THE
$ 80 BILLION PAYROLL FOR IN-HOUSE EMPLOYEES. SERVICE CONTRACTING
CONSTITUTES THE FASTEST GROWING AREA OF FEDERAL PROCUREMENT,
ACCOUNTING FOR OVER HALF OF THE $200 BILLION SPENT EACH YEAR ON
OUTSIDE CONTRACTS. BETWEEN FISCAL YEAR 1989 AND FISCAL YEAR 1992,
THE NUMBER OF CONTRACTORS DOING BUSINESS WITH THE GOVERNMENT ROSE
FROM 62,819 TO 82,472.

IT SHOULD NOT SURPRISE ANYONE ON THIS COMMITTEE THAT OUR
ORGANIZATION HAS LONG OPPOSED WASTEFUL, COSTLY AND INAPPROPRIATE
CONTRACTING OUT OF GOVERNMENT FUNCTIONS. WE ONCE AGAIN REITERATE
THAT THE EXPLOSION IN CONTRACTING OUT OF SERVICES HAS COST THE
AMERICAN TAXPAYER MILLIONS OF DOLLARS, DIMINISHED GOVERNMENT’S
EXPERTISE IN KEY AREAS, AND REDUCED ITS ABILITY TO ADDRESS THE
PROBLEMS OF THE FUTURE. IN A MARCH, 1994 REPORT, THE GAO FOUND
THAT THE FEDERAL GOVERNMENT COULD SAVE MILLIONS OF DOLLARS BY


154

options proven to be cost-effective?

3. Whether through a) contracting out properly through A-76, b) waiving A-76 in
order to contract out, c) direct conversion of functions involving 10 or fewer
employees, d) outsourcing new functions, or e) outright privatization, work that had
formerly been performed by federal employees is now being performed by
contractor employees.

Queries: What differences are there, if any, in terms of pay, health care benefits, and
retirement benefits between contractor employees and federal employees who used to
perform their work?

4, Queries: How much does the federal government spend annually on performance of
commercia! activities contracting? (How much Is spent on goods contracting?) What
percentage of those commercial activities contracting dollars is competed under A-76?
What percentage of those dollars is competed under either an informal competitive
framework or none at all? How many contract employees make up the federal
government's commercial activities contracting workforce?

5. The new A-76 supplement allows for work to be contracted-in in the event of

poor contractor performance.

28


149

*Before partnership at the Naval Warfare Center, in Crane, IN, it took two years
for the parties to cobble together a collective bargaining agreement. After
partnership, the parties finished their negotiations in less than two months. And
by jointly designing new work systems and using self-directed work teams, the
union and management were able to eliminate 150 front-line supervisor and mid-
level positions, resulting in substantial savings to the taxpayers.

*At Anniston Army Depot, AL, the base Commander warned that if productivity
problems could not be solved in the small arms facility, it would be necessary to
bring in forty-five new contract employees. A partnership studied the problem and
began to make changes in manufacturing and supply; and now the facility is
working better, more economically, and faster.

*At the Department of Veterans Affairs (DVA) Medical Center, in Des Moines, IA,
self-managed work teams established through partnership have cut overtime costs
from thousands of dollars every year to zero. These teams have also cut by more
than one-half the amount of time that veterans have to wait for treatment at the
hospital's clinic. One of the team members said that she used to work for a
‘supervisor; now she works for her real customers: the nation's veterans.

*At another DVA hospital, in Albuquerque, NM, AFGE and management have
jointly designed several new clinical programs to help care for veterans, includirig

23


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California

J. DENNIS HASTERT, Illinois TOM LANTOS, California

CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, JR., West Virginia

CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York

STEVEN SCHIFF, New Mexico . EDOLPHUS TOWNS, New York

CHRISTOPHER COX, California PAUL E. KANJORSKI, Pennsylvania

ILEANA ROS-LEHTINEN, Florida GARY A. CONDIT, California

JOHN M. MCHUGH, New York CAROLYN B. MALONEY, New York

STEPHEN HORN, California THOMAS M. BARRETT, Wisconsin

JOHN L. MICA, Florida ELEANOR HOLMES NORTON, Washington,

THOMAS M. DAVIS, Virginia DC

DAVID M. McINTOSH, Indiana CHAKA FATTAH, Pennsylvania

MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland

JOE SCARBOROUGH, Florida DENNIS J. KUCINICH, Ohio

JOHN B, SHADEGG, Arizona ROD R. BLAGOJEVICH, Illinois

STEVEN C. LaTOURETTE, Ohio DANNY K. DAVIS, Illinois

MARSHALL “MARK” SANFORD, South JOHN F. TIERNEY, Massachusetts
Carolina JIM TURNER, Texas

JOHN E. SUNUNU, New Hampshire THOMAS H. ALLEN, Maine

PETE SESSIONS, Texas HAROLD E. FORD, JR., Tennessee

MICHAEL PAPPAS, New Jersey . —

VINCE SNOWBARGER, Kansas BERNARD SANDERS, Vermont

BOB BARR, Georgia (Independent)

ROB PORTMAN, Ohio

KEVIN BINGER, Staff Director
DanreL R. MOLL, Deputy Staff Director
WILLIAM MOSCHELLA, Deputy Counsel and Parliamentarian
duptta McCoy, Chief Clerk
Putt ScHILIRO, Minority Staff Director

SUBCOMMITTEE ON THE CIVIL SERVICE
JOHN L. MICA, Florida, Chairman

MICHAEL PAPPAS, New Jersey ELIJAH E. CUMMINGS, Maryland
CONSTANCE A. MORELLA, Maryland ELEANOR HOLMES NORTON, Washington,
CHRISTOPHER COX, California Dc
PETE SESSIONS, Texas HAROLD E. FORD, Jr., Tennessee

EX OFFICIO
DAN BURTON, Indiana HENRY A. WAXMAN, California

GeoRGE NESTERCZUK, Staff Director
Nev LywcH, Senior Research Director
CAROLINE FIEL, Clerk
Cepric HENDRICKS, Minority Counsel

ap


119

performed before work is contracted to the private sector.
Legislation to require federal agencies to make these cost
comparisons -- including contracts for advisory and assistance
services -- and to prohibit agencies from entering into outside
service contracts if the services can be performed at less cost by
federal employees is overdue. I urge the Subcommittee to look at
legislation introduced by Congresswoman Eleanor Holmes Norton on
this topic, H.R.885. This bill addresses one of the fundamental
flaws in federal contracting and deserves to be adopted by this

Congress.

As detailed above, the 1996 supplement to Circular A-76 allows
the government the opportunity to win back a contract after it has
been contracted out if the service can be performed at less cost
in-house. This key provision not only allows the government to
take advantage of improvements that make delivering services more
efficient over time, it serves to encourage government to find ways
to become more efficient and remain competitive. This, too, should

be included in legislation.

Agency Budget Line-Item Accountability for Service Contracts

Congressional budget and appropriation bills should include
line-items for agency contract services. Just as agencies are
required to live within congressionally-mandated salary and expense

account limits which dictate the number of full time equivalent

“7+


Carrent Efforts,

{As noted in your letter, the aggregate dollar amount of Federal service contracting has
recently declined, in real terms. When consideration is given to the effects of inflation and
Service Contract Act wage increases, the decline is even more significant. Clearly, the budget
constraints that agencies have faced under OBRA '93 and will face as we implement the
Balanced Budget Agreement has contributed to this decline. Technological improvements,
efforts to achieve better economies of scale, other improved contracting techniques and efforts to
enhance the level of competition available have also had an effect.

Service Contracting
($ billions)
¥ Total Service Contracting DOD Sevice Contracting Percent DOD

FY 1992 $105.2 $60.9 579
FY 1993 $105.5 $62.0 588
FY 1994 $110.0 $65.3 59.4
FY 1995 $41 $66.9 58.6
FY 1996 SILT $68.8 61.6
Note: Source: The OFPP Federal Pri ‘Data System. These RED, Ce tion,
AGE, ADP. (ir and ‘and other

At the same time, we are currently engaged in the largest privatization, outsourcing and
competition effort ever undertaken by the Federal Government. We began with the National
Performance Review. A consensus was developed to reorganize agencies, reinvent them,
develop performance standards and to encourage competition and choice in the performance of
commercial support activities. Today, over 30,000 FTE are currently under Circular A-76
review within the Department of Defense. To put this in context, I would note that total Federal
civilian personnel compensation figures for the same years (1992-1996) are also essentially flat,
but decline significantly in real terms.


152

APPENDIX: SUGGESTED QUESTIONS FOR GAO
1. In early 1994, the Office of Management and Budget (OMB) reported that
several agencies--including the Departments of Agriculture, Health & Human
Services, Housing & Urban Development, State, Education and Treasury, as well
as the Environmental Protection Agency--sald that they each could have saved
several million dollars by performing functions directly rather than having them
performed by contractors but did not do so because either their requests to OMB
to take on the necessary full-time equivalents (FTEs) were refused or the
agencies were so sure such requests would be refused that they were not even

submitted.

On March 16, 1995, the personnel directors of the four branches of the armed
forces told the Senate Armed Services Personne! Subcommittee that civilian
personnel ceilings, not workload, cost, or readiness concerns are forcing them to
‘send work to contractors that could have been performed more cheaply in-house.

‘Also In March 1995, GAO reported “that the personnel ceilings set by OMB
frequently have the effect of encouraging agencies to contract out regardiess of
the results of cost, policy, or high-risk studies."

And the DoD Inspector General noted in a 1995 report, “the goal of downsizing the
federal workforce is widely perceived as placing DoD in a position of having to

26


79

Introduction

Mr. Chairman and distinguished members of the committee, itis a pleasure to appear
before you today to discuss the Department of Defense's initiatives to adopt better business
practices and introduce competition in the provision of its commercial support activities.

American military forces are the finest in the world. They have repeatedly demonstrated
their ability to meet changes in our security environment by incorporating new technologies,
adopting new tactics, and creating new structures. The methods by which DoD supports its
soldiers, sailors, airmen, marines and their families must also change. We simply cannot afford
to do business in the traditional ways just because we are used to them. Unless we make this
transition, we run the risk of entering the next milleanium unprepared for the global challenges
we will face.

‘We must make our support capabilities as agile and efficient as possible. In so doing, we
will improve our service to the warfighters and generate the savings required to help fund our
modernization goals. As the recently-completed Quadrennial Defense Review concluded, the
Department of Defense must increase its spending on modernization by approximately 50 percent
~ to $60 billion/year — to maintain our battlefield dominance into the 21" century.

In order to achieve this critical goal, DoD is carefully examining its internal operations
and support activities to determine where we can lower cost and improve performance. One key
way to achieve these objectives is by drawing on the tools of outsourcing, privatization, and
competition. My testimony today will highlight the Department's activities - planned and
underway ~ to meet this objective.

In particular, I would like to focus on two key and related components of our effort. First,
we are working to adopt best business practices in how we conduct and manage our support
activities. Second, we are seeking to introduce more competition from the private sector in the
delivery of goods and services.

Adopting Best Business Practices

The Department of Defense is taking a number of steps to find better and more efficient
business practices in order to provide cost effective support. Many of these practices involve
drawing on the private sector in new ways. They are commonplace in the private sector, and we
are seeking to adapt them to our needs. These changes are working to improve both the quality
of life we provide to our troops and their families, and the quality of support we provide to the
warfighters.


15

them? Does contracting out save money as it is purported to do?
How do we measure their performance? Who monitors their work?
Must they re-bid in the out years?

We didn’t have any solid answers then and, more disturbing, we
still don’t have the answers today. I do have, however, several files
of letters from Federal employees and Federal managers who are
concerned about the results of contracting out the functions of Fed-
eral agencies. Every time Federal employee groups come to see me,
concerns about the issue top their agenda.

I think we need clarification; we need to know. So I hope that
by the end of today’s hearing, the questions that I have posed will
be answered, or that we have obtained a firm commitment to find
the answers to these critical questions.

Thank you, Mr. Chairman.

Mr. Mica. I want to thank the gentlelady.

[The prepared statement of Hon. Constance A. Morella follows:]


128

INTRODUCTION
Mr. Chairman and Subcommittee members, my name is Bobby L. Hamage. | am
the Nationaf Secretary-Treasurer of the American Federation of Government Employees.
(AFGE)--the largest federal employee union, representing 600,000 government workers.
serving worldwide. | appreciate the opportunity to submit this testimony for the record.
The nation's newspapers continue to be filled with contractor horror stories. Here

are abstracts of some recent entrants into the Hall of Shame:

RE-ENGINEERING B-52 BOMBERS: A recent General Accounting Office study
reports that a proposal by Boeing to re-engineer the Air Force's fleet of B-52
bombers would cost $1.4 billion more than sticking with the aircraft's current
engines. This contrasts with a projection by the company that the proposal~-which
involves the use of commercial engines in the bombers--would yield savings of
$4.7 billion over the life of the planes.

STUDENT LOAN PROCESS: In September 1997 the Department of Education
announced that it would not accept any more applications from recent college
graduates seeking to consolidate or refinance their tuition loans because the
contractor hired to process such applications--Electronic Data Systems--had
allowed an enormous backlog to accumulate. The length of time required to handie
applications had risen as high as seven months.


134

* the application of averhead to purchased labor costs, which were not Included
In the proposed labor allocation base; and

* the application of fringe benefits to foreign management labor costs included in
the 'domestic/foreign’ management labor category when the benefit factor was only
applicable to domestic management.

‘The audit resulted in savings to the Government of $25.3 million."

--report for 4/1/94-9/30/94, p.2-2

What's been the response of lawmakers to this crisis in contracting out? Many
have passively accepted the consequences, notwithstanding the unfair burdens imposed
on the taxpayers. And others have even said that we should make it even easier to

contract out!

AFGE AND OMB CIRCULAR A-76

Permit me now to say a few words about where AFGE stands on contracting out
and outsourcing. Unlike some organizations in the federal employee community, AFGE
is not refiexively opposed to each and every instance of contracting out. In these times,
such a position is as unrealistic as it is untenable. Because we are conscientious
‘employees, patriotic Americans, and hard-working taxpayers, AFGE members are
determined to see that the federal government's dollars are spent wisely. Quite simply,
federal employees should not perform work that is not inherently governmental if they
cannot do it more effectively, more efficiently, and more rellably than contractors.


14

The Right of First Refusal

Federal employees and existing Federal support contract employees adversely affected by
a decision to convert to contract or ISSA performance have the Right-of-First-Refusal for jobs
for which they are qualified that are created by the award of the conversion. A standard clause is
included in direct conversion and A-76 cost comparison solicitations notifying potential
contractors of this requirement (see FAR 52.207-3). Executive Order 12933, "Non-Displacement
of Qualified Workers Under Certain Contracts,” dated October 20, 1994, also provides the Right-
of-First-Refusal to contract employees (see FAR 7.305 (c)).

Information regarding the use of the Right-of-First Refusal does not exist, nor would we
support a legislative mandate to collect such information. In general, however, we believe that
agencies are doing their best to place employees without the need for invoking the Right-of-First
Refusal. For example, personnel officers are: giving priority consideration for available
positions within the agency; establishing a reemployment priority list and an effective placement
program; paying reasonable costs for training and relocation that contribute directly to
placement, and coordinating with the Office of Personnel Management (OPM) to ensure
employees have access to placement programs, including the OPM-operated Displaced
Employee Program and the Interagency Placement Assistance Program.

Related to the question of the Right-of-First-Refusal is the impact of contracting out on
‘wages and pensions. Contract wages and fringe benefits - including pensions - are covered by
the Service Contract Act and contractors must offer prevailing not minimum wages and benefits
to adversely affected employees. With regard to pension portability - CSRS is not, in fact,
portable. In contrast, FERS was specifically designed to give people a more portable benefit
than was available under CSRS and to reflect private sector practice. By having both defined
benefit (FERS basic) and defined contribution (TSP) elements, FERS spreads the risk of
retirement planning between the employer and the employee.


32

our information, the service contractors in this particular situation
are living up to the specifications set forth in the service contract.

The service contract assumes only a certain amount of rust build-
up on the bolts will exist. Under the contract, the service contractor
is required to remove only x amount of rust and no more. There-
fore, even if a greater amount of rust has formed on these bolts,
affecting safety and operation of the airplanes, the service contract
itself limits the quality of work because the service contractor is
not required to finish the job.

The result is that oftentimes the work of the service contractor
does not pass quality inspections. Planes are returned back to Fed-
eral employees to finish the job. The contractor may be living up
to his contract by following the contract to the letter but the con-
tractor is not getting the job done.

NFFE contends that service contractors must be required to pro-
vide additional information on true contract cost and size of service
contract work force. The reality is that the front line Federal em-
ployees do not have access to all of the information they need in
order to determine the extent of cost overruns by service contrac-
tors.

Federal employees do observe practices by service contractors
which do not look right to them. Our members report evidence that
post-contract costs conflict with the initial bid which only makes it
look like it is cheaper to contract out. It is an absolute necessity
that Federal employees, specifically, and American taxpayers, ulti-
mately, be provided with a more accurate and complete picture of
cost of service of contracting.

Although NFFE could provide many anecdotes where Federal
employees believe contract costs skyrocket, those stories would be
limited in effect. What we can testify to is that no one has suffi-
cient information on the size of the contracting work force, either
generally or by agency. OMB still does not have the data on the
number of employees working for contractors performing functions
for Federal agencies. Estimates, guesses, and conjecture will not
suffice, and they must be replaced with a requirement that service
contractors report this information.

Without this information, reports on status of Federal spending
on service contracts must be taken with a grain of salt. Information
on size of the contractor work force would reveal true cost of Fed-
eral spending on service contracts. Federal employees are entitled
to know that information, and with that information they will be
able to show that they can perform the work at a lower cost than
service contractors.

The American taxpayers deserve to know how money is being
spent on service contractors, because they should be able to expect
to receive a better bargain. Agencies should be required to meet the
burden of showing in numbers and dollars that contracting out
makes sense.

H.R. 885 requires agencies to make cost comparisons between
the cost of doing work in-house and the cost of contracting the
work out. Additionally, H.R. 887 requires OMB to develop a gov-
ernmentwide system for determining and reporting the number of
non-Federal employees engaged in service contracts. Together, H.R.
885 and 887 are designed to shift the burden to agencies to prove


103

2. THE GROWTH OF SERVICE CONTRACTING

Question: "Please provide the level of service contracting done by Federal agencies for the
past fen years."

‘Response:

Federal service contracting has declined, in real terms, over the ten year period. Clearly,
the budget constraints that agencies have faced under OBRA '93 and will face as we implement
the Balanced Budget Agreement has contributed to this decline. Technological improvements,
efforts to achieve better economies of scale, improved contracting techniques and efforts to
enhance the level of competition available have also had an effect. The following provides a
summary of service contracting by year, not adjusted for inflation.

Service Contracting
(S$ billions)
FY 1986 $82.5 $53.7 65.1
FY 1987 $88.3 $58.8 66.6
FY 1988 $879 $57.2 65.1
FY 1989 $884 $55.3 62.6
FY 1990 $906 $57.7 63.7
FY 1991 $102.9 $61.8 60.0
FY 1992 $105.2 $60.9 57.9
FY 1993 $105.5 $62.0 58.8
FY 1994 $110.0 $65.3 59.4
FY 1995 $114.1 $66.9 58.6
FY 1996 $111.7 $68.8 61.6

Note: Source: The OFPP Federal Procurement Data System, These numbers include R&D, Construction, A&E, ADP
services (including installation and maintenance) and other services.

After adjusting for inflation, average growth over the period is estimated at 3.1 percent
per year, well within the compound inflation rate of 3.6 percent per year over the same period.
Stated somewhat differently, when the DOD's estimated deflator’ is used to estimate constant
dollars, the $82.5 Billion in expenditures in FY 1986 is the equivalent of $112.8 Billion in 1996
dollars, again showing a slight decline in overall service contract spending.

> Appendix A: Estimating Savings by Function, "Outsourcing Opportunities for the Navy,” Center for Naval
‘Analysis, April 1996,


The phrase, “reinventing government” has been an empty one in the context
of slashing federal employee jobs and replacing them with contract
employees. In addressing this reality, I ask that legislation be moved forward
that will give meaning to this phrase.

The term “reinventing” implies something better. It implies that the end
result of the process will be something new and improved. In the context of
reinventing government, we are told that by slashing federal employee jobs
and contracting them out to the private sector, “reinvention” would result in
increased efficiency, genuine cost savings and better service, all with no
negative impact. In the majority of cases, that’s nct what results from
contracting out. What results is senseless contracting out.

Earlier today, I told you about NFFE’s Forum on Contracting Out. The forum
attendees, along with Mr. Koskinen of OMB, reached a consensus that, when
given the chance and a level playing field, federal employees do the job best
every time. And having that chance from the outset is critical. One final
reality is that it is virtually impossible to contract back in. Once the work is
contracted out, federal employee jobs and irreplaceable federal workers are
eliminated. Unless senseless contracting out is halted from the start,
taxpayers will be at the mercy of service contractors, which, at best, overcharge
and, at worst, do not live up to the promises they have made.

That concludes my testimony. Thank you again, Mr. Chairman, for allowing
me the opportunity to discuss with you the thoughts of NFFE’s membership
on contracting out practices. I would be happy to answer any questions.


164

17. In T-GGD-95-131, GAO reported that even after years and years of billions
and billions of dollars in contracting out, it could not ‘convincingly prove nor
disprove that the result of federal agencies' contracting out decisions have been
beneficial and cost-effective.” In GGD-94-95, GAO reported that it had surveyed
nine studies on service contracting and concluded that in each case savings would

have been realized if the work had been retained in-house.

Query: Have there been any startling developments of late that would cause GAO to
change its collective mind with respect to those two assessments?

38


64

tractors are reducing their costs or otherwise developing an unfair
competitive advantage by reducing pay and benefits to their em-
ployees. The Service Contract Act requires Federal contractors to
meet prevailing wage and fringe benefits for each job category. This
creates incentives for Federal employees to develop new perform-
ance standards and reduce costs as they engage in the competitive
rocess,

» Your letter requested that we provide our best information re-
garding the number of contractor employees serving Federal agen-
cies. To our knowledge, this information does not exist. While we
need to know that the workload required is being undertaken, that
contract prices are reasonable, and that the work is of appropriate
quality, it is not important that we know the specific number of
contract employees.

Ongoing governmentwide procurement reengineering efforts are
also helping to dramatically improve our buying behavior. The Fed-
eral Acquisition Streamlining Act and the Clinger-Cohen Act, in
conjunction with other reform initiatives that encourages the use
of past performance and financial incentives, are enabling us to
male better, more efficient use of the marketplace.

There are several bills currently before Congress that address
outsourcing. On the one side, there is H.R. 716, the Freedom From
Government Competition Act, on which I testified to on Monday be-
fore Mr. Horn in this very room. This bill would require the Fed-
eral Government to procure from the private sector the goods and
services necessary for the operation and management of certain
Government agencies and other purposes.

We are opposed to this legislation. H.R. 716 undermines the prin-
ciple of competition on a level playing field. It does so by restricting
the development of competitive public offers—that is, by Federal
employees “by inserting provisions that affect the structure of that
playing field.

On the other side is H.R. 885, a bill that would prohibit any ex-
ecutive branch agency from entering into any service contract if the
services procured under the contract can be performed at a lower
cost by employees of the agency. Specifically, the proposal would re-
quire Federal agencies to conduct A-76 cost comparisons before
awarding any work to contract performance—even work that is
currently contracted—if that work could be performed by Federal
employees.

We also are opposed to this legislation because it is unnecessary
and administratively burdensome. We simply do not have the re-
sources necessary, nor are we prepared to assume that the competi-
tive process under current Federal Acquisition Regulations is insuf-
‘icient.

We are also opposed to H.R. 886, a bill that would provide fund-
ing for Federal employee pay adjustments and comparability pay
through reductions in agency spending on service contracts. Specifi-
cally, it would require the redirection of $5.7 billion designated for
service contracting to appropriate payroll accounts. Reducing con-
tract dollars, without regard to the disruption-of-service require-
ments or the competitive cost of services, could lead to significant
inefficiencies and would limit an agency's ability to respond to
changing conditions, emergencies, and other requirements.


148

itis undeniable that the federal government is not an employment agency and that
lawmakers are obligated to ensure that taxpayer dollars are spent wisely. But, at the
same time, the federal government, ostensibly the nation's mode! employer, should not
be providing incentives to contractors to provide their employees with inadequate
compensation.

This is an emotional issue for both unions and contractors--and the absence of
comprehensive and reliable information invariably teads to fiery debates that shed far
more heat than light. Therefore, Mr. Chairman, | suggest that you ask GAO to compare
the compensation--pay, health care benefits, and retirement benefits—-of the federal
employees who have been downsized in favor of contractors with that of the contractor
employees who have assumed their work. if it appears that significant savings from
contracting out are being generated simply because the contractor workforce is poorty—
compensated, then lawmakers like yourself need to consider the necessity of
implementing corrective measures to ensure that some basic floors exist for the pay, and
health care and retirement benefits of contractor employees.

— Managers to work rank-and-file federal 10) make the

emme! more

Taking a lesson from the private sector, the Administration issued an executive
‘order In 1993 that established labor-management partnerships in agencies throughout
the federal government. It hasn't been easy to change the hostile climate of labor-
management relations in the federal sector, but we're making great strides. And that

progress is paying dividends for the taxpayers.

22


35

Mr. Chairman and members of the Subcommittee: My name is James D.
Cunningham, Sr., and I am the National President of the National Federation
of Federal Employees. On behalf of 150,000 Federal employees our union
represents, I appreciate the opportunity to testify before the Subcommittee
today and offer you the views of NFFE’s membership concerning Federal
contracting for commercial services.

Last May, FFE members had the opportunity to testify at our union’s Forum
on Contracting Out, which was held before fellow union members and a
panel consisting of myself, Mr. John Koskinen, formerly of OMB, and Mr.
James King, formerly of OPM. During that forum, our members had the
chance to relate stories of senseless contracting out. NFFE members told
about the very real and most often very negative impact of contracting out on
federal employees. The experiences of these front-line workers are a call to
support legislation that would begin to put a stop to senseless contracting out.
NFFE supports legislation that would help to ensure that service contracting
will occur only when it is absolutely necessary. That is, contracting out for
services should be done only if it can be positively shown by the agency that
there would be (1) no decline in the quality of work; (2) a significant cost
savings would be realized over the life of the contract; (3) acceptable
monitoring of the service contractor to prevent abusive service contracting
practices; and (4) certainty that the procedures set forth in A-76 have been
followed. NFFE firmly believes that, in a majority of cases, the well-trained,
dedicated federal employees provide the best value for the federal dollar, and
will be able to keep work in-house. But, in a minority of cases, and only if all
of these criteria are met at a minimum, can there be sound service
contracting. Where these minimum criteria are not met, then there will be
an example of senseless contracting out for services, and work that should
remain with federal employees who are the best workers for the job.

NFFE members have not experienced a decrease in contracting out
First, I would like to state that, as a whole, the experiences of our members do

not match claims that there has been a decrease in contracting out. The
opposite is true. While fully dedicated to performing their jobs, our members


67

Government wide acquisition reform initiatives are enabling us to take more effective
advantage of competition between private sector offerors and better leverage the Government's
buying power. We are implementing the government-wide management improvements
authorized by the Chief Financial Officers (CFOs) Act of 1990, the Government Performance.
and Results Act of 1993, the Government Managemient Reform Act, the Federal Acquisition
Streamlining Act, the Debt Collection Improvement Act, the Clinger-Cohen Act (the Federal
‘Acquisition Reform Act and the Information Technology Management Reform Act of 1996), to
mention just a few.

OMB Circular A-76

In March of 1996, OMB issued its Revised A-76 Supplemental Handbook to improve the
competitive playing field, respond to concems for unnecessary administrative burdens and,
reflect the other management reinvention initiatives being undertaken, The Revision modifies
the cost comparison requirements for recurring commercial activities and makes certain
interagency agreements that were not previously subject to competition available to both public
and private offerors. The revision reduces reporting and other administrative burdens; provides
for enhanced employee participation; eases transition requirements to facilitate employee
placement; maintains a level playing field for cost comparisons between Federal, interservice
support agreement and private sector offers, and seeks to improve accountability and oversight to
ensure that the most cost effective decision is implemented.

Legislative mandates that require or restrict performance by in-house or contract
‘employees are not helpful. Competition drives organizations to review and streamline their
activities. We believe that the Revised A-76 Supplement increases the level of competition for
Federal workload - not only to reduce cost but also to improve performance. For example, in
testimony offered in June before the Senate Governmental Affairs Committee, Dr. Samual
Kleinman, Center for Naval Analysis, noted that in over 2,100 competitions conducted by the
DOD, involving over 80,000 Federal positions, savings of approximately 30 percent were
achieved - savings that have translated into over $1.5 billion annually, without workload
reductions and often with quality improvements. However, it was also noted in that testimony
that in approximately 50 percent of those competitions the Federal Government was found to be
the best value offeror.


104

3. AGENCY COST COMPARISONS

Question: "Please provide the Subcommittee with a listing, by agency, of the number of cost
comparisons conducted for each of the past ten years, the number of positions
retained in-house as a result of these competitions and the dollar value of the
functions converted to contract through the Circular A-76 procedures."

Response:

While the number of A-76 cost comparisons conducted by the Department of Defense is
available, OMB has not generally monitored the number of individual cost comparisons
conducted by the agencies. The number of cost comparisons may vary due to size and could
include decisions to convert directly to or from in-house or contract without a formal cost
comparison, as permitted by the Circular and its Supplement. Agencies, for example could have
conducted 30 or 40 cost comparisons involving 10-15 FTE or, as in the case of the Air Force, one
study involving over 800 FTE. FTE studied, FTE savings and dollar savings generated are more
useful aggregate measures of agency competition efforts. The number of studies conducted by
the DoD is shown below. The FTE studied, FTE savings and dollar savings generated, as
reported by the agencies, is shown in attachments 1, 2 and 3, respectively.

DEPARTMENT of DEFENSE
COST COMPARISONS BY FISCAL YEAR:
NO. OF TOTAL
ry STUDIES EIEs
86 261 8,164
87 232 10,187
88 192 12,000
89 109 6,100
90 3 6,989
1 64 1,243
92 4 496
93 8 441
94 10 1,623
95 18 2,128
96 4 5,241
7 344 25.255
Total 1,369 79,867


167

DISA WESTHEM Memo, WE04, Results of the DMCs’ Revenue Based
Staffing Plans

c. We are still working several issues relating to filling
vacancies from within the WESTHEM “family” and will update you as
decisions and solutions are achieved.

3. Quarterly, we will be reviewing with you your staffing plan
revisions. The next review will occur in May 1997. Details will
be provided to you under separate cover.

4. Points of contact for staffing plan guidance are staff
members of WEO4 at DSN 869-9600 or commercial (614) 693-9600.
Points of contact for personnel actions are WE1 staff members at
DSN 761-2284.

» amas a pals

Ww.
igadier General, USAF
” Commander
Distribution:
WEO, WEOCS, WEO1, WEO2, WEO4, WEOS, WEG, WEL, WE2, WE3, WEA,

WES, WEA, WEB, WED, WEE, WEG, WEH, WEJ, WEK, WEL, WEM, WEP, WER,
WES, WET, WEW, WEY

48 205 230


126

One of the biggest loopholes that VA officials have exploited is the
ability to waive fire protection standards without adequate rationale.
In cases where local jurisdictions have been unable to comply with
VA and NFPA* fire protection standards, the VA has simply: issued
variances--in effect nullifying their own standards. These variances
are issued without regard to patient safety or any legitimate fire
protection criteria. Rather, they are simply issued in order to allow
local governments to offer a low enough bid so that contracting out

fire protection becomes economically feasible.

In at least one case, a VA Medical Center Administrator chose to
simply ignore the cost efficiency studies, and contracted out fire
protection in direct violation of A-76. He told the president of a local
union that he knew he was violating the law, but decided to go ahead
anyway because "by the time OMB finds out, all the fire fighters will
be Jong gone and then I'll have to contract out."

This story brings up a final problem with the A-76 process: lack of
oversight. In essence, OMB gives each agency wide latitude in
determining whether or not they have fairly complied with A-76 -
requirements. Agencies that wish to contract out in violation of A-76
Protocols have little difficulty doing so. The result of this lax
enforcement has serious repercussions. Not only are taxpayers
footing the bill by paying for services that could be provided cheaper

* The National Fire Protection Association (NFPA) is the consensus,
standard making body for the fire service.

4


45

& ‘Statement of FMA Chapter 21 President Patricia Armstrong before the House Civil Service Subcommittee. 10/1/97

Today I hope to elaborate upon that groan by talking briefly about revisions to OMB Circular A-76,
DOD efforts to contract-out military up-grade and repair workload, and the Freedom From Government
Competition Act.

OVERVIEW: CONTRACTING-OUT IS NOT A PANACEA FOR DEFICIT REDUCTION

Mr. Chairman, in your March 29, 1995 opening statement you said, “in the next four years it should be
possible to contract out more than fifty percent of the services and activities of the Federal Government.”
This has already come to pass. The Government's total payroll cost (including benefits) in 1996 was
$112 billion, (Analytical Perspectives: Budget of the United States Fiscal Year 1998, Table 10-4, p.
209.) Former OMB Deputy Director John Koskinnen testified on June 18, 1997 before the Senate
Governmental Affairs Subcommittee on Oversight of Government Management, Restructuring and the
District of Columbia that in Fiscal Year 1996 “we spent over $114 billion on commercial support service
contracts.”

Workforce downsizing is increasing the pressure on agencies to contract-out for services even when
contractor performance may not be in the best interest of the Government and the taxpayers. According
to a January 1994 OMB report, Summary Report of Agencies’ Service Contracting Practices, service
contracts are the “fastest growing area of government procurement.” In testimony before this
Subcommittee in 1995, GAO called personnel ceilings “an impediment to choosing the option of Federal
performance when that is more cost-effective.” (GAO/T-GGD-95-131)

Mr. Chairman, in your letter of invitation dated September 24, 1997, you state that “recent reports from
OMB indicate that the amount of contracting has been reduced since our last hearings on this topic.”
(3/29/95 and 4/5/95) FMA finds this curious in light of former Director Koskinnen’s observation in his
June 1997 Senate testimony that, “the amount of outsourcing has increased maderately over the four
years that the Government has downsized by 300,000 employees.” Perhaps Mr. Koskinngn's successor,
Mr. G. Edward DeSeve, will be able to shed some light on these apparently conflicting reports

POLITICALLY DRIVEN DOWNSIZING AND NOT A-76 IS INCREASING CONTRACTING

In March of 1996 OMB issued its Revised Supplemental Handbook for OMB Circular No. A-76. FMA
agrees with and supports the principles enunciated in the new Supplement:

Circular A-76 is not designed to simply contract out. Rather, it is designed to:
() balance the interests of the parties to a make or buy cost comparison, (2)
provide a level playing field between public and private offerors to a competition,
and (3) encourage competition and choice in the management and performance
of commercial activities. It is designed to empower Federal managers to make
sound and justifiable business decisions.

age 2-


87

range from 3 to 10 percent of the contract cost, and the savings I
reported to you earlier are net of those monitoring costs.

‘or about 30 competitions, we went back to the bases to learn
about the quality and the subsequent cost. There were a couple of
defaults, but in most cases costs were contained and quality main-
tained; the reason, we believe, is that when the contract ended,
there were sufficient competitors out there to bid away the con-
tract. So there are always competitive pressures controlling the
contractors.

In one large competition, we were able to follow performance and
labor productivity through two competitions. We found that per-
formance and labor productivity continued to improve. We have
started looking at persistence of savings for competitions that were
won in-house by the public teams. Our preliminary observations
are that savings persisted there, also.

In the past, the Department of Defense sometimes felt obligated
to select low-cost bidders that they suspected could not perform.
This contributed to some terminations for poor performance. Agen-
cies and departments should use and are now more likely to use
a selection process that allows them to pick the best value and not
necessarily a sealed bid, low-cost alternative. They are allowed to
weigh past performance, management, and financial solvency of the
bidders; and by doing this, they should reduce the risk of poor per-
formance.

In summary, competitions produced the best efforts in all partici-
pants and the best value for our agencies and departments. The
end result would include more outsourcing, but more importantly,
it would lead to a more efficient government.

That concludes my opening comments. I'll be happy to answer
any questions.

(rhe prepared statement of Mr. Kleinman follows:]


‘support the conversion ofthe Office of Personnel Management's conversion of its investigations
‘workforce into an employee stock ownership program.

Costs of Contracting and Federa! Pay Raises
‘Each year since be has been in office, President Clinton has argued that The Federal

spending by $5.7 billion to provide full funding for FEPCA. The Administration bes been ssked
to assess the impact of such « measure on agencies.


CONTRACTING OUT—SUCCESSES AND
FAILURES

WEDNESDAY, OCTOBER 1, 1997

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON THE CIVIL SERVICE,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:30 a.m., in room
2154, Rayburn House fice Building, Hon. John L. Mica (chair-
man of the subcommittee) presiding.

Present: Representatives Mica, Pappas, Morella, Cummings, Nor-
ton, and Ford.

Staff present: George Nesterczuk, staff director; Caroline Fiel,
clerk; Ned Lynch, senior research director; Cedric Hendricks, mi-
nority counsel; Jean Gosa, minority staff deputy clerk; and Denise
Wilson, minority counsel.

Mr. Mica. Good morning. I would like to call this meeting of the
House Civil Service Subcommittee to order and welcome our
guests. Today we are conducting a hearing entitled “Contracting
Out—Successes and Failures.” I am going to open with a brief
opening statement, yield to the ranking member and then any
other Members who join us, for their statements. Then we will get
right into the two panels we have scheduled this morning.

‘oday’s hearing will again focus on the issue of contracting out
in the Federal Government. Previous information obtained through
prior hearings indicates that contracting for commercial services
has been a useful tool in many instances for restraining cost infla-
tion of government operations in certain circumstances. However,
opponents of contracting in this manner have maintained that the
cost savings due to contracting are only temporary and that con-
tracting may compromise program efficiency and effectiveness.

I believe that to examine these issues properly, Federal employer
organizations should have a fair opportunity to present their side
of this very important issue. Some Federal employer organizations
have charged that contracts are inadequately monitored, that con-
tractors fail to deliver the quality required for effective operations,
and that when contractors fail, Federal employees must pick up the
pieces, apparently under tight deadlines. In this hearing we hope
to examine those charges and hopefully get the facts about what
is really happening in contracting.

In the last Congress, our hearing on Government contracting fo-
cused on the potential benefits from contracting out more commer-
cial services. Since that hearing, a number of employer organiza-
tions have requested that they be given an opportunity to challenge

qm


150

a women's clinic, a new drug rehabilitation center, and a pain-management clinic.
Other quality improvements designed in partnership by the union and management

have reduced the waiting time for patients from four hours to thirty minutes.

*At the Department of Labor headquarters, here in Washington, DC, AFGE and
management developed a program called “Serving Our Customer." Teams of
supervisors and employees were brought together to identify customer
improvement opportunities. The teams were empowered to implement their ideas
without further review by any management official. When it was all over, this
innovative program produced almost 10,000 decisions—-not recommendations, but
decisions--for improving service to the agency's internal and external customers.

Mr. Chairman, it would have been easy for a federal employee union like AFGE,
during a time of unprecedented downsizing, to do nothing more than fuss and fight. But
we didn't. Our members are striving every day to make the federal government the
word's best service provider.

Ensuring that federal em mmental

‘The needless controversy over the Administration's privatization-in-place initiative
at Kelly and McClellan Ait Force Bases reminds us of the perils of allowing politics to
intrude upon policy. As the Pentagon admitted, 79% of the work at Kelly and 87% of the
work at McClellan is considered to be core--so national security-critical that it is

24


42

Consolidations in the private defense industry will monopolize
the industry and drive up cost away from the deficit reduction and
funding for new weapons systems that you are seeking. Depots that
privatize in place do not save taxpayer money. GAO reports have
stated that the Louisville, KY, Navy Depot that was privatized in
place will cost the taxpayers an additional $48.6 million over the
next 5 years.

Privatization within the Department of Defense is putting us on
a course that will result in the elimination of valuable and irre-
placeable national military assets and will negatively impact readi-
ness. For example, one of the major pitfalls is the ability of the con-
tractor to strike. Strike is something in the Department of Defense
that you do to the enemy, not to your employer.

In June of last year, 6,700 workers from the St. Louis head-
quarters of McDonnell Douglas, one of DOD’s largest contractors,
went on strike. Ironically, the employees were protesting the prac-
tice of outsourcing work. The reasons for other defense industry
strikes include negotiation for higher wages. Government workers
cannot and will not strike.

It is important to remember during the Gulf war that civil serv-
ants were sent to the Gulf region and performed their mission.
Contractors did not stay in the region. A civil servant’s loyalty to
the U.S. military should not be forgotten by the Congress. This loy-
alty goes beyond any contractual agreement that is made between
a private contractor and the Government. The defense worker feels
strongly about supporting the fleet’s needs. Congress has a moral
obligation to its citizens to ensure the maintenance of freedom in
this country and therefore should preserve the corresponding loy-
alty of the civil servant.

Competition, rather than privatization, produces savings. Warner
Robins’ recent bid was $22 million less than the nearest bid to win
the C-5 aircraft work. There are numerous examples where public
depots have served the fleet’s needs at less cost and at reduced
turnaround time. GAO has stated that public depots win bids 67
percent of the time with 40 percent less cost than their private sec-
tor competitors.

Earlier this week there was a hearing on H.R. 716, the Freedom
from Government Competition Act. This bill would only intensify
the contracting out problem by requiring a statutory preference for
contracting out.

In closing, FMA supports the following bills introduced by Con-
gresswoman Norton, and we do appreciate, Congresswoman Nor-
ton, your attention to this: H.R. 885, 886, 887, and 888. H.R. 887
requires the Director of OMB to develop and implement a system
for determining and reporting the number of contractors who were
awarded contracts by executive branch agencies.

In addition, FMA would like for Congress to consider providing
a mechanism for automatically reviewing contracts that have ex-
ceeded their initial projected cost to determine if the work could be
performed more efficiently in-house. Contracting out in itself can-
not guarantee a reduced deficit or more funding for new weapons
systems. Competition, incorporation of better business practices in
the Government, and a hard examination of all Government spend-
ing will.


161

NYNEX Corp.--the regional Bell operating company in the Northeast, which
recently merged with Bell Atlantic--cut back so many employees that the New
York State Public Service Commission ordered the company to rebate $50 mitlion
to customers because the reduced staff had fallen so far behind in handling
service calls. NYNEX ended up hiring back hundreds of former employees,

Including many who were already receiving pensions.

‘These dynamics are being repeated at corporations araund the country. As Robert
Ramsey put it in an article in the journal Supervision earlier this year: *For the first
time in a long time, economists and other trend-watchers are picking up signals
that there Is life after layoffs and there is growth after downsizing...More and more
business leaders are concluding that ‘enough is enough.’ Downsizing can't be a

permanent direction unless your destination is nowhere."

Query: Given the emerging skepticism towards contracting out in the private sector, what

lessons should we take with respect to outsourcing by the federal government?

13. S. 314 / H.R. 716 invests extraordinary power in the Office of Management
and Budget with respect to determining which are inherently governmental
functions and whether or not to contract out--at the expense of the discretion now
exercised by the managers out in the field who are closest to the action and thus

best qualified to make such decisions.

35


73

and would convert what are essentially management implementation decisions into statutory
requirements subject to judicial review.

On the other side is H.R. 885, “a bill to prohibit any executive branch agency from
entering into any service contract if the services procured under the contract can be performed at
a lower cost by employees of the agency." Specifically, the proposal would require Federal
agencies to conduct A-76 cost comparisons before awarding any work to contract performance -
‘even work that is currently contracted - if that work could be performed by Federal employees.
We are also opposed to this legislation, as unnecessary and administratively burdensome.

We seek to restore the public’s faith in Government by managing our resources more
effectively and by giving citizens and taxpayers more value for the dollar. H.R. 885 requires that
‘we cost compare all existing contract workload as a matter or law. We simply do not have the
resources necessary nor are we prepared to assume that the com,
current Federal Acquisition Regulations is insufficient to establish appropriate prices and quality
levels. The Revised A-76 Supplement permits agencies to submit bids and to compete for the
conversion of work from contract to in-house performance at the agencies’ discretion and where
they believe that they can offer a cost-effective alternative to private sector performance. This is
a major change over the previous, much more limited opportunity to convert to in-house
performance that was provided for under the 1983 Supplement.

We are also opposed to H.R. 886, "a bill to provide funding for Federal employee pay
adjustments and comparability payments through reductions in agency spending on service
contracts." Specifically the provision would require the redirection of $5.7 billion dollars
designated for service contracting to appropriate payroll accounts.

Agencies have been asked to reduce administrative costs and take further spending
reductions in order to meet existing budget spending requirements. In order to achieve these
savings, agencies should be encouraged to contract-out or contract-in functions depending upon
the total cost to the Government. Reducing contract dollars, without regard to the disruptions to
service requirements or the competitive costs of services, could lead to significant inefficiencies,
and would severely limit an agency's ability to respond to changing conditions, emergencies and
other requirements.


82

Increasing Efficiency Through Competition

Competition drives organizations to streamline operations in order to improve quality,
increase efficiency, and better focus on their customers’ needs. For DoD, competition will not
only reduce costs, but also lead to more rapid delivery of better products and services to the
warfighter, thereby increasing readiness.

Competition, of course, is not new to the Department of Defense. Our own experience
demonstrates that the organizational streamlining and competition associated with outsourcing
studies has yielded significant savings. As a result of over 2,000 cost comparisons conducted
between 1978 and 1994 (under OMB Circular A-76 — the Federal guidance on performance of
commercial activities), the Department now saves about $1.5 billion a year. On average, these
competitions ~ about half of which were won by government in-house organizations ~ have
reduced annual operating costs of the functions involved by about 30 percent. This level of
‘competition savings has been consistently achieved for over a decade and a half.

These savings were generated from A-76 studies covering about 82,000 workyears. By
way of comparison, DoD’s“‘commercial activities” inventory; i.e, those functions that are
theoretically amenable to performance by private sector sources, consists of about 320,000
workyears. It is for this reason that DoD believes that billions of dollars per year can be saved by
introducing greater competition into its support activities.

Some have argued that A-76 competitions do not save money because of eventual
contract cost increases. We do not agree and believe that the overall track record is very positive.
Ina March 1997 report, GAO, for example, noted that many post-contract reviews indicated that
savings from competitions 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. 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. 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. Other internal audits and
reports to Congress we 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.

Of course, out-of-scope additions to contracts can increase the cost of performance. It is
jportaat to recognize that these changes can increase the costs of contracts won by both the
Private sector and by an in-house Most Efficient Organization. We are following a three-pronged
strategy to avoid such developments.



CONTRACTING OUT—SUCCESSES AND FAILURES

HEARING

BEFORE THE

SUBCOMMITTEE ON THE CIVIL SERVICE

OF THE

COMMITTEE ON
GOVERNMENT REFORM
AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
FIRST SESSION

OCTOBER 1, 1997

Serial No. 105-106

Printed for the use of the Committee on Government Reform and Oversight

oe

1.8. GOVERNMENT PRINTING OFFICE
48-205 WASHINGTON : 1998

For sale by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-056528-6



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131

fraudulent billing scheme in connection with the transportation of military cargo."
--report for 10/1/96-3/31/97, p.20

“SmithKline Beecham Corporation agreed to pay $325 million to resolve issues of
civil false claims to Medicare, CHAMPUS and other Federal and state health care
programs, The issues that were the main focus of the investigation and the basis
for the settlement included greatly inflated insurance billings through unbundling
of clinical test profiles, fabricating test codes and double billing for tests not
performed."

~-report for 10/1/96-3/31/97, p.13

“An audit of two related contract termination proposals by Cinpac, incorporated,
resulted In savings to the government of $8.3 million. Before the award of the
contract for meals-ready-to-eat, the contractor was required to identify any
additional building or equipment acquisitions or modifications needed to perform
the contracts and to submit a proposal for a separate line item. Cinpac did not
‘submit any requirements. The auditor then questioned the claimed costs for
building and equipment acquisition/modification expenses that were not included
in the contract. The auditor also questioned settlement expenses for outside legal
counsel and accounting expertise as being unreasonable."

~-Teport for 4/1/96-9/30/96, p.17


159

because of the onerous demands of contract administration, the loss of quality

control and workforce flexibility, and the failure of cost savings to materialize.

In fact, over the past year or two, many large companies have been having second
thoughts about the downsizing mania that swept Corporate America earlier in the
decade. Firms are realizing that there is a price to be paid for making wholesale
reductions in their workforce. *Cost-cutting has become the holy grail of corporate
management," one consultant told the Wall Street Journal. “But what helps the

financial statement up front can end up hurting it down the road."

One of the first companies to recognize this problem was Delta Air Lines. In an
attempt to compete with low-priced upstart carriers, Delta abandoned its
longstanding no-layoff policy in the early 1990's and began eliminating tens of
thousands of jobs. It also hired outside contractors to take over functions that had

been handled by veteran employees.

Before long, serious problems began to surface at Delta, which had prided itself
‘on the quality of its service. Understaffed ticket counters created long delays and
confusion at airports. Insufficient numbers of mechanics and bag handlers
undermined the carrier's on-time performance and forced passengers to endure
long waits for luggage after they landed. Inadequate staffing at telephene

reservation centers kept customers on hold for long stretches. Last spring, Delta's

33




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NATIONAL ASSOCIATION OF GOVERNMENT EMPLOYEES
[AFFILIATED WITH THE SERVICE EMPLOYEES INTERNATIONAL UNION. AFLNTO
‘SH7 Souty Patrick Sect

"Felephone 7037319 6300
‘Alexandria, VA 22314

Pax 703519 0311
E-mail mage @ erols.com

HOUSE RULE XI, CLAUSE 2(3)

NAGE HAS RECEIVED NO GRANTS OR CONTRACTS FROM THE FEDERAL
GOVERNEMNT IN THE LAST THREE FISCAL YEARS.


89

time, in-house teams constructed the full cost of doing work internally
and developed performance work statements of what they were
required to do. The government could then compare alternative
sources for accomplishing the required work.

Winning teams, whether public or private, appear to reduce costs by
using fewer people, not by paying less per person. We believe that
they do this by moving people from one job to another; by giving
employees a greater range of skills; and by using more temporary
workers, part-timers, overtime, and workers from other sites to meet
peak workload demands.

For about thirty competitions, we went back to the bases to learn
about the quality and subsequent costs. There were a couple of
defaults, but in most cases, costs were contained and quality
maintained. The reason, we believe, is that when the contract ended,
there were sufficient competitors out there to bid away the contract.
So, there were always competitive pressures controlling the
contractors. In one large competition, we were able to follow
performance and labor productivity through two recompetitions. We
found that performance remained high and that labor productivity
continued to improve. We have started looking at the persistence of
savings for competitions won by public teams. Our preliminary
observations are that the savings also persist there.

When contractors win, they have to offer any new jobs to the affected
government workers. Only 3 percent of the affected workers joined
the contractors. Most federal workers prefer to continue employment
with the government. However, our case studies show that when a
contractor loses a subsequent competition, most of the workers were
rehired by the winning firm.

There is a cost to competing and monitoring contracts. We estimated
that the one-time cost to compete is 10 percent of the annual value of
the contract. The cost to monitor these contracts is 3 to 10 percent of


84

COMMERCIAL ACTIVITIES
(Workyears In Thousands)
Major Functions FY 1996 Toul “Announced
(Example) Population for Study
Social Services: (Chaplains, Morale, Welfare and 3 23
Recreation)
Base Maintenance /Multi-function: (Grounds Maintenance 1 “92
and Vehicle Maintenance) *
Maintenance & Repair (Intermediate/DirecyGeneral) 15 65
(Local repair of vehicles)
RDT&E Support: (Model Construction) 9 a7
Automatic Data Processing: u 7
‘(Development and Maintenance of software)
‘Maintenance of Real Property: 18 $2
(Facility Painting)
Installation Services: (Motor Pool) 83 59
Subtotal Base Commercial Activities 162 30.5
‘Health Services: (Physical Therapy) “4 3
(Other Non-manufacturing: 46 28
(Printing and Reproductions)
Education and Training: 20 6
(Training development and support)
Products Manufactured In-House: 3 0
(Manufacturing of crates)
Maintenance & Repair (Modify/ConvervOverhaul): 6 °
(Overhaul of vehicles)
Total 31 342

* Announced multi-function studies include workyears from other functions

In the aggregate— regardless of who wins the competitions, DoD anticipates steady state
savings of over $2 billion annually commencing in FY 2003 from A-76 cost comparison studies
to be conducted over the Future Years Defense Program (FYDP) period. These savings are
based on conservative extrapolations of historical experience for savings from A-76 cost

comparisons.

The Involvement Of Government Employees

DoD consults with unions and employee associations via its regular national consultation
channels and the Defense Partnership Council. The Department works closely with its unions
and employee associations to ensure that they are kept informed of potential changes affecting
civilian employees. Information on privatization and competition has been shared through the
Defense Partnership Council and meetings with unions with national consultation rights. We
will continue to consult with employees, their unions, and professional associations at all levels
to include notifying them during development, preparation, and review of performance work
‘statements and management studies.



12

contracting workforce. This information is essential if we are to
have the means to properly manage the Federal government’s
procurement of services and its workforce.

Thank you.


54

vote, and I am hoping Mr. Cummings and other members will be
able to come back, and I do want to make this panel available to
all those who have questions. Let me continue, if I may.

Ms. Norton, did you have anything at this point? I will yield to
you.

Ms. Norton. Thank you, Mr. Chairman. I simply wanted further
clarification from these witnesses on the practice that is growing
in States and localities of competition between civil servants and
contract or would-be contract employees, with the pressure even
greater on cities, for example. There is an enormous amount of pri-
vatization and contracting out going on and many of them don’t
have any choice, don’t have anything like the deep pockets or shall
I say deeper pockets, at least, that the Federal Government has.

Because of respect for civil servants, and because many of these
localities are not willing to simply assume that the work can be
done either better or cheaper, some of them have begun to set up
procedures which allow real competition. I recognize that some of
this is coming forward now in the Federal sector, real competition
between civil servants and private sector employees.

There have been instances where, I am not sure whether mem-
bers saw the article on the mayor of, is it Indianapolis, who has
perhaps the most thoroughgoing, the most thoroughgoing process
whereby competition goes on almost routinely, and he has gotten
the support of his union for that, of his workers for that, and ap-
parently a considerable amount of the work has been kept in-house
because the civil servants proved that they could do it, do it better
and do it at least as cheaply. As I recall, the mayor of Indianapolis,
I believe it was Indianapolis, when the civil service indicated that
they would need some technical assistance in designing a proposal,
that the city actually allowed that to happen and funded that and
they then competed.

Since the Federal Government is likely to look to the States and
the cities for any models of how to proceed with contracting out,
I would like to know whether you have any indication from your
membership regarding their willingness to compete with private
sector employees, whether you have any experience with any of
your own employees in doing this, and what your general view of
this way of proceeding would be.

Mr. CUNNINGHAM. I don’t have a lot of experience with this, Con-
gresswoman Norton. But I know that one of our locals, for example,
in Chambersburg, PA, Letterkenny Army Depot, actually went out
and competed with the city of Chambersburg for fire service. The
fire fighters there at the depot, my understanding was, and this
has been several years ago, competed for and won the bid to do
some of the fire fighting for the city. I’m sure that I can speak for
the membership on this. We would—not only would we be willing
to stand competition across the board in any area that we may be
able to compete, but we would embrace that. We would encourage
that. Absolutely.

Mr. DONNELLAN. Ms. Norton, our members have never shied
away from competition from the public private sector as long as it
is fair and equitable. We are going to look at that testimony by the
mayor of Indianapolis. We’re willing to compete, we want to com-


171

House Rule XI, Clause 2(g)

AFGE has no grants or contracts to deciare.

O

aL


96

Ms. Norton [presiding]. Thank you very much.

Mr. DeSeve, you are at least partly responsible for the quick re-
covery of Philadelphia, your hometown, because of the way you
worked with Mayor Edward Rendell to produce a more efficient
and financially stable government. Mayor Rendell allowed some
competition between civil servants and private employees seeking
the same work.

Would you support a process by which, before any contract was
let, the civil servants could have the option of competing for it?

Mr. DESEVE. We believe that system is currently in place under
OMB Circular A-76.

Ms. NorTON. The employees certainly don’t know about it. I’m
asking about whether or not in each and every case, the employee
should be made a formal offer—we just had them testify, whether
in each and every case a formal offer should be made to the unit,
you are hereby notified that you may compete for this contract.

We have heard what happens in DOD, when DOD was ahead of
the rest of the Federal Government in buyouts and everything else,
and they had such a lion’s share of the employment, that they per-
haps felt pushed. I’m talking about the non-DOD agencies now.

Mr. DESEve. I don’t understand the question. The option ex-
ists——

Ms. NORTON. The question is, would you support a process by
which, in every case, employees were given the opportunity in the
non-DOD agencies to compete for work being contracted out?

Mr. DESEVE. We believe that is now the case. I will be happy to
look at Circular A-76, if there’s a need for a clarification——

Ms. Norton. You really do believe that in each Federal agency
that the employees are approached?

Mr. DESEVE. Yes.

Ms. Norton. And formally notified that?

Mr. DESEVE. I didn’t say that.

Ms. Norton. That they may now compete for this contract?

Mr. DESEvE. I didn’t say that there was a formal notification, no.

Ms. Norton. How are they going to know it? How are the em-
ployees going to compete if there is not some way to inform that,

ey, the bell has started—the bell has rung; you now are in this
competition if you desire?

Mr. DESEVE. The procurement process itself notifies all parties
that a procurement——

Ms. Norton. Who is the party you notify in unit x if their work
is now being contracted out?

Mr. DESEVE. There is a general notification requirement, and the
notification that goes out to the general public, and the contracting
community is also available to the employee community. I know of
no specific requirement to notify an employee group.

Ms. Norton. Mr. Goodman, when employees are notified—I’m
sorry, when competition takes place in the way you describe, how
are employees notified that they may compete?

Mr. DMAN. Congresswoman, the A-76 process requires that
you give the Government employees an opportunity to put together
an MEO or, Most Efficient Organization. That is preliminary and
structured into the procurement process of writing a performance
work statement, writing the request for proposals ‘and submitting


170

Before serving as National Vice President, Harnage worked as a National
Representative for the Sth District for 10 years--from 1968 to 1978. As a National

Representative, he worked with AFGE members in South Carolina and Georgia.

He served in the Air Force from 1959 to 1963. During that time Harnage worked
as an Alr Police Investigator at Clark Air Force Base in the Philippines. He was later
transferred to the Strategic Air Command at Warner Robins Air Force Base in Georgia.
While at Robins he became involved in small arms competition and won the 8th Air Force
Individual Championship twice. He also won the Georgia State Championship, was a
team member of the Air Force Logistics Command Championship Team, placed fourth

in worldwide competition and won a gold medal in 1962.

After his discharge in 1963, Harnage stayed at Wamer Robins, beginning his
civilian career as a sheet metal helper. He later transferred to the Security Police, where

he worked until his resignation in 1968 to accept the position of National Representative.

Born October 2, 1939 in Lakeland, Florida, Harnage was raised and educated in
Moultrie, Georgia. He graduated from Moultrie Senior High in 1957. He attended
Norman Junior Coliege on a baseball scholarship prior to entering the Air Force. After

his discharge from the military, he attended Macon College and the University of Georgia.

40


15

Contrasting -in

In your letter of invitation you specifically asked that I comment about the possibility of
converting work from contract to in-house performance. As you know, this is permitted under
the Circular A-76 and was made easier under the March 1996 Revisi

Unfortunately, while we know that this has happened, we have not had the opportunity to
collect aggregate information on the number of employees performing work in-house that was
once performed by contract. Collecting this information would require a significant level of
‘work and a data call to all agencies. We have no need for this information, would be concerned
by the validity of the information collected and are, frankly, more concerned that the work is
being performed cost effectively.

Conclusion

In conelusion, by improving management and by creating the needed incentives to
change the way commercial activities are performed, by cutting out the waste and confusion
caused by antiquated workload and financial systems and by improving our contracting methods,
agencies will achieve better performance at lower cost. More importantly, the taxpayer will be
getting the most out of each tax dollar. The private sector is already an important partner in the
provision of services to the Federal Government. By providing a fair and level playing field
competitions between in-house and contract resources can be assured that their efforts will be
rewarded appropriately. Taken together, this approach promises a reduction in unnecessary
administrative support costs and will enable us to concentrate more on mission and mission
delivery.

Mr. Chairman, that concludes my prepared statement. I will be pleased to answer any
questions you may have.

10


must be ever vigilant and focus their attention to saving their jobs. In fact,
during the past year, our members’ requests for training and assistance on
A-76 procedures have increased tenfold. In May, at a National Training
Session, there was standing room only for all of our training sessions on A-76
procedures. Our members’ requests for assistance in this area are in direct
response to announced competitions for their jobs, particularly within the
Department of Defense. Keep in mind, such competitions mean that Federal
employee jobs are up for grabs to the private sector. This is the reality which
clearly contradicts reports of decreased contracting out.

1. Quality of the Contractors’ Work

The difference in quality of contractors’ work as compared to federal
employees’ work can best be explained by the fact that service contractors and
their employees work only to the specifications of the contract, while federal
employees work to get the job done. That difference in orientation that
federal employees have is what makes federal employees’ work superior.
Consider the case of maintenance work done on airplanes down in NAVAIR,
Jacksonville, Florida. One aspect of maintenance on the planes is removing
rust from bolts as they corrode. To the best of our information, the service
contractors in this particular situation are living up to the specifications set
forth in the service contract. Significantly, the service contract assumes only a
certain amount of rust buildup on the bolts will exist. Under the contract,
they service contractor is required to remove only “x” amount of rust, and no
more. Therefore, even if a greater amount of rust has formed on these bolts,
impeding safety and operation of the airplanes, the service contract itself
limits the quality of work because the service contractor is not required to
finish the job. The result is that the work of the service contractor regularly
does not pass quality inspections. Planes are returned for federal employees
to finish the jobs. The contractor may be living up to his contract by
following the contract to the letter, but the contractor is not getting the job
done.


48

© set ogee Pc tn a eC Sen Seite 107

‘employees were protesting McDonnell Douglas's practice of outsourcing work. (06/05/96, New York
Times, p. A18)

In negotiating higher wages, the private sector union chief at Sheppard AFB, Texas called the right to
strike the union’s “ace in the hole.” When private sector flight-line maintenance workers for Sheppard's
1-37 and T-38 trainer jets went on strike last Spring they brought the base’s training mission to a
screeching halt. The strike affected the training of 250 pilots. (08/25/97, Federal Times, p. 14)

PITFALL - DOD 1s UNABLE TO MONITOR AND CONTROL CONTRACTOR COSTS: Claims of big DOD
savings attributed to contracting-out ring hollow in light of the Department's spotty financial accounting
systems. In our experience, current methods of cost accounting do not always provide sufficient
management controls on contracting-out. “As of May 1996, DOD reported that its problem
disbursements totaled about $18 billion. However, our preliminary work on DOD's reporting of problem
disbursement data indicates that reported amounts are substantially understated. . .. We found that some
contractors had retained overpayments. For example, in one case, a contractor was overpaid $7.5 milion
due 10 numerous errors. The overpayment remained outstanding for 8 years. We estimate that the
‘government fost interest on the overpayment amounting to nearly $5 million.” (GAO/HR-97-4 Defense
Contract Management. February 1997.)

MYTH - PRIVATIZATION PRODUCES BIG SAVINGS: According to GAO, "privatizing depot maintenance
workloads in the current environment, is not likely to achieve the savings DOD expects and may even be
‘more costly." (GAO/T-NSIAD-96-146, Defense Depot Maintenance: Privatization and the Debate
Over the Public-Private Mix, 04/16/96.)

This prediction has come true in the case of two depots that have been privatized. According to a recent
GAO report, the Navy's decision to privatize-in-place gur-repair work performed at the closed
Louisville, Kentucky Navy depot, as opposed to transferring that work to Goverment owned and
‘operated facilities, will cost taxpayers an additional $48.6 million over the next five years. (GAO/NSIAD-
97-52 Navy Depot Maintenance, 07/31/97,)

In December of 1995 the Air Force turned over the work performed by the Aerospace Guidance and
Metrology Center, located on Newark AFB, OH, to the private sector. A recent analysis by GAO
suggests that the Center, now run by Boeing, is 18 to 31 percent or $13.3 to $23.3 million more
expensive to run than what it would have cost for the work to be performed by the former government
operated facility. (GAO-T/NSIAD-97-111, Defense Depot Maintenance: Uncertainties and Challenges
DOD Faces in Resiructuring Its Depot Maintenance Program, 03/18/97.)

MYTH - THE PUBLIC SECTOR IS NOT COMPETITIVE: According to GAO, when public depots
‘competed head-to-head with the private sector they were able to win 67% of the time with an average bid
that was 40% less than their closest private sector competitor. GAO also found that 76% of current
depot maintenance contracts were awarded sole-source, i.e. only one private-sector company bid on the
work. GAO concluded that the savings DOD attributed to shifting work to the private sector were “the
result of competition rather than privatization." (GAO/T-NSIAD-96-146.)



117

the necessary expértise to accomplish a job and seeking that
assistance from the private sector is wholly appropriate. However,
there are also those functions that are so inherently governmental
in nature that there should be no question but that the federal

government shall perform them.

The basic definition of the concept of “inherently
governmental functions" is set forth in OMB Circular A-76 and dates
back to at least 1983. In that Circular, OMB states that an
inherently governmental function is “a function which is so
intimately related to the public interests as to mandate
administration by government employees." In listing examples of
inherently governmental functions, the Circular includes federal
tax collection and revenue disbursement activities. Both the
General Accounting Office's general guidelines and the literal
language contained in Circular A-76 make clear that these

activities fall into this protected category.

Despite clear guidance on this point, Congress mandated an IRS
private sector debt collection pilot program which was initiated in
FY 1996. Opposition to the pilot program came from many quarters,
including the National Association of Enrolled Agents which
strenuously opposed siccing private bounty hunters on some
individuals with long overdue taxes. Revenues collected under the
program were significantly less than expected and the pilot was
subsequently canceled. Nevertheless, advocates of contracting out

—


53

under a contract versus how many folks it takes in the Federal
work force to perform this duty, is there a model? Is there some
specific recommendation?

Mr. CUNNINGHAM. I think the only group that can give us that
information is OMB, the people who are ultimately responsible for
paying the bills. That has been our dilemma the whole time, is try-
ing to get a handle on exactly how to approach this problem. We
feel that it’s very unfair to point at Federal employees who are to-
tally accountable. We know exactly how many Federal employees
we have and exactly what the costs are. We know what the costs
are for the total lot of contractors, but we don’t know what it took
that contractor to earn that money in terms of the human re-
sources. That’s a dilemma. That’s a real problem.

Mr. Mica. One other thing. Maybe you’ve heard me speak on
this. Where there is some privatization taking place, I have always
felt that Federal employees should have the opportunity to have a
shot at performing that duty, and I have supported also ESOPs,
employee stock ownership plans. Do you think employees should
have that option—where a specific long-term task or responsibility
function can be accomplished by Federal employees, should one of
the alternatives presented give the employees an opportunity to bid
on that and become employee stock owners, create their own stock
ownership and get first shot at the contract, Mr. Donnellan?

Mr. DONNELLAN. I think the employees would appreciate any op-
tion that they may have compared to the alternative.

Mr. Mica. Mr. Cunninghatn.

Mr. CUNNINGHAM. Mr. Chairman, as we stated over and over, we
are against privatization and contracting out. We’ve shown and
studies have been done and it’s been proven over and over that pri-
vatization actually costs more. If you’re asking me, sir, if NFFE is
looking out for our workers, in the result, if it turned out that the
facility that they worked at had to be privatized, obviously we
would like for our workers to have the first shot at those jobs. Be-
cause they’re the best workers, sir.

Mr. Mica. Ms. Armstrong, did you want to comment?

Ms, ARMSTRONG. I agree with what he just said. I wanted to also
add, Congresswoman Norton’s bill H.R. 887 does require the Direc-
tor of OMB to come up with that mechanism to measure the num-
ber of employees, so I would think it would come out of OMB to
develop a mechanism, and that is an excellent starting point.

T’d like to thank Congressman Cummings for the bill that he is
going to introduce, that has to do with providing a mechanism for
automatically reviewing contracts to see if the cost savings are
really there. So I think OMB would be an important place to mon-
itor that.

Mr. Mica. Members have left to vote. We are going to depart to
vote.

What we will do is, we will recess the panel for a few moments
until after the end of the vote, and then we will reconvene. If the

anel would still remain, I think there are additional questions.

‘hank you.

{Brief recess.]

Mr. Mica. I would like to call the subcommittee meeting back to
order. I apologize. There was a procedural vote after the original


138

Administration officials say.

This problem is particularly acute in DoD--even though the Congress has explicitly
prohibited management-by-FTE ceilings. GAO reported in a recent survey that a "senior
command official in the Army stated that the need to reduce civilian positions is greater
than the need to save money.”* An earlier report by the DoD Inspector General 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.”

In 1995, the personnel directors of the four branches of the Armed Forces told the
Senate Armed Services Personnel Subcommittee that civilian ceilings--not workload,
cost, or readiness concerns-—are forcing them to send work to contractors that could be
performed more cheaply in-house. The witnesses bemoaned the fact that their services’
depots must turn away valid, funded workload requirements because of the FTE ceilings,
thus limiting the flexibility of our depots to adjust to and meet quickly the critical,
unprogrammed, surge requirements of our Armed Forces.

Sadly, our concerns about this problem have been repeatedly dismissed by the
Administration. Earlier this year, | was provided a copy of the attached correspondence
between General George Fisher, the Commander, Army Forces Command at Fort
McPherson, GA, and the Commander, Ill Corps and Fort Hood, Killeen, TX. (We have
obtained a copy of a similar letter which was sent to the Commander, Fort Riley, KS.)

* General Accounting Office, BASE OPERATIONS: Challenges
Confronting DoD as It Renews Emphasis on Outsourcing (GAO/NSIAD-
97-86) (March 1997), p. 11.

12


49

& swenen otra caper President Patricia Armstrong before the House Civil Service Subcommittee 10/1/97

‘The first-hand experience of FMA members at the Jacksonville Naval Aviation Depot with public-private
competition is typical of all public depots. In 1986, NADEP Jacksonville competed against Lockheed for
the P-3 aircraft update IIT program for the P-3C Orion. The update contract included manufact eg
parts and installation. NADEP Jacksonville was able to execute the contract for $30
wihich was 40% below Lockheed's contract estimate of $80 million, In 1993, NADEP Jacksonville
competed against a wide field of private sector competitors for a 5-year contract to maintain the J52
engine for the EA6B aircraft. NADEP Jacksonville won the contract by showing they could do the work
at a cost that is 40% less than that of their nearest competitor.

‘Showing just how competitive Government can be, FMA members at the Air Logistics Center at Warner
Robins AFB in Georgia rejoiced last month after winning a head-to-head competition with private sector
companies to win a bid for $434 million worth of work over seven years for inspection, repair, overhaul
and modification of the C-S Galaxy transport aircraft. Wamer Robins beat out defense giants Boeing and
Lockheed Martin. The closest private sector bid was $22 million more than the one tuned in by Warmer
Robins. (09/08/97, Defense Week, p. 3)

FREEDOM FROM GOVERNMENT COMPETITION

Mr. Chairman, as you know the Govemmment Reform and Oversight Subcommittee on Information and
Technology held a hearing earlier this week on HR. 716, the Freedom from Government Competition
Act. FMA believes that this bill is an unnecessary “solution” in search of a “problem.” Government

izing is already tying the hands of agency managers when it comes to making smart choices about
contracting-out. This legislation would only exacerbate this problem by requiring a statutory preference
for contracting-out.

FMA would like to briefly comment on some of the findings of H.R. 716:

© “Competitive private sector enterprises are the most productive, efficient, and effective sources of
goods and services.” - In the experience of FMA members we have not found this to be universally
true. The Government can learn much from private industry and private industry can learn much from
the public sector. Our best experiences with contracting-out are characterized by fewer headaches
and noticeable cost savings. Our worst experiences with contracting-out involve having to go in and
clean up the mess left by contractors who are unable or unwilling to perform the work.

‘« “Government competition with the private sector of the economy is detrimental to all businesses and
the American economic system.” No one who has any experience with contracting-out believes this.
Competition and not privatization produce savings for the American taxpayer.

© “Reliance on the private sector is necessary and desirable for proper implementation of the Federal
Workforce Restructuring Act of 1994 (Public Law 103-226).” Not true. The FWRA goal of a
272,900 FTE reduction since 1993 has already been met.

page 6


78

Placement has resulted in 60,000 Government workers finding new
employment.

We are finding 800 jobs for displaced workers a month. We are
very proud of that record. It is a record unmatched by any other
agency, and for that matter, by any private sector firm.

Congressman Cummings had asked about the effect of some of
these changes on women and minorities. I don’t know the overall
numbers for the Federal Government, but I know that the tools
that we have used have enabled DOD to retain diversity in our
work force despite our drawdown. The relative proportion of women
has remained constant over the past 8 years while, in fact, the per-
centage of minorities has increased as a total percentage of our
work force. So we are very attuned to the effects of this kind of
broad change that has taken place in all components of our work
force.

In conclusion, Mr. Chairman, we must make our support struc-
ture as agile and as efficient as possible. Unless we change the tra-
ditional approach to providing support activities, we run the risk
of entering the next millennium unprepared for the global chal-
lenges we will face.

Thank you, sir.

Mr. Mica. Thank you.

(The prepared statement of Mr. Goodman follows:]


88

Competition and Outsourcing:!
Opportunities to Reduce Support Costs

Good morning, Mr. Chairman. Thank you for inviting me to testify
before the subcommittee. My name is Sam Kleinman and I am the
Director of the Infrastructure and Readiness Team at the Center for
Naval Analyses, a nonprofit Federally Funded Research and
Development Center. I will briefly discuss our examination of the
Defense Departments competitions and outsourcing under OMB
Circular A-76. We believe that our results demonstrate, more than
anything else, the value of competition, and this is what DoD has
gained when it introduced its outsourcing program. The program is
built on the premise that all providers of services, both in-house teams
and private contractors, should be able to demonstrate that they
provide the best value to DoD and the government.

We looked at 2,100 public-private DoD competitions conducted
between 1978 to 1994. These competitions covered 80,000 government
positions, of which 80% were held by civilians and 20% by military
personnel. Overall, savings were 30 percent, and half the competitions
were won by the in-house teams. There were 20- percent savings when
the in-house team won and 40-percent savings when a private firm
won, The in-house savings appear low because, when no bidder
produces savings, the competition is decided in favor of the in-house
team, and those no-saving competitions are included in their average.
We estimated an annual savings of $1.5 billion from these
competitions.

We believe that the source of the savings is competition. It provides
cost visibility and a choice of suppliers. In many cases, for the first

* The opinions are those of the author and do not necessarily represent those of the Department of
the Navy.


43

Federal managers and supervisors across this country stand
ready to ensure the delivery of high quality goods and services to
America. I hope my comments will be helpful to you and your fu-
ture efforts.

This concludes my prepared remarks. I will be happy to answer
any questions.

Mr Mica. Thank you, Ms. Armstrong.

[The prepared statement of Ms. "Armstrong follows:)


129

MEDICARE COMPUTERS: In September 1997 the Department of Health and
Human Services terminated a contract with GTE to create a single national
computer system for Medicare. The project had fallen far behind schedule and had

accumulated cost overruns of more than $65 million.

SPACE STATION: The General Accounting Office recently told the Senate
Commerce Subcommittee on Science, Technology and Space that Boeing's
performance as the prime contractor on the space station has continued to
deteriorate. As of July, cost overruns had reached $355 million, and NASA was

penalizing the company.

PIT 9 PROJECT: in July the GAO told the House Commerce Oversight and
Investigations Subcommittee that there were serious problems with the
performance of contractor Lockheed Martin in the cleanup of the Pit 9 nuclear
waste site in Idaho. The company has already exceeded the expected $200 million
cost by more than 25 percent, even though waste processing has not yet begun.
Lockheed began a work slowdown to pressure the Energy Department to convert

the contract from a fixed-cost to a cost-plus-type arrangement.

FAA NAVIGATION SYSTEM: In April 1996 the Federal Aviation Administration
terminated a $475 million contract with Wilcox Electric (a subsidiary of Thomson

CSF) because of dissatisfaction with the company's performance in developing a


113

Chairman Mica, Members of the Subcommittee, I am Robert
Tobias, National President of the National Treasury Employees Union
(NTEU). On behalf of the more than 150,000 federal employees
represented by NTEU, I appreciate the opportunity to appear today
as your Subcommittee examines critical issues associated with the

federal government's contracting out practices.

As you know, federal agencies have been undergoing downsizing
for several years now. Over 300,000 federal jobs have been
eliminated since President Clinton took office. Unfortunately, the
same cannot be said of the shadow government which has grown to
take the place of, and perform the functions that have previously
been performed by federal workers. The Washington Post reported in
the fall of 1995 that while government spending had declined
nationwide, local Washington, D.C. area businesses reaped $20
billion in federal contracts -- a 10 percent increase over the

previous year.

Moreover, I understand that the federal government's current
annual service contracting budget is in the neighborhood of $115
billion dollars. In contrast, the federal government's annual
personnel costs stand at approximately $90 billion dollars. While

Congress has mandated dramatic federal agency downsizing in the


122

review H.R.887 and include its provisions in any contracting out

legislation that the Chairman may draft.

Federal Employee Protections

NTEU strongly endorses the protections afforded to federal
employees by Circular A-76. It is essential that these remain
intact and be included in legislation drafted to address contacting
out in the federal sector. These include the right of first
refusal for any new contract work, priority consideration for
available positions within the agency, payment of reasonable costs
for training and relocation and an internal appeals process
following announcement of a contract. These provisions help
maintain a federal workforce that continues to be of the highest

quality.

In conclusion, I want to thank you again for inviting me to
appear on this important topic. My staff and I would welcome the
opportunity to work with you on legislation that encompasses the

important issues I have addressed today.

-10-


127

by federal employees, but because agencies waive standards to
circumvent A-76, the American public is not getting the service they
deserve. And when this service is fire protection, lives are being

jeopardized.

We believe there is a solution to these problems, at least as they
pertain to fire protection. The unique demands of safeguarding
people and property at military and veterans installations require
the unique talents of specialized and highly trained fire fighters.
Congress should acknowledge this special case and deem fire fighting
an “inherent government function." By giving fire fighters this
designation, no longer will taxpayers’ money and lawmakers’
precious time and energy be wasted in the mounting gamesmanship
of those who would contract fire protection at all costs. The inherent
government function designation will ensure better fire protection at

reduced cost. That's something we should all want.

Mr. Chairman, I.thank you for this opportunity to share our views on
this important subject. I would be happy to answer any questions

you may have. -


151

statutorily-required to be performed by federal employees. Nevertheless, for reasons
unrelated to national security and military readiness, the Pentagon defied the 1995 Base
Realignment and Closure Commission recommendation to reduce excess capacity in the
depot infrastructure by closing Kelly and McClellan and consolidating the workload at
three depots. Instead, the Pentagon has attempted to privatize-in-place ail of the work
at Kelly and McClellan. Initially, the Pentagon would not allow any public-private
competitions. Later, some element of competition was introduced, although many feared
that the regime was tilted in favor of the contractors, But the point is that work which is
inherently governmental, like most of the work performed at Kelly and McClellan, must
continue to be performed by federal employees, notwithstanding the parochial concerns

of certain well-placed politicians.

CONCLUSION

‘Again, Mr. Chairman, thank you for inviting me to testify at today's hearing. AFGE
is ready to work with you to ensure that non-inherently governmental work remains
subject to strong public-private competition before it can be contracted out. 1 would
suggest, Mr. Chairman, that GAO be asked to more fully investigate the crisis in
contracting. Please see the Appendix to my testimony for a list of questions which can

be used to guide your investigation.

25


155

Queries: Have any federal agencies used this provision? If not, why? What problems,
if any, have federal agencies encountered in contracting-in work? To the extent such

problems genuinely exist, what steps have been taken to deal with them?

6. Queries: What efforts, if any, have federal agencies undertaken to educate federal
employees and managers about competing under the A-76 competitive framework?
Given the possibility of bringing about even more intense public-private competitions,
would federal agencies be well-advised to make a stronger commitment to educating

federal employees and managers about A-76?

7. Both OMB and GAO have been highly critical of the federal government's
contract administration capability:

a. contracting personnel concentrate on awarding contracts, not monitoring costs

(OMB);

b. contract administration difficulties can often be attributed to the failure of top

agency managers to be held accountable for their poor decisions (GAO);

c. use of cost-reimbursable contracts provide contractors with little incentive to
contro! expenses and place a considerable administrative burden on the federal

government to oversee, control and identify inappropriate costs (GAO);

29


CONTENTS

Hearing held on October 1, 1997 ...
Statement of:
DeSeve, G. Edward, Acting Deputy Director for Management, Office of
Management and Budget; John Goodman, Deputy Under Secretary
of Defense, Industrial Affairs and Installations; and Samuel Kleinman,
Center for Naval Analyses .
Donnellan, Christopher M., legislative director, National Association of
Government Employees; James Cunningham, national president, Na-
tional Federation of Government Employees; and Patricia Armstrong,
chapter president, Federal Managers Association, U.S. Marine Corps

Air Station, Cherry Point, NC ..
Letters, statements, etc., submitted for the record
‘Armstrong. Patricia, chapter president, Federal Managers Association,
US .S Manne Corps Air Station, Cherry Point, NC, prepared statement

Cummings. Hon. Elijah E., a Representative in Congress from the State
of Maryland, prepared statement of ...

Cunningham, James, national president, National Federation of Govern-
‘ment Employees. prepared statement of

DeSeve, G. Edward Acting Deputy Director for Management, Office of
Management and Budget, prepared statement of ...

Donnellan, Christopher M., legislative director, National Association of
Government Employees, prepared statement of .

Ford, Hon. Harol pees "Representative in Cong:
Tennessee, prepared statement of

Goodman, John, Deputy Under Sect
and Installations, prepared statement of

Kleinman, Samuel, Center for Naval Analyses, prepared s

Mica, Hon. John L., a Representative in Congress from the State ol
Florida, prepared statement of ..

Morella, Hon. Constance A., a Representative in Congress from the State
of Maryland, prepared statement of ..

Pappas, Hon. Michael, a Representative in Congress from the State of
New Jersey, prepared statement of .

(ID)

Page

63

22


145

Improving contract administration

In order to ensure that agency managers make well-informed contracting out
decisions, we need to conduct a bottom-up review of the entire contract administration
process. Problems from start to finish are unnecessarily increasing service contracting
costs.

As OMB itself has reported, Statements of Work, the forms used to describe
specifically the services to be contractually procured, are frequently so poorly-written that
it is difficult to determine the agency's requirements or the standards against which the
contractor's performance is to be measured.”

As OMB itself has reported, cost analyses and independent government estimates
are not performed by many agencies prior to renewal, extension, or recompetition of
existing contracts. And in far too many instances, OMB must admit, cost estimates are
not even prepared prior to entering into new contracts.”

As OMB itself has reported, agencies believe that they are contracting for mission—
essential services; as a result of this haste-makes-waste approach, most contract
administration efforts focus on ensuring that they receive the required services with costs
often becoming peripheral.

‘As OMB itself has reported, agencies do not always review the effectiveness and

© OMB, Ibid., p. v.
7 Ibid.
* Ibid.

19


106

that same year, continue to view competition as a fundamental building block of our procurement
process. (See attachment 4 for a brief excerpt from the 800 Panel Report describing how
competition is viewed.) The NPR, in particular, has focused on ensuring that agencies can make
efficient and effective use of competition.

As you are aware, the Small Business Administration (SBA) has oversight responsibility
for Federal procurement set-aside programs. Among other things, SBA administers the 8(a)
program, which authorizes the SBA to enter into all types of contracts, including competitive
awards, for performance by eligible program participants. It is also tasked with administering
the “Very Small Business Set-Aside” (VSBSA) program under which contracting activities and
the SBA will seek to identify requirements which can be competed among firms that qualify as
“very small businesses.” (The Small Business Reauthorization Act of 1997 extended the
authority for this program through fiscal year 2000.) SBA will also have responsibility for the
HUBZone program, which was established by the Reauthorization Act to encourage the
competitive award of Federal contracts to small businesses located in, and employing residents
of, designated urban and rural communities to promote economic development. According to the
SBA, none of the existing set-aside programs have resulted in a disproportionate number of
complaints related to “defective contracting.”



66°

STATEMENT OF G. EDWARD DESEVE
ACTING DEPUTY DIRECTOR FOR MANAGEMENT
OFFICE OF MANAGEMENT AND BUDGET

BEFORE THE
HOUSE SUBCOMMITTEE ON CIVIL SERVICE

HEARING ON
“FEDERAL CONTRACTING FOR COMMERCIAL SERVICES -- CHANGING
CONDITIONS FACING THE FEDERAL WORKFORCE”

October 1, 1997

INTRODUCTION

‘Mr. Chairman thank you for giving me the opportunity to discuss with you Federal
practices related to the outsourcing of commercial services and their impact on Federal
employees. As requested, my testimony will touch on the implications presented by the March
1996 Revised A-76 Supplemental Handbook and the questions presented in your letter of
‘September 24, 1997, including a review of pay issues, contractor performance and contract
oversight. I will also briefly address our views with regard to several pieces of legislation,
including H.R. 886, "a bill to provide funding for Federal employee pay adjustments and
comparability payments through reductions in agency spending on service contracts."

‘The challenge of managing in a balanced budget environment is to provide a Government
that empowers its employees, seeks out better business practices, works better and costs less.
‘Our guiding principle for determining when the Government should engage in commercial
activities or consider outsourcing, privatization or competition is to ensure that we get the best
deal possible for the American taxpayer. We are downsizing, consolidating, and taking
advantage of new technologies. We are incorporating competition into our budgets, into our
financial and accounting systems and in our other management approaches to improved service
delivery.


52

Mr. Mica. I am going to try to get a few questions in here before
we vote.

In my opening comments, I cited statistics that were presented
to us by OMB that contracting out for services has actually gone
down $2.4 billion from 1995 to 1996. Do you consider these figures
accurate, or do you see some masking or some inaccurate reporting
by OMB, Mr. Donnellan?

Mr. DONNELLAN. Just by hearing our members from the field, we
would have to question those figures, and look forward to OMB tes-
timony.

Mr. Mica. Mr. Cunningham.

Mr. CUNNINGHAM. Yes, I have a question about that, Mr. Chair-
man. Since they have already conceded that they don’t know how
many folks they have, that $2.4.

Mr. Mica. This is dollars in contracting.

Mr. CUNNINGHAM. In contracting. I will look into that and get
back with you, sir.

Mr. Mica. Just hard dollars. One of the problems that we have,
and we asked the question of OMB, is about the number of contract
employees which is almost impossible to determine. We asked OMB
to provide their best information relating to the number of contract
employees serving in Federal agencies. And we are also trying to
determine the number, if you get a contract with x million dollars,
what does that interpret into full-time equivalent employees?

The administration responded back that we really don’t have any
need for this type information. You see the dilemma we are in in
trying to evaluate this? Do you agree with the administration and
OMB’s position on this, Mr. Cunningham?

Mr. CUNNINGHAM. No, sir, I don’t agree with that, obviously. I
think that it’s—from my testimony, we need that information in
order to level the playing field.

Mr. Mica. Mr. Donnellan, what is your position?

Mr. DONNELLAN. Mr. Chairman, it is ironic that the administra-
tion knows the exact number of jobs that have been downsized and
the number of Federal employees, but they do not know the num-
ber of contractors out.

Mr. Mica. There was an estimate of, I think you may have testi-
fied to this, the jobs transferred to the private sector. Do you think
that figures are being masked, or do you have any way that we
could require an evaluation, get an accurate count as to how many
folks? We could do an apples-and-apples comparison or an oranges-
and-oranges comparison to what folks are required under a con-
tract as opposed to how many folks that are employed, would be
employed in the Federal work force to do a similar task. Mr.
Donnellan.

Mr. DONNELLAN. Any legislative remedy would be helpful for us.
I can tell by the panel that there is—we are left out in the dark
with the number of contractors out there, and we’re just seeking
any solution or any remedy to find out exactly how many are out
there.

Mr. CUNNINGHAM. I’m not sure if I understood the question, Mr.
Chairman.

Mr. Mica. Again, trying get some mechanism to determine accu-
rately how we compare x number of employees we are paying


101

EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503

DEPUTY DIRECTOR FEB - 3 1008

FOR MANAGEMENT

Honorable John L. Mica

Chairman

Civil Service Subcommittee

Committee on Government Reform and Oversight
USS. House of Representatives

Washington, D.C. 20515-6143

Dear Mr. Chairman:

Thank you for your letter of November 12, 1997, regarding OMB's testimony of October
1, 1997, before the House Civil Service Subcommittee. The hearing focused on agency use of
outsourcing and OMB Circular A-76. Your letter included several follow-up questions. Enclosed
are detailed responses to these questions.

Again, thank you for your inquiries. Please let me know if I can be of any further
assistance.

Sincerely,


26

PERFORMING FUNCTIONS DIRECTLY RATHER THAN FARMING THE WORK OUT TO
PRIVATE CONTRACTORS. THE GAO SURVEYED NINE STUDIES OF SERVICE
CONTRACTING AND JUDGED THAT IN EACH CASE, SUBSTANTIAL SAVINGS WOULD
HAVE RESULTED IF THE WORK WAS LEFT IN-HOUSE.

IN ADDITION TO QUESTIONS OF COST EFFECTIVENESS, CONTRACTING
OUT HAS RAISED QUESTIONS AS TO ITS IMPACT ON THE ABILITY OF
GOVERNMENT TO ACCOMPLISH ITS MISSION, AND IMPACT ON GOVERNMENT
GOALS SUCH AS AFFIRMATIVE ACTION, AND VETERAN PREFERENCE. DESPITE
REPEATED EXPRESSIONS BY SOME MEMBERS OF CONGRESS THAT CONTRACTING
OUT HAS "GONE TO FAR," SOME MEMBERS OF THIS ADMINISTRATION HAVE
BEEN FIRM IN THEIR RESOLVE TO TURN AS MUCH OF GOVERNMENT OVER TO
THE PRIVATE INDUSTRY AS POSSIBLE, IRRESPECTIVE OF COSTS OR IMPACT
ON MISSION. CONGRESS MUST ENACT LEGISLATION ESTABLISHING A
NATIONAL POLICY ON CONTRACTING OUT WHICH WILL ENSURE A FAIR COST
COMPARISON, RETAIN INHERENTLY GOVERNMENTAL FUNCTIONS IN HOUSE,
ENSURE A FULL AND FAIR APPEAL MECHANISM AND REQUIRE COMPLETE RECORD
KEEPING ON THE FULL COST OF CONTRACTING OUT.

THE CONTRACTING OUT OF SERVICES IS FREQUENTLY A MASK FOR A
REDUCTION IN THE LEVEL OF SERVICES, WHICH OFTEN MAY NOT BE
ACCOMPLISHED LEGISLATIVELY. CONTRACTORS ARE ABLE TO PRESENT THE
AGENCY WITH A SEDUCTIVE PACKAGE OF COST REDUCTIONS BY REDUCING THE
LEVEL OF SERVICES. INADEQUATE INVESTIGATIONS OF THE STATEMENT OF
WORK BY THE AGENCY ALLOWS THE CONTRACTOR TO ACHIEVE THIS RESULT.
IN THE INTERWOVEN ENVIRONMENT OF A FEDERAL INSTALLATION, ANY
REDUCTION IN SUPPORT OR RELATED SERVICES WILL HAVE A DOMINO EFFECT
ON THE AGENCY'S CAPACITY TO PERFORM.

MR. CHAIRMAN, COSTS OVERRUNS AND SHODDY WORK PERFORMANCES BY


22

Mr. Mica. We will begin with our first panel. As you may know,
this is an investigations and oversight subcommittee and commit-
tee of Congress, and we do swear in our witnesses. If you would
please stand.

[Witnesses sworn.]

Mr. Mica. The witnesses answered in the affirmative.

I would like to welcome our panelists and thank them for their
contribution to our hearing today, and just point out that if you
have written statements, we will be glad to make them part of the
record. We like to try to get your oral comments down to about 5
minutes. We do also welcome other comments for the record and
we will keep the record open.

With that, I would like to recognize Christopher Donnellan, the
legislative director of the National Association of Government Em-
ployees. Welcome, and you are recognized, sir.

STATEMENTS OF CHRISTOPHER M. DONNELLAN, LEGISLA-
TIVE DIRECTOR, NATIONAL ASSOCIATION OF GOVERNMENT
EMPLOYEES; JAMES CUNNINGHAM, NATIONAL PRESIDENT,
NATIONAL FEDERATION OF GOVERNMENT EMPLOYEES;
AND PATRICIA ARMSTRONG, CHAPTER PRESIDENT, FED-
ERAL MANAGERS ASSOCIATION, U.S. MARINE CORPS AIR
STATION, CHERRY POINT, NC

Mr. DONNELLAN. Mr. Chairman, Representative Cummings,
members of the subcommittee, my name is Christopher Donnellan
and J am the legislative director of the’ National Association of Gov-
ernment Employees. NAGE is an affiliate of the Service Employees
International Union, the third largest union in the AFL-CIO. On
behalf of the President of NAGE, Kenneth T. Lyons, and the
120,000 employees represented by NAGE, I want to thank you for
this opportunity to testify today on the issue of Federal contracting
out of commercial services.

It should not surprise anyone on this committee that our organi-
zation has long opposed wasteful, costly, and inappropriate con-
tracting out of government functions. We once again reiterate that
the explosion in contracting out of services has cost the American
taxpayers millions of dollars, diminished Government’s expertise in
key areas, and reduced its ability to address the problems of the
future. In a March 1994 report, the GAO found that the Federal
Government could save millions of dollars by performing functions
directly rather than farming the work out to private contractors.

The contracting out of services is frequently a mask for a reduc-
tion in the level of services which often may not be accomplished
legislatively. Contractors are able to present the agency with a se-
ductive package of cost reductions by reducing the evel of services.
Inadequate investigations of the statement of work by the agency
allows the contractor to achieve this result. In the interwoven envi-
ronment of a Federal installation, any reduction in support or re-
lated services will have a domino effect on the agency's capacity to

orm.

I would like to share with the subcommittee one example of the
flaws in contracting out. Recently our office received a letter from
our national rep at Fort Leonard Wood, MO. On March 1, 1997, a


105

In reviewing the number of cost comparisons conducted within the Department of
Defense, it is important to note that during the 1980s, legislation was introduced to end, delay,
change or otherwise restrict the conduct of cost comparisons for the conversion of work from in-
house to contract performance. There are several provisions of law that inhibited DoD's
competition 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 their workforce, the cost
of diverting local resources to conduct studies, and a desire for more direct control of their
workforce, many commanders chose not to pursue competition as a reinvention tool. 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 and required their cancellation in certain cases.
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 A-76 (conversions from in-house to contract performance). Taken in combination and
over time, these provisions have limited DOD's ability to enter into competitions or to outsource
commercial work without regard to cost or performance.

4, COMPETITIVE VERSUS NON-COMPETITIVE CONTRACTING

Question: "The Subcommittee requests that you submit, for our records, copies of any
reports or studies that endeavor to assess the comparative costs and benefits of
competitive versus non-competitive contracts. In particular, we are interested in
identifying whether any particular program of set-aside procurement has been
disproportionately identified as a source of complaints about defective
contracting, either by Inspector Generals or through other agency review
procedures.”

Response:

‘Asa general matter, competition has been long recognized as a key ingredient to reducing
the cost and increasing the quality of the goods and services agencies buy in pursuit of their
missions. Reaffirming the importance of competition in the mid-1980s — in response to concerns
that sole-source contracting was increasing and competition was becoming the exception rather
than the rule -- Congress noted that competition both curbs cost growth and promotes innovation.
See House Report No. 1157, 98th Cong., 2d Sess. 11 (1984), cited in attachment 4. With respect
to costs, House and Senate Committees estimated the savings from competition at anywhere
between 15 to 70 percent per procurement. See House Report No. 1157 at p. 14 and Senate
Report No. 50, 98th Cong., Ist Sess. 3 (1983). Not surprisingly, major studies of our
procurement system, such as the Report of the Acquisition Law Advisory Panel in 1993 (the
“800 Panel”) and the Report of the Vice President's National Performance Review (NPR) later

4


162

Query: Is it wise to invest such power in decision-makers so far removed from the
customer service level? Would this result in a cookie-cutter approach to determinations
of inherently governmental functions. For example, photography services at one military
installation might be completely commercial, but the same services at another installation
might involve contract-sensitive matters. If determinations of inherently governmental
functions are made in Washington, DC, is it likely that such important distinctions would

receive the necessary consideration?

14, Codifying A-76 (or some such regimen for public-private competitions) would
surely result in considerable litigation. More significantly, codification would likely
result in unprecedented politicalization of the contracting out process. Some
lawmakers would likely try to prevent some favored federal functions from being
contracted out. And many lawmakers would likely try to help out contractor
constituents by exempting their firms (or federal functions in which their contractor

constituents are interested) from real public-private competition, in part or in full.

Queries: What impact would the inevitable politicalization of the contracting out process
have on the integrity of public-private competitions? What impact would such

politicalization have on any savings that might occur as a result of enactment of S. 3147

15. Queries: Please prepare charts showing the growth over the last ten years in the

federal government's goods contracting; the federal government's commercial activities

36


165

7 S| Maroouerraseemerasatenceei conan

aes eA

©, III Corps and Fort Hood,
Hood, TX 76544-5000

jine support activities and achieve cost savings
inifg services in an environment of greatly reduced
The ,CA program provides an approach to achieve these
savings wether jthe work remains in-house or is contracted.

2. The Army hag bean tasked to study CA functions totaling
16,000 spaces. ‘Forces Command’s share (DA directed) is 4700
spaces (1500 in‘FY 96 and a total of 3200 in Frs 97 and 98).
Installation input to date ia only 33 percent of our share.

3. To ensure support of the Army’s privatization effort, we have
established installation quotas. Based on a review of the FY 95
CA inventory, your fair share’ is 767 spaces. You have currently
identified 645 spaces for study. We need you to increase the
number of spaces identified for study by 122 in FY 98 {encl).
Submit the functions you select and associated spaces to this
headquarters ATEN: AFPI-~IMP, by 26 June 1996.

“tm ‘sformed Saeed
4:~ The DOD h&S:informed the services and agencies that TM
fmoney* will become available beginning in FY 97. these funds ~
will be diatributed in the amount of $1000 per space based on )
fficial notification of FY 96 studies.
ficial noti

5. For more information, contact Mr. David Mayes, DSN 367-6254.

ma Tm conpintt
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fem ponvaelel, 1 et, Latlig Bn extinction!
Jecaemn afore ahhad ff med” gengene ; gust
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169

Biography of Bobby L. Harnage
National Secretary-Treasurer of the American Federation of Government

Employees, AFL-CIO

Bobby L. Harnage is the seventh National Secretary-Treasurer of the American
Federation of Government Employees, AFL-CIO, the largest union for federal workers,
representing over 700,000 government employees in some 1,200 locals in the United
States and overseas, as well as the District of Columbia.

Harnage was elected National Secretary-Treasurer at the AFGE National
Convention on August 28, 1991, and was overwhelmingly re-elected to serve another
three-year term in 1994. Prior to his election as Nationa! Secretary-Treasurer, Harnage
served as District 5 National Vice President in Atlanta, Georgia. During that 13-year
period, from 1978 to 1991, he represented federal workers in the states of Alabama,
Georgia, Florida, South Carolina and Tennessee. He was a member of the Labor
Advisory Board, Center for Labor Education and Research at the University of Alabama
in Birmingham and served on the Board of Directors of the Atlanta Metropolitan Area
American Red Cross. Harnage Is currently the senior member of the Federation's
National Executive Council (NEC) and serves as Chair of the NEC's Privatization
Committee,

39


34

In conclusion, the phrase reinventing Government has been an
empty one in the context of slashing Federal employee jobs and re-
placing them with contract employees. In addressing this reality, I
ask that legislation be moved forward that will give meaning to
this phrase.

The term reinventing implies something better. It implies that
the end result of the process will be something new and improved.
In the context of reinventing Government, we are told that by
slashing Federal employee jobs and contracting them out to the pri-
vate sector, reinvention would result in increased efficiency, genu-
ine cost savings, and better service, all with no negative impact. In
the majority of cases, that is not what results from contracting out.

As I mentioned earlier, NFFE held a public forum on contracting
last May. At that forum we collected statements from Federal em-
ployees concerning problems with the contracting process. Over the
coming year, we will be holding similar forums throughout this
country. We feel confident that we will collect hundreds of stories
about abuse and inefficiency in the contracting system. We would
like to take this opportunity to offer these transcripts of these fo-
rums to this subcommittee and interested officials at OMB. As a
whole, the testimony will show that when given the chance and a
level playing field, Federal employees do the best job every single
time.

That concludes my testimony, Mr. Chairman. Thank you again
for allowing me the opportunity to discuss with you the thoughts
of NFFE membership on contracting out practices, and I would be
happy to answer any questions that you may have.

Mr. Mica. Thank you, Mr. Cunningham.

[The prepared statement of Mr. Cunningham follows:]


115

detailed examples of contractors charging the federal government
for millions of dollars in costs, such as employee parties, tickets
to sporting events, and alcoholic beverages, that are either
unallowable or questionable. Numerous other GAO reports cite
contract cost overruns, poor, or nonexistent oversight and lax
management of contracts as rational reasons why their use must be
tightly controlled. Yet, this black hole of federal spending is as
active today as it was when these reports were first issued. While
the federal government downsizes and federal employment has dropped
to its lowest level in decades, private sector contractors appear

to be the ones who have benefitted.

The performance of commercial government activities by outside
contractors is subject to OMB Circular A-76, which requires a cost
comparison between performing work in-house by federal employees
and performing the work by private contractors. Consulting, or

service contracts, however, are not subject to A-76 cost analyses.

Considering the roughly $115 billion currently estimated to be
spent annually by the federal government on service contracts, such

a requirement is long overdue.

We applaud the changes made to Circular A-76 in early 1996.
Among the changes was a provision to allow the government the
opportunity to win back a contract after it has been contracted out
if the service could be performed at less cost in-house. This
provision allows the government to take advantage of improvements



136

considerably fewer problems with the Circular then. However, agencies--employees and
managers alike, often working in partnership--leamed from their defeats and looked to
the private sector for inspiration and guidance. With the reinvention of government and
partnership initiatives, agencies are now running their operations more like businesses.
In doing so, the public sector has pulled even with the contractors, winning every other
A-76 competition. Now, as you might expect, the contractors aren't so happy--even
though the federal government runs up service contracting bills of approximately $120
billion annually. | have to wonder if this dissatisfaction can be attributed more to the fact
that federal service contracts aren't quite so attractive to private sector firms now that
increased competition from federal employees has driven down costs so sharply.

However, instead of expressing admiration for this remarkable transformation in
‘the federal workplace, some lawmakers can express only dismay. Instead of "Wow,
they're good," it's “Wow, they're good, they're too good." After being bashed for so many
years, usually very unfairly, for not measuring up to their private sector counterparts, Mr.
Chairman, you can't begin to imagine how bewildering and discouraging these attacks on
A-76 are for federal employees. Instead of giving us grudging credit for doing better
work, our private-sector competitors and their friends in Congress say that the system
has suddenly broken down. Just as good craftspersons, whether in-house or contractor,
‘shouldn't blame their tools, contractors who are genuinely interested in real public-private
competition shouldn't blame A-76,

Let me make one final remark with respect to AFGE and contracting out. Some

lawmakers insist that AFGE's relentless determination to ensure full and fair public-

10


58

the opportunity to see if they wanted to compete for the work.
Thank you very much, Mr. Chairman.

Mr. Mica. Thank you. I think you make some excellent points.
Let me ask just a couple of final questions.

Was it you, Mr. Donnellan, who mentioned contractor fraud,
some instances where folks who had received a contract were not
performing? Do you feel that there is adequate oversight enforce-
ment that contractors who get these functions and replace Federal
employees, that there is some accountability and enforcement
where they go astray?

Mr. DONNELLAN. Mr. Chairman, if you talk to the employees at
Fort Leonard Wood, they would tell you that they’re quite upset
about this and they think there’s no accountability and they would
like some accountability, actually just like some justice about back
pay and benefits that are due to them.

As I said in my statement, seven different contractors since the
early 1970’s have provided laundry service at Fort Leonard Wood,
and four of those contractors, the workers have suffered non-
payment in wages and benefits.

Mr. Mica. Mr. Cunningham.

Mr. CUNNINGHAM. Mr. Chairman, my response to that would be
that Federal workers as a work force, as an identifiable work force,
are the most uncorrupt, the most wholesome, able to show year
after year after year the type of workers we are.

In contrast, all you have to do is watch the fleecing of America;
usually it’s always about contractor abuse, contractor fraud.

To answer your question, I don’t think that there is nearly
enough accountability or monitoring of the contractors that get
these things and that we, as taxpayers, are stuck with in the long
run.

Mr. Mica. Ms. Armstrong, in DOD they are increasing contract-
ing out while they are decreasing civilians and other work force. Do
you feel there are adequate mechanisms for oversight and account-
ability in this area that has experienced such rapid growth in con-
tracting out?

Ms. ARMSTRONG. No, I do not. I know at the depot, one example
of this is that we, a couple of years ago, were doing a mod on a
CH-46, putting a mod on the aircraft. This particular modification
and as we were doing the work—it was undergoing engineering
changes daily; drawings were being changed—we went through a
tremendous learning curve putting in this mod. During that time
we had a great deal of workload, so we brought in some contractors
to help us with the workload. They worked side by side in the
hangar with the Federal employees.

As time went on and we became productive and just started to
get our costs down where it needed to be, suddenly there was some

lecision made above us that this work should be contracted out, as
field mod teams, where we competed with that same contractor to
do this mod in-house. The contractor got the award and they are
now doing that mod at New River.

As far as trying to monitor what they are expending on that
modification and compare it with what we could do it for now, be-
cause our costs have come down greatly, it’s hard to get—I cannot
find out what the costs were. On the first aircraft they sold, they


M2

The competition policy underlies all of the Panel's recommendations on contract
formation. The Panel believes that its recommendations will improve and strengthen the
competition process and enable DOD to gain fuller measure of the benefits of competition.


76

Mr. Mica. I will now recognize the Deputy Under Secretary of
Defense, John Goodman.

Mr. GoopMAN. Mr. Chairman, distinguished members of this
committee, it’s a pleasure to be here today to discuss the Depart-
ment of Defense’s plans and activities in the area of competition
and outsourcing. With your permission, I ask that my full state-
ment be entered in the record.

Mr. Mica. Without objection, so ordered.

Mr. GoopMAN. Mr. Chairman, I would like to make five points
Tegarding competition and outsourcing at the Department of De-
fense.

First, as both Secretary Cohen and General Shalikashvili have
stated, the Department of Defense has no choice but to improve the
performance and reduce the cost of the support we provide to our
warfighters. American military forces are the finest in the world.
They have continuously demonstrated their ability to adapt and
meet new and emerging strategic threats. But as the recently com-
pleted Quadrennial Defense Review concluded, future threats are
likely to require a much more agile force. Meeting those threats
and maintaining the kind of technological superiority that we dem-
onstrated in the Gulf war will also require increasing our spending
on weapons modernization.

These goals mean that our support activities will also have to be-
come agile. Because our overall budget is not going to increase, any
increased funding for modernization is going to have to come
through increased internal efficiencies.

The second point I want to make is that to achieve this objective,
we are seeking to improve our internal practices in a broad array
of ways. One example of our effort can be seen in the Defense Lo-
gistics Agency Direct Vendor Program. DLA has completely re-
vamped the way that we procure everyday items, ranging from
pharmaceuticals to uniforms to groceries. In these areas, it used to
be that the contractor, the supplier of the products, would send
them to a Department of Defense warehouse and that we would
then distribute them out to the field. It was lengthy and it was

costly.

at the Defense Logistics Agency has done essentially is to en-
able the private sector, the suppliers, to send their goods directly
and immediately to the base that needs it. In the case of pharma-
ceuticals, this has meant that we are now able to get pharma-
ceuticals to the DOD customer, to the warfighting bases 75 percent
faster, within a 24-hour time, and 25 percent cheaper. That is not
just doing the job cheaper; that is doing the job better, and it leads
to significant improvements in the readiness of our forces.

As part of this process, we are also striving to increase efficiency
through competition. I stress competition, not outsourcing. Com-
petition drives organizations to streamline operations in order to
improve quality, reduce costs, and better focus on their customer
needs.

The third point I wish to make is that we are not engaged in
wholesale outsourcing. Rather, we are following a clear and meas-
ured approach of introducing more competition into our support ac-
tivities. We are only considering noninherently governmental ac-
tivities, and we are only considering them when we know that the


28

\
RIPPED OFF THE FEDERAL GOVERNMENT, TAXPAYERS AND FEDERAL EMPLOYEES.

SEVEN DIFFERENT CONTRACTORS SINCE THE EARLY 1970s HAVE PROVIDED
LAUNDRY SERVICE AT FORT LEONARD WOOD. THE WORKERS HAVE SUFFERED
NON-PAYMENT OF WAGES AND/OR BENEFITS UNDER FOUR CONTRACTORS. THE
EMPLOYEES BLAME THE GOVERNMENT AND THE CONTRACTORS. © SEVERAL
EMPLOYEES WERE NOT HIRED BY THE SUCCESSOR CONTRACTOR. THIS IS A
PRIME EXAMPLE OF WHY CONTRACTING OUT DOES NOT WORK. THE GOVERNMENT
GETS SUB-STANDARD WORK, AND GOVERNMENT EMPLOYEES LOSE THEIR JOBS.

ONE FINAL EXAMPLE FROM FT. LEONARD WOOD CONCERNS THE
DIRECTORATE OF LOGISTICS, MAINTENANCE. IN 1994, AFTER BEING
CONTRACTED OUT FOR SIX YEARS, THE ARMY AT FT. LEONARD WOOD TOOK THE
LOGISTIC MAINTENANCE CONTRACT BACK IN HOUSE, SAVING THE TAXPAYERS
$ 1.6 MILLION ANNUALLY. IT WAS THE LARGEST GOVERNMENT SERVICE
CONTRACT TO RETURN TO AN IN-HOUSE OPERATION AFTER BEING CONTRACTED.
NOW, THE DEPARTMENT OF DEFENSE IS MANDATING THAT THIS FUNCTION BE
STUDIED AGAIN. THE LATEST STUDY INVOLVES ALL BASE MAINTENANCE IN
ALL TRADOC BASES GOING UNDER ONE CONTRACT, IT WILL NOT MATTER THAT
‘THE EMPLOYEES AT FT. LEONARD WOOD SAVED $ 1.6 MILLION ANNUALLY.

MR. CHAIRMAN, THE ENTIRE MEMBERSHIP OF NAGE IS PLEASED THAT
SEVERAL PIECES OF LEGISLATION INTRODUCED BY CONGRESSWOMAN ELEANOR
HOLMES NORTON WOULD BEGIN TO TAKE A LOOK AT THIS SO CALLED "SHADOW
GOVERNMENT" OF SERVICE CONTRACTORS. HR 885 WOULD REQUIRE AGENCIES
TO MAKE COST COMPARISONS AND PROHIBIT AGENCIES FROM CONTRACTING OUT
IF THE SERVICES COULD BE PERFORMED AT A LOWER COST BY AGENCY
EMPLOYEES. HR 886 WOULD CUT $5.7 BILLION FROM AGENCY SERVICE
CONTRACTING FUNDS AND MAKE THE MONEY AVAILABLE FOR PAY RAISES THAT
ARE DUE FEDERAL EMPLOYEES IN 1998, HR 887 WOULD REQUIRE OMB TO


94

Mr. DESEVE. There was a backlog in the processing of this par-
ticular service. You could see that, month after month, things
weren't getting processed.

We said to the contractor, “We’d like you to fix this problem.”
The contractor said, “The only way I can fix that problem is by
using a new technique of getting information to do that.” So we
then asked how many people that would require. And the contrac-
tors said, “Well, it’s not going to take people; in fact, I’m going to
have to let some people go, because I’m going to get the information
by magnetic tape directly from the information providers rather
than getting it by paper form and having it keyed in.

So my point is that employment, as an indicator of cost or per-
formance, is not helpful to us in making judgments under Federal
law and regulation.

Ms. NorTON. Just let me suggest to you the kind of hypotheses
that such numbers might suggest. If it was half as many as civil
servants doing the same work, it might suggest that they’re cutting
corners. If there were twice as many, it might suggest that they
were not terribly productive. If there is any concern about the qual-
ity of the work, it seems to me that the quality of work done, it
does seem to me that that information would be useful.

I note in your testimony, Mr. DeSeve, that you said in response
to H.R. 886, that would have funded for the first time in a millen-
nium almost a statutory raise for Federal employees; you say, re-
ducing contract dollars without regard to the disruptions to service
requirements could lead to significant inefficiencies and would se-
verely limit an agency’s ability to respond to changing conditions.

Nobody said—when we reduced the FTE’s and reduced the funds
available to agencies, I didn’t hear anybody from OMB say, doing
that without regard to the disruption-to-service requirements could
lead to significant inefficiencies; and as a result, we have people in
Federal agencies doing the same work they were doing 5 years ago
with, indeed, sometimes half as many employees as they had. OMB
seemed totally unconcerned with that as long as the workers in-
volved were civil servants, but seems to have greater concern for
the service when it is done by contract workers.

Mr. DESEVE. I would like to respond by paraphrasing some testi-
mony I gave before this committee on the ESOP and the
downsizing at OPM.

The question before this committee was, Was there radical
downsizing in OPM? I think the answer is yes.

What happened to the function of training? We eliminated it. Did
that critically affect the way employees were trained in the Federal
Government? We believe the answer was then, and is now, no.
There are sufficient trainers in the private sector who picked up
many of the Federal employees.

Even more telling is the indication of investigations. Investiga-
tions have been turned into an ESOP with what we believe are ap-
propriate protections, and converting those employees from one sta-
tus to another has continued the level of service to Federal agen-
cies.

So on a continual basis, as we reduced employees, we asked that
question. I’ve testified to that before this committee in the past.


9

Mr. Mica. I am pleased to recognize now the ranking member,
the distinguished gentleman from Maryland, Mr. Cummings.

Mr. CuMMINGS. Thank you very much, Mr. Chairman. I com-
mend you for agreeing to hold a hearing that examines how con-
tracting programs affect Federal employees. I join in welcoming our
witnesses and I appreciate the time they have taken to be with us
so that we may learn from them. I anxiously await your observa-
tions, suggestions, and recommendations.

I would like to state at the beginning of this hearing that the
functions of the Federal Government need to be performed effi-
ciently and effectively. Whether this can best be done by career
Federal employees or by contractors and their employees is the
issue that we must have a clear policy and a fair procedure to ad-

SS.

I would like to see proof that contracting out for goods and serv-
ices saves taxpayers money. It does not make sense to hire hun-
dreds of thousands of contract employees while at the same time
we downsize more than 250,000 Federal employees. Do we really
have a Government that works better and costs less, or do we have
a Government that looks like some contractor’s dream world?

I have a host of concerns that I feel need to be answered before
I can embrace the notion that contracting out is good for the Fed-
eral Government and that, consequently, it should be increased. I
am interested in the process by which we determine the Govern-
ment services to be contracted out. I would like to see the cost com-
parison, the savings, if any, and the cost benefit analysis used in
deciding that it is indeed necessary and justifiable to outsource
Federal services. Otherwise, our Government employees are forced
out of jobs and those who remain do more with fewer resources.

The Federal Government spends more than $114 billion a year
on service contracts. For that kind of money, we need to have sys-
tems in place to ensure that we get exactly what we pay for, that
is to say, that we have received quality, timely, and cost effective
products or services.

To that end, I am prepared to introduce legislation suggested by
the Federal Managers Association that would require Federal agen-
cies to annually review the costs of all service contracts in order
to determine whether the costs have exceeded the contract price.
A 1994 Government Accounting Office report found that contract-
ing work out is not necessarily cheaper, and an Office of Manage-
ment and Budget study done that same year found that cost com-
parisons are not routinely done.

To that end, Representative Eleanor Holmes Norton must be rec-
ognized and hailed for legislation she has introduced that would
bring needed reform and accountability to the contracting process.
The enactment of her bills is critical if we are to acquire basic and
sorely needed data on contracting costs and the size of contracting
work force. This information is essential if we are to have the
means to properly manage the Federal Government's procurement
of services and its work force.

Thank you very much.

Mr. Mica. I thank the gentleman.

{The prepared statement of Hon. Elijah E. Cummings follows:]


17

private sector can perform that activity and, in the judgment of our
military leadership, their performance will not hinder our
warfighting mission. Any outsourcing decision finally must result
in the best value for the Department of Defense and, therefore, for
the American taxpayer.

Fourth, the record of our activities to date is very positive. Be-
tween 1978 and 1994, we conducted approximately 2,000 cost com-
Petitions under OMB Circular A-76, and that is now saving the

partment of Defense about a billion and a half dollars a year.
On average, these competitions reduced annual operating costs of
the functions by about 30 percent, regardless of who won.

The reason I stress that last point is that half of these competi-
tions did not result in outsourcing. They were won by our in-house,
reengineered teams.

I wanted to add additional points that were not in my statement.
First, a 1994 GAO study was cited. At an earlier hearing this year
before the House National Security Committee, where I testified
along with the GAO, the GAO reported on its recent report on base
operations which was published in March 1997. In that report, the
GAO notes that “outsourcing can be cost effective, because
outsourcing competitions generate savings whether competitions
are won by the government or by the private sector.” We strongly
concur in that finding.

A second issue that has arisen is the question of contracting in.
The Fort Leonard Wood example was raised. I wanted to provide
the committee with several other examples that have occurred re-
cently. At Shaw Air Force Base in South Carolina, we have re-
cently brought the family housing maintenance function in-house
involving about 30 workers. We have also recently brought in-
house the security police operations at Onizuka Air Force Base in
California, involving approximately 60 workers.

Ed will be working to try to get this data for what’s been happen-
ing since the new supplement was issued, but within the Depart-
ment, all competitions conducted under the new supplement have
in fact resulted in in-house teams winning the competitions, none
of those competitions have resulted in contracting out. Over the
past 15 months, the military departments have initiated A-76 cost
comparisons for a very broad array of activities, encompassing a
total of about 34,000 work years. We expect that these activities,
and others which we expect to subject to competition, will literally
save billions of dollars a year.

Fifth and finally, we have not lost sight of our ongoing partner-
ship with our work force. The Department of Defense has a high
quality, dedicated military and civilian work force. They have re-
peatedly demonstrated their ability to meet changes in our security
environment; and the Department and its employees now confront.
additional challenges as we seek the right mix of forces and capa-
bilities, supported by an efficient and responsive infrastructure, to
meet the national security missions of the 21st century.

We recognize that some of our employees will face dislocation.
We have and we will continue to use every tool available to assist
in retaining, relocating, and retraining displaced employees. Pro-
grams such as our Priority Placement Program have been enor-
mously successful. Since our downsizing began in 1989, our Priority


83

« First, Statements of Work must adequately characterize all the work that will be
competed. To help ensure better performance, all of the Military Departments are now
increasing training and sharing of lessons learned on the preparation of Statements of Work.

* Second, contracts and in-house performance is audited on an selected basis by the
relevant Service audit agencies. Contractors are also subject to a Quality Assurance Surveillance
Program and the many sanctions available under the FAR. We are also working to improve our
data base of contract performance to analyze developments across the Department.

* Third, Military Departments and Defense Agencies can and do recompete contracts if
performance, in terms of either cost or quality, is substandard.

DoD’s Approach to Introducing Competition

‘The Department of Defense began developing its strategy for outsourcing and
competition approximately two years ago. DoD established three broad criteria that must be met
for activities to become candidates for outsourcing:

‘© First, private sector firms must be able to perform the activity and meet our warfighting
mission. DoD will not consider outsourcing activities that constitute our core
capabilities.

« Second, a competitive commercial market must exist for the activity. DoD wilf gain
from outsourcing and competition when there is an incentive for continuous service
improvement.

« Finally, outsourcing the activity must result in best value for the government and
therefore the U.S. taxpayer. Activities will be considered for outsourcing only when
the private sector can improve performance or lower costs in the context of long term
competition.

‘Over the past 15 months, the Military Departments have initiated, or announced their
intention to initiate, A-76 cost comparisons for a broad array of activities encompassing a total of
over 34 thousand workyears. The following table compares the workyears comprised in these
announcements with the total DoD “Commercial Activities” employment in 1996 for these
functions:


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SUBJECT: Background Paper — Contracting Out: Successes and Failures

The Civil Service Subcommitee wll conduct «hearing to gather sdditional information
about federal agencies’ practices contracting for commercial goods and services. This hearing
trl be bed on Wednestay, Ocaber 1997, in Room 2154 of the Rayburn House Office
‘Building, beginning at 10:30 am. This hearing will provide an opportunity to hear employee
organization's concerns about contracting activities and enable the Subcommittee to receive
‘more recent information sbout current contracting practices.

‘This Subcommitiee’s most recent bearings on the subject were conducted on March 29

“before and after” examples to provide a precise basis of comparison. GAO also noted that the
contracts that it reviews are rarely a random sample of all contracts that any agency awards.
‘Most frequently, GAO responds to claims that contracts were awarded improperty (through bid
‘Protest procedures) or conducts inquiries atthe request of Members of Congress who have heard
complaints from constituents. Thus, although OMB has estimated that the procedures for
conducting competition have resulted in net savings averaging about 30 percent,' neither GAO
nor OMB have reliable data to support the estimates. These hearings also provided opportunities
for ecaployee organizations to report their concems about contracting, and allowed the

‘Savings from competition would occur if either a contract was awarded to a
private provider thet delivered the goods and services at a lower cost or if the government

agency, competing to retain the function in-house, improved its work procedures so that it
perted wore efiietl.


ll

4 lw to provide that "al purchases and contracts for supplies and services shall be made by open
purchase or by previously advertising for proposals." This policy was reinforced and
strengthened by numerous other laws in the ensuing years.6

The role of competition in the buyer-seller relationship was recognized by the Supreme
Court in 1925 in United States v. Purcell Envelope.” In Purcell, the Court addressed a sealed bid
procurement, the primary method for obtaining competition at that time, and observed that “the
procedure for advertising for bids "gives the Government —

. the benefit of the competition and each bidder is given the
chance of a bargain, It is a provision therefore in the interest of
both Government and bidder necessarily giving rights to both and
placing obligations on both."®

More recently, in response to concerns that competition had become the exception and not
the rule in Government contracts, the Congress established full and open competition as the
guiding principle for all Government acquisitions. The Conference Report on the Competition in
Contracting Act of 1984 explained this principle as follows:

The conference substitute uses “full and open" competition as the
required standard for awarding contracts in order to emphasize that
all responsible sources are permitted to submit bids and proposals
for a proposed procurement. The conferees strongly believe that
the procurement process should be open to all capable contractors
‘who want to do business with the Government.9

‘The Report of the House Government Operations Committee on CICA provided further
support for competition stating:

The Committee has long held the belief that any effort to reform
Government procurement practices must start with a firm
commitment to increase the use of competition in the Federal
marketplace. Competition not only provides substantially reduced
costs, but also ensures that new and innovative products are made
available to the Government on a timely basis and that all interested
offerors have an opportunity to sell to the Federal Government.10

52 Stat. 536,

see generally John Cibinic, I. and Ralph C. Nash, Jc, FORMATION OF GOVERNMENT CONTRACTS 216 (2d ed. 1986).
7249 US. 313 (1919).

81d, at 318-319.

SHLR. Conr. Rep, No, 861, 98th Cong., 2d Sess. 1442 (1984).

TOELR. Rer, No. 1157, 98th Cong., 2d Sess. 11 (1984).


81

Materiel Management. The Defense Logistics Agency's (DLA) Direct Vendor Delivery
and Prime Vendor programs illustrate the savings and improvements in readiness that DoD can
achieve through business reengineering. Under these programs, suppliers deliver products
directly to their DoD customers, rather than to a DoD warehouse for storage and subsequent
distribution.

Let me give you an example of how this works. Under the old way of doing business,
DLA would buy food for all of our dining facilities for an extended period ~ perhaps six months
ata time for bulk items - because of our slow acquisition system. The food would be stored in
warehouses, and then, using our own transportation system, we would deliver food daily from
these warehouses to our dining facilities.

Today, we use basic ordering agreements with volume discounts for all food that our
dining facilities need. Each evening, the cooks can call in their orders for breakfast based on the
number of people expected to eat the next morning. The food is fresh, and I can tell you from my
own discussions, the cooks and our uniformed personnel are both happier. We are also saving
money, because we've eliminated warehousing, inventories and transportation.

‘Such programs make a tangible contribution to readiness — reducing the need for DoD's
own warehousing and transportation allows DLA to provide supplies to warfighters cheaper and
faster. For example, DoD pharmaceutical customers now receive their requested goods 75 to 90
percent faster (within 24 hours) and 25 to 35 percent cheaper. In other words, these programs not
only save resources, but do the job better.

Government Purchase Card. DoD has initiated a robust campaign to increase use of
the IMPAC purchasing card. The IMPAC is a VISA card issued by a commercial bank under a
contract with the General Services Administration and is used throughout the Federal
Government. Greater use of the card (which is permitted by the Federal Acquisition
Streamlining Act) will reduce acquisition cycle time and the paperwork associated with making,
and paying for, local level, small procurement actions — thus reducing costs and improving
timeliness.

‘The Department now has over 85,000 cardholders making purchases totaling nearly $2
billion annually. Although this purchasing constitutes about half of the U.S. government total at
or below $2,500, DoD believes that the use of the purchase card can be expanded to replace
nearly all of the 9.9 million separate invoices paid by the Defense Finance and Accounting
Service in FY 1996. Consequently, the Department is reengineering some of its internal
processes so that it can make maximum use of the IMPAC card's potential for reducing costs.


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92

Ms. Norton. What has OMB done to monitor service contracts,
particularly in the dollar amounts, in performance and in ways
that would be comparable to the way you monitor the work of civil
servants.

Mr. DESEVE. Thank you very much. That’s a good question.

Ms. Norton. I’m known for my good questions.

Mr. DESEVE. OMB does not, in fact, monitor the work of civil
servants. We appropriately leave that to the agencies themselves.
Similarly, we do not monitor service contracts. What we try to do
is to work \with the private sector employee groups, as well as the
agencies, to create guidance.

Our 1996 revision to A-76 was the culmination of a 2- to 3-year
effort with those groups that allowed for public comment, and com-
ment from Members of Congress. We have tried to create a policy
that provides a level playing field for those entities to move for-
ward.

Had we seen any major changes or shifts from the aggregate
data we do collect and publish, we certainly would have asked the
agencies why those shifts occurred. In fact, I think Mr. Goodman
has testified about the increase in DOD—and you can even see it
in the testimony that I have given.

Ms. Norton. Mr. DeSeve, thank you very much. I’m rushing be-
cause I know the Members are going to leave. The specific objection
I have, of course, is that you are relying on aggregate data. And
as long as all you have is aggregate data, you really don’t have any
information, you have aggregate data, whereas when the Office of
Management and Budget in its summary report of agency service
contracting practices looked beyond aggregate data, they concluded,
and I quote, cost analyses and independent Government cost esti-
mates are not performed by many agencies prior to the renewal,
extension or recompetition of existing contracts.

And more seriously, let me quote this, “In some instances cost es-
timates are not prepared prior to entering into new contracts.”

You think that that observation, that view from OPM is worthy
of further investigation by OMB or anyone else in the Federal Gov-
ernment?

Mr. DESEVE. I'll be happy to look at it. I don’t have that informa-
tion before me. If you give me a copy, I would be happy to review
it.

Ms. Norton. I’m sorry, this is OMB, January 1994. I mislooked.

Mr. DESEVE. The January 1994, Office of Federal Procurement
Policy Report, “Summary Report of Agencies Service Contracting
Practices,” summarized a review of our 17 largest agency service
contracting programs and was designed to determine: First, if ex-
isting service contracts were accomplishing what was intended, sec-
ond, whether they were cost effective and third, whether inherently
governmental functions were being outsourced. Without exception
it was found that existing contracts were accomplishing what was
intended. While the report did not specifically address the question
as to whether work should be performed by in-house or contract,
the report found that agency contract administration is uneven and
that contracting officers were not always preparing independent
contract cost estimates prior to the renewal or award of some serv-
ice contracts.


60

tractor. So when they come back into the depot, they are familiar
faces and that does help with blending. I understand in other parts
of the country when they try to go out and contract employees in,
sometimes they have a difficult time getting people. It just depends
on what part of the country you're in. For us, they have blended
in fairly well. It impacts, but we've made it work.

Mr. CUMMINGS. . Donnellan, when these contracts go out, are
they rehiring people that used to, say, work at these places? And
is there any—from what you have seen, or you, Mr. Cunningham,
is there any difference in the pay and benefits and things of that
nature? If they do hire them back, that is; the contractor I’m talk-
ing about.

Mr. DONNELLAN. Yes, some do hire. Some hire maybe at a re-
duced level. Some hire them back at reduced pay and benefits. It’s
a case-by-case study.

Mr. CuMMINGS. Do you find the same, Mr. Cunningham?

Mr. CUNNINGHAM. Yes, sir, I would say the same thing. It de-
pends on the work that they’re performing, at what level they’re

ought back in.

The last facility, where I’m still employed actually—Aviation
Troo Command in St. Louis, MO—that is a higher level of pay for
the folks.

I would just comment on something that Ms. Armstrong men-
tioned, and that is, the contract employees and the Federal employ-
ees are under two entirely different working conditions in terms of
employee responsibilities; Federal employees, we’re under the eth-
ics code. We swear an oath of allegiance to our country.

I know—and I am sure that the contractors have their own ways
of conducting themselves or their employees during the work, but,
for example, I knew of contractors that would come out and sell
Amway during the day or whatever it is.

It does make a difference whenever you're a Federal employee
and you're sitting at a desk and you have to train people that you
know are going to be coming in and taking your jobs eventually.
And that’s happening across this country at an alarming rate; it’s
having an effect.

Mr. CumMINGS. In my other life, before I came to Congress, I
used to represent a lot of small corporations and we used to pre-
pare bids. It just seems to me, I was thinking about some of the
things the chairman was talking about with the response from the
witnesses that will be coming forward after you, getting the em-
ployees, the number of employees that we are actually hiring with
these contracts. I find it incredible and unbelievable that a Federal
agency would come in here and tell us that they basically deter-
mine it to be irrelevant and not important how many people we are
employing. I mean, that’s part of this work force that we have, I
mean, assuming that these people are receiving Federal dollars. So
I take it that you all, from your comments earlier, agree with that.

Mr. DONNELLAN. We're looking forward to the testimony.

Mr. CummMinGs. Do you think that would be difficult? You don’t
think that would be difficult for them to do that, do you?

In the contracts that we had to do for the city of Baltimore, we
literally had to say how many people they were employing, but the
city wanted to know how many people were being employed. As a


56

Mrs. MoreELLA. Thank you. I want to thank you for testifying.
This is very important to us, to hear from you in terms of what is
happening. I loved some of the statements that were in your testi-
mony.

For instance, one of the testimonies that I listened to and read
talked about the fact that we can contract out but it is almost im-
possible to contract back in, and I think that part of what this

earing is all about is how do you remedy it? Once you do it, is
it something that’s inviolable?

I like the concept of partnering out, you absolutely have to, using
that kind of concept. But just one question to all of you, I wondered
what you would suggest that we ask GAO, or what could GAO and
OMB do to measure the quality of contracted functions that were
formerly performed by Federal employees? How do they measure
the quality of it? Any suggestions that you have from your experi-
ences? Whoever wants to answer. Ms. Armstrong.

Ms. ARMSTRONG. I know at the depot there have been occasions
where we have brought in contractors to perform aircraft mainte-
nance, and internally we have our own quality that we’ve reviewed
for our work that we do. I know that sometimes the contractors did
make errors and we had to go back and correct it.

I would assume the agency that has the work, that has the con-
tractors in-house, should be able to develop and maintain the same
type of information for contractors that they would for their own
em; loyees. And that should be reported back up to whoever, GAO
or .

Mrs. MORELLA. You feel they’re not doing that at this time?

Ms. ARMSTRONG. I do not believe they’re doing that.

Mrs. MoRELLA. Mr. Cunningham, any comment about that?

Mr. CUNNINGHAM. I think more employee participation. These
decisions to contract, to contract out or to try to—the problem with
that is it’s never considered very often to contract back in. But I
think, both, if you contract the work out, if an agency is consider-
ing contracting out, or to contract the work back in, I think it’s ab-
solutely essential that the employees as represented by their
unions get involved in that process, get to the heart of the problem.
The statute that we live under, 5 U.S.C. that I mentioned in my
testimony, excludes unions from that process, excludes employee
groups, and I think that for sake of accountability and to insure
the integrity of that decision, that the employees absolutely should
be brought in.

Mrs. MORELLA. So they are excluded?

Mr. CUNNINGHAM. Yes, ma’am.

Mrs. MORELLA. That is interesting. Would you like to comment
on that, Mr. Donnellan?

Mr. DONNELLAN. When. you mentioned about contracting back, in
my testimony I didn’t read it but I submitted another example from
Fort Leonard Wood: The employees took the logistics maintenance
contract back in-house, saving the taxpayers $1.6 million annually.
But now the latest study involves all base maintenance in all
TRADOC bases going under one contract, so they will lose that
$1.6 million annually when the contract is looked at basewide.
That’s just another example. I think Mr. Cunningham was also cor-
rect in saying employee participation is needed badly.


18

Mr. Mica. There being no further opening statements at this
time, I would like to introduce our first panel, which consists of
Christopher M. Donnellan, legislative director of the National Asso-
ciation of Government Emplo: loyees; James Cunningham, national
president, National Federation of Federal Employees; Patricia
Armstrong, chapter president of the Federal Managers Association,
U.S. Marine Corps Air Station, from Cherry Point, Ko.

Before I recognize you, Mr. Ford has returned. Mr. Ford, did you
have any opening comment?

Mr. Forp. Just very briefly, Mr. Chairman.

Mr. Mica. Go right ahead. You are recognized.

Mr. Forp. I thank the chairman, I certainly thank the panelists
and my ranking member.

I join my colleagues in associating myself with really what both
sides have said this morning. I certainly view today’s hearing, and
I say to our panelists, as an opportunity to address an issue that
has become increasingly important as the Federal Government con-
tinues to downsize. I think it speaks to a fundamental issue.

We talk about the cost efficiency and we talk about cost savings
rather than efficiency, and they certainly should be the core prin-
ciples guiding us in this process, but I would also hope that the
whole notion of accountability would remain important to those of
us on this committee and certainly to those of us in this Congress.
I think it really sort of speaks to the fundamental question of the
role or helps to speak to the fundamental question of the role of
government, and particularly the Federal Government, in today’s
society. So I look forward to hearing from our panelists.

I will not belabor the point. I am a strong believer that we invite
panelists and we ought to listen to them, and hopefully they will
be able to shed some light for all of us. I thank my chairman and
I look forward to the testimony of our panelists.

Mr. Mica. Thank you, Mr. Ford.

{The prepared statement of Hon. Harold E. Ford, Jr., follows:]


47

® ‘Statement of FMA Chapter 21 President Patricia Armstrong before the House Civil Service Subcommittee 10/1/97

Under this approach, the military services may contract with private industry to perform up to 40 percent
of the remaining upgrade and repair work.

House and Senate leaders are expected to reach final agreement this week on the 1998 Department of
Defense Authorization, H.R. 1119. As this testimony was being prepared, final agreement had not yet
been reached on the contentious issue of depot workload. Senate conferees are expected to vote again
this week on a tentative agreement reached between the House and Senate to replace the 60/40 rule for
depot workload with a 50/50 formula after October 1, 1998. The agreement crafted by members of the
House Depot Caucus, Reps. James Hansen (R-UT), Solomon Ortiz (D-TX), and Tillie Fowler (R-FL),
would also effectively halt privatization-in-place of two large Air Logistics Centers at Kelly AFB in Texas
and McClellan AFB in California. While this agreement could shift $1 billion worth of depot workload to
the private sector it would also: bring new work into public depots; require contractor logistics support
and interim contractor support to be subject to the statutory workload split; drop a Senate-passed
provision to count contractors on government facilities toward the government share of workload; and
strengthen the definition of core, While the Administration favors elimination of the 60/40 rule it has
threatened to veto the legislation over the provisions affecting Kelly, AFB and McClellan, AFB.

‘The military currently operate 21 major depots staffed by 76,000 Federal employees. The number of
depot employees has been reduced by 71,000 since fiscal year 1990, and the four base closure rounds will
reduce the number of depots from 39 in 1988 to 19 by the year 2001. Highly skilled and dedicated FMA
‘members work at nearly all of these facilities. These men and women insure that our Nation's 52,000
combat vehicles, $14,000 wheeled vehicles, 351 ships and 17,000 aircraft are in top working order to
support military training and contingency requirements at home and abroad. Activities in support of this
mission require trained technicians, engineers and managers to perform major overhauls of weapons
systems and equipment, completely rebuild parts and end items, modify systems and equipment by
applying new or improved components, and manufacturing parts unavailable from the private sector.
While contractor employees are frequently trained to work only on their own company's equipment,
public employees are typically trained to work on many different systems.

FMA is concemed that the Federal Government is developing an unjustified and short-sighted reliance
upon privatization of public depots as a means of resolving budgetary issues. The Department of Defense
is ignoring some of the pitfalls and myths of privatization as it embarks on a course that will result in the
climination of valuable and irreplaceable national military assets.

PITFALLS AND MYTHS OF PRIVATIZATION

PITFALL - CONTRACTOR STRIKES DISRUPT THEIR OPERATIONS: For Defense civilians, strike is
something you do to the enemy not your employer. The same laws that make it illegal for Government
workers to strike cannot be applied to the private sector.

In June of last year, 6,700 workers from the St. Louis headquarters of one of DOD's largest contractors,
McDonnell Douglas, went on strike, These workers build the F-15 and the F-18 fighters, the Navy's T-
45 training jet, part of the Air Force's C-17 cargo plane and are upgrading the Harrier strike aircraft. The

page -


51

Biography of

Patricia D. Armstrong
Federal Managers Association
President of Chapter 21
Marine Corps Air Station, Cherry Point, NC

Patricia Armstrong, born on March 17, 1959, is a native of New Bern, NC, and she
currently resides there with her husband, Greg Armstrong, of New Bern, and daughter,
Jennifer.

Upon graduation from New Bem High School in 1977, she obtained an Associate in
Applied Science Degree in Executive Secretarial Science from Hardbarger Junior College
of Business in Raleigh, NC. She began her Federal career in 1979 in Raleigh, NC, with
the U.S. Department of Agriculture, Soil Conservation Service, and later with the Animal
and Plant Health Inspection Service, as a Clerk-Steno. In 1981, she returned to her
native New Bem upon receiving a transfer to the Supply Directorate and later the Civilian
Personnel Department aboard the Marine Corps Air Station, Cherry Point, NC, as a
Personnel Clerk. In 1982, she was promoted to the Apprentice Program at the Naval
Aviation Depot at Cherry Point, and in 1986 was promoted to the journeyman level of the
Aircraft Engine Repairer Trade and later the Pneudraulic Systems Mechanic Trade. In
1989, she was promoted to Production Assistant, and later to Management and Program
Analyst in the Production Department Office. This current position in the Production
Department at the depot demands her attention and involvement in a variety of issues and
programs that directly affect the depot’s mission, efficiency, and production.

Patricia is a member of the First Presbyterian Church in New Bem. She is past
president of Cherry Point’s Federally Employed Women and received a Distinguished
‘Member Service Award from that organization in 1992 She has held numerous board
positions in the NADEP Toastmasters Club and is an Able Toastmaster. She is a an
active member of the Cherry Point Employees Association and has served on the board.
In 1993, she received both the depot’s EEO Runner-Up Employee Award and the EEO
Woman of the Year Award. She served as Secretary of the Neuse Harbour Home
Owners Association from 1993 to 1997. She has served as Vice President and is
currently President of Chapter 21 of the Federal Managers Association, MCAS, Cherry
Point, NC, an organization consisting of 320 members. In July, 1997, Patricia became
the Federal Managers Association’s voting representative on the Naval Air Systems
Command’s Labor-Management Partnership Council.


80

Using Private Sector Capital to Revitalize Military Housing

Our military housing is old, in need of extensive repair and below contemporary
standards. DoD owns and manages over 300,000 houses, two thirds of which require
revitalization or replacement. We estimate that it would cost about $20 billion and require 30
years to do this work using our traditional funding and procurement approach. Attracting private
capital to help speed this revitalization is imperative.

‘The National Defense Authorization Act for Fiscal Year 1996 provided the Department
with new legislative authorities to achieve this objective. The authorities include direct loans and
guarantees, leasing, investments, rental guarantees, differential lease payments, and conveyance
or lease of properties and facilities. Using these new tools, we expect to be able to leverage
military construction dollars significantly — by a factor of at least 3:1. Some of our current
projects will enable us to do even better, resulting in nearly twenty times as much housing for the
dollar. This approach wil open the competition to members of the private sector who have been
shut out of the traditional mulrtary construction market.

In our first year, we are off to a good start. We have two completed projects — a $9.5
million limited partnership project at the Naval Air Station Corpus Christi, Texas, for 404 units
of enlisted personnel family housing, and a $6 million partnership project at Naval Station
Evérett, Washington, to construct 185 units for enlisted personnel. In addition, we are now in
source selection for two additional projects ~ one involves 2,600 units at Fort Carson, Colorado
providing housing for the entire base, and the other will provide 400 units at Lackland Air Force
Base, Texas. All together, these projects will revitalize more than 4000 units.

We are now developing RFPs at a host of other sites including: Robins Air Force Base,
Georgia; Marine Corps Base, Albany Georgia; and, Camp Pendleton, California. The
Department is reviewing other sites to expand the program significantly in the coming year.

Reengineering to Improve Support

To reduce costs and enhance customer satisfaction, Defense Agencies and Military
Departments are striving to ensure that we adopt best commercial practices in their operations.
Some examples of this kind of reengineering include:


142

‘on the public payroll-—although their salaries are paid for out of the same revenues that
pay the salaries of federal employees.

Taxpayers are still paying for the services now provided by contractors, Often,
they are paying even more, based on the reports discussed elsewhere in my testimony.
Just how big is the contractor workforce, Mr. Chairman? | wish | could tell you, sir, but
‘such statistics aren't even kept. Strange, isn't it? We keep such meticulous statistics
about the government's in-house workforce, but know so little about the government's
contractor workforce. But if the federal government spends $120 billion annually on
highly labor-intensive service contracting and the federal government's yearly in-house
payroll is less than $80 billion, the contractor workforce must be quite large, indeed.

Clearly, lawmakers like yourself would benefit from knowing more about the federal
government's shadow workforce, particularly its size. Such information would help
lawmakers to better assess the Administration's claims for downsizing the federal
workforce, public- and private-sector. It would also help lawmakers to better understand
the growth in service contracting and better assess the claims made by some that A-76
is somehow biased against contractors.

Finally, such knowledge would help lawmakers make more informed decisions
‘about how to achieve real and lasting deficit reduction. As | mentioned earlier, meticulous
Statistics are kept about federal employees. That's why, when Administration officials or
lawmakers want to provide tax relief or ensure deficit reduction, they can always help to
generate much of the necessary savings by cutting the compensation and the size of the
federal government's in-house workforce.

16


135

In fact, AFGE Is unreservedly pro—competition when it comes to work that is not
inherently governmental. Full and fair competition for such work spurs federal employees
and contractors to be more productive and ensures that taxpayers and customers receive
high-quality services at low costs. As the General Accounting Office (GAO) concluded
in a recent report.

*..(C)ompetition Is the key to realizing some savings, whether the function is
outsourced or remains in-house. According to (Department of Defense) data on
cost comparisons done between fiscal year 1978 and 1994, savings from
competed functions occurred regardiess of whether the government or a private
company was awarded the work. DoD's data shows that the government won
about half of the time and private industry won the other half.""

‘That's why AFGE was the only federal employee union to work with the
Administration last year to reform OMB Circular A-76.? This effort resulted In a revised
Supplement that, while permitting more flexibility to contract out, also ensures federal
employees greater involvement in the competitive process, and makes contracting out a
“two-way street” by permitting work to return back in-house when it is more cost-
effective to do so.

The fact that OMB Circular A-76 Is now under continuous attack is implicitly a
compliment of federal employees and their work. Several years ago, federal employees
were losing 70% of all A-76 competitions. As you might expect, contractors had

* General Accounting Office, BASE OPERATIONS: Challenges

It Renews Em (March
1997), p. 8. Although this report discusses the Department of
Defense, the agency responsible for most contracting out, its

competition-friendly conclusion applies to all other federal
agencies.

? In fact, we are working with Pentagon officials on
implementing instructions for the new A-76 supplement.


13

Mr. Mica. I now recognize the lady from the District, Ms. Nor-
ton.

Ms. Norton. Thank you very much, Mr. Chairman. I thank the
ranking member for his words about my bills.

We have just gone through a period of deep scrutiny of virtually
everything in our budget, Mr. Chairman, and have succeeded in
crafting a budget reconciliation bill that requires deficit reduction
over the next 5 years. Every part of the Federal Government has
been made accountable, save one, and that is the fastest growing
part of the Federal Government, the service contracting area.

Of the $200 billion that the Federal Government spends every
ear on outside contracts, we are now at the point where $114 bil-
ion is spent on service contracts, up from $105 billion in 1992.

Contractors doing business with the Government have risen be-
tween 1989 and 1992 from 62,819 to 82,472.

When you have that kind of growth, it is irresponsible not to
begin to look closely at it. That kind of money and that kind of
growth always contain a certain amount of waste and a certain
amount that needs to be corrected. Maybe it is a little and maybe
it is a lot, but what is totally unacceptable is to simply let it grow
like topsy and to know almost nothing about it.

That is where we are in service contracts. The administration
recognizes this and has begun to move forward. I think the admin-
istration deserves credit for the new performance-based standards
for existing service contracts. But this does not go to the question
of growth. In effect when we look at service contracts, we are look-
ing at a very different kind of contract than we find, for example,
in the defense sector. We are looking at contracts that essentially
mean that we have two work forces. There is our civil service work
force, and then we have got another work force out there. That
work force, of course, is employed by private contractors.

This growth in service contracts has taken place on one and only
one assumption. No one says that we know that service contractors
do the work better. The assumption is that they do the work cheap-
er, and cheaper and cheaper alone is what has driven this growth.
I think that the Congress has come to the point where it must say
“prove it.” We can’t continue to spend this kind of money without
coming forward to demonstrate either that the assumption is cor-
rect or that the assumption is not correct.

My four bills would move us in that direction. First there is a
bill that would require that cost comparisons be done. It will come:
as a shock to most Americans to know that cost comparisons are
not routinely done before work is contracted out and the reason for
that is that it is assumed, or presumed, what has turned out to be
an irrebuttable presumption, that the work will be done cheaper.

Well, should not the agency be made to demonstrate that that is
the case, particularly after a 1994 GAO study that proved just the
opposite in a number of contracts that they investigated? The GAO,
in several cases they analyzed, found that agencies could have
saved as much as 50 percent by keeping the work in-house. This
is an instance where information may not be power, but it sure
would be money if we did the cost comparisons before we farmed
the work out.


137

private competition for work that is not inherently governmental is nothing but
parochialism--that we are only concerned about saving federal jobs. This is not the
case, AFGE has a long-standing policy to follow outsourced work into the private sector
‘once a decision is made to contract out. We are adapting to the reality that the federal
in-house bid may not win every competition. For example, earlier this year, we signed
accontract with Hughes Aircraft, which allows AFGE to continue its representation of the
employees at the recently privatized-in-place Naval Air Warfare Center, in Indianapolis,
IN. The fact that AFGE will retain its vigor and vitality--even in this era in which
privatization, often mindless, is all the rage--by organizing outsourced workers allows this
union to be a calm and constructive player in the debate over public-private competitions.

After all, our members are taxpayers also.

AFGE'S SUGGESTIONS FOR IMPROVING THE COMPETITIVE PROCESS

Mr. Chairman, | welcome the Subcommittee's interest in the important issue of
ensuring that the government's taxpayers and customers actually benefit from contracting
‘out. Permit me now to make some suggestions for related issues to be discussed at
future hearings of your panel.

Lifting Arbitrary Cellings On Government Employees

Quite simply, Mr. Chairman, the federal government is contracting out work that
could be performed more cheaply by federal employees because of the arbitrary ceilings
‘on full-time employees (FTE's) imposed as part of the government's overall downsizing.
That's not just what AFGE says. That's what independent observers, and, yes, even

cet


55

pete, but as we’ve said many numerous times, on a level playing
jield.

Ms. ARMSTRONG. Congresswoman Norton, contracting out some-
times does make sense. Our Federal Managers Association does
recognize that contracting out sometimes is in the best interest of
the taxpayer and we have cases where it has worked very well.

We just need to make sure that we allow managers the flexibility
to contract out only when it makes sense and to make sure that
we are able to compete. I believe there are cases where we are
being left out, due to unsolicited bidding and such, where we are
being left out of the loop and not able to compete.

And because of our downsizing in personnel, we are just simply
forced to contract out when we have work that needs to be done.
That’s really the way we look at contracting out. Sometimes it
works, and we just need to be flexible with it.

Ms. Norton. I appreciate your responses. I think it is very im-
portant particularly that employee organizations look to practices
that, as you said, Mr. Donnellan, level the playing field. Just say
no probably won’t work here any longer. We're talking about a
$114 billion train that has left the station. Even those like myself
who know up close that the Federal work force is the best in the
country will not be able to make the case that some contracting out
should not occur.

But the practices that are now only coming to light, which essen-
tially create a preference for service contract workers, are nothing
less than an abuse. And the way to respond, it seems to me, at
least in part, is the way you have described. Let us in on this com-
petition. Look not only, of course, to the costs of the work, and that
will be looked at; look to your performance-based standards to see
who does the work better.

As you know, States and cities, indeed the Federal Government,
doesn’t always accept the lowest bid. They look at who can do the
work well. But at the same time this is all driven by cost and there
is no way in which that is going to turn around.

I agree with you. I know what the Federal work force looks like.
I chaired a Federal agency, and I saw the agency have a work force
whose quality was driven by a desire for public service, or else
these people definitely would not have been in the Federal Govern-
ment, given the fact that so many of them could have commanded
higher salaries in the private sector.

So I don’t see any risk if the playing field is level, if in fact the
Federal Government affords a way for people to write their own
specs. I think, if anything, Federal employees might have an ad-
vantage, because they know the work, because they understand the
quality that must be there to keep the agency from itself being
criticized because of the quality of the work.

This is an overdue experiment here, and I think the States and
cities are leading the way, and I think your responses show that
Federal employees not only have nothing to fear but, in fact, fear
nothing.

Thank you, Mr. Chairman.

Mr. Mica. Thank you. I would now like to recognize Mrs.
Morella.


2

the cost saving claims of contracting’s proponents. Today I am hop-
ing that this hearing provides a fair opportunity to present those
facts and that information.

Since our last hearing, there have also been a number of changes
that affect the contracting environment. In 1996, the Office of Man-
agement and Budget published a revision of Circular A-76, the
rule book that governs cost competitions within the Federal sector.
These revisions enable Federal agencies to comply with the
changes in Government accounting and management practices em-
bodied in statutes such as the Chief Financial Officers Act, the
Federal Acquisition Streamlining Act, and the Government Per-
formance and Results Act.

The operating environment has also been affected. Budgets have
been cut and the work force reduced, but often, workloads remain
the same. We have heard frequent speculation that agencies have
resorted to increased contracting to cope with workloads. According
to OMB, however, Federal agencies awarded $111.7 billion in serv-
ice contracts in 1996. That represents a decline in contracting of
$2.4 billion from 1995 levels.

We have a responsibility to take a close look and discover what
is actually taking place with Federal contracting for services. Are
we contracting out more or less than in prior years? Are taxpayers
getting value out of contracting or are we, in fact, wasting money?
These and many more important questions need accurate answers
if we are to conduct the business of Government in a responsible
manner.

Our panelists today will give us their views on these questions.
In addition to employer organizations, we will hear from the Office
of Management and Budget. OMB will report on the role that con-
tracting has played in implementing National Performance Review
recommendations and other administration management initia-
tives. We will also hear from witnesses who have reviewed the con-
tracting programs of the Department of Defense. With the help of
several years of contracting data, hopefully, they will provide an
assessment of the costs and benefits of contracting for Federal
agencies.

Iam pleased to open with those comments, but also must apolo-
gize. I made the commitment to hold this hearing at least by late
summer, and because of conflicting schedules of the full committee
and other business before the subcommittee, we have been delayed
until now in holding it. I am pleased that we are looking at this
issue and will continue to look at it and get a fair appraisal during
my tenure as chair of this subcommittee.

{The prepared statement of Hon. John L. Mica follows:]


163

contracting; the federal government's goods and commercial activities contracting
combined; the number of A-76 studies initiated; the number of federal employees
covered by A-76 studies; savings from the public-private competitions mandated by A-
76 studies; increases in contract administration costs; and losses from waste, fraud, and

abuse in commercial activities contracting and poor contract administration.

16. Contracting out and outsourcing are supposed to result in savings and
efficiencies for the taxpayer and federal government. However, because there is
no means of auditing these contracts after their award, the claims of savings and
efficiencies are purely speculative. Conversely, in the absence of post-award
‘oversight, no one is able to determine whether or not an outsourcing decision has

resulted in greater costs and dagraded quality of service.

Queries: What post-contract audit provisions, if any, do agencies have in place to
determine whether or not projected outsourcing costs and efficiencies are being realized?
Are there any measures in place, which compel managers to revisit or reverse a bad
‘outsourcing decision such as in the case of contractor default, overruns, or non-
performance? If these measures are not in place, or are inadequate, should agencies
be required to annually audit the post-contract award performance of outsourced
activities, and to recompete these functions in the event they fail to realize their savings

and performance projections?

37


12

‘We are also encouraging agencies to use a two-phase selection process where the first
phase of competition is initiated without the submission of formal proposals and offerors
are advised based on this information if they have a realistic chance for award. Those
offerors choosing to participate in the second phase are able to contribute substantially to
the development of requirements and evaluation criteria. This opportunity incentivizes
them to invest more of their own resources to perform “due diligence” to learn about
agency needs, to more effectively and efficiently develop high value solutions that can
better fit with those needs, and to offer stronger proposals. This process facilitates the
negotiation of firm performance objectives for which the contractor can be held
accountable.

. Agencies are taking steps to improve their management systems for major acquisitions.
They are working to develop realistic cost, schedule, and performance goals that establish
clear accountability for project progress and support budget priorities. In this regard, we
have been stressing to agencies the importance of creating performance-based
‘management systems that will provide agency managers good visibility into the progress
of their projects in achieving stated goals.

Use of the tools described above serves as an effective alternative mechanism to intrusive
and costly oversight. However, in those cases where these tools are not effective, the
government will continue to resort to appropriate oversight mechanisms (e.g., audits,
inspections).

Related Legislation.

There are several bills before the House that address outsourcing and the performance of
commercial activities. On the one side there is H.R. 716, "The Freedom from Government
Competition Act," "a bill to require that the Federal Government procure from the private sector
the goods and services necessary for the operations and management of certain Government
agencies, and for other purposes.” We are opposed to this legislation. H.R. 716 undermines the
principle of competition on a level playing field. It does this by restricting the development of
competitive public offers and by inserting provisions that effect the structure of that playing
field, We are concemed that H.R. 716 would mandate specific cost comparison requirements

7


27

CONTRACTORS ARE THE BY PRODUCTS OF CARELESS STATEMENTS OF WORK AND
INADEQUATE ENFORCEMENT OF EXISTING CONTRACTS.

RECENTLY OUR OFFICE RECEIVED A LETTER FROM OUR NATIONAL
REPRESENTATIVE AT FORT LEONARD WOOD, MISSOURI. ON MARCH 1, 1997,
A NEW CONTRACTOR TOOK OVER THE OPERATION OF THE POST LAUNDRY
FACILITY AT THE FORT. NAGE REPRESENTS THE EMPLOYEES OF THE
CONTRACTOR.

THE PREDECESSOR CONTRACTOR, I.G.I.T., INC., FAILED TO PAY ALL
EMPLOYEES A FINAL BI-WEEKLY CHECK FOR WORK PERFORMED, TOTALLING
APPROXIMATELY $ 23,000. 1I.G.I.T. TOOK A FEDERAL PAYMENT AND RAN.
THE PAYMENT DUE TO THE CONTRACTOR FROM THE GOVERNMENT, BECAUSE OF
PAST UTILITY BILLS, FOR THAT PERIOD ONLY CAME TO $16,000. NOW,
I.G.I.T. HAS ASSIGNED ALL CONTRACT INCOME TO A BANK AS COLLATERAL
AND THE BANK HAS KEPT THE MONEY AND WELSHED ON EMPLOYEE PAYROLL
CHECKS.

FURTHERMORE, FOR A PERIOD COVERING SEVERAL MONTHS, THE
CONTRACTOR DEDUCTED FEDERAL AND STATE INCOME TAX AND SOCIAL
SECURITY FROM THE EMPLOYEES AND NEVER DEPOSITED SUCH TAXES WITH THE
INTERNAL REVENUE SERVICE, SOCIAL SECURITY ADMINISTRATION, OR THE
STATE OF MISSOURI. MOREOVER, I.G.I.T. OWES $ 11,000 IN ACCRUED
VACATION PAY AND $ 41,000 IN SEVERANCE PAY TO MEMBERS THAT LOST
JOBS. THE APPROXIMATE AMOUNT I.G.I.T. OWES EMPLOYEES TOTALS $
74,000. I.G.I.T, HAS SINCE DECLARED BANKRUPTCY.

THE DEPARTMENT OF LABOR HAS INTERVENED AND WILL MAKE AVAILABLE
ONLY $ 16,000 OWED TO THE EMPLOYEES; 22 CENTS ON THE DOLLAR THAT
THEY ARE OWED. SO MUCH FOR EFFICIENCY IN THE PRIVATE SECTOR.

I.G.I.T. IS NOT THE ONLY PRIVATE SECTOR COMPANY THAT HAS


70

To our knowledge, this information does not exist, but we don't really have any need for
this type of information. While we need to know that the workload is required, that contract
prices are reasonable, and that the work is of appropriate quality, itis not important that we know
the specific number of contract employees. Again, the contractor is subject to the provisions of
the Service Contract Act and other Federal Acquisition Regulations, While we note that H.R.
887 would require the Director of the Office of Management and Budget to develop these
estimates, we are opposed to the requirement because the final product would require a
considerable expenditure of resources and would be of questionable value

Getting Better Deal for the Government

Ongoing governmentwide procurement reengineering efforts are helping to dramatically
change our buying behavior in ways that significantly reduce risk on the taxpayer and ensure that
contractors are providing products and services with the best overall value for the dollars spent.
‘The Federal Acquisition Streamlining Act and the Clinger-Cohen Act, in conjunction with other
Administration reform initiatives to increase consideration of an offeror’s past performance and
provide appropriate financial incentives, are better enabling us to make more efficient and
effective use of marketplace competition. This, in tum, is putting us in a stronger position to get
better deals from our contractors. Consider the following:

+ Weare increasingly buying commercial. By eliminating barriers to entry and improving
the source selection process, recent procurement reinvention efforts have helped agencies
to position themselves better to take advantage of market driven innovations and
commercial economies of scale. As a result, we are better able to reduce risk in our
efforts to meet mission needs and obtain more value for taxpayer’s dollars.

Agencies are also in a better position to make use of proven commercial purchasing
strategies. Many agencies, for instance, are better leveraging the government's buying
power by using multiple award contract vehicles to provide their users as well as users at
other agencies an efficient and competitive means for acquiring commercial products and
services.


146

efficiency of the services performed by contractors prior to making payments.”

As GAO has reported, agencies are bestowing "bonuses" on contractors who have
‘only just met contractual requirements, and even to some who have fallen short, often
grievously so.'?

As GAO has also reported, “(independent audits show millions of dollars in
unallowable and questionable costs have been charged that do not contribute directly to
the agency's intended mission."

Mr, Chairman, | think you'd agree that gutting A-76's firm but fair requirement for
vigorous public-private competition would be ill-advised. But to do so when our existing
contract administration system is in need of significant repairs would be nothing short of
irresponsible. We would be committing a profound disservice to the nation's taxpayers
and the federal government's customers. AFGE represents many hard-working federal
employees who perform contract administration work--from the Pentagon to the
Government Printing Office--who have many good ideas for saving precious tax dollars.
Please permit us to help you to address this problem.

Making contracting out decisions for the right reasons

Mr. Chairman, you and many of your colleagues have spoken eloquently about the

‘economic difficulties confronting working- and middle-class Americans. While all of us

* rbd.
© GAO, EI INTRACTING: t- Ef fe ra
it sti mitment (GAO/T-RCED-93-2)
(December 1992), p. 8.
TM Gao, Ibid., p. 11.

20


63

Welcome. We would like to go ahead and try to get your state-
ments. There may be another vote in another 10 minutes or so
here.

I will recognize first, from the Office of Management and Budget,
Edward DeSeve. Sir, you are recognized.

STATEMENTS OF G. EDWARD DeSEVE, ACTING DEPUTY DIREC-
TOR FOR MANAGEMENT, OFFICE OF MANAGEMENT AND
BUDGET; JOHN GOODMAN, DEPUTY UNDER SECRETARY OF
DEFENSE, INDUSTRIAL AFFAIRS AND INSTALLATIONS; AND
SAMUEL KLEINMAN, CENTER FOR NAVAL ANALYSES

Mr. DESEVE. Thank you very much, Mr. Chairman. Thank you
for inviting me to appear before you today to discuss Federal prac-
tices related to the outsourcing of commercial services and their
impact on Federal employees. As requested, my testimony will
touch on the implications presented by the March 1996 revisions
to the A-76 Supplemental Handbook and on contract oversight, as
well.

Today we face a new challenge, the challenge of managing in a
balanced budget environment. Our goal is to provide a Government
that empowers its employees, seeks better business practices, and
works better and costs less. To accomplish this goal, we are
downsizing, consolidating and taking advantage of new tech-
nologies. We’re incorporating competition into our budgets and into
other management approaches to improve service delivery. Govern-
mentwide acquisition reform, which this committee has been in-
strumental in assisting us with, is enabling us to take more effec-
tive advantage of competition between private sector offerers and
to better leverage the government’s buying power.

In March 1996, OMB issued its Revised A-76 Supplemental
Handbook to improve the competitive playing field, respond to ad-
ministrative concerns and reflect the other management reinven-
tion initiatives being undertaken. The revision modifies the cost
comparison requirements for recurring commercial activities;
makes certain interagency agreements available to both public and
private offerers; provides for enhanced employee participation;
eases transition requirements to improve employee placement;
maintains a level playing field for cost comparisons among Federal,
interservice support agreement and private sector offers; and seeks
to improve accountability and oversight.

The aggregate dollar volume of Federal service contracting has
declined slightly from about $114 billion in fiscal 1995 to $112 bil-
lion in fiscal year 1996. When consideration is given to the effects
of inflation, the decline is even more significant. Budget con-
straints, the effects of downsizing, technological improvements, ef-
forts to achieve better economies of scale and other improved con-
tracting techniques have contributed to this decline. At the same
time, I would note that Federal civilian personnel compensation
figures for the same years are also essentially flat.

Our goal is not, nor has it ever been, to simply contract out or
to maintain a given level of Federal employment in a given place.
Rather, it is to optimize the use of both public and private sector
resources by selecting the most cost-effective source to meet current
and future requirements. We have no evidence that suggests con-


3 20

P. Mr. Mica. I recognize now the vice chairman of the panel, Mr.
appas.

Mr. Pappas. Thank you, Mr. Chairman. I am glad to be here. I
apologize for being late. I have a written statement that I would
like to enter into the record.

Mr. MICA. Without objection, so ordered.

[The prepared statement of Hon. Michael Pappas follows:]


2. Service contractors must be required to provide additional information
on true contract cost and size of service contract workforce

The reality is that front-line federal employees are able to make only limited
observations on cost overruns by service contractors. Federal employees on
the front line have a distinct lack of information needed to verify their
experiences that, even if initial estimates and bid information make it appear
that contracts are cheaper than federal employees, post-contract costs would
conflict with the initial conditions.

It is an absolute requirement that federal employees specifically, and
American taxpayers ultimately, be provided a more accurate and complete
picture of costs of service contracting. Although NFFE could provide many
anecdotes where federal employees believe contracting costs skyrocket, those
stories‘would be limited in effect. What we can testify to is that no one has
sufficient information on the size of the contracting workforce, either
generally or by agency. OMB still does not have data on the number of
employees working for contractors performing functions for federal agencies.
Estimates, guesses and conjecture will not suffice, and they must be replaced
with a requirement that service contractors report this information. Without
this information, reports on status of federal spending on service contracts
must be taken with a grain of salt. Information on size of contractor
workforce would reveal true cost of federal spending on service contracts.
Federal employees are entitled to know that information, and with that
information, they will be able to show that they can perform work at a lower
cost than service contractors. The general public, American taxpayers deserve
to know how money is being spent on service contractors, because they
should be able to expect to receive a better bargain.

In summary, agencies should be required to meet the burden of showing in
numbers and dollars that contracting out makes sense. H.R. 885, requiring
agencies to make cost comparisons between the cost of doing work in-house
and the cost of contracting. Additionally, H.R. 887 requires the OMB to
develop a government-wide system for determining and reporting the
number of non-Federal employees engaged in service contracts. Together,
HLR. 885 and 887 are designed to shift the burden to agencies to prove the
contracting out makes sense. If the agency cannot show that contracting out
these jobs makes sense, the federal employees should be allowed to continue


157

government for use by contractors in the performance of their services was still in
the possession of those contractors. The report noted that, in many cases,
contractors had improperly used this federal government property to perform
commercial work unrelated to the contract. In addition, according to the report,

some of that property had even been sold back to the government.

In 1994, GAO noted that almost $75 million of government property had been lost
by a single contractor at just one Department of Energy (DoE) facility. GAO
reported that this amount represents only what the contractor reported to DoE as
missing. We believe that figure probably understates the actual amount of missing

property, in light of our detailed review of property management at the (facility)."

Queries: To what extent, if any, is this still a problem at federal agencies? If so, what

steps have been taken to address this problem?

9. It was reported in The Washington Post in mid-1994 that the specter of
competition at DoE had proved so frightening that “some contractors (offered) to
reduce costs by 15 percent to 20 percent..." "If implied competition will do that,
imagine what real competition will do,’ (a senior agency official) quipped." These
concessions represent implicit admissions by DoE contractors that some of their
contracts contain as much as 20% of waste, fraud, and abuse. Unfortunately, DoE

never attempted a reform so simple yet so sensible as to cut service contracting

31


57

Mrs. MorELLA. How can we better monitor the work performed
through that very process, including the employees and A-B union
representative in establishing those standards which may or may
not be evident? Is that basically it? Are there any other sugges-
tions?

Mr. CUNNINGHAM. Part of the concept of contracting work out,
anyway, has to do with monitoring performance, and that’s been
considered as inherently governmental and that type of work can’t
be contracted out. But my understanding is that that’s happening
more all the time. You know, like the old saying, the fox guarding
the chickens. We think that more effort needs to be made in not
only establishing a good quality assurance program but staffing it
adequately and having them in the process throughout, to ensure
that the contractors are performing per the work order and that
we're getting the best bang for the buck.

Mrs. MoRELLA. That’s exactly what we want to do, is to make
sure that we can make this a fair and even process and contracting
out only, if it is absolutely imperative and cannot be done in-house.
Incidentally, as you probably do know, I am a cosponsor of H.R.
885, 887, and 889 and hope we can move those forward. When we
have our next panel, maybe we can ask some questions that could
result in administratively bringing about some of the desired re-
sults. Thank you.

Thank you, Mr. Chairman.

Mr. Mica. I thank the gentlelady.

Yes, ma’am.

Ms. Norton. Could I just make a suggestion for the record? I
must say that I do not hear complaints about the productivity or
the work of Federal employees, and I recognize that many Federal
employees are, as it were, overqualified for the jobs they do. That’s
why we have been into locality pay. Many Federal employees per-
form work that is comparable to work in the private sector and are
paid less for it. Of course, locality pay hasn’t been forthcoming in
the amounts that workers deserve and were promised. But we do
have a situation where people, of course, who supervise and ac-
count for millions of dollars and billions would have counterparts
that would earn much more in the private sector.

So I make this suggestion within that context but at a time when
we are told, with good reason, that we want to promote competition
everywhere because competition helps people improve. If you want
to improve the productivity and the quality of a work force, our
own work force, then one way to do it might be to make sure that
no contract was let without giving the employees the opportunity
to bid for it.

If competition promotes improved productivity and gets people to
working at their best, then we want to make sure that Federal em-
ployees have the ability to show what they can do, and I would like
to see a situation where they would have first refusal. Say, do you
want to compete for it, and the people say no, they wouldn’t want
to compete for it, they wouldn’t have to, of course, but I believe
that we would probably see an already excellent work force fine
tune its skills and its competitive edge even more if we were to as-
sume that no contracts should be let without giving the employees


23

new contractor took over the operation of the post laundry facility
at the fort. NAGE represents the employees of the contractor.

The predecessor contractor, I.G.I.T., Inc., failed to pay all employ-
ees a final biweekly check for work performed, totaling approxi-
mately $23,000. I.G.I.T. took a Federal payment and ran. The pay-
ment due to the contractor from the Government because of past
utility bills for that period only came to $16,000. Now I.G.1.T. has
assigned all contracting income to a bank as collateral, and the
bank has kept the money and welshed on employee payroll checks.

Furthermore, for a period covering several months, the contrac-
tor deducted Federal and State income tax and Social Security
from the employees and never deposited such taxes with the Inter-
nal Revenue Service, Social Security Administration, or the State
of Missouri. Moreover, I.G.I.T. owes $11,000 in accrued vacation
pay and $41,000 in severance pay to members that lost jobs. The
approximate amount I.G.LT. owes employees totals $74,000.

.G.LT. has since declared bankruptcy. The Department of Labor
has intervened and will make available only $16,000 owed to the
employees, 22 cents on the $1 that they are owed. So much for effi-
ciency in the private sector.

LG.IL.T. is not the only private sector company that has ripped off
the Federal Government, taxpayers, and Federal employees. Seven
different contractors since the early 1970’s have provided laundry
service at Fort Leonard Wood. The workers have suffered non-
payment of wages and/or benefits under four contractors.

Mr. Chairman, the entire membership of NAGE is pleased that
several pieces of legislation introduced by Congresswoman Eleanor
Holmes Norton will begin to take a look at this so-called shadow
Government of service contractors. NAGE strongly endorses all
four of these bills as a start to finding out exactly who and what
the Government is getting to do their work.

This administration and others have repeatedly praised their ef-
forts in creating the smallest Federal work force since the Kennedy
administration. But as we know, much of that work that used to
be performed by Federal employees has simply been transferred to
the private sector.

Mr. Chairman, the members of the National Association of Gov-
ernment Employees are proud of the work they do for the American
taxpayer. They look forward to competition that allows the em-
ployee to be maintained on the basis of their performance, not
through some arbitrary ceilings on full time employees imposed as
part of the government desire to downsize.

This concludes my written statement. I'd be happy to answer any
questions you may have.

Mr. Mica. Thank you, Mr. Donnellan. We will withhold questions
until we finish the panel.

[The prepared statement of Mr. Donnellan follows:]


144

eliminating a given function as a goverment activity and relying on the private sector for
{ts provision (privatization). *

Clearly, the A-76 process may not be the best for conducting every single type of
public-private competition. And AFGE is always willing to consider changes that might
‘expedite the public-private competition process. But at the same time we must Impose
some form of cost comparisons on all of the federal government's lucrative service
contracting.

Representative Norton has introduced very sensible legislation (H.R. 885) which
would require agencies to make cost comparisons before contracting out work and
prevent agencies from contracting out that work if the cost comparisons show that the
work could be performed less expensively by federal employees.

Mr. Chairman, what do you think should happen when it is shown that a contractor
has nat lived up to the terms of the contract? | say that the work should be recompeted
or brought back in-house-—and | think you'd agree. The new supplement to A-76
already requires agencies to collect the information necessary to determine if satisfactory
performance of a contract has been achieved. Now we need to charge agency managers.
with the responsibility of acting on well-informed determinations of poor performance by
requiring them to correct the problem by either recompeting the work or bringing it back
in-house. To ensure that all taxpayers and customers benefit from this important
Initiative, the post-contract audit should be required for all contracting out decisions,
Including those made outside of A-76.

* GAO, Ibid.
18


90

the contract cost. The savings I reported are net of the monitoring
costs.

In the past, the Department of Defense sometimes felt obligated to
select low-cost bidders that they suspected could not perform. This
contributed to some terminations for poor performance. Agencies and
departments should use a selection process that allows them to pick
the best value and not necessarily a sealed-bid, low-cost alternative.
They are allowed to weigh past performance, management, and
financial solvency of the bidders. This should reduce the risk of poor

performance.

In summary, competitions produce the best efforts in all participants
and the best value for our agencies and departments. The end result
would include more outsourcing, but more importantly, it will lead to
more efficient government.


44

® ‘Statement of FMA Chapter 21 President Patricia Armstrong before the House Civil Service Subcommitice 10/1/97

‘Mr. Chairman, Ranking Minority Member Cummings and members of the Subcommittee:

‘My name is Patricia Armstrong and I am President of the Federal Managers Association (FMA) Chapter
21 at the Marine Corps Air Station, Cherry Point, North Carolina, On behalf of the 200,000 managers
and supervisors throughout the Federal Government whose interests are represented by FMA, I would
like to thank you for holding this important hearing and for allowing us to present our views and
recommendations to the Civil Service Subcommittee on Federal contracting-out for services. I would
particularly like to thank Congresswoman Eleanor Holmes Norton and Congresswoman Connie Morelia
leadership in drawing Congressional attention to the short-sightedness of
designed to create 2 shadow-government of contractors who are in many
instances more expensive and less accountable to the American public.

Before I begin, I would like to make it clear that my remarks today are being made in my capacity as an
FMA Chapter President and do not represent the official views of the Department of Defense, the Navy,
or the United States Marine Corps.

INTRODUCTION

As tax-paying Americans first and civil servants second, FMA members have long been concemed about
the consequences of shifting important governmental responsibilities to a, shadow-government of
contractors. In February of this year FMA’s National President, Michael B. Styles, appeared before this
‘Subcommittee to comment on the impact of the President’s budget proposals on the Federal workforce.
‘Mr. Styles took that opportunity to reiterate FMA's view that contracting-out is not and should not be
viewed as a panacea for deficit reduction. At the same hearing, National Federation of Federal
Employees President James D. Cunningham, Sr. quoted the following published remarks of former OMB
Deputy Director for Management John Koskinnen:

Overall, Mr. Koskinnen acknowledged, the Government does not know
‘how many private workers itis paying for.
“You can use any mumber you wart,” he said, “but whatever itis itis a lot
of people.”
He said, however, that he did not think the replacement of Federal
workers with private workers was wide.
03/18/96, New York Times, p. Al

In March of this year FMA had the honor of being the first employee group to host a monthly meeting of
the National Partnership Council at our 59th Annual National Convention in Tysons’ Comer, VA. At
‘one point during the meeting, John Koskinen repeated his observation that Federal downsizing was not
driving agencies to increase reliance on contractors. A very audible groan from the audience of 200 mid-
level managers from around the country and from across Government told Mr. Koskinnen that his
headquarters’ perception did not jive with our reality atthe operations level.



85

‘The Department of Defense has a high quality, dedicated workforce. Nevertheless, the
Department and its employees now confront new challenges as we seek the right mix of forces
and capabilities, supported by an efficient, but responsive, infrastructure, to meet the national
security missions of the 21" century. We recognize that some employees will face dislocation.
‘We will utilize every tool available to assist in retaining, relocating, and retraining displaced
employees. Programs that support these efforts have been successful in the past. They are the
reason that the Department has been able to hold involuntary separations to less than nine percent
of the jobs eliminated over the past six years — we are proud of this record.

Conclusion

In conclusion, we must make our support structure as agile and efficient as possible. We
are committed to seeking out and adopting the best business practices, streamlining our
organizations, and introducing competition into the delivery of our support services, wherever it
makes sense to do so.

I stand ready to answer any questions you may have.


62

ployees at that moment, you lose those employees, is that the way
it usually works; and then you have to go in and try to get them
unionized in the private company? How does that usually work?
Would they come under another union?

Mr. CUNNINGHAM. NFFE has in its constitution that we only rep-
resent Federal employees, period. We do understand that there are
other unions who represent Federal employees now, who are follow-
ing the work. Our only concern is with the employees that we rep-
resent and with this wonderful country that we live in, to make
sure that we have the very best folks available to do the job, and
Federal employees provide that.

Mr. CUMMINGS. Do you find that as far as—I don’t know whether
you follow this—African-Americans and women? Do they fare any
better or any worse with the contracting out?

Ms. ARMSTRONG. I’m sorry, what was the question?

Mr. CumMINGS. Blacks and women, minorities, do you find that
they fare any better or worse when we start contracting out? When
we have contracting-out?

Ms. ARMSTRONG. Personally, I haven't seen any difference or any
type of discrimination in that area. I think they mainly look at
their qualifications.

Mr. CUNNINGHAM. I think clearly statistics show that the group
that suffers the most through downsizing of any type, whether it
results in contracting-out or not, is always women and minorities.
The Federal Government, in many ways, at least attempts to be
the model employer. It’s too bad that because of the glass ceiling
that we know still exists that women and minorities are on the
lower end of this thing. They have the lowest seniority, so that
whenever a tragedy like this happens, then they are clearly the
ones that are affected the most.

Mr. CUMMINGS. Thank you very much.

Mr. Mica. I thank our panelists. I don’t think we have any addi-
tional questions at this time, but what we would like to do—it
sounds like NFFE is going to do additional field hearings and testi-
mony from your employees, and other organizations may have in-
formation. First of all, we will keep the record open for at least 2
weeks here so that additional organizations who have not been able
to testify can submit statements for the record. But also we would
ask you to work with the committee so that we can get some con-
crete information on how to proceed and what elements of the leg-
islative proposals would most effectively address the problems that
we have heard outlined here today.

I would like to thank each of you for participating with us today
and for your contribution and to dismiss the panel.

Our second Genel is Edward DeSeve, who is Acting Deputy Di-
rector for the Office of Management and Budget. We also have the
Honorable John Goodman, Deputy Under Secretary of Defense for
Industrial Affairs and Installations. We also have Samuel
Kleinman with the Center for Naval Analyses.

To our witnesses, I think you have also heard the terms, that we
ask you to try to summarize your statements and we also will
swear you in, if you would stand and raise your right hands.

(Witnesses sworn.]

Mr. Mica. The witnesses answered in the affirmative.


86

Mr. Mica. I now recognize Samuel Kleinman, Center for Naval
Analyses. You're recognized, sir.

Mr. KLEINMAN. Good afternoon, Mr. Chairman. Thank you for in-
viting me to testify before the subcommittee.

My name is Sam Kleinman, I am director of the Infrastructure
and Readiness team at the Center for Naval Analyses. We are a
federally funded research and development center. I will briefly
discuss our examination of the Defense Department’s competitions
and outsourcing under OMB Circular A-76.

We believe that our results demonstrate more than anything else
the value of competition, and this is what DOD has gained with its
A~-76 program. The program is built on the premise that all provid-
ers of service, both Government in-house teams and private con-
tractors, should be able to demonstrate that they provide the best
value to DOD and the Government.

As Mr. Goodman mentioned, we have examined 2,100 public-pri-
vate DOD competitions that were conducted between 1978 and
1994. Those competitions covered 80,000 Government positions; 80
percent were held by civilians; 20 percent by military personnel.
The savings, on average, were 30 percent. That includes a very
wide range, going from 0 up to 70 percent. We find the savings
across all the military services and across all different types of
functions.

Half the competitions were won by Government in-house teams.
The average savings when an in-house team won was about 20 per-
cent. When an outside team won, it was 40 percent. The in-house
savings appear low because when no bidder produces a savings, the
competition is decided in favor of the in-house team, and those no-
saving competitions are included in their average. When competi-
tions with no savings are removed, the savings are very com-
parable between government and private teams. Overall, savings
have come to $1.5 billion per year.

We believe that the source of savings is competition. It provides
cost visibility and choice of suppliers. In many cases, for the first
time, in-house teams had to construct the full cost of doing work
internally and develop performance work statements of what they
were required to do. The Government could then compare alter-
native sources for accomplishing the required work.

Winning teams, whether public or private, appear to reduce costs
by using fewer people, not by paying less per person. They do this
by moving people from one job to another, by giving employees a
greater range of skills, and sometimes by using temporary workers,
part timers, overtime and workers from other sites to meet peak
workload demands.

When contractors win, they have to offer any new jobs to the af-
fected Government workers. Most Federal workers prefer to con-
tinue employment with the Government. Only 3 percent of the af-
fected workers actually joined the contractors. However, our case
studies show that when a contractor loses a subsequent competi-
tion, most of the workers were rehired by the winning firm.

There is a cost to competing and monitoring contracts. We esti-
mated that the one-time cost to compete is about 10 percent of the
annual value of the contract. The costs to monitor these contracts


121

questionable or cléarly unallowable expenses.

Moreover, GAO, in previous reports to Congress, has made clear
that federal agencies have often abdicated their responsibilities
and relied on contractors to carry out their own oversight! This
is akin to encouraging federal employees to write their own
performance evaluations. In December of 1992, (GAO/T-RCED-93-2),
GAO concludes, "Unfortunately, in all too many instances, federal
agencies have abdicated to their contractors the responsibility for

ensuring that contractors perform quality work cost effectively."

Contract administration is one of the costs of doing business
with contractors -- it not only must be done; it must be included

in cost comparison analyses.

Federal Government Contractor Inventory

Just as the federal government tallies the number of employees
working for the federal government, a similar annual accounting
should be kept of the number of contract employees doing business
with the federal government. Congresswoman Eleanor Holmes Norton
(D-DC) has introduced legislation to provide for just such an
accounting, H.R.887. Her bill would require the Office of
Management and Budget to develop a government-wide system for
determining and reporting the number of non-federal employees

engaged in service contracts. I encourage this Subcommittee to

-9-


124

differs markedly, they share the common theme that the current

Process is not working in either agency.

I wish to begin by discussing the situation in the Department of
Defense. As you know, Mr. Chairman, more than ten years ago
Congress came to the conclusion that fire protection at military
installations was so specialized that it should not be contracted out.
Among Congress' many reasons for taking this step were the
potential threats to national security stemming from base
commanders’ ceding control over emergency situations to outside
private sector contractors, and the need for fire fighters at certain

sensitive installations to have security clearance.

For these and other reasons, Congress created Section 2465 of Title
10 which expressly forbids the Department of Defense from
contracting for fire protection or security guard functions. With such
a clear statement on the matter of contracting for fire protection, one
would think that there would be no problems in this area. One

would be wrong.

For ten straight years, opponents of this provision have refused to
accept Congress’ decision and have tried every imaginable tactic to
circumvent Section 2465. Repeated efforts to directly repeal the
provision have failed miserably, so these overzealous advocates of
contracting out have sought other avenues. Every single year the
Defense Department conjures up new and increasingly creative ways

to undermine Congress’ clear policy on this issue. There have been


31

Mr. Mica. I would like to now recognize James Cunningham,
whe is the national president of the National Federation of Federal

imployees.

ir. CUNNINGHAM. Thank you, Mr. Chairman. Mr. Chairman and
the distinguished members of this subcommittee, my name is
James D. Cunningham, Sr. I am the president of the National Fed-
eration of Federal Employees, and on behalf of the 150,000 Federal
employees our union represents, I appreciate this opportunity to
testify before this subcommittee today and offer you our views of
NFFE’s membership concerning Federal contracting for commercial
services.

Last May, NFFE members had the opportunity to testify at our
union’s forum on contracting out which was held before a panel
consisting of myself, Mr. John Koskinen, formerly of OMB, and Mr.
James King, formerly of OPM. During that forum our members had
the chance to relate firsthand stories of contracting out. NFFE
members told about the very real and, most often, very negative
impact of contracting out.

The experiences of these front line workers are a call to support
legislation that would begin to put a stop to senseless contracting
out. NFFE supports legislation that would help to ensure that serv-
ice contracting will occur only when it is absolutely necessary. That
is, contracting out for services should be done only if it can be posi-
tively shown by the agency that there will be: One, no decline in
the quality of work; two, a significant cost savings which would be
realized over the life of the contract; three, acceptable monitoring
of the service contractor to prevent abusive service contracting
practices; and, four, certainty that the procedures set forth in A—
76 have been followed.

NFFE has heard claims that there has been a reduction in con-
tracting out. The experiences of our members do not match these
claims that there has been a decrease in contracting out. We be-
lieve that the opposite is true. While fully dedicated to performing
their jobs, our members must be ever vigilant and focus their at-
tention to saving their jobs.

In fact, during the past year, our members’ requests for training
and assistance in A-76 procedures have increased tenfold. In May,
at our national training session, there was standing room only for
all of our training sessions on A~76 procedures. Our members’ re-
quests for assistance in this area are in direct response to an-
nounced competition for their jobs, particularly within the Depart-
ment of Defense. Keep in mind that such competition means that
Federal employees’ jobs are up for grabs to the private sector. This
is the reality which clearly contradicts reports of decreased con-
tracting out.

The difference in quality of contractors’ work as compared to
Federal employees’ work can best be explained by the fact that
service contractors and their employees work only to the specifica-
tions of the contract, while Federal employees work until the job
is done. That difference in orientation that Federal employees have
is what makes Federal employees’ work far superior.

Consider the case of maintenance work done on airplanes at
NAVAIR in Jacksonville, FL. One aspect of maintenance on the
planes is removing rust from bolts as they corrode. To the best of


156

d. contractors are often significantly overpaid and do not always return
overpayments unless instructed to do so (although they didn’t hesitate to report
underpayments) (GAO);

‘. agencies do not always review the effectiveness and efficiency of the services
performed by contractors prior to the issuance of payments (OMB); and

f. independent audits show millions of dollars in unallowable and questionable
costs have been charged that do not contribute directly to the agency's mission

(GAO).

Queries: To what extent do these problems continue to plague the federal government's
contract administration? What steps should the federal government take to resolve these
Problems? To what extent will the contemplated drastic downsizing of the Pentagon's
contract administration workforce complicate these problems? To what extent would an
even greater reliance by federal agencies on service contractors, as a result of enactment
of S. 314 / H.R. 716, complicate these problems? How much is lost in dollars annually
as a result of waste, fraud, and abuse from service contracting and poor contract

administration?

8. The House Committee on Government Operations reported in 1985 that more
than $40 billion worth of materials and equipment purchased by the federal

30


and $111.7 billion in 1996. The 1996 figure reflected a drop from $114.1 billion in 1995. In
short, spending on service contracts does not appear to have increased during the workforce
reductions under this Administration.

Quality of the Contractors’ Work

Employee organizations have frequently claimed that contractors do not perform work at
the same level of quality as federal employees. Some of the organizations have alleged that
‘when contractors fail to perform adequately, federal employees have been left to complete tasks
late in the process and after considerable expense. Employee organizations have been requested
to provide specific examples of such experiences,

Cost Overruns

Employees" organizations have alleged that contractors underbid on original submissions,
hoping to take advantage of task order modifications and other subsequent changes in the terms
of contracts to escalate their profit margins. Thus, even ifthe initial estimates and bid
information make it appear that contracts are cheaper than federal employees, post-contract costs.
‘would conflict with the inital conditions. Again, employee organizations have been requested to
provide specific examples to support such allegations. The Center for Naval Analysis and the
‘Administration witnesses have been invited to provide the Subcommittee information about the
methods of tracking these costs used (primarily within the Department of Defense).

‘Lack of Monitoring

Employees’ organizations have also alleged that contracts are not adequately monitored
to ensure that the government gets what it pays for from the contractors. As a result, these
‘groups allege, federal agencies don’t have the same controls over contractors that they have over
in-house workforces, and this omission results in lesser quality being provided under contracts.
Both panels have been requested to address issues related to monitoring.

‘Changes Resulting from Modifications of Circular A-76

‘The Administration has been asked to provide an assessment of changes that it has seen
in the first year following the revision of Circular A-76. This version of the cost competition
‘guide required stricter cost accounting (notably, forcing agencies to include long-term costs of
easion benefis in estimating in-house expenses) that comply withthe Chief Financial Ofices
‘Act and provide a more level playing field in evaluating in-house estimates and contractors’ bids.
“The revised Circular A-76 retained protections for employees (especially the “right of first
refusal” to positions with the contractor if functions are converted to contract), but also expanded
the ability of federal managers to convert functions to contract without competition if the
function is performed by fewer than 10 FTE, or ifthe function is a commercial operation that the
agency head decides will no longér be a government function. The latter rationale was used to

3


139

In his letter, General Fisher informs the Commander of Fort Hood that the installation's
FTE elimination-in-favor-of-privatization quota has been increased from 645 to 767
spaces. To soften the biow a bit, General Fisher added a handwritten note at the bottom
of the letter:

“Tom, We're required to meet the Army's assigned requirement. For each function

you select, a study leading to a contract-out decision. You're ahead of most

everyone; just need a few more in "98. George"

Obviously, Mr. Chairman, the outcome of any competition at Fort Hood or
elsewhere within Forces Command for that matter has already been decided in advance.
Contracts won't be awarded because contractors provided more effective, more efficient,
and more reliable services. Rather, they will be awarded because there aren't enough
federal employees available to do the work. Administration officials took a look at the
‘same letter and said this wasn't a clear case of management-by-FTE cellings; rather, the
General simply wasn't a very artful writer. Mr. Chairman, you be the judge.

Here's another example. In this attached letter, a senior Defense Information
Services Agency (DISA) manager clearly instructs his subordinates not to exceed
established FTE ceilings. The manager also instructs his managers to back-fill positions
at GS-12 and below with contractors, or re-engineer the positions in order to make up
for FTE shortfalls. Again, this is a clear case of management-by-FTE ceilings, and then
contracting out work that might have been performed more cheaply by federal employees.
Administration officials say I'm wrong; it's not that the DISA manager is a bad writer, it's
that I'm a bad reader. Again, Mr. Chairman, you be the judge.

13


147

can't agree on explanations and solutions, all of us would accept the simple principle that
the federal government should not exacerbate those difficulties.

That's why when we contract out we must do it for the right reasons. If a
contractor can do work more cost-effectively than federal employees because she has
devised a better system, employs better managers, or has done a better job inspiring her
workforce, then that work should be contracted out. But what happens if a contractor can
do the work more cost-effectively than federal employees merely because he pays his
employees inadequate salaries or provides few if any health care and retirement benefits?

Mr. Chairman, contrary to a lot of propaganda, pay and benefits for federal
employees are not extravagant. It's well-documented that our pay lags behind
‘employees in the private sector who perform comparable work by anywhere from 13%
to 43%. Further, federal employees pay more than almost alll of their counterparts in the
private sector for their health care and retirement benefits, Over 400,000 full-time federal
employees dont have health insurance because the premiums are prohibitively
expensive-~even though our health care system, the Federal Employees Health Benefit
Pian, is often cited as a model for some form of national health care. And the average
before tax income of all U.S. retirees of $19,371 is in excess of the average before tax
annual annuity of federal retirees. Quite simply, federal employees are not living high off
the hog. Consequently, if work is being contracted out to firms that provide the
government with savings simply because they provide their employees with compensation
that is even more inadequate than that provided to federal employees, then | think

Jawmakers like yourself need to look at this phenomenon very carefully.

21


153

contract for services regardless of what is more desirable and cost effective."

Queries: To what extent are FTE ceilings on the federal government's civilian workforce,
imposed explicitly or implicitly, forcing agencies to contract out services? Has at least
some of this contracting out cost more than if the work had been performed in-house?
Has any of this contracting out been perpetrated in defiance of Section 1031 of the FY96
defense authorization act which prohibited DoD from managing its civilian workforce on

the basis of FTE ceilings?

2. A recurring provision in section 8015 of the defense appropriation act requires
DoD to certify in-house cost estimates before converting most DoD activities with
more than 10 civilian employees to the private sector, Recent indications are that
DoD will rely more on heavily on outright privatization—at the expense of the A-76
competitive framework, As GAO pointed out in NSIAD-97-86, 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)."

Queries: What cost, quality, reliability comparisons, if any, are being used by federal
agencies, particularly DoD, to 1) convert functions with 10 or fewer employees, 2)

outsource new functions, and 3) eliminate functions in order to privatize? Have these

27


46

© sent age Pt Passage ee Cv Se Soils 1017

For the most part, the new Supplement has brought welcome changes. While allowing the Government
more flexibility to contract out, the Supplement ensures that employees have more involvement in the
competitive process and it also allows work to be contracted-in when it is more cost-effective to do so.

From a line manager's perspective there are four significant differences between the old and new A-76
processes:

The average study time has been reduced from 18-60 months to between 12-18 months;
“How to” specifications have been replaced with proposals
‘The emphasis on “low bid” has been changed to “best value”; and,

Instead of focusing on individual functions, studies now take a broader systems approach.

eee

Currently there are more than 40,000 full-time equivalents under A-76 review within the Department of
Defense.

What really creates anxiety and frustration among Federal managers, however, is the perception that
downsizing and not obtaining best value are driving the increase in contracting-out. While the
‘Administration expects to meet the Federal Workforce Restructuring Act (P.L. 103-226) goal of reducing
the number of FTE’s by 272,900 two years early, many FMA members have seen their agencies’
workloads increase. (Analytical Perspectives: Budget of the United States Fiscal Year 1998, Table 10-
1p. 205.) :

‘An excellent example of the shortcomings of politically driven contracting-out is our Government's
experience with trying to privatize prisons. At the start of the current Administration, two political
promises, one to reduce the size of the Federal bureaucracy and the other to increase the size of the
Federal prison system, created a dilemma. The solution, it appeared, would be to privatize some Federal

prison operations. Contractor guards wouldn't show up on Federal payrolls and the politcal leaders
Could take credit for increasing the numberof prison beds (1122498 New York Times, p. Al) ‘The
Justice Department, however, decided in June of last year to scrap this plan after coming to the
conclusion that it could not minimize the impact of contractor strikes and inmate disturbances st
contractor run facilities. (06/24/96, Federal Times, p. 8)

While the shortcomings of privatization were immediately obvious in the case of prisons, the negative
Jong-term impact of privatizing military upgrade and repair work may only come to light after it is too
late.

1G PUBLIC-PRIVATE DI

Policies to deliberately shift more defense industrial maintenance work to private contractors pose serious
consequences, Current law (10 U.S.C. 2466 - the 60/40 rule) requires that 60 percent of overhaul and
repair work on military hardware be performed at public defense depots. This requirement was prudently
established by Congress to retain a “core” industrial infrastructure and a skilled strike-free workforce
capable of assuring absolute readiness and surge capacity in the event of war or national emergency.

page 3


enacted
laws that prohibited conversion to contract or, in some cases, even prohibited conducting studies
‘to assess the costs and benefits of potential contracts.

‘After those hearings, OMB forwarded to the Subcommittee a list of legislative provisions
that impeded contracting, and the National Performance Review concluded that the list of such
restrictions (commonly riders to appropriations bills) was reduced during the 104th Congress.
During 1995, OMB completed the firt revision of Circular A-76 since 1983. This Circular,
which describes the rules and procedures for agencies conducting cost comparisons, required
revision to bring it into alignment with accounting requirements and managerial standards
developed in the Chief Financial Officers Act of 1990, the Federal Acquisition Streamlining Act
of 1994, and through the National Performance Review. Federal employee organizations have
requested this hearing to address a variety of issues.

Size of the Contractor Workforce

‘Although the reductions of the federal workforce authorized by the Federal Workforce
Reduction Act of 1994 have been bone disproportionately by the Department of Defense,

equal or greater size is alleged to have replaced federal employees. Neither OMB nor any other
agency has been able to provide the Subcommittee with an accurate count of the contractor
workforce, 90 data that might be used to evaluate whether contractors are increasing or
decreasing is unavailable. Data supplied by the Department of Labot's Office of Federal
Contract Compliance indicate that firms that provide goods and services under contract with
federal agencies employ a total of 22 million persons, but those data include all of the firms’
‘employees, most of whom do not work on federal projects.

OMB still does not have data on the number of employees working for contractors
performing function for federal agencies. However, OMB has provided data indicating that the

engineering,
held steady in constant dollars in recent years, but declined when adjusted for inflation and as a
Portion of the federal budget. Federal agencies spent $105.2 billion on these contracts in 1992

2


Neither I, James D. Cunningham, Sr., nor the National Federation of Federal

Employees, has received any federal grant, contract or subcontract during the
current or the previous two fiscal years.


120

employees, agencies‘should be required to live within a contracting
budget as well. The amount of money an agency spends on contract
employees should be no lees prominently displayed than the agency's

accounting of ‘salaries and expenses for in-house employees.

— Contracts

It has become clear over the years that even if cost estimates
are performed by agencies prior to letting a contract, they are
often skipped when it comes time for the renewal, extension of even
re-competition of existing contracts. In the interest of
streamlining federal expenditures and continuing to ferret out and
eliminate waste, fraud and abuse, there must be increased emphasis
placed on the necessity of cost estimates whenever private sector
contracts are reviewed. This, too, must be addressed in

legislation.

Effective Oversight and Contract Administration by Federal
Agencies

Lax management and ineffective oversight of contracts
continues to plague many federal agencies. As detailed earlier in
this testimony, GAO has uncovered instances where the federal

government has been charged millions of dollars in either


19

HAROLOE. FORD, JR.

Congress of the United States tee
House of Representatives eve

‘Bashington, BE 20515-4209 acl
Opening Remarks of Congressman Harold E. Ford, Jr.
Hearing

Civil Service Subcommittee
Contracting Out: Successes and Failures
‘October 1, 1997

‘Thank you Mr. Chairman and my ranking member Mr. Cummings. To the panelists, let me
say that { fook forward to your testimony.

Today's hearing provides this Subcommittee with an important opportunity to address an issue
that has become increasi 4s the federal government continues to downsize. In
fact, many of my colleagues, particularly those on the other side of the aisle, believe that much
‘of what the government does can be contracted-out to the private sector in a cost-efficient
manner. In my mind, however, can and should are two different matters.

Although cost-savings and efficiency are core principles that should guide the way in which the
federal government does business, in my mind, accountability is an equally important concern.
‘And when the federal government contracts-out services to the private sector in hopes of
saving money, we also lose much of our oversight abjlity. In turn, the government and this
‘Commitee in particular cannot ensure thatthe bill ayer dollars pouring into our
“shadow government” each year are being spent wisely and efficiently.

\ In closing, let me say that I find it somewhat ironic that at the same time that many
\\ Republicans are criticizing the Department of Education for failing to be able to account for

\bow federal fuunds are used, that this body seriously would be considering expanding private
‘sector contracting.


14

The Congress recognized this in 1988 when a bill required that
agencies cut service contracts significantly. The GAO reported back
to the Congress that it could not tell whether service contracts had
been cut significantly because there was no system in place to
measure that. Therefore, one of my bills would require that the size
of contracting work forces be measured and that the size and the
amounts be reported to the OMB, so that the OMB might develop
a Governmentwide system for determining how many non-Federal
employees are engaged in service contracts.

cognizing that there is nothing in the private sector to bring
contractors into the sphere of sacrifices that Federal employees are
undergoing, I have a bill that would cut $5.7 billion in Federal
agency contractors in order to allow Federal employees to get their
statutory raise each year. We haven’t reneged on the promise to
the Federal employees that they will get a specific statutory raise
calculated by a formula. We just don’t do it and we haven't done
it for years. Meanwhile, as far as we know, people doing the same
work as service contractors get their raises every year, and I can
tell you that almost never in the private sector do people not get
raises that they are promised every year. It seems to me that that
would bring some equity and save us some money.

Finally, I have a bill that would plug a hole in buyout legislation
that we have done. This was landmark legislation, the first across-
the-board legislation, and we were at great pains to make sure that
civil servants did not in fact take advantage of us in this legisla-
tion. So we said if you were bought out with cash, then you couldn’t
come back, and that such folks could not be replaced with new

ires.

There is now evidence that instead of replacing Federal employ-
ees with new hires, the agencies are using contract service employ-
ees to do the same work. If the point was deficit reduction, if the
point was to reduce the Federal work force, we cannot allow a
phantom work force to grow, paid 100 percent with Federal funds,
while patting ourselves on the back that we have cut our civil serv-
ice work force.

Mr. Chairman, I hope that this year in addition to these hearings
that we can get some motion on at least some of these bills. I have
myself testified in favor of these bills. I believe these bills have
great bipartisan potential, and I hope that we are seeing the begin-
ning, with these hearings, that we are seeing the beginning of a
process that will take some or all of these bills to the floor.

Thank you, Mr. Chairman.

Mr. Mica. I thank the gentlelady.

I would like to recognize Mrs. Morella from Maryland.

Mrs. MorRELLA. Thank you, Mr. Chairrian. I want to thank you
for holding today’s hearing on contracting out the Federal work
force. I have concerns about contracting out. I think it is critical
that we closely examine the issue today and that we continue to
closely monitor the manner in which we contract out for functions
of our Federal work force.

I can vividly remember this subcommittee’s hearings on the sub-
ject during the spring of 1995. During those hearings, we posed im-
portant questions. How many Federal contractors performing func-
tions for Federal agencies are there? How much are we paying


eee Congress of the United States

Fate a teal House of Representatives:

Sei cox tee (COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

ea 767 Ravan House Orrox Buona
aes araerox, DO 2051-6543

ey (Ove HNORED FIFTH CONGRESS

Opening Remarks of the Honorable John L. Mica
‘Chairman, Civil Service Subcommittee
Hearing on Contracting Out: Successes and Failures
October 1, 1997

Today's hearing will again focus on the issue of contracting out in the federal
government. Previous information obtained through prior hearings indicate that contracting for
‘commercial services has been @ useful tool for restraining cost inflation of goverment
‘operations in certain instances. However, Opponents of contracting in this manner have
maintained thatthe cost savings due to contracting are only temporary and that contracting may
‘compromise program efficiency and effectiveness.

I believe that to examine these issues properly, Federal employee organizations should
have the opportunity to present their side of this important issue. Some federal employee
“organizations have charged that contracts are inadequately r onitored, that contractors fail to
deliver the quality required for effective operations, and that when contractors fail, federal
‘employees must pick up the pieces, apparently under tight deadlines. In this hearing we hope to
examine those charges.

In the last Congress, our hearing on government contracting, focussed on the potential
benefits from contracting out more commercial services. Since that hearing, a number of
employee organizations have requested that they be given an opportunity to challenge the cost-
saving claims of contracting’s proponents. Today, we are providing that opportunity.

Since our last hearing there have also been a number of changes that affect the
contracting environment. In 1996, the Office of Management and Budget published a revision of
Circular A-76, the rule book that governs cost competitions within the federal sector. These
revisions enable federal agencies to comply with the changes in government accounting and

practices embodied in statutes such as the Chief Financial Officers Act, the Federal
Acquisition Streamlining Act, and the Government Performance and Results Act.

‘The operating environment has also been affected. Budgets have been cut and the
workforce reduced, but the workloads remain. We have heard frequent speculation that agencies
have resorted to increased contracting to cope with the workloads. According to OMB, however,
federal agencies awarded $111.7 billion in service contracts in 1996. That represents a decline in
contracting of $2.4 billion from 1995 levels.


182

‘The audit determined that Defense information Systems Agency (DISA)
acquisition planning and award procedures inappropriately restricted competition,
allowed inherently Government functions to be contracted and had incomplete and
Inaccurate acquisition packages. Administration of time-and-material contracts did
not safeguard the Government's interests and incurred duplicative administration
costs. The DISA also improperly used a multiple source procurement award that
restricted competition, produced excessive prices and gave contractors windfall
profits."

--summary of Audit Report 96-032 in report for 10/1/95-3/3/1/96, p.7

"Mark Zetzer, Sr., president and sole owner of Mobility Systems, Incorporated
(MSI), submitted fraudulent progress payment claims to the DoD on behalf of MSI.
MSI, under contract to produce munitions trallers, recelved $1,490,000 in
overpayments. Following guilty pleas, Zetzer was sentenced to $250,000
restitution, 3 months imprisonment and 5 years probation. MSI was fined $50,000,
placed on 3 years probation and must obtain court approval before contracting with
the Goverment."

~-report for 10/1/95-3/31/96, p.35

“Westinghouse Electronic Corporation, Electronic Systems Group, gave the
Government inaccurate cost or pricing data in connection with the F/FB-111
Avionics Intermediate Shop Replacement Program contract, resulting in the Air


110

ATTACHMENT 4
Excerpt from: Report of the Acquisition Law Advisory Panel
to the United States Congress (January 1993)

1.0.1. Competition as a National Policy

ition has been the foundation for the buyer-seller relationship in Goverment
contract laws from the earliest days of the United States. In 1809, for example, Congress

Ma


69

Federal Civilian Personne! Compensation
(S$ billions)
FY 1992 $107.3 $42.7 39.9
FY 1993 $110.9 $413 37.2
FY 1994 S11 $40.7 36.6
FY 1995 $111.2 $40.1 36.0
FY 1996 $112.3 $39.6 35.3

Note: — Source: The Analytic Perspectives, FY 1998, 1997, 1996 Budget of the United
Federal Contracting

‘Our goal is not to contract-out or to maintain a given level of Federal employment.
Rather, it is to optimize the use of both public and private sector resources by selecting the
highest quality, most cost-effective source to meet current and future requirements. We are using
best value techniques to evaluate both the public and the private sector offers. We are aware of
no evidence that suggests that contractors are reducing their costs or are otherwise developing an
unfair competitive advantage by reducing pay and benefits to their employees. The Service
Contract Act (SCA) requires Federal contractors to meet "prevailing wages and fringe benefits"
for each job category - not minimum wages or fringe benefits. On the Federal side, the Revised
Supplement retains the opportunity for Federal employees to bid their Most Efficient
Organization (MEO) and not their current organization or wage grades. We believe this is
appropriate and creates incentives for employees to develop new performance standards, to
reduce costs and engage in the competitive process.

Number of Contract Employees
‘Your letter requested that we provide our best information regarding the number of

contractor employees serving Federal agencies and any information regarding recent changes in
the size of that workforce.


24

MR. CHAIRMAN, REPRESENTATIVE CUMMINGS, MEMBERS OF THE
SUBCOMMITTEE, MY NAME IS CHRISTOPHER DONNELLAN AND I AM THE
LEGISLATIVE DIRECTOR OF THE NATIONAL ASSOCIATION OF GOVERNMENT
EMPLOYEES (NAGE). NAGE IS AN AFFILIATE OF THE SERVICE EMPLOYEES
INTERNATIONAL UNION, THE THIRD LARGEST UNION IN THE AFL-CIO. ON
BEHALF OF THE PRESIDENT OF NAGE, KENNETH T. LYONS, AND THE 120,000
EMPLOYEES REPRESENTED BY NAGE I WANT TO THANK YOU FOR THIS
OPPORTUNITY TO TESTIFY TODAY ON THE ISSUE OF FEDERAL CONTRACTING
OUT OF COMMERCIAL SERVICES.

THE NATIONAL ASSOCIATION OF GOVERNMENT EMPLOYEES IS PROUD OF
ITS MEMBERS WORKING ON BEHALF OF THE AMERICAN PEOPLE. THEY ARE SOME
OF THE MOST HARDWORKING, COMPETENT AND LOYAL WORKERS THIS COUNTRY
HAS. EVERY DAY THESE FEDERAL EMPLOYEES GO TO WORK ANXIOUS TO
ENSURE THAT THE GOVERNMENT OPERATES AS EFFICIENTLY AND EFFECTIVELY
AS POSSIBLE.

BEFORE I BEGIN MY TESTIMONY ON TODAY’S TOPIC I MUST COMMENT
BRIEFLY ON A HEARING HELD THIS MONDAY ON HR 716, "FREEDOM FROM
GOVERNMENT COMPETITION ACT OF 1997." THIS IS A BILL THAT WOULD
REQUIRE THAT THE FEDERAL GOVERNMENT PROCURE FROM THE PRIVATE SECTOR
THE GOODS AND SERVICES NECESSARY FOR THE OPERATIONS AND MANAGEMENT
OF CERTAIN GOVERNMENT AGENCIES, AND FOR OTHER PURPOSES. WHILE WE
AGREE THAT GOVERNMENT CAN ALWAYS IMPROVE ON THE WAY SERVICES ARE
PROVIDED, WE DO NOT BELIEVE THAT PRIVATE INDUSTRY IS ALWAYS THE
MOST EFFICIENT AND PRODUCTIVE COURSE. THE GAO SUPPORTED THIS

POSITION IN A MARCH, 1995 REPORT WHICH CONCLUDED THAT AFTER


143

As you may know, the Administration has consistently asked the Congress to
provide federal employees with significantly smaller pay raises than those recommended
by the Federal Employees Pay Comparability Act, thus causing them to fall farther and
farther behind their counterparts in the private sector. The deficit reduction package most
recently enacted by the Congress requires federal employees to contribute even more
towards their retirement plans. Since 1980, incidentally, federal employees and federal
retirees have contributed more than $175 billion towards deficit reduction in the form of
lost compensation. Further, the federal government's in-house workforce has been cut
by approximately 300,000 over the last four years, resulting in even more savings.

Clearly, lawmakers know where to look when savings are needed, If data similar
to that compiled for the federal government's in-house workforce was kept for the federal
government's contractor workforce, lawmakers would have more information available
when they needed to make important decisions about how to spend precious taxpayer
dollars. Representative Norton has introduced legislation (H.R. 887) which would require
OMB to develop a government-wide system for determining and reporting the number
of non-federal employees engaged in service contracts.

Requiring cost comparisons on all service contracting

Even though public-private competition has proven to save money for the
taxpayers and spur providers, whether they be federal employees or contractor
employees, to offer better service, much work is, incredibly, still contracted out without
the benefit of cost comparisons. DoD officials, the same people who gave us prohibitively

expensive toilet seats, are “considering the possibility of avoiding A-76 studies by

17


10

STATEMENT BY THE HON. ELUAH E. CUMMINGS
OCTOBER 1, 1997
SUBCOMMITTEE ON CIVIL SERVICE: CONTRACTING OUT

Thank you Mr. Chairman.

T commend you for agreeing to hold a hearing that examines
how contracting programs impact and affect Federal employees.
I join in welcoming our witnesses and I appreciate the time they
have taken to be here with us so that we may learn from them. I
anxiously await your observations, suggestions and
recommendations.

I would like to state at the beginning of this hearing that the
functions of the Federal government need to be performed
efficiently and effectively. Whether this can best be done by
career Federal employees or by contractors and their employees
is the issue that we must have clear policy and a fair procedure
to address.

I would like to see proof that contracting out for goods and
services saves taxpayers’ money. It does not make sense to hire
hundreds of thousands of “contract employees” while at the
same time we downsize by more than 250,000 Federal
employees. Do we really have a government that works better
and costs less or do we have a government that looks like some
contractor’s dream world.

I have a host of concerns that I feel need to be answered before I
can embrace the notion that contracting out is good for the
Federal government and that, consequently, it should be


141

compete because the in-house workforce has been so arbitrarily downsized?

Mr. Chairman, agencies must be prevented from employing arbitrary in-house
personnel ceilings. Instead, agencies must be allowed to manage by budgets. If
agencies have the money to perform the work, they should be allowed to use either
contractor employees or federal employees--depending on which provider gives the most
efficient, most effective, and most reliable service to the nation's taxpayers and the
government's customers.

OMB insists that to the extent management-by-FTE's occurs, it is perpetrated by
managers who should know better. Regardiess of whether one accepts that position,
management-by~FTE's is happening. It's costing the taxpayers money. It's depriving
federal employees of opportunities to compete. It's wrong--and the Congress and the
‘Administration must become more aggressive in eliminating this pernicious practice.

Representative Eleanor Holmes Norton (D-DC) has introduced legislation (H.R.
888) which would prevent agencies from replacing downsized federal employees with
contractor employees. Such meritorious legislation should serve as the starting point for
your own effort to address this problem.

ing AL Under Of The Contr Is

Many lawmakers have bragged to their constituents about how drastically they
have reduced the federal workforce. But as we know, much of the work that used to be
performed by federal employees has simply been transferred to the federal government's
"shadow workforce" in the private sector. The federal government's actual workforce

hasn't gotten any smaller. It's just that the people who now do the work are not directly

15


29

DEVELOP A GOVERNMENT WIDE SYSTEM FOR DETERMINING AND REPORTING THE
NUMBER OF NON-FEDERAL EMPLOYEES ENGAGED IN SERVICE CONTRACTS.
SHAMEFULLY, NO STATISTICS ARE AVAILABLE ON THE NUMBER OF PEOPLE
WORKING FOR CONTRACTORS. FINALLY, HR 888 WOULD PROHIBIT FEDERAL
AGENCIES FROM REPLACING FEDERAL EMPLOYEES WHO RECEIVED BUYOUTS WITH
FEDERAL CONTRACTORS. NAGE STRONGLY ENDORSES ALL OF THESE BILLS AS
A START TO FINDING OUT EXACTLY WHO AND WHAT THE GOVERNMENT 1S
GETTING TO DO THEIR WORK.

THIS ADMINISTRATION AND OTHERS HAVE REPEATEDLY PRAISED THEIR
EFFORTS IN CREATING THE SMALLEST FEDERAL WORKFORCE SINCE THE
KENNEDY ADMINISTRATION. BUT, AS WE KNOW, MUCH OF THE WORK THAT
USED TO BE PERFORMED BY FEDERAL EMPLOYEES HAS SIMPLY BEEN
TRANSFERRED TO THE PRIVATE SECTOR.

MR. CHAIRMAN, THE MEMBERS OF THE NATIONAL ASSOCIATION OF
GOVERNMENT ARE PROUD OF THE WORK THEY DO FOR THE AMERICAN TAXPAYER.
THEY LOOK FORWARD TO COMPETITION THAT ALLOWS THE EMPLOYEE TO BE
RETAINED ON THE BASIS OF THEIR PERFORMANCE NOT FROM SOME ARBITRARY
CEILINGS ON FULL-TIME-EMPLOYEES IMPOSED AS PART OF THE GOVERNMENT
DESIRE TO DOWNSIZE. THIS CONCLUDED MY WRITTEN STATEMENT. I WOULD

BE HAPPY TO ANSWER ANY QUESTIONS YOU MAY HAVE.


166

COURTHOUSE ROAD
ARLNeSTOR( VRGROA: Zee

DISA WESTHEM (WEO4)

MEMORANDUM FOR DISTRIBUTION

‘SUBJECT: Results of the DMCs’ Revenue Based Staffing Plans

1, The outstanding effort you put forth in developing your
staffing plan is appreciated. The results show the bottom-line
objective was achieved to attain the targets for FY98: 2,116 A-
Goal staffing and an A-Goal Revenue per FTE of greater than
$230,000. Enclosure 1 contains the narrative results of each
DMC’'s submission and the Resource Management Advisory Group
(RMAG) approved A- and C-Goal staffing levels for FY98.
Enclosure 2 is a spreadsheet synopsis showing the following
staffing breakouts: the original FY98 Staffing Projections from
the June 1996 model, the DMC requested staffing from their plans,

the RMAG approved staffing levels, and the DMC onboard staffing
\ as of 31 December 1996.

2. The attachment identifies each DMC’s RMAG approved strength
for civilians, military, and contractor personnel. That strength
is your new ceiling and is rot to be exceeded without exception ,
approval. These numbers will be used by RM during the build for
the F¥99 budget. In order to assist you in implementing your
plans, the following guidance is provided.

a, If your site is below target and you require filling a
position at the GS-12 and below level, you may utilize
contractors or reengineer the position for filling under the DISA
Bridge Position Program to meet your need. However, you are not

“authorized to increase your civilian end strength.

b. Due to the variety of versions and overall age of many of
the exception requests currently submitted to WE1 and the RMAG,
ALL pending requests for hiring exceptions are canceled effective
with receipt of this memo. If you determine that you have a
critical position that performs an inherently governmental
function such as supervision, technical COTR, senior security
specialist, contract management, senior financial management,

etc., a new request for exception hiring should be prepared and
forwarded to WEl.

Quality Information for a Strong Defense


98

a very poor tool to achieve that end because when we enter into
a competition, we don’t know who’s going to win. We do know that
in-house teams win an awfully high percentage of those competi-
tions. And that is our principal objective, to have the most efficient
provider of that service.

But we do not use this as a form of personnel reduction.

Ms. Norton. I’m not suggesting that you’re using it as a form
of personnel reduction. Everybody knows that the President—and,
Mr. DeSeve, the Congress didn’t say, let’s find out how many peo-
ple we can let go. I am suggesting that Congress keeps track of
FTE’s like it was at the race track, that ’s really do matter.
And if they matter, to see FTE’s on Federal funds go up in one sec-
tor while they are coming down in another suggests that at least
part of what we were after is not being accomplished.

Mr. DeSeve—and I am glad you said it for the record, tells me
he doesn’t care how many people it takes, and he regards even
huge increases or huge reductions as irrelevant. I’m going to muse
on that, because it does seem to me that, at some level, great dif-
ferences above or under what the same folks were using in the Fed-
eral sector ought to say something to us.

I sympathize, and let me just say to Mr. DeSeve, I think—be-
cause he and I have worked and worked very well together, and he
knows the enormous respect I have for him——

Mr. DESEvE. And I share the same respect for the Congress-
woman.

Ms, NorTON [continuing]. That Mr. DeSeve knows what I think
about excessive bureaucracy and excessive paperwork. That I think
that many on my side of the aisle have killed the goose that laid
the golden egg by simply asking for more data, wanting more bu-
reaucracy, thinking that that is the functional equivalent of effi-
ciency, assuming we could demonstrate that large variations were
an indication that we want to check to make sure that at some
point we didn’t end up with a scandal or an exposé in a newspaper
that we couldn’t respond to.

And let me be clear, I don’t think that the Congress or the Presi-
dent wants to wake up one day and say, well, they have certainly
cut the cost, but somebody who contracted with the XYZ unit at
HHS now has three times as many employees, we in the New York
Times have found out.

Or to take what is more likely to be the case, they contracted out
the data processing work at HHS for whatever, for the unit that
did a certain jor. And while they must be efficient, because they
have one-tenth of the employees that they had when HHS was
doing the work, I think that the bell that would ring is that some-
body is cutting corners and that maybe on that contract, I would
want to look at it. That is the predicate for this question.

Under some circumstances, would it be appropriate to spot-check
contracts where the numbers may seem to the average analyst
wildly beyond or below what one might expect? Given the experi-
ence we have with the Federal work force, if we spot-checked it,
didn’t build ourselves a whole data bureaucracy, would this be an
appropriate way to perhaps respond to this concern?

ir. DESEVE. That’s a good question and Mr. Goodman may want
to answer as well. When we award a contract, we try to put as


140

Moreover, a senior DoD official admitted to me in wnting in response to our
concerns that he had discovered that “some managers have been establishing FTE
bogeys on some depot maintenance activities." This official insisted that he was taking
corrective action. I'd be happy to share this correspondence with you and your staff. |
didn't include his letter in my testimony because his deviation from the Pentagon line that
*management-by-FTE's is never, ever practiced" at DoD would surely invite retribution.
And since he is one Pentagon political appointee who's trying to be part of the solution,
| wouldn't want that to happen.

As bad as this problem Is, Mr. Chairman, it's not limited to DoD. Actually, it's
government-wide. As OMB reported three years ago, several agencies--including the
Departments of Agriculture, Health & Human Services, Housing & Urban Development,
‘State, Education, Treasury, as well as the Environmental Protection Agency-~said that
they each could have saved several million dollars by performing functions directly rather
than having them performed by contractors but did not do so because either their
requests to OMB to take on the necessary FTE's were refused or the agencies were so
‘sure such requests would be refused that they were not even submitted.‘

Mr. Chairman, | think you'd agree that even if you, the Ranking Minority Member,
OMB, a representative from the contractor community and | locked ourselves in a room
to think of ways that A-76 could be made even more fair to both contractors and federal
employees, ali of our work would be in vain. What's the point in coming up with a more
equitable public-private competition system if federal employees aren't even allowed to

* office of Management and Budget, Summary Report of
Agencies' Service Contracting Practices (January 1994), p. v.

14


91

Mr. Mica. I thank each of the panelists for their testimony. In
fairness, usually I start off with questions, but since Mr. DeSeve,
on behalf of OMB, fired several broadsides at legislation proposed
by Ms. Norton, I think I’m going to give her the opportunity to
launch a counterattack and yield my time to you.

Mr. DESEVE. Could I have DOD defend me here, is that possible?
Only in the national security sense.

Ms. Norton. One good deed deserves another, Mr. DeSeve.

Would you describe in detail what actions OMB; has taken to
monitor the explosive growth of service contracts over the last dec-
ade?

Mr. DESEVE. I guess I'd like to start with the premise of explo-
sive growth over the last decade. You'll see on page three of my tes-
timony—hopefully your pagination is the same as mine—informa-
tion from the Federal Procurement Data System.

In 1992, we believe that service contracting, Governmentwide,
was $105.2 billion and in 1996 it was $111.7 billion.

Ms. NorTON. Would you consider that a decade, Mr. DeSeve?

Mr. DESEVE. Madam, I would be happy to go back——

Ms. Norton. You are known for your mathematical abilities.

Mr. DESEvE. I would be happy to go back and add the additional
years that would round out the decade. I do not have here the
numbers going back to 1987.

Ms. NorTON. If you would supply for the record, the record in the
1980’s when this growth really began—and this administration has
continued it, perhaps not at the same rate but certainly has contin-
ued it.

When Mr. Panetta became Director of OMB, he said that the
growth of these contracts was out of control and was one of the
first things he began to look at. We now see that—I don’t know,
approximately $200 billion in the procurement program; perhaps
that number is greater now because that’s a 1992 number—the
service part of that was growing faster than any other part of it.

So you then have taken on—you then, of course, have changed
the subject because you now wanted to focus us on the number
when I asked—the gravamen of my question is, what has OMB
done to monitor the growth? Let’s take explosive out of it and just
leave growth in it.

Mr. DESEVE. We don’t think there has been a growth, certainly
not in the dollar volume. I do not have the statistics before me, and
I don’t know if they’re available. But I’m questioning the premise
of growth overall.

Ms. NorTON. You say there has been no growth, sir?

Mr. DESEVE. No, I think the statistics show that from 1992 to
1996, the dollar volume of growth, before you account for inflation,
was approximately $6.5 billion. But if you account for inflation, my
guess is that there would be negative growth.

Ms. NorTon. With great respect, you are evading my question.
If you object to the word “growth” and you really want us to believe
there has not been growth, then let’s take out “growth” and see if
I can get an answer to this question.

Mr. DESEVE. Are you asking what has OMB done to monitor the
high level of service contracting?


11

increased. I am interested in the process by which we determine
the government services to contract out. I would like to see, the
cost comparison, the savings, and the cost benefit analysis used
in deciding that it is indeed necessary and justifiable to
outsource Federal services. Otherwise, our government
employees are forced out of jobs and those who remain do more
with fewer resources.

The Federal government spends more than $114 Billion a year
on service contracts. For that kind of money, we need to have
systems in place to ensure that we get exactly what we pay for --
that is to say, that we have received a quality, timely and cost-
effective product or service.

To that end, I am prepared to introduce legislation, suggested by
the Federal Managers Association, that would require Federal
agencies to annually review the costs of all service contracts in
order to determine whether the costs have exceeded the contract
price.

A 1994 Government Accounting Office (GAO) report found that
contracting work out is not necessarily cheaper and a Office of
Management and Budget (OMB) study done that same year
found that cost comparisons are not routinely done.

To that end, Rep. Eleanor Holmes Norton must be recognized
and hailed for legislation she has introduced that would bring
needed reform and accountability to the contracting process.
The enactment of her bills is critical if we are to acquire basic
and sorely needed data on contracting costs and the size of the


97

it. Then the MEO, the internal team, would bid for that. It is an
integral part of our process. The management of the function
knows this, and it is discussed with the work force.

Ms. Norton. I’m suggesting to Mr. DeSeve, that process does not
routinely occur, at least the employee organizations do not tell us
that that process routinely occurs in the non-DOD agencies. To say,
hey, it’s in the rule someplace when you’re dealing with a part of
the work force that has not been largely involved in competition is
not enough; and frankly, I don’t think it’s fair and does not level
the playing field because it says, y'all better go and find out. If, in
fact, it’s done in DOD, we need to bring it over into the non-DOD
agencies.

I want to ask Mr. DeSeve if he would be concerned if agencies
are contracting out work to get around reductions in their FTE’s
or in their budgets.

Mr. DeSEvE. If agencies are contracting out work to get around
reductions in their budgets? For that, I would applaud them be-
cause they are then seeking to achieve savings. In terms of FTE
limits, we have tried to be as clear as we can centrally—which is
not to say that everyone always listens to OMB, believe it or not—
in that the purpose of FTE limits is not to cause work to be con-
tracted out.

Ms. Norton. But is it not the purpose of the President to reduce
the Federal work force in FTE’s, as well as in money? And that is
why the cheaper—you keep account of whether FTE’s in fact are
going up.

Mr. DESEVE. Congress actually adopted the Work Force Restruc-
turing Act, which required a reduction of 272,000 FTE’s, and that
was then increased somewhat. So it is the law of the land. It’s not
just the President’s intention, it’s the law.

Ms. Norton. Now why don’t you answer my question?

Mr. DESEVE. I’m sorry, what was it?

Ms. Norton. Was it not then the point to reduce the number of
people, as well as reduce the amount of spending?

Mr. DESEvE. I would have to refer to the bill, which I don’t have
with me. My understanding is that the driving force was cost sav-
ings. In fact, those cost savings were used for other purposes, in-
cluding crime reduction, most specifically. FTE is certainly an indi-
cia of what things cost, but it’s not the only indicia.

Mr. GOODMAN. Congresswoman, I’m hesitant to enter between
my White House regulator and my own representative.

Mr. DESEVE. I’m not your regulator—your colleague, John, your
colleague.

Mr. GoopMAN. My partner in Congress and my partner in the
White House.

We're the largest agency; we’ve taken the largest drawdowns
both in our military personnel and in our civilian personnel. That
has come through a wide variety of processes. We have gone
through four painful, but necessary, rounds of base closure. We've
brought our force structure down significantly. We no longer have
as many air wings or divisions or submarines as we used to. All
of that brings down the work force.

But in our competition policy, in our use of A-76, the goal is not
Federal work force reduction. Even if it were the goal, it would be


102

ENCLOSURE
Questions and Answers Regarding:
Outsourcing, OMB Circular A-76 and Related Contracting Issues
as submitted by
Chairman Mica, Committee on Government Reform and Oversight,
Subcommittee on Civil Service.
January 1998

1, THENUMBER OF FEDERAL CONTRACT EMPLOYEES

Question: "We believe that Congress should be able to know the number of employees who
work for Federal contractors. This information would help us assess the
recurrent claims that Federal employees' positions are simply being converted to
contract, with little reinvention resulting from the transition."

Response:

There is currently no system of reports that will identify or aggregate contract employees
by contract type, location or contract number. Reasonable estimates of the number of Federal
contract employees can be made based upon a range of economic assumptions and using reported
contract dollar values.

Agencies need to know the scope of contracted workload, that contract prices are
reasonable, that the work is of appropriate quality, and the dollars being spent. It is not,
however, useful or important that an agency know the specific number of employees hired by a
contractor on a full-time or part-time basis to meet the performance requirements of the contract.
Collecting this kind of information would be arduous and costly to both the agencies and to the
contractors themselves. It would be time sensitive and subject to significant distortions over
time, by contract, by contract type, by location, by function, individually or in aggregation. To
collect this information, OMB would be obligated, in accordance with the Federal Paperwork
Reduetion Act, to demonstrate the practical utility of the information requested and that the
administrative burden associated with its collection was outweighed by the benefit of having
access to the information on a recurring basis. We do not believe that this information is useful.
Tt would have little or no impact on the conduct of individual A-76 cost comparisons and would
contribute little to understanding the growth or decline in overall Federal employment levels.


118

continue to suggest that other, equally sensitive, aspects of tax
collection are appropriate areas for contractors. NTEU strenuously

disagree:

The relevant portions of A-76 on these points have been
incorporated into the Code of Federal Regulations. They are
binding on all agencies and have the force and effect of law.
Legislation adopting these same points would serve an important
purpose -- making clear that the Congress, too, believes they

should guide federal procedure in this area.

Cost Comparisons of Federal vs, Contractor Services

The rationale most often advanced for contracting out federal
jobs is that the services can be accomplished at less expense. As
the many GAO reports on this topic accurately point out, this is
not necessarily the case. Still other advocates of contracting out
federal jobs to the private sector have indicated their beliefs

that contracting out achieves superior productivity, efficiency and

effectiveness. There is simply no truth to these unfounded
beliefs.
Federal employees deserve a fair shot to compete. The

provisions of Circular A-76 require a cost-compariaon between
contracting out and conducting the work in-house. Yet, agencies

often disregard this rule and cost-comparisons are frequently not

~6-


65

We share your concern that the Federal employee unions ad-
versely affected by a decision to convert to contract performance be
treated fairly. Federal employees adversely affected by a decision
to convert to contract have the right of first refusal for jobs for
which they are qualified. A standard clause is included in direct
conversion and A-76 cost comparison solicitations notifying poten-
tial contractors of this requirement.

In your letter of invitation, you also specifically asked that I com-
ment about the possibility of converting work from contract to in-
house performance. We have a recent example of this with the ice-
man contract, where Agriculture Department employees banded to-
gether and bid against private sector providers for the provision of
computer services to the FAA.

‘e have not had the ability to collect all of the information since
the A-76 March revision, but we are trying to figure out a way
with the agencies to begin, at least on a case-by-case basis, to make
some of this information available to the committee. As the union
representatives commented earlier, it may be too early to begin the
indepth process of collecting that.

In conclusion, by improving management and creating incentives
to change the way commercial activities are performed, by cutting
out the waste and. confusion caused by antiquated workload and fi-
nancial systems and by improving our contract methods, we hope
to achieve better performance.

Thank you very much, Mr. Chairman.

Mr. Mica. Thank you for your testimony.

(The prepared statement of Mr. DeSeve | follows:]


7m

We are doing business with better-performing contractors that are committed to
excellence and to meeting cost, schedule, and performance goals. This achievement is
the result of a concerted effort by contracting activities to increase their focus on the past
performance of contractors when conducting competitions for work. It is also attributable
to changes to Federal Acquisition Regulation Subpart 42.15 that currently require
evaluation of contractor performance for all contract actions (with certain exceptions) in
excess of $1,000,000, and beginning in January 1998, will require such evaluations for
contracts of $100,000 or more. Because completed evaluations (along with contractor
responses thereto and any additional agency review comments) are used to support future
award decisions, contractors are motivated to excel in their performance.

We are making greater use of contracting methods that will help improve the likelihood
of successful contract performance. For the acquisition of services, we are using
performance-based service contracts that include objective performance requirements and
standards (which give contractors latitude to be innovative and adopt the latest, most cost
effective management practices). Performance based service contracts (PBSC) are
accompanied by a quality assurance plan that allows for the use of both positive and
negative incentives. The contractor’s payment is tied to the achievement of requirements
and standards. Poor contractor performance may result in an immediate reduction in
payment and would also be reflected in contractor past performance evaluations which
could impact the contractor’s future business opportunities. An ongoing Goverment
wide pilot project already has demonstrated that savings of 15 to 20 percent are common
when using PBSC, and the agencies involved have expressed more satisfaction with
contractor performance.

In addition, we are encouraging agencies to break their large procurement into smaller
‘more manageable modules so they can better accommodate changing technology and
agency priorities. A “modular contracting” approach allows agencies to attack risk
incrementally, thereby making it easier to manage. Equally important, modular
contracting strengthens and maintains end user enthusiasm for, and involvement in, the
program by providing benefits early in the process. It also permits periodic evaluation to
ensure projects continue to merit funding under current budget priorities.


16

The Honorable Constance A. Morella
Subcommittee on Civil Service
Contracting Out -- Successes and Failures
October 1, 1997
Mr. Chairman, I want to thank you for holding today’s hearing on
Contracting Out the Federal Workforce. I am very concerned about
contracting out. It is critical that we closely examine this issue today,

and that we continue to closely monitor the manner in which we

contract out the functions of our federal workforce.

I vividly remember this subcommittee’s hearings on this subject
during the spring of 1995. During those hearings we posed important
questions. How many federal contractors performing functions for
federal agencies are there? How much are we paying them? Does
contracting out save money as is purported? How do we measure their
performance? Who monitors their work? Must they re-bid in the out

years?


160

board finally decided that it was time to take action. They forced the company's
chief executive Ronald Allen--the architect of the downsizing and cost-cutting
campaign--to resign, and they began to search for a replacement with a less

draconian management style.

Or take the case of Eastman Kodak, From the mid-1980's to the mid-1990's, the
company underwent five different restructurings in the course of which some
40,000 jobs were eliminated. Some departments were so decimated that they later
had to contract out to get the work done. In some instances, managers brought
back laid-off Kodak employees as contract workers, paying hourly rates much
higher than what those people earned while on Kodak's payroll. George Fisher,
who took over as Kodak's chief executive in the 1994, has been focusing on

growth rather than downsizing.

Digital Equipment Corp. faced similar problems. The computer company made
massive reductions in its workforce. Many of these were inevitable because of the
shift away from minicomputers. But the company also cut jobs in many areas that
were not overstaffed. For example, DEC eliminated hundreds of jobs in its division
that sold computers to hospitals and other health-care providers. This reduced
costs, but it also undermined longstanding relationships between its veteran sales

force and major customers, many of whom took their business elsewhere.

34


99

many performance factors into it as possible. We have the contrac-
tor describe how they intend to process x amount of transactions.
So in terms of spot-checking, they describe the methodology they
intend to use, whether it is, for example, to use a mainframe com-
puter or network computers, or to have employees located in three
different locations.

The spot-checking is part of the bid evaluation process. So each
time a bid is awarded, the entity looks at the overall nature of the
operation that’s going to occur. The question is, do we focus on em-
ployees or do we focus on performance and cost?

We believe that we should focus on performance and cost. Rather
than keeping a data system that continuously monitors how many
people are working, we have a data system that monitors what it
costs and what we’re getting. That’s our focus.

Ms. NorTOn. It would be a red flag for you if the costs were
greatly beneath?

Mr. DESEVE. Yes, ma’am. Beneath or above.

Ms. NorTON. Above, you wouldn’t pay much attention to it if it
was greatly above; but if it was greatly beneath, assuming you did
any cost comparisons at all——

Mr. DESEVE. We had one of those the other day. An agency came
in with a data processing contract now being done out-of-house.
And they were using a new contracting vehicle to bring it in-house.
The reduction in magnitude was from 20 to 4. They went from 20
to 4. In this case, it was in millions of dollars. We thought that was
ridiculous; there was no way that could happen. So we asked them
to go back and take a look at it again.

They demonstrated to us the change that was occurring, both in
their requirements, because they had reengineered some of them,
and in the methodology that was going to be used by the provider.

In that case, it came to our attention. It’s not normal for OMB
to learn of those things. They were just proud of themselves. They
were telling us what a great job they did. We thought, how the
heck could you do that, scratched our heads a little bit. But when
we hear about something, we do try to go in and find out what’s
going on.

In the iceman contract, a case of contracting in to the Agriculture
Department to which I referred earlier, all of the possible areas
where bid protests might have occurred and all of the cost factors
in that contract were clear, so that any protest would be done on
good data. So we did try to help the folks at FAA there as well.

Ms. Norton. Let me just say that I learned a considerable
amount from listening to all three of you. In some cases, you made
me assured, in others you raised questions for the committee.

Mr. DeSeve, I am a little troubled by the anecdotal nature of
your responses, because I do think, and we can find an example
here, they had to tell us anything. I do think that as the Govern-
ment contracts out more work, it ought to protect itself from what
might be exposure from others than the Congress or their own in-
ternal anecdotes from problems that could arise simply because the
amount of money we're talking about is so colossal and there’s so
much of it to be had here.


21

Opening Statement of the Honorable Michael Pappas
Vice Chairman, Civil Service Subcommittee
Hearing on Contracting Out: Successes and Failures
‘October 1, 1997

Mr. Chairman - This moming the Civil Service Subcommittee has gathered to further examine
the issue of contracting out services from the government to the private sector. 1 applaud this
‘committee’s past work on the subject and I am pleased to be here today with my colleagues to

learn more about the successes and failures of contracting out to the private sector.

Iam committed to helping reduce the size of the federal bureaucracy if it leads to
efficient government. I look forward to hearing the testimony from the committee’s witnesses
today. The key, however, is efficiency. The federal government must not simply replace federal

‘workers with private contracts if there is no improvement in cost, experience, and/or quality.

Both sides of this issue raise good points and I look forward to hearing the testimony

toaday.


50

& Statement of FMA Chapter 21 President Patricia Armstrong before the House Civil Service Subcommittee 10/1/97

RECOMMENDATIONS FOR IMPROVING CONTRACTING OUT

FMA supports the following bills introduced by Congresswoman Eleanor Holmes Norton (D-DC) as an
excellent starting point for any serious debate on getting a handle on our Nation’s shadow-Government
of contractors:

‘* LR. 885, to prevent any executive branch agency from entering into a contract if the services
provided under that contract can be performed at a lower cost by employees of the agency.

© LR. 886, to provide full funding for Federal employee pay adjustments through reductions in the
$114 billion the Government spends annually to contract for services.

+ HLR. 887, to require the director of OMB to develop and implement a system for determining and
reporting the number of individuals employed by non-Federal government entities providing services
under contracts awarded by executive branch agencies.

‘¢ HLR. 889, to amend current statutory buyout authority to provide that the duties performed by
individuals separating from government service as a result of receiving a voluntary separation
incentive payment may not be performed by any person under contract with the United States.

In addition, FMA would like for Congress to consider providing a mechanism for automatically reviewing

contracts that have exceeded their initial projected costs to determine if the work could be performed
more efficiently in-house.

CONCLUSION

1 want to thank you again for inviting FMA to present our views on contracting-out to the Subcommittee.
FMA looks forward to continuing to work with you to improve the ability of Federal managers and
supervisors to insure the delivery of high quality goods and services to America. I hope the experiences
and suggestions FMA has shared with you will be helpful in any future efforts you may undertake to
reform the Government's practice of contracting-out for services,

This concludes my prepared remarks, I would be happy to answer any questions you may have.
FEDE! i: FMA has not received any Federal grants or contracts within the last two years.

page -7-


95

Ms. Norton. Of one section of one agency. The real question is,
did you ask that question of all the units or even a representative
sample of the units where there were reductions? One example
does not a satisfactory response make.

The fact is, you say H.R. 885 requires that we cost-compare all
existing contract workload as a matter of law. Would you favor
HR. 885 if it said that you do cost comparisons only on new con-
tracts?

Mr. DESEVE. We would like to use the standards in A-76, which
generally require that whenever there’s a change in the way work
is done, whether it is contracted in or contracted out, cost compari-
sons occur.

Mr. Mica. If you could let me interrupt, I would like to allow you
to continue. Can I let you—are you sure? Because I was going to
let you chair and grill these guys while we go vote. I can let you
chair. The chairman can decide whatever he wants to do.

Mrs. Morella, go ahead and ask your questions.

Mrs. MORELLA. We have only about 5 minutes to go vote.

I would like to ask Mr. DeSeve if he would kindly develop and
implement a system by determining and reporting the number of
individuals employed by non-Federal Government entities provid-
ing service under contract, supported by executive branch agencies.
That's H.R. 887. I don’t know why we would do it eee
when we can ask you to do it.

Would you try to do it?

Mr. DESEVE. We would apply the same standard we try to apply
to things coming before us that, ask for Federal data collection.
would first ask, what is the burden on the businesses when we ask
for that information? And, what is the burden to Federal agencies
to collect it?

The second question we would ask is, what frequency of report-
ing is required? Is it every pay period, or semiannually?

We would also ask, how would we use that data? Once we had
the data, what difference would it make in decisionmaking?

Finally, we would conduct a cost-benefit analysis to assess
whether it was cost beneficial.

I have not yet been persuaded that the collection of the data
would change behavior. If I knew how many people were working
on a particular contract, it would be a variable allowed in bid-
ding—or if allowed in bidding, it would be informative to us in
making the bid award——

Mrs. MorELLaA. I’m going to ask, can you get that to us in writing
so we can scrutinize and monitor it? I have to go and vote. Maybe
Ms. Norton could pick up on that.

Mr. DESEVE. We'll be happy to take whatever questions the com-
mittee submits and answer them.

(NoTE.—The information referred to may be found at the end of
the hearing.]

Mrs. MoRELLA. Mr. Goodman, I think your assistance in helping
displaced employees is certainly outstanding. I wonder if you might
share that kind of expertise with OPM.

And Mr. Kleinman was saying—I would ask the same of you two,
that maybe you could do more pooling and sharing—partnering.
Thank you.


33

that contracting out makes sense. If the agency cannot show that
contracting out these jobs makes sense, then Federal employees
should be allowed to continue to perform the work that they have
been doing so well for so long. It is that simple.

NFFE members have reported many instances of service con-
tracting where the taxpayers are simply not getting what they
have paid for. One of the main reasons is a lack of monitoring of
the work performed by service contractors. Without adequate over-
sight, our members tell us that the days of the outrageously expen-
sive screwdrivers and hammers are not quite over.

For example, at Fort Leonard Wood, as Chris was testifying to
earlier, the lack of monitoring and oversight allowed a service con-
tractor to bill for work not completed. The cost to the Government
was not limited to dollars and cents. A group of employees in the
Army’s base dental arts building had become sick due to poor in-
door air quality. Many were placed on workers’ compensation.

A service contractor for the Department of Logistics and Mainte-
nance was responsible for replacing HEPA air filters in the build-
ing. In this case, the air filters are critical to insuring a healthy
work environment. Workers from the dental arts building who were
concerned about their health checked to see whether the filters
were in fact being replaced. The workers found out that the service
contractor had failed to replace the filters as required under the
service contract, billing the Army for work not yet completed.

But the cost was not strictly monetary, as I have stated, as per-
sonnel, civilian and military alike, were unnecessarily exposed to
harm to their health due to unscrupulous practices by these con-
tractors. This is the kind of story that is all too common when it
comes to service contractors who lack supervision and accountabil-

ity.

With regard to oversight of the contracting out process, keep in
mind that there are alternatives to having OMB be solely respon-
sible. For example, the Federal service labor management relations
statute is extremely restrictive regarding a union’s right to nego-
tiate over the substance of contracting decisions. Presently a Fed-
eral union cannot negotiate contracting criteria nor enforce even A—
76 criteria under the grievance or arbitration process.

If labor and management negotiated for the criteria for contract-
ing as part of a collective bargaining agreement, then those provi-
sions would be enforceable. This would remove the burden of en-
forcement and oversight from OMB. Furthermore, it would not obli-
gate management to agree to any overly restrictive criteria, but it
would allow for local management to set policies on contracting at
the level where the contract is to be let.

NFFE looks forward to reviewing data provided by the adminis-
tration assessing changes following the revisions of Circular A-76.
We understand that the administration has been asked to provide
an assessment of changes that it has seen in the first year follow-
ing the revision of Circular A-76.

'e believe that it may yet be too early to accurately assess what
the changes mean. It has been only 18 months since the A-76 was
revised. A-76 contemplates that the cost comparison competition
will take up to 18 months in the case of single function studies and
36 months for multifunction studies.


168

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183

Force being overcharged $1,361,517. The DCAA used the false data during the
pre-award audit of the modification proposal. The investigation resulted in a
$1,803,188 civil settlement against Westinghouse."

—-report for 10/1/94-3/31/95, p.3-4.

"An audit of the Lockheed Aeronautical Systems Company overhead costs
incurred during 3 fiscal years questioned four major cost elements:

* the C-130 aircraft support enhancement costs that were beyond the scope of the
contract and not requested by the Government;

* unreasonable repair and maintenance costs incurred on perishable tools caused
by significant internal contra! weaknesses in the standard toal control department;
* repair and maintenance costs that should have been capitalized or charged direct
to the facilities contract; and

* first class travel to third world countries.

As a result of the audit, the Government saved $3.4 million."

~-report for 10/1/94-3/31/95, pp.2-3 and 2-4,

“An audit questioned a Johnson Controls International, Incorporated, equitable
adjustment proposal for:

* extended warranty costs expressly unallowable under the subcontract and other
overhead costs unallowable under the Federal Acquisition Regulation;

* duplicate domestic labor hours included in the ‘domestic/foreign’ labor category;


17

We did not have solid answers then. More disturbing, we still
don’t have answers today. I do have, however, several files of letters
from federal employees and federal managers who are concerned about
the results of contracting out the functions of federal agencies. And
every time federal employee groups come to see me, concerns about

this issue top their agenda.

By the end of today’s hearing, I expect that the questions I posed
earlier will have been answered, or that we will have obtained a firm

commitment to find answers to these answers.


61

matter of fact, it went even further than that. They wanted to
know how many of those were city employees; they just wanted to
know so they could keep their records straight. It was a little thing
that we had to do.

Why do you think that they would consider that irrelevant? I
know they’re going to tell us, but I’m just wondering, since you're
not going to get a chance to come back up here again, why would
you think they would think that is so difficult and almost irrele-
vant according to their written testimony?

Come on, don’t be shy.

Mr. CUNNINGHAM. That’s a tough one for me. And I’m sure as
soon as I leave this table and get in a cab, I'll think, man, I should
have said this.

I think it’s very relevant for us. For example, if it takes 100 Fed-
eral employees to move x number of widgets a day, and it’s going
to take this contractor 150 employees to do it, why? Why is that?
Or if it takes less contractors to do the job, why does it take more
for Federal workers? I would be interested in knowing that. And
as a potential employer, if I were at OMB—I would certainly want
to know that.

I cannot imagine—and I’m not Chris; I’m interested in hearing
the testimony, also. I have no idea. This is a shadow government.
There’s no number. We don’t know what it is. The frustrating part
about this whole issue, Congressman, is, we don’t know.

Mr. CumMINGs. Let me ask you this. It appears that it is one
way in and no way out, as far as Federal contracting is concerned.
In other words, have you seen the trend of going backward and
saying, OK, we really screwed up here and, boy, this is costing us
too much and maybe we need to backtrack a little bit. Have you
found any of that?

Mr. CUNNINGHAM. It is rare, but I have heard of it. I know that
at Fort Leonard Wood, that they have contracted back in some of
the work that they had previously contracted out, because they
found that it was much more expensive to contract the work out.
I’m not sure what that was, and I can get that information for you.

Mr. CUMMINGS. I would love to have that.

Mr. DONNELLAN. We would also like to send you some informa-
tion regarding that.

Mr. Cummincs. Do you know whether your organizations had
anything to do with that, as saying to the Federal Government,
maybe in this instance, maybe you got some complaints from peo-
ple and said to the Federal Government, in this instance, maybe
you ought to take another look at this?

Mr. CUNNINGHAM. Absolutely. In the case at Fort Leonard Wood,
again, I don’t know the exact type of work that was brought back
in, but I know for a fact that through the efforts of the employees,
the businesses in the area, it was a concerted effort by a lot of folks
to get the work back in; and they were successful. The national sec-
retary-treasurer of NFFE was a union activist there at Fort Leon-
ard Hood, and was also involved in that effort, and they were suc-
cessful.

Mr. CumminGs. Let me ask you just two other questions.

When there is a contracting-out involved, I take it that—of
course, if the unions are representing people who are Federal em-


130

new navigational system. Among the problems was a $100 million cost overrun in
the project.

LUCAS INDUSTRIES: In 1995 Lucas Wester Inc., a subsidiary of the British-
owned Lucas Industries, pleaded gullty to 37 counts of submitting false statements
to the Defense Department and agreed to pay a criminal fine of $18.5 million--the
largest criminal penalty ever imposed against a defense contractor. Lucas had
falsely certified to DoD that gearboxes it manufactured for the Navy's F/A-18
aircraft had been fully inspected, when it fact many had not.

Here is a sample of contractor problems at just one agency--the Department of
Defense--as reported by the Inspector General:
Defense Reform Task Force

Although AFGE tries to track the performance of individual contractors, the union
is not in a position to obtain systematic information. However, here is a sample of
contractor problems cited in Inspector General reports in recent years:

* A summary judgment of $6,680,000 was ordered against John Gillesple, former
employee of Daniel F. Young, Incorporated. Under a civil complaint filed by the
Government, Gillespie was charged with filing false claims, totaling in excess of
$3.6 million, and failing to pay restitution ordered in a related criminal proceeding.
A DCIS investigation disclosed that Gillespie and others were involved in a


114

name of deficit reduction efforts, private sector procurement
contracts have become one of the fastest growing areas of federal
spending. It is ironic that tighter restrictions on hiring federal
employees have led to even moré expensive contracting out of
federal services -- little more than a ledger paper change, and a
costly one at that. Although there may be no room in agency
Personnel budgets, it seems there is always room for one more

contractor.

We are all familiar with the findings outlined in the March
1994 General Accounting Office (GAO) study that measured the costs
associated with contracting out federal functions. Entitled,
Measuring Costs of Advisory and Assistance Service Contractors

Versus Federal Employees (GAQ/GGD-94-95), its findings still bear
repeating today. GAO found that the federal government could save
millions of dollars by performing functions directly rather than
allowing them to be performed by private contractors. An audit of
Air Force service contracts found that the Air Force could have
saved up to $6.2 million if contractor work had been performed in-
house in 1990. An audit of the Department of Energy's support
service contracts revealed that direct government performance of
these contracts would have resulted in savings of between 26 and 53

percent.

Yet another GAO Report, Federal Contracting: Cost-effective
Contract Management Requires Sustained Commitment (GAO/T-RCED-93-2)

-2-


116

that may have been made that permit more efficient delivery of
services, but it also serves as an important check on private
contractors. Absent this provision, contractors have had little

incentive in the past to provide timely and efficient service.

In testimony before the Senate Governmental Affairs Committee
earlier this year, OMB Deputy Director for Management, John
Koskinen, provided illuminating facts concerning the government's
ability to compete for, and win back contracts that have been let
to the private sector. He indicated that federal employees have
proven to be extremely cost competitive and stated that
“approximately 50 percent of the competitions conducted to date

have been won by the Government .*

But more remains to be done to address serious problems that
remain. Your letter inviting me to appear today asked for my
recommendations on what should be included in legislation on
contracting out. Such legislation is long overdue, Mr. Chairman,
and I will detail some of the points NTEU believes must be
addressed in order to level the playing field and provide for
genuine competition, where it is appropriate, between contractors

and federal employees:

Provision for Inherently Governmental Functions

There are many instances where the government does not have

-4-


‘We have a responsiblity to discover what is actually taking place with federal contracting
for services. Are we contracting out more or less than in prior years? Are taxpayers getting value
‘out of contracting or are we wasting money? These and many more questions need accurate
answers if we are to conduct the business of government in a responsible manner.

‘Our panels today will give us their views on these questions. In addition to employee
organizations, we will hear from the Office of Management and Budget. OMB will report on the
toe that conratng ha played in inplementing National Performan Review
recommendations and other Administration management initiatives. We will also hear from
‘witnesses who have reviewed the contracting programs of the Department of Defense. With the
help of several years of contracting data, they will provide an assessment of the costs and
benefits of contracting for federal agencies.


93

The independent government cost estimates, prepared in accord-
ance with Federal Acquisitions Regulations [FAR], are used to de-
termine contract price reasonableness and reflect the market and
price history for similar types of work. They are not formal A~76
cost comparison estimates of what it would cost the Government to
do the work in-house. Finally, in the very few cases where the
agency reviews questioned whether inherently governmental func-
tions had been converted to contract, actions were taken to convert
that work back to in-house performance.

Ms. Norton. So does that mean that every agency does a cost
estimate before contracting or recontracting?

Mr. DESEvE. Based upon the guidance that has been issued as
a part of the FAR and more recent guidance, including OFPP Pol-
icy Letter 93-1: “Management Oversight of Service Contractors,”
agencies should be developing estimates of reasonable contract
costs before contracting or renewing existing contracts, but not
every new or renewal contract is subjected to an OMB Circular A-
76 cost comparison. When appropriate, and really at the agency’s
discretion, an agency may also submit an A-76 offer. When that A-
76 offer, which reflects the full cost of in-house performance to the
taxpayer, is compared on a level playing field with the prices/costs
to the Government submitted by the private sector, the service may
be returned to in-house performance.

Ms. Norton. Mr. DeSeve, it is, of course, the case that agencies
monitor their employees. Are you suggesting that agencies should
in the same way, are in the same way the entities who should be
monitoring service contractors; or is that your responsibility?

Mr. DESEVE. They should be monitoring the level of service con-
tracts and the award of those service contracts, yes.

Ms. NorTOon. But you don’t have anything but aggregate data, so
you don’t know what they’re doing?

Mr. DESEvVE. I'll be happy to supply you with all the data we
have. We have department-by-department data, and I would be
happy to share that with you.

Me NorTON. We would be pleased to have that data.

Mr. DESEVE. Certainly.

(Note.—The information referred to may be found at the end of
the hearing.]

Ms. Norton. Mr. DeSeve, if you learned that a contractor had
half as many employees doing a task that was—that in a prior pe-
riod was assigned to civil servants or had twice as many employees
as a unit that was previously assigned to civil servants, would you
have no cause—would you have no curiosity about that?

Mr. DESEVE. I always have curiosity. What I would like to know
is what it costs and what they’re producing; that’s what I care
about. I don’t care how many people there are in that unit. I care
about what it costs the Government and what they are producing.
Let me give you an example.

I recently became aware of a contract where there were 150 em-
ployees; it was a new undertaking for the Federal Government.
These employees were failing to provide good service. We went
down to the contractor and said——

Ms. Norton. I’m sorry, what was the indication of that?


to perform the work that they have been doing well all along. It is that
simple.

3. Lack of monitoring and oversight

NFFE members have reported many instances of service contracting where
the taxpayers are simply not getting what they have paid for. One of the main
reasons is a lack of monitoring of work performed by service contractors.
Without adequate oversight, our members tell us that the days of the
outrageously expensive hammer are not over.

For example, at Fort Leonard Wood, Missouri, a contractor for the
department of logistics and maintenance was responsible for replacing HEPA
air filters in the dental arts building. Employees had been out on workers’
compensation due to poor indoor air quality. Workers who were concerned
about their health checked and found out that the service contractor had
failed to replace the filters as they had promised to do so under the service
contract. It also came to light that the service contractor billed the fort for
replacement of the filters at a cost hundreds of dollars each. But the cost was
not strictly monetary, as personnel, civilian and military alike, were
unnecessarily exposed to harm to their health due to unscrupulous practices
by this contractor.

This is the kind of story that is all too common when it comes to service
contractors who lack supervision and accountability.

4. NFFE looks forward to reviewing data provided by the Administration
assessing changes following the revision of Circular A-76

We understand that the Administration has been asked to provide an
assessment of changes that it has seen in the first year following the revision
of Circular A-76. NFFE anticipates that the assessment will show the positive
results that we have seen already: However, we also would caution that it
may yet be too early to accurately assess changes. It has been only 18 months
since the A-76 was revised. A-76 contemplates that the cost comparison
completion will take 18 months in the case of single function studies and 36
months for multi-function studies.


158

expenses by 15-20%, knowing that such a slash would have no effect on the

ability of contractors to deliver services.

Query: What would happen if the federal government simply cut expenses relating to

commercial activities contracting by 10%?

10. Query: Given the extent to which DoE is contracted out, would it not be correct to say
that the agency gives us the best possible approximation for what the federal government
would be like if S, 314 / H.R. 716 is enacted?

11. OMB Circular A-76 has been criticized by contractors and federal employee

unions for a variety of reasons.

Queries: Examined in its totality, is the Circular adequate to ensure full and fair public—
private competition? To the extent that genuine problems exist, what are they? How
might they be corrected? How much money has A-76 saved through its public-private
competitions? Hasn't A-76 been recently reformed to make it even easier to contract out
commercial activities? How important is the Most Efficient Organization process in

Tealizing efficiencies and savings and in ensuring full and fair public-private competition?

12, Much of the recent literature involving outsourcing in the private sector

indicates that many corporate executives feel they have taken privatization too far

32


125

pilot projects, studies, exceptions and restrictions. In some cases,
military base commanders have even tried ignoring the law and
illegally moved forward with their contracting out plans. The
amount of taxpayer resources expended by those seeking ways to
by-pass current law is truly extraordinary. These games have to

stop now!

Even worse than the antics of the Department of Defense, has been
the inexcusable conduct of the Department of Veterans Affairs. VA
fire fighters protect Medical Facilities which care for our nation's war
heroes. The total disregard for patient safety that has marked the
VA's efforts to contract out fire protection is a national shame.

Unlike their colleagues in the Defense Department, VA fire fighters
are covered by the contracting out process of OMB Circular A-76.
While A-76 was intended to bring a rational approach to contracting
out, the story of how the VA approaches fire protection contracts
highlights the deficiency of the process.

Every assessment conducted using the guidelines of A-76 has .
concluded that the most cost effective and éfficient way to provide
fire protection at VA facilities is to use in-house fire fighters. If A-
76 was working properly, these studies would have resolved the
issue. On the contrary, the studies have only prompted VA Medical
Center Administrators to invest resources in finding ways to

circumvent the A-76 process.


100

Thank you very much for this very appropriate and elucidating
testimony.

This hearing is now adjourned.

(Whereupon, at 1:30 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]


41

Mr. Mica. I now recognize Patricia Armstrong, chapter president
of the Federal Managers Association, U.S. Marine Corps Air Sta-
tion, Cherry Point, NC. Welcome, and you are recognized.

Ms. ARMSTRONG. Mr. Chairman and members of the subcommit-
tee, my name is Patricia Armstrong and I’m chapter 21 president
of the Federal Managers Association at Marine Corps Air Station,
Cherry Point, NC. I work at the Naval Aviation Depot at Cherry
Point. The military currently operates 21 major depots staffed by
76,000 Federal employees with $13 billion worth of defense work.
For example, at Cherry Point we repair H-53, H-46 helicopters,
AV-8 Harriers, F-4’s and thousands of aircraft components. The
Congress wants to contract out $1 billion of this work.

Thank you again for holding this very important hearing. My
comments are in my capacity as an FMA chapter president and do
not represent the official views of the Department of Defense, the
Marine Corps, or the Navy.

On Capitol Hill it is felt that privatization itself produces sav-
ings. My experience says that this is not true. Contracting out is
on the increase. OMB Circular A-76 is not the entire reason. The
reason contracting out is on the increase is due to politically driven
downsizing. The Revised Supplemental Handbook for OMB Cir-
cular A-76 is not designed to simply contract out, and there are
certain pitfalls.

One such pitfall is the loss of the manager's flexibility in hiring
to supplement functions. Now under the revised A-76, the entire
function must be contracted out. At the depot and at many other
depots, we are partnering with private industry with some success.
At the depot where I work we are partnering with McDonnell
Douglas in the case with the AV-8 remanufacture program. There
are other examples across the country where depots are partnering
successfully, such as in the cases where the depot has excess or ad-
ditional facilities that they can do work to tradeoff to get part of
the workload.

Currently there are about 40,000 full-time equivalents under A—
76 review within DOD. Over the next 5 years the Navy plans to
conduct outsourcing competitions on commercial activities involving
80,000 positions Navy-wide. Savings of about $1.4 billion are ex-
pected and have already been programmed into the budget cycle.
What this means is that our ceilings, our personnel ceilings are
being driven down due to budgets, so we are managing our work-
loads due to ceilings rather than the needs of the fleet.

DOD is famous for claiming big savings that never materialize.
And GAO reports state that the Air Force turned over the Aero-
space Guidance and Metrology Center to the private sector. The re-
sult is that this activity is now costing the taxpayers $13 to $23
million more a year to operate. Again, politically driven
downsizing.

Contracting out is not a remedy for deficit reduction, nor is it a
remedy for funding new weapons systems. DOD is unable to mon-
itor and control contractor costs. DOD has reported that some con-
tractors have retained overpayments, as much as $7.5 million, due
to numerous errors. Taxpayers lost $5 million in interest due to the
contractor holding onto overpayment for 8 years.