Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD is Not Demonstrated
Published: 2005-07-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) is the largest user of other federal agencies' contracting services. The availability of these contracting services has enabled DOD and other departments to save time by paying other agencies to award and administer contracts for goods and services on their behalf. DOD can access these contracting services a number of ways, such as ordering directly from interagency contracts for commonly needed items. DOD also can pay someone else to do the work. For example, DOD uses franchise funds, which are government-run, fee-for-service organizations that provide a portfolio of services, including contracting services. As part of a congressional mandate, GAO assessed whether franchise funds ensured fair and reasonable prices for goods and services, whether DOD analyzed purchasing alternatives, and whether DOD and franchise funds ensured value by defining contract outcomes and overseeing contractor performance.
section_title: What GAO Found
paragraphs: GovWorks and FedSource, two of the franchise funds that DOD has relied on for contracting services, have not always ensured fair and reasonable prices while purchasing goods and services. The franchise funds also may have missed opportunities to achieve savings from millions of dollars in purchases, including engineering, telecommunications, or construction services. In the course of its review, GAO examined $249 million worth of orders and work assignments from the contracts the franchise funds used to make purchases on DOD's behalf. In many cases, GovWorks sought but did not receive competing proposals. GovWorks added substantial work--as much as 20 times above the original value of a particular order--without determining that prices were fair and reasonable. FedSource generally did not ensure competition for work, did not conduct price analyses, and sometimes paid contractors higher prices for services than established in contracts with no justification provided in the contract files. For its part, DOD--in the absence of clear guidance on the proper use of other agencies' contracting services--chose to use franchise funds on the basis of convenience without analyzing whether using franchise funds' contracting services was the best method for meeting purchasing needs. DOD also lacks information about purchases made through other agencies contracts, including franchise funds, which makes it difficult to make informed decisions about the use of these types of contracts. The franchise funds' business-operating principles require that they maintain and evaluate cost and performance benchmarks against their competitors. However, the franchise funds did not perform analyses that DOD could have used to assess whether the funds deliver good value. The funds' performance measures generally focus on customer satisfaction and generating revenues. These measures create an incentive to increase sales volume and meet customer demands at the expense of ensuring proper use of contracts and good value. DOD and the franchise funds--which share responsibility for ensuring value through sound contracting practices such as defining contract outcomes and overseeing contractor performance--did not adequately define requirements. Without well-defined requirements, DOD and the franchise funds lacked criteria to measure contractor performance effectively. On a separate oversight-related issue, GAO found that the departments of the Interior and the Treasury--each of which has responsibility in the successful operation of the respective franchise funds--and the Office of Management of Budget have performed little oversight of GovWorks and FedSource.

section_title: Letter
paragraphs: In recent years, federal agencies have made increasing use of other  agencies’ contracting services to purchase goods and services in less  turnaround time. Use of these services, generally referred to as  interagency contracting, has enabled federal agencies to reduce the time  they spend awarding and administering contracts in the face of acquisition  workforce reductions and growing workloads. Although these services  have grown rapidly and have helped streamline purchasing, using the  many types of contracts demands a high degree of business acumen and  contracting knowledge. Federal agencies can obtain contracting services  through entrepreneurial, fee-for-service organizations, which are  government-run but operate like businesses. Franchise funds are one such  type of organization.
We have reported on the challenges of using other agencies’ contracting  services and have cited the need to effectively manage this contracting  environment. Indeed, we and the inspectors general of some federal  agencies have found instances in which interagency contracts have been  improperly used. Furthermore, we have reported that the agencies that  provide and the agencies that use interagency contracting assistance— such as franchise funds—should be subject to improved oversight and  controls, clearer lines of accountability, and better policies, processes, and  implementation. It is for these reasons that we have designated  management of interagency contracting as a governmentwide high-risk  area.
The Department of Defense (DOD) is the largest customer for other  agencies’ contracting services for purchases, typically ranging from office  supplies to information technology. Use of interagency contracts has  allowed DOD to focus more of its contracting offices’ time and attention  on the acquisition of specialized, highly sophisticated defense equipment.  DOD uses two franchise funds in particular to make purchases on its  behalf—GovWorks, which is run by the Department of the Interior, and  FedSource, run by the Department of the Treasury. In fiscal year 2004,  DOD paid these franchise funds more than $1.2 billion for purchases of  goods and services. (See figure 1.)
The Conference Report accompanying the National Defense Authorization  Act for Fiscal Year 2004 directed us to report on DOD’s use of franchise  funds. We assessed (1) whether franchise funds ensured fair and  reasonable prices for goods and services; (2) whether DOD analyzed  alternatives to determine the best method for acquiring certain goods and  services; and (3) whether DOD and franchise funds ensured value through  other sound contracting practices, such as defining contract outcomes,  and overseeing contractor performance.
To fulfill these objectives, we examined DOD’s largest projects that  involved contracting assistance from GovWorks and FedSource in fiscal  year 2003, the most recent year for which complete data were available at  the time we were planning our review. We reviewed 17 projects, including  the interagency contracts used, and orders and work assignments  representing $249 million in fiscal year 2003 DOD funding. We interviewed  DOD customers and officials at the two franchise funds and reviewed  documentation to assess the contracting practices used to place orders for  goods and services. The results of our review cannot be generalized to all  types of interagency contracts that DOD and the franchise funds used;  however, we believe we have sufficient information to make informed  judgments on the matters in this report. Appendix I provides details on our  scope and methodology. We conducted our work from June 2004 through  June 2005 in accordance with generally accepted government auditing  standards.
subsections: section_title: Background
paragraphs: Franchise funds are government-run, self-supporting businesslike  enterprises managed by federal employees. Franchise funds provide a  variety of common administrative services, such as payroll processing,  information technology support, employee assistance programs, public  relations, and contracting. This review focuses on DOD’s use of the  franchise funds’ contracting services. Franchise funds are required to  recover their full costs of doing business and are allowed to retain up to 4  percent of their total annual income. To cover their costs, the franchise  funds charge fees for services. The Government Management Reform Act  of 1994 authorized the Office of Management and Budget to designate six  federal agencies to establish the franchise fund pilot program. Congress  anticipated that the franchise funds would be able to provide common  administrative services more efficiently than federal agencies’ own  personnel. The original operating principles for franchise funds included  offering services on a fully competitive basis, using a comprehensive set of   performance measures to assess the quality of franchise fund services, and  establishing cost and performance benchmarks against their  competitors—other government organizations providing the same types of  services. Although there are five franchise funds currently in operation,  DOD primarily uses two for contracting services—GovWorks, operated by  the Department of the Interior, and FedSource, operated by the  Department of the Treasury. Figure 1 shows the revenues for GovWorks  and FedSource and the percentage of revenue derived from doing business  with DOD in fiscal year 2004.
Effective contract management requires specialized knowledge and  careful attention to a range of regulatory requirements and contracting  practices designed to protect the government’s interests. In obtaining  contracting services through a franchise fund, three main parties share  responsibilities for ensuring that proper procedures are followed:    government customer—the program office or agency in need of a good  or service;  franchise fund—the federal entity that provides contracting services;  and    contractor—the vendor that provides the good or service desired by  the government customer.
DOD program officials are most familiar with the technical requirements  for the goods and services they need. DOD contracting officers can place  orders directly through many interagency contracts. Alternatively, DOD  pays the franchise fund to assume many of the contracting responsibilities  that normally would have been handled by DOD’s contracting officers if  the customers had relied on them to purchase the goods or services.  Whether DOD makes purchases directly or through another agency,  regulatory procedures and requirements are the same, such as ensuring  competition, determining fair and reasonable pricing, and monitoring  contractor performance. Table 1 shows the basic steps to acquire a good  or service through GovWorks or FedSource.
GovWorks and FedSource can either make use of their own or other  agencies’ contracts, or they can develop new, customized contracts to  satisfy a DOD customer’s needs. GovWorks generally uses other agencies’  contracts, and FedSource generally uses its own contracts. Table 2 lists  the various types of contracting methods the franchise funds use.
While use of other agencies’ contracting services may offer convenience  and efficiency, our prior work and that of some agency inspectors general  have identified problems with the use of other agencies’ contracting  services, including lack of compliance with federal requirements for  competition and lack of contractor oversight. In prior work, we found that  increasing demands on the acquisition workforce and insufficient training  and guidance are among the causes for these deficiencies. Two additional  factors are worth noting. First, the fee-for-service arrangement creates an  incentive to increase sales volume because revenue growth supports  growth of the organization. This incentive can lead to an inordinate focus  on meeting customer demands at the expense of complying with  contracting policy and required procedures. Second, it is not always clear  where the responsibility lies for such critical functions as describing  requirements, negotiating terms, and conducting oversight. Several  parties—the government customer, the agencies providing the contracting  services, and, in some cases, the contractors—are involved with these  functions. But, as the number of parties grows, so too does the need to  ensure accountability. We have previously reported that ensuring the  proper execution of the contracting process is a shared responsibility of  all parties involved in the acquisition process and that specific  responsibilities need to be more clearly defined.
section_title: Franchise Funds Did Not Always Ensure Fair and Reasonable Prices or Competitive Procedures
paragraphs: GovWorks and FedSource did not always obtain the full benefits of  competitive procedures, did not otherwise ensure fair and reasonable  prices, and may have missed opportunities to achieve savings on behalf of  DOD customers for millions of dollars worth of goods and services. With  limited evidence that prices were fair and reasonable, GovWorks  sometimes added millions of dollars of work to existing orders—as high as  20 times the original order value. In addition, we found limited and  inconsistent evidence in the GovWorks and FedSource contract files we  reviewed that the franchise funds sought to negotiate prices or conducted  price analysis when required. DOD customers told us they were under the  impression that franchise funds ensure competition and analyze prices.  However, we found numerous cases in which these practices did not  occur.
subsections: section_title: Criteria
paragraphs: The FAR states that contracting officers must purchase goods and services  from responsible sources at fair and reasonable prices. Price competition  is the preferred method to ensure that prices are fair and reasonable. The  FAR also includes special competition procedures for orders placed under  the types of contracts the franchise funds use, including GSA schedules  and multiple-award contracts. DOD’s procurement regulations have  additional procedures for ensuring competition when purchasing services  from these types of contracts with certain exceptions—such as urgency or  logical follow-on. For example, when ordering from GSA schedules, DOD  procurement regulations require contracting officers to request proposals  from as many contractors as practicable and receive at least three offers.  If three offers are not received, a contracting officer must determine in  writing that no additional contractors can fulfill the requirement.  Alternatively, the contracting officer may provide notice to all schedule  holders that could fulfill the requirement. When prices for the specific  services being ordered are not established in the contract, the FAR and  GSA ordering procedures require contracting officers to analyze proposed  prices and to document that they are determined to be fair and reasonable.  For example, when labor rates are established in the contract, relying on  labor rates alone is not a good basis for deciding which contractor is the  most competitive. The labor rates do not reflect the full cost of the order  or critical aspects of the service being provided, such as the number of  hours and mix of labor skill categories needed to perform the work. These  procedures are designed to ensure that the government’s interests are  protected when purchasing goods and services.
We reviewed 10 orders—totaling about $164 million in fiscal year 2003  funding—in which GovWorks provided contracting services to DOD’s  customers. With the exception of two orders, which were placed against  GovWorks’ own contracts, the orders we reviewed were placed against  GSA schedules. In 5 of the 10 cases, GovWorks sought, but did not receive,  competing proposals as required for the types of contracts used. In 3 of the  10 cases, GovWorks sought and received multiple proposals for the work.  In the remaining 2 cases, GovWorks placed orders on a sole-source or  single-source basis and provided relevant explanations, such as an urgent  need for the work and an award to a small disadvantaged business. Table 3  provides details on these 10 orders, and additional information is available  in appendix I.
In the five cases for which GovWorks sought competing proposals but  received only one proposal for each order, GovWorks allowed 2 weeks or  less for proposals to be submitted. In four of these cases, orders were  ultimately placed with incumbent contractors to fill requirements for  ongoing programs. For example, when the Air Force’s Office of the Deputy  Chief of Staff Air and Space Operations sought a contractor to provide  analytical services, GovWorks gave potential contractors 4 days—around  Christmas—to respond. The one contractor that responded was the  incumbent and received the order, which totaled $63.4 million. When the  Air Force’s Aging Landing Gear Life Extension Program needed a  contractor to provide services involving landing gear technology,  GovWorks invited 17 contractors to submit proposals and posted the  solicitation on the Internet allowing 14 days for proposals to be submitted.  The incumbent contractor, which had provided services to the program  since its inception in 1998, submitted the only proposal and received the  order, which totaled $19.8 million. Each of these 5 orders was subject to  the standards for obtaining competing offers for DOD orders, but in only  the case of the Aging Landing Gear Life Extension Program did contract  documentation indicate that GovWorks had attempted to meet Defense  procurement regulations for ordering from GSA schedules.
Our findings at GovWorks are consistent with our previous work on DOD’s  use of other agencies’ contracts. In our prior work we found that the  reasons only one contractor responded to opportunities to compete for  work included a perception among potential contractors that incumbent  contractors have an advantage in competing for ongoing work and that  very short time frames to prepare proposals discouraged others from  competing. In this review, we found GovWorks received multiple  proposals for work when there was no incumbent contractor and longer  time frames allowed for competition to occur.
In the five cases in which competing proposals were sought but not  obtained, we found limited evidence of price analyses in GovWorks’  contract files. In four of these cases, orders were subject to GSA ordering  procedures for services requiring a statement of work. In the fifth case, an  Interior multiple-award contract, the FAR required price analysis. (See  table 3.) Consequently, GovWorks should have determined that the total  price was fair and reasonable. GovWorks told us that it had conducted  analyses, but we found that the files generally included only brief  statements that prices had been determined reasonable, and GovWorks  generally could not provide us with documentation showing what data had  been gathered or analyses conducted to support the conclusion for the  cases we reviewed.
In 6 of the 10 cases we reviewed, GovWorks added substantial work  beyond what was originally planned without determining that prices were  fair and reasonable. For example, GovWorks increased an original order  20-fold by adding $45.5 million for management consulting services for the  National Guard Bureau Chief Information Office. GovWorks modified  another National Guard order on numerous occasions, this time increasing  the value of the original order for an automated information system from  $17.6 million to $44.6 million. An order for reconnaissance and  surveillance flight support to Army combatant commands increased in  value from $7.4 million to $34.9 million. The order was intended to provide  support in Bosnia, for a period of 15 months with no option to renew, but  was expanded to include operations in Colombia, and the period of  performance was extended by more than 2 years. In each of these  examples, GovWorks assigned the additional work without conducting  price analyses to determine whether the prices charged were fair and  reasonable.
We reviewed seven FedSource projects—amounting to $85 million in fiscal  year 2003—and found that the franchise fund did not compete orders it  placed under multiple-award contracts or perform analyses to ensure fair  and reasonable pricing. FedSource commonly used multiple-award  contracts to make purchases for DOD. When placing orders against  multiple-award contracts, DOD is generally required to ensure that  contract holders have a fair opportunity to submit an offer and have that  offer fairly considered for each order with certain exceptions—such as  urgency or logical follow-on. In addition, FedSource used Blanket  Purchase Agreements and requirements contracts for some of the projects  we reviewed. Table 4 provides detail on the seven projects, and additional  information is available in appendix I.
The FedSource business model involves a two-step process of placing an  order under previously awarded contracts and subsequently developing  work assignments to define requirements for that order. In the first step,  contracting officers issue orders indicating the type and approximate  dollar value of work that FedSource anticipates will be required under  each contract. This estimated value is based on historical usage. The  second step is executed later when DOD identifies its needs. At this point,  FedSource administrative personnel define tasks and outcomes and assign  work to a contractor. In our past work, we recommended that the FAR  clarify that agencies should not award large, undefined orders against  multiple-award contracts and subsequently define specific tasks. The  FAR was revised to encourage agencies to define work clearly so that the  total price for work could be established at the time orders are issued.
Although this requirement was in effect for the period of our review, we  found that FedSource routinely allowed modifications to orders through  work assignments that substantially increased the total price of the orders.
FedSource did not provide contractors the opportunity to submit offers  for orders under multiple-award contracts and have their offers fairly  considered, as required by the FAR. FedSource officials told us that their  business model does not provide contractors the opportunity to submit  offers on orders. Instead, FedSource officials told us that administrative  personnel were responsible for providing contractors a fair opportunity to  be considered for work under multiple-award contract orders when  assigning specific work to contractors. However, we found this generally  did not occur. Of the 120 work assignments we reviewed, 75 were for work  under multiple-award contracts. We found that in most of the 75 work  assignments, FedSource administrative personnel did not provide  contractors this opportunity. For example, FedSource used one of these  contracts to fill several individual support staff positions at Brooke Army  Medical Center at Fort Sam Houston and generally assigned work to one  of the three multiple-award contractors without providing the other two  contractors an opportunity to be considered. Justifications accompanying  these assignments stated that assigning work to more than one contractor  might create conflict among assigned staff over variations in pay and  benefits. The Army’s Fort McCoy used FedSource to obtain contractor  support for a variety of construction projects, and FedSource assigned the  work noncompetitively for all 12 work assignments we reviewed to 1 of 3  multiple-award contract holders—totaling $7.2 million. The contract  holder, a firm specializing in staffing, subsequently passed the work  through to local construction companies that Fort McCoy officials had  identified. Justifications accompanying some of the projects stated that  the FedSource contracting officer’s representative had determined that it  was “in the best interest of the government to award task orders to the  vendor that solicited and brought in the business.” A FedSource quality  review later concluded that these justifications were inadequate. Many  months after the assignments were made, a second justification was  placed in the contract files citing numerous reasons for selecting the  preferred contractor. One of the reasons was that the project required  expedited effort to support urgent requirements, which might have been  an acceptable reason, except that the justification did not indicate that use  of the other two contractors would have resulted in unacceptable delays.
In another example, the Navy needed to fill several administrative  positions at its 31 regional recruiting centers around the country. Under  another purchasing arrangement, FedSource assigned the work to two  contractors, one for recruiting centers east of the Mississippi River and the  other for centers to the west of the river. These arrangements did not  establish prices for any of the services provided, and FedSource personnel  told us that they accepted the prices provided by the contractors. This  type of purchasing arrangement does not justify purchasing from only one  source—contracting officers are still required to solicit price quotations  from other sources. However, there was no evidence FedSource personnel  had negotiated or analyzed these prices.
In addition, FedSource did not always demonstrate that prices were  reasonable. For example, in two of the customer projects we reviewed,  FedSource made work assignments for construction services at the Army’s  Fort McCoy and Fort Snelling against a contract for operational support.  Because the original contract had a very broad and undefined statement of  work that did not explicitly include construction, no prices for that type of  work had been established in the contract. For the project at Fort McCoy,  the contractor that received the assignment solicited prices from potential  subcontractors and presented their price, including a markup, to  FedSource. We did not find any analysis to determine that the contractor’s  price was reasonable in FedSource’s files. FedSource officials told us that  they have since awarded a separate contract for construction services.
In four of the five projects involving staffing support, FedSource paid  contractors higher prices for services than were established in the  contract. Most of the files we reviewed contained no justifications for the  higher prices. For example, in our review of 25 work assignments for  staffing support services at an Army medical center, 14 of the work  assignments were priced higher than the price established in the contracts.  In 9 of these cases, FedSource had agreed to additional sick leave or  vacation time as part of the hourly rate, but FedSource’s contract file  contained no documentation indicating that the contractor employee  qualified for the additional benefits.
section_title: DOD Focused on Convenience and Did Not Pay Sufficient Attention to Analyzing Contracting Alternatives
paragraphs: DOD did not follow sound management practices designed to ensure value  while expeditiously acquiring goods and services. DOD customers chose  to use franchise funds based on convenience, rather than as part of an  acquisition plan. DOD conducted little analysis, if any, to determine  whether using franchise funds’ contracting services was the best method  for acquiring a particular good or service. For their part, although  franchise funds’ business operating principles require that they maintain  and evaluate cost and performance benchmarks against their competitors,  they did not perform analyses that DOD could use to assess whether the  franchise funds deliver good value. Their performance measures generally  focus on customer satisfaction and generating revenues, rather than  proper use of contracts and sound management practices. This focus on  customer satisfaction and generating revenues provides an incentive to  emphasize customer service rather than ensuring proper use of contracts  and good value.
subsections: section_title: DOD Selected Franchise Funds for Convenience with Limited Analysis of Alternatives
paragraphs: DOD customers told us that they did not formally analyze contracting  alternatives but generally chose to pay GovWorks and FedSource to  provide contracting services because the franchise funds provided quick  and convenient service. Some customers were dissatisfied with the speed  and quality of services provided by DOD’s in-house contracting offices.  For example, two DOD customers told us that their contracting offices  required 9 months to respond to their purchasing needs, while the  franchise fund required only a few weeks. The franchise fund’s ability to  place orders quickly was valuable to DOD customers in these situations.  DOD customers said that franchise funds’ contracting services were less  restrictive than other DOD contracting alternatives. Some DOD customers  told us that GovWorks and FedSource made it easier to spend funds at the  end of a fiscal year unlike DOD’s in-house contracting offices. Two DOD  customers said that GovWorks made it easier to spend small amounts of  funding because GovWorks would place orders incrementally as funding  became available. Some DOD customers mentioned that using FedSource  meant they did not have to “live with the terms and conditions” of a long  term contract or that it was easier to replace problem contractor  employees. In one case, we were told that, if the organization had to fill  positions with government employees, it would have less flexibility to hire  the personnel it needed in a timely manner.
Analysis of contracting alternatives helps to ensure that purchases are  made by the most appropriate means and are in DOD’s best interest;  however, DOD has no clear mechanism for making this determination  when using other agencies’ contracting services. DOD’s guidance on the  use of these vehicles has been evolving for several years and has not yet  been fully implemented. DOD also lacks a means to gather data on the use  of interagency contracts on a recurring basis, although it has been subject  over the years to various requirements to monitor interagency purchases.  In 2003, in response to a congressional mandate, DOD was unable to  compile complete data on spending through interagency contracts. DOD  officials told us that their financial systems are not designed to collect this  data. Without this type of data, it is difficult to make informed decisions  about the use of other agencies’ contracting services. DOD issued  guidance in October 2004 that requires the military departments and  defense agencies to determine whether using interagency contracts—such  as those the franchise funds manage—is in DOD’s best interest. While this  guidance outlines procedures to be developed, and general factors to  consider, it does not provide specific criteria for how to make this  determination and does not require military departments and agencies to  report on the use of interagency contracts. DOD has directed the military  departments and defense agencies to develop their own guidance to  implement this policy. Congress has also recently taken action to ensure  DOD’s proper use of interagency contracts. The conference report  accompanying this legislation established expectations that DOD’s  procedures will ensure that any fees paid by DOD to the contracting  agency are reasonable in relation to work actually performed.
In 2001, Congress adopted legislation requiring DOD to establish a  management structure and establishing savings goals for the procurement  of services. The legislation also requires DOD to ensure that contracts for  services are entered into or issued and managed in compliance with  applicable laws and regulations regardless of whether the services are  procured by DOD directly or through a non-DOD contract or task order.  One of the goals of this legislation was to allow DOD to improve the  management of the procurement of services. However, DOD generally  chose to use franchise funds for reasons of speed, convenience, and  flexibility rather than taking a strategic and coordinated approach to  acquiring services. We found that prior to choosing to use a franchise  fund, DOD did not analyze costs and benefits or prepare business cases to  determine whether the franchise fund provided better value—considering  the fees it charges—compared with other alternatives, such as using a  DOD contracting office or purchasing goods or services through another  federal agency’s existing contract. As a result, DOD customers did not  consider opportunities to leverage their buying power when using  franchise funds. None of the DOD customers we spoke to analyzed trade- offs between total price, including fees, and the benefits of convenience.  For example, on a group of work assignments for construction services  valued at $7.2 million, the Army’s Fort McCoy paid FedSource a total of  about $1 million, or 17 percent above the subcontractor’s proposed price,  for the contractor markup and the franchise fund fee. Most of these  assignments were placed towards the end of the fiscal year. This may have  led to a higher price for the services than DOD would have paid in  contracting directly with the subcontractors. Figure 2 shows the general  process by which the Army’s Fort McCoy used FedSource to obtain  contractor support for construction services.
The DOD customer said that FedSource made it easier than his own  contracting office to assign work with values greater that $25,000 late in  the fiscal year because FedSource’s deadlines were not as strict. He also  speculated that the subcontractor probably would have charged more if  contracting directly with the government because dealing with the  government is cumbersome and costly. He did not have information to  indicate what the subcontractor’s price might have been, nor did he  perform any formal analysis to compare FedSource with other contracting  opportunities.
Conducting a thorough analysis also might have given DOD a better  understanding of the fees paid to make purchases through the franchise  funds. For example, DOD customers sometimes paid a GovWorks fee, or  service charge, on top of a fee to use another agency’s contract because  GovWorks generally uses other agencies’ contracts to make purchases for  DOD customers. While some customers were aware of the fees they paid,  in two cases, DOD customers selected GovWorks because its fees were  lower than fees charged by other agencies; however, the customers did not  realize that GovWorks’ fees were in addition to the other agencies’ fees.  GovWorks’ fees generally ranged from 2 percent to 4 percent of the price  for goods and services purchased, and our analysis showed that  FedSource fees ranged from 2 percent to 8 percent for the contracts and  orders we reviewed. Congress has mandated that DOD agencies report  fees paid for the use of other agencies’ contracts in the past and required  DOD to do so again for fiscal year 2005.
section_title: Franchise Funds Emphasize Customer Service over Good Value
paragraphs: The franchise funds’ business operating principles require that they  maintain and evaluate cost and performance benchmarks against their  competitors. However, they did not perform analyses that DOD could use  to assess whether the franchise funds deliver good value. FedSource  claims that it achieves lower prices on goods and services because it  aggregates requirements and negotiates price discounts. Further,  FedSource claims that competition with other contracting offices provides  an incentive to provide better quality at lower cost. However, this  incentive may not drive costs down unless customers are sensitive to the  cost of doing business with one agency over another and make decisions  based on costs. Franchise fund officials told us that demonstrating these  advantages was difficult because they lacked insight into the prices  customers would have paid when using other contracting alternatives to  fill their requirements. FedSource officials also explained that quantifying  the value of the other benefits they provide—such as convenience and  flexibility—is difficult. Instead, GovWorks and FedSource have used such  measures as growth in total contracting activity and revenues as well as  customer satisfaction but have little data to demonstrate that they provide  better quality and lower price goods and services than other federal  contracting alternatives can provide. In fact, GovWorks marketing  materials emphasize convenience and value-added service rather than  costs. In our prior work, we found that fee-for-service contracting  arrangements emphasize the overall sustainability of the contracting  operation, as the fees collected are used to cover the costs of doing  business, which may lead to a focus on customer service at the expense of  compliance with contracting policy and procedures.
section_title: DOD and Franchise Funds Did Not Pay Sufficient Attention to Defining Outcomes or Overseeing Contractor Performance
paragraphs: DOD, GovWorks, and FedSource did not follow federal contracting  procedures designed to ensure value while expeditiously acquiring goods  and services. DOD and the franchise funds did not define desired  outcomes and the specific criteria against which contractor performance  could be measured and paid limited attention to monitoring contractors’  work. As we have reported previously, it is not always clear where the  responsibility lies for such critical functions as describing requirements,  negotiating terms, and conducting oversight. Although the FAR states that  contracting officers are responsible for including appropriate quality  requirements in solicitations and contracts and for contract surveillance,  the franchise funds do not have sufficient knowledge about the DOD  customers’ needs to fulfill these responsibilities without the assistance of  the DOD customer. Recently, the franchise funds contracting operations  performed some internal reviews that have findings similar to ours, and  the funds are working to address the problems. These shortcomings  mirror many of the findings of our previous work and are among the  reasons we have designated interagency contracting as a governmentwide  high-risk area.
subsections: section_title: GovWorks and FedSource Did Not Clearly Define Outcomes or Establish Criteria for Quality
paragraphs: In the GovWorks and FedSource cases we reviewed, required outcomes  were not well-defined, work was generally described in broad terms, and  orders sometimes specifically indicated that work would be defined more  fully after the order was placed. GovWorks and FedSource files we  reviewed lacked clear descriptions of outcomes to be achieved or  requirements that the contractor was supposed to meet.
The FAR states that contracting officers are responsible for including the  appropriate quality requirements in solicitations and contracts. Without  these criteria, accountability becomes harder to determine and the risk of  poor performance is increased. Clear definition of requirements promotes  better mutual understanding of the government’s needs. In a typical  situation, the customer—a DOD program office, for example—is best  qualified to know what it needs. However, once a DOD program office  chooses to pay a franchise fund to make purchases on its behalf, the office  must then rely on the franchise fund to provide the contracting expertise.  The two parties have to work together to ensure that requirements for  purchases are well-defined with sufficient detail to determine whether the  desired outcomes were met and the goods and services provided meet the  government’s needs. Critical information must be documented in order to  make these determinations. GovWorks and FedSource use different  processes, and the tables in appendix III explain some of the pertinent  contract documents used to define desired outcomes and criteria.
In 7 of the 10 GovWorks orders we reviewed, statements of work were  very broad. For example, six of these orders contained language stating  that specific tasks could be added, deleted, or redefined throughout the  period of performance. In some cases, DOD program officials told us that  the statements of work were broad because they were not aware of all  requirements when the order was placed or because they were operating  in a constantly changing technological environment. DOD program  officials also told us that the broad statements of work gave them  flexibility to add requirements to existing orders as additional needs arose.
Orders placed by FedSource against its contracts contained only a very  general statement—generally just a few words—describing the work in  broad terms and an anticipated dollar value. These orders did not clearly  describe all services to be performed or supplies to be delivered so that  the full price for the work could be established when the order was  placed, as required by the FAR. As noted earlier, FedSource officials  explained that in their business model, orders were not intended to  describe specific work to be completed. Instead, FedSource administrative  personnel issued work assignments that were intended to provide the  clear descriptions of desired outcomes that the orders did not. However,  we found that these work assignments were often unclear as well. Five of  FedSource’s largest customer projects for DOD involved use of contracts  to provide staff. Work assignments for staffing services often described  the position to be filled, including a general outline of duties. However, the  assignments did not contain criteria for evaluating the work performed by  contract employees.
In addition, when providing staffing support, FedSource uses these  contracts to fill positions individually, rather than describing functional  needs or desired results. For example, at an Army medical center  FedSource filled over 200 positions individually instead of aggregating  these positions into fewer functional requirements. This acquisition  approach does not provide contractors with the flexibility to determine  how best to staff a function and does not lend itself to a performance- based approach. Under performance-based contracting, the contracting  agency specifies the outcome or result it desires and leaves it to the  contractor to decide how best to achieve the desired outcome.  FedSource officials said they were moving toward a more performance- based contracting approach.
To determine whether an environment had been created that would allow  improper personal services relationships to develop, we interviewed  officials at five DOD program offices that used FedSource contracts to  staff individual positions. We asked questions about the work performed  by the contractor employees and the relationships between the DOD  customers and the contractor employees. The DOD officials said that  generally: the services provided by the contract employee were integral to  agency functions or missions; the contractor employees were providing  services comparable to those performed using civil service personnel; and  the services were provided on site and with the use of equipment provided  by the government. With regard to the work relationships, DOD customers  told us that government employees assigned and prioritized daily tasks for  the contractor employees. FedSource guidelines also state that the  government customer is responsible for verifying contract employee hours  worked by signing the contractor’s weekly timesheet. Further, a  FedSource internal review found that statements of work contained  “personal services-type language like ‘under the direction of’ or ‘oversee’  or ‘duties’ or ‘job description.’” Our review also found documents that had  been edited to revise similar language. FedSource officials were aware of  the potential that these contracts might be used for personal services and  took various steps to clarify that personal services were not to be  provided. For example, FedSource officials provided training for DOD  customers on how to avoid creating a situation that had the appearance of  personal services. Although this training is a positive step, poorly defined  statements of work provided the opportunity for situations to arise in  which personal services relationships could develop.
FedSource relied on administrative staff, not contracting officers, to work  with the customer to define and assign the specific tasks to be performed  or the positions to be filled. A FedSource review found that trained  contracting staff was needed for developing task order requirements and  warranted contracting officers were required for issuing task orders. The  FedSource administrative employees do not have the same level of  expertise as contracting officers, who have specialized knowledge to  ensure compliance with federal regulations and guidelines. Inadequacies  we found in FedSource’s contracting practices pointed to the challenges of  relying on administrative personnel rather than contracting experts to  review statements of work, choose appropriate contracting vehicles,  ensure adequate competition, and sign off on assignments of specific  work.
section_title: DOD Customers, GovWorks, and FedSource Did Not Specify Necessary Criteria for Contract Oversight
paragraphs: DOD customers, GovWorks, and FedSource often relied on methods of  contract oversight that lacked performance measures to ensure that  contractors provided quality goods and services in a timely manner.  Typically, the franchise funds failed to include an oversight plan that  contained specific quality criteria in their contracts or orders. Without this  critical information, neither DOD nor the franchise funds could effectively  measure contractor performance.
The FAR and DOD’s procurement regulations require contract surveillance  and documentation that it occurred. Contract surveillance, also referred  to as oversight, is a contracting officer’s responsibility, and DOD pays the  franchise fund to assume the responsibilities of contracting officers. The  Office of Management and Budget’s Office of Federal Procurement Policy  has issued policy stating that contract oversight begins with the  assignment of trained personnel who conduct surveillance throughout the  performance period of the contract to ensure the government receives the  services required by the contract. DOD guidance states that  documentation constitutes an official record and the surveillance  personnel assessing performance are to use a checklist to record their  observations of the contractor’s performance. The guidance also states  that all performance should be documented whether it is acceptable or  not.
The GovWorks contract files we reviewed generally did not include  contractor monitoring plans, quality assurance surveillance plans, test and  acceptance plans, or other evidence of monitoring activities. However, the  files did contain evidence that a contracting officer’s representative from  the DOD program office had been appointed to assist in performing  contractor oversight. Although ensuring that contract oversight occurs is a  contracting officer responsibility, GovWorks officials told us that  surveillance plans were not usually kept in the GovWorks contracting  officers’ contract files. Instead, these plans were maintained by the  contracting officer’s representative at the DOD customer agency. When we  asked about contract oversight, we found that in the absence of an agreed  upon oversight plan, DOD customers generally ensured that there was  some process in place for monitoring performance. Some customers  described status meetings and regular progress reports, but generally told  us that they had no specific criteria for monitoring contractor  performance or established measures for determining the quality of  services. Although GovWorks officials told us that their contracting  officers did assist customers in measuring quality services from the  acquisition planning stages through contract completion, we found little  evidence that this actually took place.
We found that FedSource generally did not ensure that contractor  oversight occurred. As was the case with GovWorks, FedSource officials  told us that they encouraged DOD to develop criteria for quality. However,  FedSource allowed general information—such as job descriptions—to  serve as requirements, even though the job descriptions contained no  criteria for measuring quality. These descriptions did not provide  sufficient information to establish an oversight plan. FedSource did not  appoint trained contracting officers’ representatives from DOD to conduct  on-site monitoring. Instead, FedSource relied on its own administrative  personnel, who had been trained as contracting officers’ technical  representatives but were not located on-site with the customer, to assess  contractor performance. Because they were not on-site, they could not  observe the quality of the contractors’ work, and FedSource generally took  the absence of complaints from DOD customers as an indication that the  contractor was performing satisfactorily. A FedSource official explained  that FedSource guidelines state that the customer agency’s acceptance of  the contract employee’s time sheet indicates agreement that services have  met quality standards and requirements. This policy lacks clear criteria  and measures to determine whether the contractor has provided quality  services. In place of criteria, we found DOD customers said they generally  evaluated performance of contractor staff based on informal observation  and customer satisfaction.
The lack of adequate oversight is consistent with what we have reported in  our recent work on contractor oversight for DOD service contracts, where  we found that almost all of those that had insufficient oversight were  interagency contracts. DOD explained that contractor oversight is not as  important to contracting officials as awarding contracts and does not  receive the priority needed to ensure that oversight occurs. DOD  concurred with our recommendations to develop guidance on contractor  oversight of services procured from other agencies’ contracts, to ensure  that proper personnel be assigned to perform contractor oversight in a  timely manner no later than the date of contract award, and that DOD’s  service contract review process and associated data collection  requirements provide information that will provide management visibility  over contract oversight.
section_title: Oversight of Franchise Funds Has Been Limited
paragraphs: Aside from monitoring the contractors’ performance, we also found that  the departments of the Interior and the Treasury, which operate  GovWorks and FedSource, respectively, and the Office of Management  and Budget have conducted infrequent reviews of franchise funds’  procurement activities. GovWorks and FedSource have recently  conducted internal reviews of their operations that have identified  concerns similar to those we found.
A GovWorks’ 2004 Management Review identified such issues as lack of  acquisition planning for work added to existing awards, unanticipated  increases in the amounts of orders, and inadequate documentation of  many requirements such as competitive procedures, determinations that  changes were within the scope of the contract, the basis of award  decisions, and that prices were fair and reasonable. FedSource officials  recently started conducting “office assistance reviews.” A June 2004  FedSource review identified lack of documentation, use of purchasing  agreements beyond their intended parameters and dollar limits, lack of  price analysis, lack of quality assurance plans, and the need for warranted  contracting officers rather than administrative personnel to perform much  of the work.
While the operating principles for franchise funds require the funds to  have comprehensive performance measures, these measures do not  emphasize compliance with contracting regulations and generally focus on  customer satisfaction, financial performance, and generating revenues to  cover operating costs. Several customers we interviewed were unaware of  compliance problems and told us that they believed the franchise funds  placed orders on a competitive basis, analyzed prices, or otherwise sought  to ensure the best deal for the government when the funds, in fact, did not.  GovWorks has taken steps that address concerns raised in its own  reviews, such as increased training for contracting officers, developing a  written acquisition procedures manual, and creating a uniform system of  contract file maintenance and sample documents to ensure adequate  documentation. GovWorks officials also told us they are trying to improve  competitive procedures by requiring all solicitations for DOD work to be  posted on e-Buy, an online system to request quotes for products and  services. FedSource also has taken steps toward addressing concerns  raised in this report, such as quality assurance planning, hiring contracting  officers, and restructuring its operations. These initiatives are underway,  and it is too early to tell whether they will improve contracting operations  at the franchise funds.
The Office of Management and Budget’s oversight of franchise funds has  been limited. The Office of Management and Budget and the Chief  Financial Officers Council established business-operating principles as a  foundation for effective franchise fund management and, as required by  the Government Management Reform Act, submitted an interim report on  the franchise fund pilot program to Congress in 1998. Among other efforts,  the report recommended that the franchise funds should continue to seek  opportunities to provide services at the least cost to the taxpayer,  contributing to reducing duplicative administrative functions and  consequently to the costs of those functions. The report noted that the  franchise funds’ performance measures were in varying stages of  development. The report recommended that the Office of Management and  Budget should report to Congress on franchise fund activity prior to the  expiration of the pilot authority and that the office should continue to  develop and implement operating guidance for the franchise fund  program. Although the Office of Management and Budget’s budget  examiners conduct some monitoring of franchise funds as part of their  general oversight responsibilities, Office of Management and Budget  representatives said they have not conducted any comprehensive reviews  of franchise funds since they submitted the required report to Congress.  Neither have they reviewed the funds’ contracting practices.
section_title: Conclusions
paragraphs: GovWorks and FedSource, created as a result of governmentwide  initiatives to improve efficiency, have streamlined contracting processes  to provide customers with greater flexibility and convenience. However,  GovWorks and FedSource have not always adhered to competitive  procedures and other sound contracting practices. They have paid  insufficient attention to basic tenets of the federal procurement system— taxpayers’ dollars should be spent wisely, steps should be taken to ensure  fair and reasonable prices, and purchases should be made in the best  interest of the government. One factor contributing to these deficiencies is  that the departments of the Interior and the Treasury have not ensured  that the franchise funds’ contracting services follow the FAR and other  procurement policies. The franchise funds need to develop clear,  consistent, and enforceable policies and processes that comply with  contracting regulations while maintaining good customer service. Another  contributing factor is that the roles and responsibilities of the parties  involved in the interagency contracting process are not always clearly  defined. GovWorks and FedSource are ultimately accountable for  compliance with procurement regulations when they assume the role of  the contracting officer. However, they often depend on the customer for  detailed information about the customer’s needs. To facilitate effective  purchasing and to help obtain the best value of goods and services, all  parties involved in the use of interagency contracts have a stake in  clarifying roles and responsibilities. Additionally, franchise funds  sometimes face incentives to provide good customer service at the  expense of proper use of contracts and good value. These pressures are  inherent in the fee-for-service contracting arrangement.
Because the franchise funds have not always adhered to sound contracting  practices, DOD customers must be cautious when deciding whether  franchise fund contracting services are the best available alternative. In  addition to convenience and flexibility, decisions to use franchise funds  should be grounded in analysis of factors such as price and fees. Further,  to enhance DOD’s ability to develop sound policies related to the use of  franchise funds, DOD needs measurable data that would allow it to assess  whether franchise funds’ contracting services help lower contract prices,  reduce administrative costs, and improve the delivery of goods and  services. This information would also be useful in leveraging DOD’s  overall buying power through strategic acquisition planning. No one  knows the total cost of using other agencies’ contracting services. Without  understanding total cost, value is elusive. In addition, DOD customers  should ensure that taxpayers’ dollars are spent wisely by sharing in the  responsibilities for developing clear contract requirements and oversight  mechanisms. DOD customers are the best source of information about  their specific needs and are also best positioned to oversee the delivery of  goods and services.
Given the incentive to focus on sustaining the franchise funds’ operations  and the many service providers from which customers like DOD may  choose, objective oversight would help to ensure that franchise funds  adhere to procurement regulations and operate as intended. The Office of  Management and Budget, which designated and has previously evaluated  the franchise funds, is well positioned to periodically evaluate, monitor,  and develop guidance to improve the franchise funds’ contracting  activities.
section_title: Recommendations for Executive Action
paragraphs: While a number of actions to improve DOD’s use of other agencies’  contracting services are already underway, to enhance these initiatives, we  make the following eight recommendations to DOD, the Interior, the  Treasury, and the Office of Management and Budget.
To ensure that DOD customers analyze alternatives when choosing  franchise funds and to provide DOD with the measurable data it needs to  assess the value of the franchise funds’ contracting services, we  recommend that the Secretary of Defense take the following three actions:    Develop a methodology to help DOD customers determine whether  use of franchise funds’ contracting services is in the best interest of the  government. The methodology should include analysis of tradeoffs.
Reinforce DOD customers’ ability to define their needs and desired  contract outcomes clearly. This skill includes working with franchise  fund contracting officers to translate their needs into contract  requirements and to develop oversight plans that ensure adequate  contract monitoring.    monitor and evaluate DOD customers’ use of franchise funds’  contracting services, prices paid, and types of goods and services  purchased. Prices include franchise fund fees and fees for use of other  interagency contracts.
To ensure that GovWorks and FedSource adhere to sound contracting  practices, we recommend that the Secretaries of the Interior and the  Treasury take the following two actions:     develop procedures and performance measures for franchise fund  contracting operations to demonstrate compliance with federal  procurement regulations and policies while maintaining focus on  customer service and    develop procedures for franchise fund contracting officers to work  closely with DOD customers to define contract outcomes and effective  oversight methods.
To ensure that the FedSource workforce has the skills to carry out  contracting responsibilities, we recommend that the Secretary of the  Treasury take the following action:    assign warranted contracting officers to positions responsible for  performing contracting officer functions.
In order to provide incentives for the franchise funds to adhere to  procurement regulations and to ensure that franchise funds operate as  intended, we recommend that the Director of the Office of Management  and Budget take the following two actions:    Expand monitoring to include franchise funds contracting operations’  compliance with procurement regulations and policies. These findings  should be available to customers to ensure transparency and  accountability to customers and the Congress.
Develop guidance to clarify the roles and responsibilities of the parties  involved in interagency contracting through franchise funds.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to DOD, the departments of the Interior  and the Treasury, and the Office of Management and Budget for review  and comment. We received written comments from DOD and the  Department of the Treasury, which are reprinted in appendices IV and V  respectively. The Department of the Interior and the Office of Management  and Budget provided comments via e-mail.
DOD concurred with our recommendations and identified actions it has  taken or plans to take to address them. In response to our  recommendation that the Secretary of Defense develop a methodology to  help DOD customers determine whether the use of franchise funds’  contracting services is in the best interest of the government, DOD  indicated that action had been taken through the issuance of a policy  memo titled Proper Use of Non-DOD Contracts and subsequent policies  issued by the military departments. We acknowledge the DOD policy  memo in our report and note that this guidance describes general factors  to consider but does not provide specific criteria for how to make this  determination. The policies issued by the military departments establish  procedures for review and approval of the use of non-DOD contract  vehicles, but do not address methods of determining whether this is in the  best interest of the government. Our recommendation takes these actions  into account and encourages DOD to go further by developing a  methodology to help customers assess contracting alternatives.
In response to our recommendation that DOD reinforce DOD customers’  ability to define their needs and desired contract outcomes clearly, DOD  maintained that it is the responsibility of the franchise fund contracting  officer to decide whether or not the requirement is described accurately.  Nonetheless, DOD committed to issue a memo by August 31, 2005,  reinforcing the need for DOD customers to define clearly their  requirements and articulate clearly their desired outcomes in the  acquisition process. We believe that this memo, coupled with DOD’s  ongoing efforts to educate DOD customers about the use of interagency  acquisitions, are steps in the right direction.
Finally, in response to our recommendation that DOD monitor and  evaluate DOD customers’ use of franchise funds’ contracting services,  DOD concurred but explained that the data capture systems that would  provide this information are not yet in place. DOD stated that the Federal  Procurement Data System-Next Generation would provide this capability  in fiscal year 2006. However, data collection is just one step in the  evaluation process. In addition to collecting data, DOD will also need to  compare alternatives and prices in order to make more informed choices.
Further, the accuracy and reliability of interagency contracting data in the  Federal Procurement Data System-Next Generation will depend heavily on  accurate reporting by franchise funds.
The Department of the Interior concurred with our recommendations and  identified actions it has taken or plans to take to address them. The  Interior highlighted 2004 accomplishments and acknowledged a need for  better documentation to demonstrate compliance and value provided. The  Interior also committed to ensuring an adequate contracting staff and to  publishing information to help DOD determine the value of using the  franchise fund. In response to our recommendation that the Department of  the Interior develop procedures and performance measures for franchise  fund contracting operations to demonstrate compliance with federal  procurement regulations, the Interior highlighted a number of recent  efforts to improve performance, including its 2004 management control  review and performance improvement plan that will monitor compliance  with federal procurement regulations. This plan establishes a goal of 75  percent reduction in reportable findings. Interior also stated that it had  revised its acquisition review process, awarded a contract for a third party  acquisition review, and provided additional training to its staff. Interior  committed to continue monitoring performance and creating guidance as  needed. In response to our recommendation that the Interior develop  procedures for franchise fund contracting officers to work more closely  with DOD customers, the Interior highlighted efforts to train its  contracting officers and develop policies for working with DOD  customers.
The Department of the Treasury concurred with our recommendations  and identified actions it has taken or plans to take to address them,  including centralization of FedSource’s acquisition workforce under one  line of authority to allow for standardization and consistency. In response  to our recommendation that FedSource develop procedures and  performance measures for franchise fund contracting operations to  demonstrate compliance with federal procurement regulations, the  Treasury committed to continue to conduct reviews to measure and  evaluate compliance with federal procurement regulations and policies.  This is a positive step toward ensuring compliance. The Treasury also said  that FedSource had instituted performance-based statements of work for  its acquisitions. While this initiative focuses on some aspects of  compliance and is important in managing contractor performance, our  recommendation addresses the performance of the franchise fund.  Developing performance measures related to compliance with  procurement regulations would reinforce the agency’s commitment to  compliance and provide a means to monitor and demonstrate progress. In  response to our recommendation that FedSource develop procedures for  franchise fund contracting officers to work more closely with DOD  customers, the Treasury indicated that FedSource will also develop  procedures to provide its customers with clear guidance for defining  contract outcomes. In response to our recommendation that FedSource  assign warranted contracting officers to positions responsible for  performing contracting officer functions, Treasury stated that FedSource  has hired contracting officers to perform all contracting officer functions.
OMB concurred with our recommendations that OMB expand its  monitoring to include franchise funds contracting operations’ compliance  with procurement regulations and policies and develop guidance to clarify  the roles and responsibilities of the parties involved in interagency  contracting through franchise funds. OMB stated that its Office of Federal  Procurement Policy (OFPP) proposed to include the implementation of  our recommendations in an undertaking pertaining to governmentwide  acquisition contracts and incorporate franchise funds into that project. As  part of that project, OMB/OFPP is asking the designated agencies to  develop plans to ensure cost-effective and responsible contracting. The  plans will address (1) training to contracting staff; (2) customer staff  training; (3) management controls to ensure contracts are awarded in  accordance with applicable laws, regulations, and policies; (4) contract  administration; and (5) periodic management reviews. OMB acknowledged  that this was only a part of the solution. We encourage OMB to give  additional consideration to providing guidance that would clarify roles and  responsibilities of the parties involved in interagency contracting through  franchise funds.
We are sending copies of this report to the Secretaries of Defense, the  Interior, and the Treasury; the Director of the Office of Management and  Budget; and interested congressional committees. We will provide copies  to others on request. This report will also be available at no charge on  GAO’s Web site at http://www.gao.gov.
If you have any questions about this report or need additional information,  please call me at (202) 512-4841 (cooperd@gao.gov). Contact points for  our Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Other staff making key contributions to this  report were Amelia Shachoy, Assistant Director; Lily Chin; Lara Laufer;  Janet McKelvey; Kenneth Patton; Monty Peters; and Ralph Roffo.
In memory of Monty Peters (1948-2005), under whose skilled leadership  this review was conducted.
section_title: Appendix I: Scope and Methodology
paragraphs: We reviewed legislation establishing the franchise fund pilot program,  governmentwide guidance relating to the program, and reports  summarizing program outcomes. We held discussions with Office of  Management and Budget representatives responsible for overseeing and  providing guidance for the program and with Department of Defense  (DOD) officials responsible for oversight of procurement issues. We  performed work at the franchise funds managed by the departments of the  Interior and the Treasury and interviewed officials and reviewed records  relating to Interior’s GovWorks and Treasury’s FedSource programs. The  Interior and Treasury franchise funds accounted for about 76 percent of  total revenues for the six franchise funds during fiscal year 2003 (the most  recently completed fiscal year at the time we were planning our field  work) and about 95 percent of all services the six funds provided DOD.  Contracting services the GovWorks and FedSource programs provided  accounted for over 95 percent of total revenues at the Interior and  Treasury franchise funds. To gain insight into how DOD customers were  using franchise funds and into franchise fund contracting processes, we  reviewed documentation relating to 17 selected customer projects totaling  $249 million in funding provided and interviewed GovWorks and  FedSource contracting personnel responsible for these projects and  representatives of the DOD customers.
To determine how DOD customers determined whether franchise funds  provided a good value, we interviewed representatives of DOD customers  for the selected projects and reviewed available documentation relating to  decisions to use franchise fund contracts. We also reviewed information  available from the franchise funds that would indicate whether the  franchise funds provided a good value, and interviewed franchise fund  officials.
To determine how franchise fund contracting officers worked with DOD  customers to define measurable quality standards for goods and services  and develop effective oversight mechanisms, we reviewed contract  documentation for selected customer projects that would establish quality  standards, and documentation relating to contract oversight. We also  discussed these issues with franchise fund contracting personnel. In  addition, we discussed these issues with representatives of DOD  customers and reviewed available documentation.
To determine whether franchise funds followed the contracting practices  needed to ensure fair and reasonable prices, we reviewed contract  documentation for selected customer projects to assess the extent to  which contracting personnel sought competition for work and analyzed  proposed prices to determine whether they were fair and reasonable, and  discussed these issues with contracting personnel. In addition, we  discussed these issues with representatives of DOD customers and  reviewed available documentation.
To select customer projects for review, we obtained data files from the  Department of the Interior’s GovWorks and the Department of the  Treasury’s FedSource contracting programs that reflected customer  projects active during fiscal year 2003, and the dollar value of customer  funding provided for these projects during the year. We ranked these  projects in terms of funding provided and selected projects representing  the greatest dollar value of customer funding provided—10 GovWorks  projects accounting for $164 million and 7 FedSource projects accounting  for $85 million. Table 5 summarizes GovWorks projects, and table 6  summarizes FedSource projects.
GovWorks contracting personnel fulfilled the requirements of each project  selected by award of a single order, and we reviewed contract  documentation related to the relevant order. FedSource contracting  personnel, in contrast, fulfilled the requirements of customer projects by  award of one or more contracts or orders. Further, FedSource personnel  initiated multiple work assignments—in some cases several hundred—to  define specific work what would be performed under each of the contracts  awarded or orders placed. Accordingly, we reviewed all contracts awarded  or orders placed to fulfill the requirements of the selected customer  projects and a sample of work assignments initiated under these contracts  or orders. To select sample work assignments for review, we first ranked  the work assignments in terms of dollar value of the work to be  performed. For those projects where a relatively small number of work  assignments accounted for a significant share of total project value, we  selected the highest dollar value assignments representing at least 50  percent of total project value. For those projects where most individual  work assignments represented only a small fraction of total project value,  we selected all assignments valued at $150,000 or more and a sample— selected at random—of the remaining work assignments.
We conducted our review between June 2004 and June 2005 in accordance  with generally accepted government auditing standards.
section_title: Appendix II: Franchise Fund Operating Principles
paragraphs: Appendix II: Franchise Fund Operating  Principles The enterprise should only provide common administrative support services.
The organization would have a clearly defined organizational structure including readily  identifiable delineation of responsibilities and functions and separately identifiable units for the  purpose of accumulating and reporting revenues and costs. The funds of the organization  must be separate and identifiable and not commingled with another organization.
The provision of services should be on a fully competitive basis. The organization’s operation  should not be “sheltered” or be a monopoly.
The operation should be self-sustaining. Fees will be established to recover the “full costs,” as  defined by standards issued in accordance with the Federal Accounting Standards Advisory  Board.
The organization must have a comprehensive set of performance measures to assess each  service that is being offered.
Cost and performance benchmarks against other “competitors” are maintained and evaluated.
The ability to adjust capacity and resources up or down as business rises or falls, or as other  conditions dictate, if necessary.
Resources to provide for “surge” capacity and peak business periods, capital investments, and  new starts should be available.
The organization should specify that prior to curtailing or eliminating a service, the provider will  give notice within a reasonable and mutually agreed time frame so the customer may obtain  services elsewhere. Notice will also be given within a reasonable and mutually agreeable time  frame to the provider when the customer elects to obtain services elsewhere.
Customers should be able to “exit” and go elsewhere for services after appropriate notification  to the service provider and be permitted to choose other providers to obtain needed service.
Full-time equivalents would be accounted for in a manner consistent with the Federal  Workforce Restructuring Act and Office of Management and Budget requirements, such as  Circular A-11.
Capitalization of franchises, administrative service, or other cross-servicing operations should  include the appropriate full-time equivalents commensurate with the level of effort the  operation has committed to perform.
section_title: Appendix III: Overview of Contract Documents Used at GovWorks and FedSource
section_title: Appendix IV: Comments from the Department of Defense
section_title: Appendix V: Comments from the Department of the Treasury