Contract Management: Comments on Proposed Services Acquisition Reform Act
Published: 2003-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Since 1997, federal spending on services has grown 11 percent and now represents more than 60 percent of contract spending governmentwide. Several significant changes in the government--including funding for homeland security--are expected to further increase spending on services. Adjusting to this new environment has proven difficult. Agencies need to improve in a number of areas: sustaining executive leadership, strengthening the acquisition workforce, and encouraging innovative contracting approaches. Improving these areas is a key goal of the proposed Services Acquisition Reform Act (SARA).
section_title: What GAO Found
paragraphs: The growth in spending on service contracts, combined with decreases in the acquisition workforce and an increase in the number of high-dollar procurement actions, create a challenging acquisition environment. It is important that agencies have the authorities and tools they need to maximize their performance in this new environment. The initiatives contained in SARA address a number of longstanding issues in contracting for services, and should enable agencies to improve their performance in this area. For example: (1) Section 201: Chief Acquisition Officers: Appointing a Chief Acquisition Officer would establish a clear line of authority, accountability, and responsibility for acquisition decisionmaking; and (2) Section 103: Government-Industry Exchange Program: A professional exchange program would allow federal agencies to gain from the knowledge and expertise of the commercial acquisition workforce. At the same time, GAO is concerned about some provisions in SARA. For example: (1) Section 211: Ensuring Efficient Payment: While GAO supports the intent of this proposal to make payments to government contractors more timely, GAO has reservations concerning its implementation. GAO's work shows that agencies have been hampered by problems such as high payment volume, inadequate payment systems, and weak controls.

section_title: Letter
paragraphs: Since 1997, federal spending on  services has grown 11 percent and  now represents more than 60  percent of contract spending  governmentwide.  Several  significant changes in the  government—including funding for  homeland security—are expected  to further increase spending on  services. Adjusting to this new  environment has proven difficult.
The growth in spending on service contracts, combined with decreases in  the acquisition workforce and an increase in the number of high-dollar  procurement actions, create a challenging acquisition environment.  It is  important that agencies have the authorities and tools they need to maximize  their performance in this new environment.  The initiatives contained in the  Services Acquisition Reform Act (SARA) address a number of longstanding  issues in contracting for services and should enable agencies to improve  their performance in this area.  For example: Section 201:  Chief Acquisition Officers.  Appointing a Chief Acquisition  Officer would establish a clear line of authority, accountability, and  responsibility for acquisition decisionmaking.
Agencies need to improve in a  number of areas: sustaining  executive leadership, strengthening  the acquisition workforce, and  encouraging innovative contracting  approaches.  Improving these areas  is a key goal of SARA.
Section 103: Government-Industry Exchange Program. A professional  exchange program would allow federal agencies to gain from the  knowledge and expertise of the commercial acquisition workforce.
At the same time, GAO is concerned about some provisions in SARA.  For  example:  Section 211: Ensuring Efficient Payment.  While GAO supports the intent  of this proposal to make payments to government contractors more  timely, GAO has reservations concerning its implementation.  GAO’s  work shows that agencies have been hampered by problems such as high  payment volume, inadequate payment systems, and weak controls.
GAO’s review of spending and workforce trends in federal procurement  highlights the significance of services acquisitions.  The table below shows  the percent of contract dollars spent on services by federal agencies. www.gao.gov/cgi-bin/getrpt?GAO-03-716T.
To view the full report, including the scope  and methodology, click on the link above.  For more information, contact William T.  Woods at (202) 512-4841 or  woodsw@gao.gov.
Mr. Chairman and Members of the Committee:  Thank you for inviting the General Accounting Office (GAO) to participate  in today’s hearing on the proposed Services Acquisition Reform Act of  2003 (SARA). Over the past several years, the federal acquisition  environment has changed dramatically. Spending for services has  increased significantly and now represents more than 60 percent of all  federal contract spending. At the same time, there has been a reduction in  the size of the acquisition workforce, and the use of alternative contracting  approaches has been growing. The purpose of SARA is to provide federal  agencies with additional tools for addressing these developments. We fully  support this objective, and look forward to continuing to work with this  Committee and others in finding ways to promote more efficient and  effective acquisitions.
In my testimony today, I will:    Summarize recent trends in contract spending and in the acquisition    Discuss our views on selected provisions of SARA based on relevant GAO  reports.
subsections: section_title: Contract Spending and Workforce Trends
paragraphs: We recently issued several reports on acquisition spending and workforce  trends. These reports show that spending on services acquisitions is  increasing at a time when the acquisition workforce is decreasing.
subsections: section_title: Spending Trends
paragraphs: Our report on spending and workforce trends in federal procurement  shows that federal agencies continue to buy far more services than goods.  Since 1997, spending on services has grown 11 percent. In fiscal year 2001,  over 60 percent of the more than $220 billion in goods and services  purchased by the federal government was for services. At six agencies,  procurement of services exceeded 75 percent of their total spending on  contracts; at one agency, the Department of Energy, nearly 100 percent of  total spending via contracts was for services (see fig. 1).
Spending on services could increase even further, at least in the short  term, given the President’s recent request for additional funds for defense  and homeland security. The degree to which individual agencies are  currently contracting for services and the growth of services spending  underscore the importance of ensuring that service acquisitions are  managed properly.
section_title: Workforce Challenges
paragraphs: Industry and government experts alike recognize that the key to a  successful transformation toward a more effective acquisition system is  having the right people with the right skills. To increase the efficiency and  effectiveness of acquiring goods and services, the government is relying  more on judgment and initiative versus rigid rules to make purchasing  decisions.
Agencies have to address governmentwide reductions in the acquisition  workforce. At the same time, government contract actions exceeding  $25,000 have increased significantly—by 26 percent between fiscal years  1997 and 2001 (see table 1).
Over the past year, GAO issued four reports on the management and  training of the government’s acquisition workforce. While the agencies  we reviewed are taking steps to address their future acquisition workforce  needs, each is encountering challenges in their efforts. In particular,  shifting priorities, missions, and budgets have made it difficult for agencies  to predict, with certainty, the specific skills and competencies the  acquisition workforce may need.
Training is critical in ensuring that the acquisition workforce has the right  skills. To deliver training effectively, leading organizations typically  prioritize and set requirements for those in need of training to ensure their  training reaches the right people. Agencies we reviewed had developed  specific training requirements for their acquisition workforce and had  efforts underway to make training available and raise awareness of major  acquisition initiatives. However, they did not have processes for ensuring  that training reaches all those who need it. And while agencies had also  developed a variety of systems to track the training of their personnel,  they experienced difficulties with these systems.
section_title: GAO Work Related to SARA
paragraphs: We have issued a number of reports on key provisions of SARA. These  reports address the areas of acquisition leadership, workforce, contract  innovations, as well as other proposals.
subsections: section_title: Leadership
subsections: section_title: Section 201: Chief Acquisition Officer
paragraphs: Our discussions with officials from leading companies, which we reported  on last year, indicate that a procurement executive or Chief Acquisition  Officer plays a critical role in changing an organization’s culture and  practices. In response to many of the same challenges faced by the federal  government—such as a lack of tools to ensure they receive the best value  over time—each of the companies we studied changed how they acquired  services in significant ways. For example, each elevated or expanded the  role of the company’s procurement organization; designated “commodity”  managers to oversee key services; and/or made extensive use of cross- functional teams. Taking a strategic approach paid off. One official, for  example, estimated that his company saved over $210 million over a recent  5-year period by pursuing a more strategic approach.
Bringing about these new ways of doing business, however, was  challenging. To overcome these challenges, the companies found they  needed to have sustained commitment from their senior leadership—first,  to provide the initial impetus to change, and second, to keep up the  momentum.
Section 201 of SARA would create a Chief Acquisition Officer (CAO)  within each civilian executive agency. We support this provision. By  granting the CAO clear lines of authority, accountability, and responsibility  for acquisition decision-making, SARA takes a similar approach as leading  companies in terms of the responsibility and decision-making authority of  these individuals.
section_title: Acquisition Workforce
subsections: section_title: Section 103: Government- Industry Exchange Program
paragraphs: Comptroller General David Walker testified earlier this month that  strategic human capital management must be the centerpiece of any  serious government transformation effort and that federal workers can be  an important part of the solution to the overall transformation effort. In  July 2001, he recommended that Congress explore greater flexibilities to  allow federal agencies to enhance their skills mix by leveraging the  expertise of private sector employees through innovative fellowship  programs.
The acquisition professional exchange program proposed in section 103 of  SARA could enhance the ability of federal workers to successfully  transform the way the federal government acquires services. The program,  which is modeled after the Information Technology Exchange Program  included in the recently passed E-Government Act of 2002, would permit  the temporary exchange of high-performing acquisition professionals  between the federal government and participating private-sector entities.
We support this provision, which begins to address a key question we face  in the federal government: Do we have today, or will we have tomorrow,  the ability to manage the procurement of the increasingly sophisticated  services the government needs? Following a decade of downsizing and  curtailed investments in human capital, federal agencies currently face  skills, knowledge, and experience imbalances that, without corrective  action, will worsen. The program established by section 103 would allow  federal agencies to gain from the knowledge and expertise of private- sector professionals and entities.
section_title: Section 102: Acquisition Workforce Training Fund
paragraphs: Section 102 of SARA would establish an acquisition workforce training  fund using five percent of the fees generated by governmentwide contract  programs. We recently completed a review of fees charged on  governmentwide contracts—covering all five designated executive  agencies for governmentwide acquisition contracts and the General  Services Administration’s Schedules program. The Office of Management  and Budget’s guidance directs agencies operating governmentwide  information technology contracts to transfer fees in excess of costs to the  miscellaneous receipts account of the U.S. Treasury’s General Fund.  Further, some of these contracts operate under revolving fund statutes  that limit the use of fees to the authorized purposes of the funds.
Quality training is important, and we recognize the need for adequate  funds for training. In our view, however, the procuring agencies should  ensure that adequate funding is available through the normal budgeting  process to provide the training the acquisition workforce needs. We are  concerned about relying on contract program fees–which can vary from  year to year and which are intended to cover other requirements–as a  source of funding for such an important priority as workforce training.
section_title: Innovative Contracting
paragraphs: Several sections of SARA would encourage the use of innovative contract  types that could provide savings to the government. For example,  performance-based contracts can offer significant benefits, such as  encouraging contractors to find cost-effective ways of delivering services.  Share-in-savings contracting, one type of performance-based contracting,  is an agreement in which a client compensates a contractor from the  financial benefits derived as a result of the contract performance.
subsections: section_title: Section 301: Share-in-Savings Initiatives
paragraphs: Share-in-savings contracting can motivate contractors to generate savings  and revenues for their clients. We issued a report earlier this year in  response to your request that we determine how the commercial sector  uses share-in-savings contracting. We examined four commercial share- in-savings contracts and identified common characteristics that made  them successful.
In the commercial share-in-savings contracts we reviewed, we found four  conditions that facilitated success:    An expected outcome is clearly specified. By outcomes, we mean such  things as generating savings by eliminating inefficient business practices  or identifying new revenue centers. It is critical that a client and  contractor have a clear understanding of what they are trying to achieve.
Incentives are defined. Both the client and contractor need to strike a  balance between the level of risk and reward they are willing to pursue.
Performance measures are established. By its nature, share-in-savings  cannot work without having a baseline and good performance measures to  gauge exactly what savings or revenues are being achieved. Agreement  must be reached on how metrics are linked to contractor intervention.
Top management commitment is secured. A client’s top executives  need to provide contractors with the authority needed to carry out  solutions, since change from the outside is often met with resistance. They  also need to help sustain a partnership over time since relationships  between the contractor and client can be tested in the face of changing  market conditions and other barriers.
The companies in our study found that successful arrangements have  generated savings and revenues. In one case highlighted in our report,  $980,000 was realized in annual energy savings.
We have not found share-in-savings contracting to be widespread in the  commercial sector or the federal government. Excluding the energy  industry, we found limited references to companies or state agencies that  use or have used the share-in-savings concept. In addition, there are few  documented examples of share-in-savings contracting in the federal  government. Officials in federal agencies we spoke with noted that such  arrangements may be difficult to pursue given potential resistance and the  lack of good baseline performance data. In addition, in previous work,  Department of Energy headquarters officials told us they believe such  contracts can be best used when federal funding is unavailable.
To achieve the potential benefits from the use of share-in-savings  contracting, it may be worthwhile to examine ways to overcome potential  issues. For example, in a letter to the Office of Federal Procurement Policy  in March of this year, we recognized that share-in-savings contracting  represents a significant change in the way the federal government acquires  services. To address this challenge, we underscored the need for the  Office of Federal Procurement Policy to develop guidance and policies  that could ensure that (1) appropriate data are collected and available to  meet mandated reporting requirements regarding the effective use of  share-in-savings contracting, and (2) members of the federal acquisition  workforce understand and appropriately apply this new authority.
section_title: Section 401: Additional Incentives for Use of Performance-Based Contracting for Services
paragraphs: Section 401 authorizes agencies to treat a contract or task order as being  for a commercial item if it is performance-based—that is, it describes each  task in measurable, mission-related terms, and identifies the specific  outputs—and the contractor provides similar services and terms to the  public. This provision, which would only apply if the contract or task  order were valued at $5 million or less, would provide another tool to  promote greater use of performance-based contracting.
Our spending and workforce trends report shows that in fiscal year 2001,  agencies reported that 24 percent of their eligible service contracts, by  dollar value, were performance-based. However, there was wide variation  in the extent to which agencies used performance-based contracts. As  figure 2 shows, 3 of the 10 agencies in our review fell short of the Office of  Management and Budget’s goal that 10 percent of eligible service contracts  be performance-based.
In our September 2002 report, we recommended that the Administrator  of the Office of Federal Procurement Policy clarify existing guidance to  ensure that performance-based contracting is appropriately used,  particularly when acquiring more unique and complex services that  require strong government oversight. If section 401 is enacted, we believe  that clear guidance will be needed to ensure effective implementation. The  Office of Federal Procurement Policy might be assisted in developing and  updating meaningful guidance by establishing a center for excellence to  identify best practices in service contracting, as required by section 401. A  center for excellence may help federal agencies learn about successful  ways to implement performance-based contracting.
section_title: Section 501: Authority to Enter Into Certain Procurement- Related Transactions and to Carry Out Certain Prototype Projects
paragraphs: Section 501 would authorize those civilian agencies approved by the Office  of Management and Budget to use so-called “other transactions” for  projects related to defense against or recovery from terrorism, or nuclear,  biological, chemical, or radiological attacks. Other transactions are  agreements that are not contracts, grants, or cooperative agreements. This  authority would be similar to that currently available to the Departments  of Homeland Security and Defense.
Because statutes that apply only to procurement contracts do not apply to  other transactions, this authority may be useful to agencies in attracting  firms that traditionally decline to do business with the government. In fact,  our work shows that the Department of Defense has had some success in  using other transactions to attract nontraditional firms to do business with  the government. Our work also has shown, however, that there is a critical  need for guidance on when and how other transactions may best be used.  The guidance developed by the Department of Defense may prove helpful  to other agencies should the Congress decide to expand the availability of  other transaction authority.
section_title: Additional Comments on SARA Proposals
subsections: section_title: Section 211: Ensuring Efficient Payment
paragraphs: Section 211 provides for a streamlined payment process under which  service contractors could submit invoices for payment on a biweekly or a  monthly basis. Biweekly invoices would be required to be submitted  electronically.
While we support the intent of this proposal—to make payments to  government contractors more timely—implementation of this provision  could result in increased improper payments and stress already weak  systems and related internal controls. Agency efforts to address improper  payment problems have been hampered by high payment volume, speed of  service, inadequate payment systems and processes, internal control  weaknesses, and downsizing in the acquisition and financial management  community. Until federal agencies make significant progress in eliminating  their payment problems, requirements to accelerate service contract  payments would likely increase the risk of payment errors, backlogs, and  late payment interest.
section_title: Section 213: Agency Acquisition Protests
paragraphs: Section 213 would provide for agency-level protests of acquisition  decisions alleged to violate law or regulation. An agency would have   20 working days to issue a decision on a protest, during which time the  agency would be barred from awarding a contract or continuing with  performance if a contract already had been awarded. If an agency-level  protest were denied, a subsequent protest to GAO that raised the same  grounds and was filed within 5 days would trigger a further stay pending  resolution of that protest.
We believe that a protest process that is effective, expeditious, and  independent serves the interests of all those involved in or affected by the  procurement system. Section 213 appears to address each of these criteria.  First, although protests currently may be filed with the procuring agencies,  section 213 would provide for a more effective agency-level protest  process by requiring that an agency suspend, or “stay,” the procurement  until the protest is resolved. Second, the process would be relatively  expeditious because decisions would be required within 20 working days.  Having an expeditious process at the agency is especially important  because section 213 would provide for a stay both during the agency-level  protest and then during any subsequent GAO protest. It should be noted,  though, that 20 working days may not be adequate for a thorough review,  particularly in complex procurements. Finally, requiring protests to be  decided by the head of the agency may help to mitigate longstanding  concerns about a perceived lack of independence when decisions on  agency-level protests are issued by officials closely connected with the  decision being protested.
section_title: Section 402: Authorization of Additional Commercial Contract Types
paragraphs: Section 402 would provide for a change to the Federal Acquisition  Regulation to include the use of time-and-materials and labor-hour  contracts for commercial services commonly sold to the general public.  This change would make it clear that such contracts are specifically  authorized for commercial services.
The Federal Acquisition Regulation states that a time-and-materials  contract may be used only when it is not possible to estimate accurately  the extent or duration of the work or to anticipate costs with any  reasonable degree of confidence. Therefore, adequate surveillance is  required to give reasonable assurance that the contractor is using efficient  methods and effective cost controls.
section_title: Section 404: Designation of Commercial Business Entities
paragraphs: Section 404 would designate as a commercial item any product or service  sold by a commercial entity that over the past 3 years made 90 percent of  its sales to private sector entities. We are concerned that the provision  allows for products or services that had never been sold or offered for sale  in the commercial marketplace to be considered a commercial item. In  such cases, the government may not be able to rely on the assurances of  the marketplace in terms of the quality and pricing of the product or  service.
section_title: Conclusion
paragraphs: The growth in spending on service contracts, combined with decreases in  the acquisition workforce and an increase in the number of high-dollar  procurement actions, create a challenging acquisition environment. It is  important that agencies have the authorities and tools they need to  maximize their performance in this new environment. The initiatives  contained in SARA address a number of longstanding issues in contracting  for services, and should enable agencies to improve their performance in  this area.
Mr. Chairman, this concludes my statement. I will be happy to answer any  questions you may have.
Contact and Acknowledgments  For further information, please contact William T. Woods at   (202) 512-4841. Individuals making key contributions to this testimony  include Blake Ainsworth, Christina Cromley, Timothy DiNapoli, Gayle  Fischer, Paul Greeley, Oscar Mardis, and Karen Sloan.