DOD Contract Services: Improved Planning and Implementation of Fiscal Controls Needed
Published: 2014-12-11T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2013, DOD reported spending more than $170 billion on contract services—contractors performing functions such as information technology support or maintenance of military equipment—constituting more than half of DOD's total acquisition spending. The National Defense Authorization Act (NDAA) for Fiscal Year 2012, section 808, limited DOD's contract services spending for fiscal years 2012 and 2013 and required reductions in select contract services. Subsequent revisions to the NDAA extended the spending limits through fiscal year 2014.
Congress requested and mandated GAO to review DOD's implementation of the required reductions. This report addresses the extent to which DOD implemented, in fiscal years 2012 and 2013: (1) contract services spending limits, (2) 10 percent funding reductions for closely associated with inherently governmental functions, and (3) 10 percent funding reductions for staff augmentation contracts. GAO reviewed relevant guidance; analyzed DOD financial, inventory, and other contract services data; and interviewed relevant officials.
section_title: What GAO Found
paragraphs: The Department of Defense (DOD) exceeded its identified limit on contract services by $1.72 billion in 2012 and spent $500 million less than the limit in 2013. GAO found that all military departments exceeded their Comptroller-provided spending targets in fiscal year 2012 due to late guidance. In fiscal year 2013, some components improved planning and implemented stronger fiscal controls over contract services, such as monitoring spending during the year, helping DOD meet its limit for fiscal year 2013. However, the Army exceeded its spending target in 2013 due to inaccurate budget estimates and weaknesses in planning by not soliciting inputs on commands' contract services spending plans.
Federal internal control standards call for effective control activities that enforce guidance to help ensure stewardship of government resources. Improved planning and consistent implementation of fiscal controls across the department could better position DOD to manage contract services spending.
Comparable and timely data are not available to determine if DOD implemented the mandated funding reductions for contracts with closely associated with inherently governmental functions—those that put the government at risk of contractors inappropriately influencing government decisions. DOD's guidance calls for reliance on data from the annual inventory of contracted services—an identification of the number of contractors and associated costs for services provided to DOD—to measure required reductions; however, these data did not include the obligation data needed to measure funding reductions in closely associated with inherently governmental functions. DOD updated its inventory guidance in 2013 to collect such information, but these data will not be comparable to previous years due to changes in methodology and will not be available until fiscal year 2015, after the statutory requirement has expired.
Similarly, data are not available to determine if DOD met the required funding reductions for staff augmentation contracts—contractors under the direction of a government official. DOD's guidance did not establish a baseline for staff augmentation or identify the data that should be used to determine if the reductions were achieved. DOD issued supplemental guidance in May 2014 instructing components to report in October 2014 on steps taken to implement these reductions. However, the current statutory requirement expired in September 2014.
section_title: What GAO Recommends
paragraphs: Congress should consider extending the time period for DOD's implementation of funding reductions in select contract functions. Further, GAO recommends that DOD improve planning and consistently implement fiscal controls to better manage contract services, among other actions. DOD concurred with the recommendations.

section_title: Letter
paragraphs: The Department of Defense (DOD) is the federal government’s largest  purchaser of contractor provided services, relying on contractors to  perform various functions, such as professional and management  support, information technology support, and maintenance of military  equipment. In fiscal year 2013, DOD reported spending more than $170  billion on contract services, constituting more than half of the  department’s total acquisition spending. Like the rest of the federal  government, DOD is operating in a constrained budget environment and  is facing difficult decisions about how to allocate its resources, including  the appropriate balance between civilian and contractor staff to meet  mission requirements. Our prior work has shown that there are benefits  to using contractors to perform services for the government. However,  reliance on contractors to support core missions can place the  government at risk of becoming overly reliant on contractors to perform  closely associated with inherently governmental functions or creating  circumstances in which contractors perform functions deemed inherently  governmental.
The National Defense Authorization Act (NDAA) for Fiscal Year 2012  imposed various limits on DOD’s contracted services for fiscal years 2012  and 2013. The goal was to ensure DOD achieved expected savings from  planned reductions to its workforce and help maintain the appropriate  balance between the civilian and contractor workforce. Among other  things, the Act set limits on DOD’s total obligations for contract services  and required the Secretary of Defense to issue guidance to the military  departments and defense agencies to reduce funding for contracts for the  performance of functions that are closely associated with inherently  governmental. The Act further required that the Secretary issue guidance  to the military departments and defense agencies to reduce funding for  staff augmentation contracts, which it defined, in relevant part, as  contracts for personnel who are subject to the direction of a government  official other than the contracting officer for the contract.
You asked us to review DOD’s implementation of the section 808  provisions in fiscal years 2012 and 2013. The House Armed Services  Committee Report accompanying a bill for the NDAA for Fiscal Year 2015  also mandated that GAO review DOD’s implementation of the section  808, as amended. This report addresses the extent to which DOD  implemented, in fiscal years 2012 and 2013: (1) contract services  spending limits, (2) funding reductions of 10 percent each year for  closely associated with inherently governmental functions, and (3) funding  reductions of 10 percent each year for staff augmentation contracts.
For all objectives, we reviewed relevant laws and guidance, analyzed  available data, and interviewed agency officials. Specifically, we reviewed  DOD’s section 808 guidance to identify steps taken by DOD to implement  the statutory requirements. Further, we analyzed DOD Comptroller  budget and obligation data for all DOD components—military  departments and defense agencies—for fiscal years 2010, 2012, and  2013 to assess DOD’s methodology for determining the annual spending  limit and the extent to which DOD and individual components adhered to  this mandated limit. We compared these obligation data to services  obligations reported in the Federal Procurement Data System-Next  Generation and found that they were sufficiently reliable for our  purposes. To identify data available to establish a baseline for mandated  funding reductions in closely associated with inherently governmental  functions we reviewed DOD guidance, which identified fiscal year 2011  inventory of contracted services data as the basis to measure reductions  in fiscal years 2012 and 2013. We reviewed prior GAO reports on DOD’s  annual inventory of contracted services and analyzed available data from  29 components for fiscal year 2011. To identify the steps taken by each  component to reduce funding of closely associated with inherently  governmental functions, we analyzed available data from 32 components  for fiscal year 2012. To determine the extent to which the military  departments and selected defense agencies achieved mandated  reductions in staff augmentation funding, we reviewed DOD’s section 808  guidance and available data. In addition, for all objectives, we also  discussed implementation efforts with officials from the Office of the  Under Secretary of Defense for Acquisition, Technology and Logistics;  the Office of the Under Secretary of Defense for Personnel and  Readiness (Personnel and Readiness); the Office of the Under Secretary  of Defense (Comptroller); and the departments of the Army, Navy, and Air  Force. In addition, we interviewed officials from selected DOD defense  agencies—the Defense Logistics Agency (DLA) and the Defense Threat  Reduction Agency (DTRA)—with the highest reported obligations for  closely associated with inherently governmental functions among the  defense agencies. A more detailed description of our scope and  methodology is presented in appendix I.
We conducted this performance audit from March 2014 through  December 2014 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on the audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: DOD has implemented a number of initiatives to generate savings from  reductions in its civilian and contract workforces in recent years. For  example, in August 2010, the Secretary of Defense directed DOD to  undertake department-wide efficiency initiatives to reduce duplication,  overhead, and excess across the department. Among other things, the  efficiency initiatives specified that DOD should freeze (or cap) the civilian  workforce at the fiscal year 2010 levels for fiscal years 2011 through  2013.
In 2012 the Senate Committee on Armed Services cited the need to  maintain the appropriate balance between the civilian and contract  workforce and to achieve the expected savings from reductions in both  workforces, and Congress enacted provisions to limit DOD’s service  contracts. Section 808 of the NDAA for Fiscal Year 2012 limited DOD’s  total obligations for contract services in 2012 and 2013 to the amount  requested for these services in the fiscal year 2010 President’s Budget  Request. The limit does not apply to contract services for military  construction, research and development, and services funded for  overseas contingency operations. Additionally, it provides for two  adjustments to the spending limit above fiscal year 2010 budgeted levels.  DOD may adjust contract services spending above 2010 levels to account  for (1) funding increases associated with contract services that were  transferred from overseas contingency operations to the base budget and  (2) the cost of additional civilian personnel positions over fiscal year 2010  levels. As shown in table 1, DOD identified an aggregate spending limit of  $56.47 billion for fiscal year 2012 and $57.46 billion for fiscal year 2013.
The spending limit identified in the Act applied to the entire department;  therefore, components could exceed their individual targets but DOD  would still be in compliance with the law if total spending for contract  services across the entire department was less than the aggregate  spending limit. Section 808 contract services spending limits ended after  fiscal year 2013, but Congress extended the spending limit through fiscal   While  year 2014 in section 802 of the NDAA for Fiscal Year 2014.spending limit requirements currently expire at the end of fiscal year  2014, draft legislation contains a provision to extend the spending limit  requirement through fiscal year 2015.
Congress has also enacted legislation to improve the availability of  information on DOD’s acquisition of services and to help the department  make more strategic decisions about the right workforce mix of military,  civilian, and contractor personnel. In fiscal year 2002, Congress enacted  section 2330a of Title 10 of the U.S. Code, which required the Secretary  of Defense to establish a data collection system to provide management  information on each purchase of services by a military department or  defense agency. In 2008, Congress amended section 2330a of Title 10 of the U.S. Code to require the Secretary of Defense to submit an annual  inventory of contracted services performed for or on behalf of DOD during  the preceding fiscal year. This annual inventory submission includes,  among other things, the number of contractor full time equivalents and the  associated direct labor cost for these positions. Following the  submission of the inventory, the secretaries of the military departments  and heads of the defense agencies are to complete a review of the  contracts identified in the inventory to ensure, among other things, that  the activities do not include inherently governmental functions—which are  those that require discretion in applying government authority—such as  the determination of budget policy. The review should also ensure that to  the maximum extent practicable, the activities do not include any closely  associated with inherently governmental functions, which are those that  may be at risk of becoming inherently governmental due to the manner in  which the contractor performs the work, among other things. Upon  completion of this review, the secretaries of the military departments and  heads of the defense agencies submit a certification letter to the Office of  Personnel and Readiness that outlines the results and any corrective  actions to be taken to ensure that contractors are not performing  inherently governmental functions and to monitor the use of contractors  for closely associated with inherently governmental functions.
Section 808 of the NDAA for Fiscal Year 2012 further reinforced these  requirements by instructing DOD to issue guidance requiring the  components to reduce funding by 10 percent for fiscal years 2012 and  2013 for contracts identified with personnel performing closely associated  with inherently governmental functions. Section 808 also instructed DOD  to establish guidance to conduct a reduction of funding by 10 percent for  fiscal years 2012 and 2013 for contracts identified with personnel  performing on staff augmentation contracts, which it identifies, in relevant  part, as contracts for personnel who are subject to the direction of a  government official other than the contracting officer for the contract.  Unlike the aggregate spending limit, the statutory requirement for  guidance on reductions in funding for closely associated with inherently  governmental functions and staff augmentation are directed to each  component; therefore, the reductions are expected to take place at each  component, rather than an aggregate reduction across the department.  The section 808 requirement to reduce funding for closely associated with  inherently governmental functions and staff augmentation expired in  September 2013; however, Congress modified the requirements in  section 802 of the NDAA for Fiscal Year 2014, extending the time period  for DOD to implement the full 20 percent reduction for both the closely  associated with inherently governmental and staff augmentation functions  through fiscal year 2014. The fiscal year 2014 period is also referred to  as a carryover year—whatever required reductions that DOD did not take  in fiscal years 2012 and 2013 are required to be taken in 2014.
While implementing both the civilian and contract services limitations, the  department faced uncertainty about funding levels associated with the  automatic, across-the-board cancellation of budgetary resources, known  as sequestration. sequestration of budgetary resources, resulting in a $37 billion reduction  in DOD’s discretionary budget, which includes funding for contract  services. As we reported in June 2014, the department implemented an  administrative furlough of the civilian workforce to help achieve these  reductions, but contract services were not subject to these furloughs and  DOD continued to use contracted support under existing contracts.
Sequestration was a result of the Budget Control Act of 2011 (Pub. L. No. 112-25  (2011), as amended). The Budget Control Act of 2011, as implemented by the Office of  Management and Budget, required spending cuts of $37 billion from DOD’s budget in  fiscal year 2013 through across-the-board, proportional reductions in funding provided in  the appropriations acts for most defense accounts, including accounts related to DOD’s  civilian workforce and contracted services.
section_title: DOD Exceeded the Contract Services Spending Limit in 2012 and Adhered to the Limit in 2013, but Varied Implementation of Fiscal Controls Hampered Some Efforts
paragraphs: DOD exceeded its spending limit by $1.72 billion in fiscal year 2012 and  spent approximately $500 million less than its limit in fiscal year 2013.  However, DOD reported spending $1.34 billion more than the limit in  fiscal year 2012 and $1.81 billion less than its limit in fiscal year 2013  because the DOD Comptroller’s office—responsible for calculating DOD  spending limits and setting spending targets—inconsistently calculated  exclusions from the contract services spending limits. Varied  implementation of fiscal controls hampered military department efforts to  adhere to the spending limits. In fiscal year 2012, DOD exceeded the  spending limit because each of the military departments exceeded their  respective spending targets. Military department budget officials  explained that they took limited steps to adhere to spending targets in  fiscal year 2012 due to late guidance from the Office of the Deputy  Secretary of Defense. After exceeding the spending targets in fiscal year  2012, some components improved planning and implemented stronger  fiscal controls over contract services, such as monitoring spending during  the year and prioritizing mission needs to assist in funding decisions,  helping DOD meet its spending limit for fiscal year 2013.
subsections: section_title: DOD Comptroller Inconsistently Calculated Adjustments, Overstating the Spending Limits
paragraphs: DOD reported spending more than its identified limit on contract services  in fiscal year 2012 by $1.34 billion and less than its limit in fiscal year  2013 by $1.81 billion. However, the DOD Comptroller’s office  inconsistently calculated adjustments by excluding certain categories of  expenditures from the spending limit. By doing so, DOD overstated its  calculated spending limit of $56.47 billion by approximately $400 million in  2012 and its spending limit of $57.46 billion by $1.31 billion in 2013, as  indicated in figure 1.
In addition to the transfer of contract services funding from overseas  contingency operations, DOD’s calculation of the spending limit consists  of two primary elements: (1) the funding of contract services categories  identified in the 2010 President’s budget request and (2) the cost of  increases in the civilian workforce over 2010 levels. The NDAA for Fiscal  Year 2012 permits DOD to exclude spending for military construction,  research and development, and services funded for overseas  contingency operations in determining its spending limit. DOD’s June  2012 guidance instructs the components to exclude these services, but  also permits excluding other services from federal sources and medical  care, which are not specifically identified for exclusion in the law. A  Comptroller official said that DOD excluded other services from federal  sources because this category includes services purchased on behalf of  other federal agencies, such as through the use of interagency  agreements, in addition to DOD purchases. The official indicated that  DOD was unable to distinguish between services purchased for other  federal agencies and those purchased for DOD and therefore excluded  the entire category. Additionally, the Comptroller official explained that the  exclusion of contracted medical care from the spending limit was done to  ensure that medical care was not reduced for service members.
Moreover, the DOD Comptroller’s office included approximately $248  million in research and development funds in the spending limit for both  fiscal year 2012 and 2013, while excluding all actual research and  development spending from its calculation of adherence to the limit for  fiscal year 2013. As a result of this error, DOD overstated the limit by  $248 million. The Comptroller’s office acknowledged this inclusion as a  coding error and plans to appropriately exclude research and  development expenditures from its spending limit in future years.
In addition to excluding certain services from the spending limit, section  808 also permits DOD to increase its spending on contract services  above 2010 levels to adjust for cost increases associated with its civilian  workforce. However, our analysis found that the DOD Comptroller office’s  calculation for the civilian workforce adjustment was not consistently  applied.
DOD excluded civilian personnel performing research and  development, military construction, and a portion of its civilian  personnel that are funded from other federal sources from its  adjustment for increases in civilian personnel costs and it also  excluded similar contract services when determining the spending  limit.
By contrast, DOD did not remove civilian personnel providing medical  care from the adjustment for increases in civilian personnel costs; yet  it excluded contract services for medical care from the determination  of the spending limit.
A DOD Comptroller official explained that a portion of contract services  associated with medical care, such as management support, was  included in the spending limit, because the Comptroller’s office could not  separate out the corresponding civilian pay adjustments associated with  these personnel. Therefore, the Comptroller’s office decided to include all  civilian medical related personnel, which accounted for nearly half of the  increase in the civilian workforce each year, in the calculation of  increases in the civilian workforce. By consistently applying DOD’s  exclusions for these civilian personnel, we found that DOD overstated the  spending limit by approximately $600 million in fiscal year 2012 and $1.1  billion in fiscal year 2013.
Inconsistencies in accounting for both research and development and the  calculation of civilian workforce increases resulted in DOD’s aggregate  spending limit being overstated by roughly $400 million in fiscal year 2012  and $1.31 billion in fiscal year 2013. As a result, DOD’s reported  spending over the limit would increase from $1.34 billion to $1.72 billion in  fiscal year 2012. Similarly, DOD’s reported adherence to the cap in fiscal  year 2013 would be reduced from $1.81 billion to about $500 million.
section_title: Military Departments Varied in Implementation of Fiscal Controls to Adhere to Spending Limits
paragraphs: DOD reported exceeding its identified spending limit of $56.47 billion by  $1.34 billion for fiscal year 2012. In implementing the limit for fiscal year  2012, DOD issued guidance that set contract services spending targets  for each of the components below the aggregate spending limit to allow  for unexpected costs that may occur during the year. DOD defense  agencies spent under their overall target as a group in fiscal year 2012;  however, some agencies, such as DLA, exceeded their individual  spending targets. Additionally, all of the military departments exceeded  their spending targets, as shown in figure 2.
Military departments took limited steps to adhere to spending targets in  fiscal year 2012, which some military department budget officials  attributed to late guidance from the Deputy Secretary of Defense. The  guidance provided each component with a contract services spending  target in June 2012, approximately 4 months before the end of the fiscal  year, which Army and Air Force budget officials said did not allow enough  time to implement spending limits in fiscal year 2012. Despite issuing  guidance late in the fiscal year, DOD officials believed the department  was on track to meet the aggregate spending limit as of June 2012.  However, military department budget officials said that they spent more  on contract services in the last quarter of the fiscal year than budgeted  due to additional funding for contract services made available through  reprogramming, which allows for the shifting of funds for contract services  requirements that were not planned for the when the appropriation was  made.
As shown in figure 3, the military departments have historically increased  contract services obligations during the last quarter of the fiscal year.  Further, an Army budget official explained that the Army exceeded its  fiscal year 2012 target by more than $2 billion due in part to poor budget  estimates, which were not informed by the Army’s inventory of contracted  services data that indicated spending in excess of the target, and other  costs that are not taken into account when budgeting, such as  reprogramming.
In fiscal year 2013, DOD reported spending $1.81 billion less than its  identified spending limit of $57.46 billion. The Deputy Secretary’s June  2012 guidance also set contract services spending targets for each of the  components for fiscal year 2013 below the aggregate spending limit to  allow for some unexpected costs during the year.spending less than the limit, but adherence to targets varied across the  components. Similar to fiscal year 2012, defense agencies as a group  spent under their target; however, adherence to targets varied, with some  agencies, such as DLA, continuing to exceed their individual spending  targets. Adherence to targets by the military departments varied, with the  Army exceeding its fiscal year 2013 spending target by $2.69 billion, while  the Air Force obligated $2.83 billion less than its target, and the Navy  obligated over $500 million less than its target, as shown in figure 4.
We found that budget officials from the components that met their  spending targets in fiscal year 2013 implemented improved planning and  oversight of contract services spending. Improvements included soliciting  contract services budget estimates from commands—an organizational  sub-unit of a military department or defense agency— during the annual  budget process, providing each command with individual contract  services spending targets, and monitoring contract services spending  during the year to ensure compliance with section 808 spending limits.As shown in table 2, the components we included in our review took  varying approaches to manage contract services spending limits.
For example, the Air Force Financial Management and Comptroller Office  provided each command with a ceiling on their contract services through  their annual funding letter. According to Air Force officials, these ceiling  amounts were based on planning documents, which included annual  budget estimates for contract services, provided by each command prior  to the start of the fiscal year. Throughout the year, Air Force Financial  Management officials monitored monthly spending reports and  communicated with commands to ensure that they adhered to their  targets and made adjustments to the allocation of funds among  commands when necessary. Additionally, these officials planned for  potential reprogramming and reviewed reprogramming actions to ensure  that they would not result in the Air Force exceeding its spending target,  as it did in fiscal year 2012. Similarly, DTRA spent less than its target in  fiscal year 2013, which DTRA Comptroller officials attributed to allocating  contract services spending targets among its organizations based on  annual budget estimates for contract services and monitoring periodic  reports on the execution of spending against these targets. Further,  DTRA Comptroller officials stated that they prioritize mission  requirements to ensure that the highest priority missions receive contract  services funds, while lower priority mission needs may not receive such  funds.
The Army Budget Office also provided spending targets to each  command in fiscal year 2013; however, it did not solicit input from the  commands on their spending plans to inform these targets. An Army  manpower official said commands have generated contract services  spending estimates through the Army’s inventory of contracted services  that could have been used by the budget office to inform contract services  targets. Further, without incorporating such information from the  commands, the Army Budget Office did not prioritize requirements to  assist commands’ planning efforts to meet their spending targets. For  example, one Army command that we spoke with said it was difficult to  meet the spending target without additional guidance to prioritize the  types of services that should be reduced or eliminated to meet the target.  Instead, these targets were based on each command’s contract services  spending in fiscal year 2012. In addition, according to an Army budget  official, the Army Budget Office does not typically communicate with  commands during the year to monitor spending, which limited the Army’s  ability to ensure adherence to the spending target. Similarly, DLA also  exceeded their contract services spending target for fiscal year 2013. The  DLA financial management official that we spoke with was not aware of  the section 808 guidance that set contract services spending targets for  each component, and therefore took no action to manage to the spending  target identified in the guidance.
Standards for Internal Control in the Federal Government call for  government agencies to take actions to ensure accountability and  stewardship of the government’s resources. In fiscal year 2013, the  improved planning and stronger fiscal controls over contract services by  the Air Force helped it to spend $2.83 billion less than its target. By  contrast, the Army did not take similar actions for contract services and  subsequently exceeded its target by more than $2 billion in fiscal year  2013, as it did in fiscal year 2012. Improved planning and consistent  implementation of fiscal controls across the department could better  enable DOD to manage contract services spending and achieve future  savings.
section_title: Accuracy of Funding Reductions for Closely Associated with Inherently Governmental Functions Could Not Be Determined
paragraphs: Comparable and timely data are not available to determine if DOD  implemented the mandated funding reductions for contractor performance  of closely associated with inherently governmental functions. DOD’s  section 808 guidance instructs the components to rely on the pre-existing  inventory process to identify and measure these reductions, but the fiscal  year 2011 inventory guidance, issued prior to the enactment of section  808, did not require components to report the obligation data necessary  to do so in their review certification letters—documentation of the results  of the inventory review that identifies the performance of closely  associated with inherently governmental functions. DOD subsequently  updated its inventory guidance for fiscal year 2012 to collect obligation  data and again for fiscal year 2013 to require components to report on  how the section 808 required reductions were achieved in fiscal years  2012 and 2013. However, two years of obligation data will not be  available until after the statutory requirement has expired in September  2014.
Section 808 requires the Secretary of Defense to issue guidance to the  components to implement reductions in funding for closely associated  with inherently governmental functions by 10 percent in fiscal years 2012  and 2013. DOD issued guidance in June 2012, which instructed  components to use the information reported in the fiscal year 2011  inventory as the baseline for the 10 percent funding reduction. However,  the 2011 inventory guidance was issued prior to the passage of section  808 and therefore did not call for reporting the necessary obligation data  to establish a baseline for these reductions.components—Army and Air Force—that submitted inventory review  certification letters reported obligations for closely associated with   Two of the 29  inherently governmental functions for fiscal year 2011. DOD updated its  guidance for the fiscal year 2012 inventory review to require components  to report more detailed information on closely associated with inherently  governmental functions and as a result 13 components identified such  obligation data in 2012. However, the Air Force did not complete an  inventory review in 2012 and the Army was the only component that  reported obligations associated with closely associated with inherently  governmental functions for both the 2011 and 2012 fiscal years. Without  obligation data for closely associated with inherently governmental  functions from the other components in their 2011 inventory review  letters, DOD does not have the data necessary to determine the funding  amount to meet the 10 percent reductions for fiscal years 2012 and 2013.
Although the Army is the only component to report obligation data for  closely associated with inherently governmental functions in fiscal years  2011 and 2012, we found that these data are not comparable due to  changes in selection methodology. The Army reported $8.5 billion in  these obligations in its fiscal year 2011 inventory review and issued  guidance instructing each command to reduce their obligations  associated with these functions by 10 percent. In fiscal year 2012, the  Army reported $4.5 billion in obligations associated with closely  associated with inherently governmental functions, showing a reduction of  nearly 50 percent when compared to the obligations reported in 2011.  However, Army manpower officials were not able to identify how these  reductions were achieved, but explained that their 2012 review  certification letter did not include complete input from all commands. For  example, the command that accounted for the largest reduction in these  functions from 2011 to 2012 attributed it to the transfer of responsibility for  these functions to another command. The command that assumed  responsibility for these functions did not include them in its 2012 inventory  review and as a result these previously identified closely associated with  inherently governmental functions were not accounted for in the Army’s  2012 inventory review certification letter.
Moreover, while components are improving their annual inventories each  year to report more detailed information on closely associated with  inherently governmental functions, Personnel and Readiness officials said  that data collected through the inventory may not be comparable from  year to year due to changes in methodology. For example, DOD’s  guidance for the fiscal year 2011 inventory review instructed components  to review at least 50 percent of the contract actions reported in the  inventory to identify these functions, while guidance for fiscal year 2012  called for a review of 80 percent of contract functions. Further, officials  from the components reported various interpretations of the 80 percent  review guidance. For example, the Army and DLA reported reviewing 80  percent of the contract dollar amounts identified in their inventory, while  DTRA reported reviewing 80 percent of the contract awards or  modifications. In addition, the fiscal year 2013 guidance does not specify  the percent of contract actions or percent of total dollar amounts that  should be reviewed for 2013 and as a result continues to limit comparison  of data collected across fiscal years. In November 2014, we  recommended that DOD update its annual inventory review guidance to  clarify this review requirement and DOD agreed to update its guidance for  future years.
The Office of Readiness and Force Management issued additional  guidance in May 2014 requiring components to identify the steps taken to  implement funding reductions in closely associated with inherently  governmental functions in fiscal years 2012 and 2013. If components did  not achieve the full 20 percent reduction for fiscal years 2012 and 2013,  they were also instructed to identify any additional carryover reductions to  be taken in fiscal year 2014 to achieve the full 20 percent reduction, as  required by the NDAA for Fiscal Year 2014. However, these carryover  reduction amounts will not be identified until fiscal year 2015, after the  statutory requirement to implement these additional reductions in 2014  has expired. In addition, it is unclear what data will be reported to  demonstrate compliance with section 808 given the lack of data from  2011 to establish a baseline for reductions and the differing selection  methodology used each year to identify these functions. We will assess  the data reported in the fiscal year 2013 inventory review certification  letters when they become available and report on results in fiscal year  2015.
Given the lack of comparable inventory data, officials at some DOD  components that we spoke with identified other data sources to measure  these reductions during the fiscal year 2013 inventory review. For  example, DTRA officials relied on actual expenditures reported for  advisory and assistance services—a subset of contract services recorded  in the department’s financial system—to show reductions in obligations  for closely associated with inherently governmental functions. According  to these officials, they relied on the advisory and assistance services  category due to the similarities between closely associated with inherently  governmental functions and the types of services captured by the  category, such as analyses or evaluations that support budget and  acquisition decisions. Further, advisory and assistance services have  been recorded in the annual budget since 1994, allowing DTRA officials  to budget a reduction and track spending in the category. Personnel and  Readiness officials agreed that the advisory and assistance budget  category provides an alternative to measure reductions, but noted that  these data have their own limitations. For example, we found in 2008 that  the identification of advisory and assistance services is subjective and  agencies experienced challenges linking obligations reported for these  categories to specific contracts to provide oversight. Based on the  challenges presented by the currently available data sources, the  Personnel and Readiness officials said that DOD does not currently have  the tools in place to measure funding reductions for specific contract  functions. Nevertheless, data collected through other available sources  may help DOD corroborate data obtained from prior inventory reviews  and assist in validating whether funding reductions for closely associated  with inherently governmental functions have been achieved for fiscal  years 2012 and 2013.
section_title: The Extent to Which DOD Has Implemented Staff Augmentation Reductions Is Not Yet Known
paragraphs: DOD has not yet determined if funding reductions in staff augmentation— contractors under the direction of a government official other than a  contracting officer—were implemented due to insufficient guidance and  management attention. Section 808 instructs DOD to issue guidance to  the components to implement a 10 percent reduction in funding for staff  augmentation contracts and to identify responsible management officials  to ensure that reductions are achieved. DOD’s section 808 guidance,  issued in June 2012, instructs each component to identify responsible  management officials to ensure that section 808 requirements, including  staff augmentation reductions, are met, but officials from only one of the  five components that we spoke with were able to clearly identify an official  responsible for implementing staff augmentation funding reductions. The  June 2012 guidance also identifies a number of officials, including  Comptroller and Personnel and Readiness officials, as points of contact  for questions on the implementation of the guidance. However, in  speaking with these officials, none considered themselves responsible for  oversight to ensure implementation of reductions in staff augmentation. In  the absence of this oversight, officials at some components stated that  they had not measured reductions in staff augmentation funding because  they had not been directed on how to report the results.
DOD’s section 808 guidance also lacked clarity in how reductions in staff  augmentation funding should be implemented and measured. The  guidance notes that these funding reductions were factored into budget  requests for fiscal years 2012 and 2013, but does not specify the  amounts of these budgeted reductions or the data source that should be  used to determine if the reduction was achieved. In response to section  802 of the NDAA for Fiscal Year 2014 that requires DOD to implement  reductions in 2014 if they were not achieved in 2012 and 2013, DOD  issued supplemental guidance in May 2014 instructing components to  report on actions taken to implement staff augmentation reductions in  their fiscal year 2013 inventory review certification letters. However, this  guidance did not provide any direction to the components on how to apply  the statutes definition of staff augmentation or the data that should be  used to measure compliance with the requirement. As a result,  components that we spoke with provided varying interpretations of how to  report on the staff augmentation requirement and were still determining  how to report on these reductions in their 2013 inventory review  certification letters. For example,
Army manpower officials planned to use a combination of inherently  governmental and authorized and unauthorized personal services  contractor data reported through the inventory review process.
DTRA interpreted the definition of staff augmentation contained in the  law as synonymous with closely associated with inherently  governmental functions and measured the reduction using the  advisory and assistance services category tracked through the  department’s financial system.
DLA officials planned to identify staff augmentation funding using  select product service codes for professional, administrative, and  management support services from the Federal Procurement Data  System-Next Generation. However, they noted that it would be  challenging to manually verify if all contracts identified were in fact for  staff augmentation services.
The results of the 2013 inventory review will not be reported until fiscal  year 2015, after the statutory requirement to implement reductions has  expired. As a result, if DOD components identify any additional reductions  needed to comply with section 808 they will have to be implemented  outside of the timeframes specified in section 808. In addition, as shown  above, the methods used to measure reductions will likely vary among  the components. We will assess the fiscal year 2013 inventory review  certification letters when they become available and report on the results  in 2015.
section_title: Conclusions
paragraphs: DOD has not fully implemented the steps necessary to effectively  manage the section 808 limitations on contract services required by law.  By inconsistently excluding categories of services and overestimating the  allowable spending, DOD did not accurately measure compliance with  contract services spending limits. Implementation of improved fiscal  controls by the Air Force helped DOD to better manage contract services  spending in fiscal year 2013, but wider use of effective fiscal controls by  all defense components could help DOD realize intended efficiencies and  effective management of contract services spending. The significant  discrepancies among the military departments’ adherence to the contract  services spending targets signal that more could be done to ensure that  the department has the information necessary to budget and manage  contract services spending. Moreover, in the absence of the data  necessary to reliably measure reductions in funding associated with  closely associated with inherently governmental functions and staff  augmentation contracts, DOD is not a position to know whether required  reductions have been achieved. As a result, DOD may need additional  time to determine whether those reductions have been implemented.
section_title: Matter for Congressional Consideration
paragraphs: To ensure that DOD takes action to implement required funding  reductions in closely associated with inherently governmental functions  and staff augmentation contracts, Congress should consider extending  the time period for DOD to achieve the reductions.
section_title: Recommendations for Executive Action
paragraphs: To ensure the management of the required portfolio of contract services  and that required reductions are achieved we recommend that the  Secretary of Defense take the following four actions:
Ensure that the Comptroller updates the department’s methodology  for determining compliance with the aggregate spending limit for 2014  to:
Consistently calculate the civilian personnel adjustment to take  into account any categories of services excluded from the  spending limit.
Adjust the spending limit to exclude research and development  obligations from both the limit and actual expenditures as  required.
Evaluate fiscal controls used by the military departments to identify  effective practices and ensure they are consistently implemented to  improve the management of contract services spending.
Given the limitations of the data available from the inventory of  contracted services for fiscal years 2011 and 2012, direct the Office of  Personnel and Readiness to identify additional data sources to  corroborate data with that reported in the fiscal year 2013 inventory to  help ensure funding reductions called for in the law are implemented.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD for review and comment. In its  written comments, reproduced in appendix II, DOD concurred with the  four recommendations. The Department concurred with our first  recommendation to consistently calculate the civilian personnel  adjustment and stated that it plans to reevaluate the civilian personnel  adjustment to account for categories of services excluded from the  spending limit in the future. In response to the second recommendation,  DOD agreed to adjust the spending limit to exclude research and  development obligations from the limit and actual expenditures. DOD  concurred with the third recommendation to evaluate fiscal controls and  the fourth recommendation to identify data sources that corroborate  inventory data, but did not provide any further details on the  implementation plans for these actions. We also received technical  comments from DOD, which were incorporated as appropriate.
We are sending copies of this report to the Secretary of Defense and  interested congressional committees. In addition the report is available at  no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202)512-4841 or makm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made key contributions to this report are  listed in appendix III.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: The objectives for this review were to determine the extent to which the  Department of Defense (DOD) implemented the requirements of section  808 of the National Defense Authorization Act (NDAA) for Fiscal Year  2012, in fiscal years 2012 and 2013 to (1) limit its service contract  spending, (2) reduce funding for closely associated with inherently  governmental functions by 10 percent each year, and (3) reduce funding  for staff augmentation contracts by 10 percent each year.
To determine the extent to which DOD implemented the service contract  spending limit in fiscal years 2012 and 2013, we reviewed relevant laws  and DOD guidance, analyzed Office of the Under Secretary of Defense  (OUSD) Comptroller data, and interviewed DOD budget officials.  Specifically, we reviewed DOD’s section 808 guidance, issued in June  2012, and compared this guidance to the law. Further, we reviewed the  Comptroller’s methodology for calculating the spending limit by analyzing  contract services budget and funding data— categorized as object class  code 25 by the Office of Management and Budget Circular No. A-11. To  ensure that the total contract services spending data provided by the  Comptroller included all contract services expenditures by the  department, we compared the Comptroller data to contract services  spending reported in the Federal Procurement Data System-Next  Generation and found that the data were within a reasonable range and  sufficiently reliable for our purposes. To determine the steps taken by  individual DOD components to implement controls over contract services  spending, we interviewed and collected information from budget officials  at the OUSD Comptroller’s Office, the military departments, the Defense  Threat Reduction Agency (DTRA) and the Defense Logistics Agency  (DLA), which reported the highest obligations for closely associated with  inherently governmental functions among the defense agencies in the  fiscal year 2012 inventory.
To assess the extent to which DOD components reduced funding for  closely associated with inherently governmental functions by 10 percent  in fiscal year 2012, we reviewed relevant laws, guidance, and data from  the inventory of contracted services certification review letters for fiscal  years 2011 and 2012, the most recent data available when our review  was initiated. We reviewed DOD’s section 808 guidance, issued in June  2012, which identified fiscal year 2011 inventory of contracted services  data as the basis to measure reductions in fiscal years 2012 and 2013.  We also reviewed DOD’s annual inventory guidance for fiscal years 2011  through 2013 to determine if the information necessary to measure  section 808 compliance was required by the guidance.
To identify the data available to establish a baseline for the required  funding reductions in closely associated with inherently governmental  functions, we reviewed prior GAO work on DOD’s fiscal year 2011  inventory and reviewed the certification letters submitted by 29  components for the fiscal year 2011 review. In addition, we analyzed the  review certification letters submitted by 32 DOD components for the fiscal  year 2012 inventory review and compared these letters to those  submitted for 2011 to determine if components reported relevant data on  funding for closely associated with inherently governmental functions to  measure reductions. In addition, we interviewed officials responsible for  compiling and reviewing the inventory data at the departments of the  Army, Navy, and Air Force, and two selected DOD agencies—DLA and  DTRA—that reported the highest obligations for closely associated with  inherently governmental functions among the defense agencies in the  fiscal year 2012 inventory. As the Army was the only component to  identify obligations for closely associated with inherently governmental  functions in both years, we interviewed officials from selected Army  Commands—the Army Installation Command, Army Materiel Command  and Acquisition Support Center—whose data showed the largest change  in closely associated with inherently governmental functions from 2011  through 2012.
To assess the extent to which the components implemented the required  reduction in funding for staff augmentation contracts by 10 percent each  year, we reviewed relevant laws and guidance and interviewed officials  from OSD, the military departments and selected defense agencies.  Specifically, we reviewed DOD’s section 808 guidance, issued in June  2012, to determine the steps taken by DOD to implement the reduction in  staff augmentation funding. Further, we interviewed OSD officials from  the office of Defense Procurement and Acquisition Policy, the Office of  the Under Secretary for Personnel and Readiness and the office of Cost  Assessment and Program Evaluation to identify available data to  measure reductions in staff augmentation funding. In addition, we  interviewed officials from the military departments, DTRA, and DLA to  identify the responsible management official at each component and the  steps taken to implement the reduction in staff augmentation funding.
We conducted this performance audit from March 2014 to December  2014 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, W. William Russell, Assistant  Director; Beth Reed Fritts; Jonathan Munetz; and Suzanne Sterling made  significant contributions to this review. In addition, Pete Anderson,  Virginia Chanley, Julia Kennon, John Krump, and Ozzy Trevino made key  contributions to this report.