Defense Acquisitions: Continued Management Attention Needed to Enhance Use and Review of DOD's Inventory of Contracted Services
Published: 2013-05-23T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: DOD is the government's largest purchaser of contractor-provided services. In fiscal year 2011, DOD reported $199 billion in obligations for service contracts, which include services as varied as medical services and intelligence support. In 2008, Congress required DOD to compile and review an annual inventory of its contracted services to include the number of contractors providing services to DOD and the functions these contractors were performing. The 2010 National Defense Authorization Act directed GAO to report for 3 years on these inventories.
For this third report, GAO assessed (1) the progress DOD has made in compiling the fiscal year 2011 inventory of contracted services and efforts to collect contractor manpower data, and (2) the extent to which defense components complied with DOD's guidance for reporting on their inventory reviews. GAO reviewed relevant laws and guidance, analyzed inventory submissions from 31 components, reviewed component certification letters, and interviewed DOD acquisition and manpower officials.
section_title: What GAO Found
paragraphs: Over the past year and a half, the Department of Defense (DOD) has taken steps to implement its plan to collect contractor manpower data directly from contractors and to develop and implement a department-wide system, based on the Army's existing system, to collect and store these and other inventory data. DOD officials estimate that the data system will be available in fiscal year 2014, with DOD components reporting on most of their service contracts by fiscal year 2016. DOD, however, is still working on key decisions related to security, funding, and other technological issues and has not developed a plan of action with anticipated time frames and necessary resources to help ensure DOD remains on track to meet its goals. Making timely decisions and developing a plan of action with anticipated timeframes and necessary resources, as GAO has previously recommended, would facilitate DOD's stated intent of implementing a DOD-wide system to collect required inventory information. For the fiscal year 2011 inventory, DOD components generally used the same compilation processes used in the previous year. As such, with the exception of the Army, which already has an inventory data collection system, the remaining components relied primarily on the Federal Procurement Data System-Next Generation (FPDS-NG). GAO previously reported that FPDS-NG has several limitations, including the inability to identify more than one type of service in a contract or the number of contractor full-time equivalents (FTE), which limit its utility for purposes of compiling a complete and accurate inventory.
Consistent with DOD's December 2011 guidance, 29 of the 31 components submitted letters certifying that they had conducted an inventory review as of April 2013. DOD officials stated that the requirement to submit certification letters represented a significant improvement over prior years' reviews, when DOD could not determine whether the required reviews were conducted. These officials also stated that the letters provided useful insights into the components' efforts. GAO's analysis, however, indicates that none of the components' certification letters discussed all six elements required by DOD's guidance. For example, GAO's analysis found that the letters generally provided only limited information on their review methodologies or the results of their review efforts. In addition, it is unclear based on the information provided in the certification letters the extent to which the differences in the methodologies components used to conduct the reviews contributed to the variation in the identification of contractors performing inherently governmental functions, unauthorized personal services, or closely associated with inherently governmental functions. For example, the Army, using its review process, identified over 44,000 contractor FTEs performing closely associated with inherently governmental functions, while the Air Force identified about 1,400 contractor FTEs and 13 components reported they had no contractors performing these functions. Further, the Army and the Air Force did not provide complete information on actions taken to resolve instances where they had identified contractors performing inherently governmental functions as part of their reviews, such as by transferring performance of these functions to DOD personnel or modifying the contract's statement of work. The ability to identify contractors performing these functions is valuable as it allows actions to be taken, but that value is significantly reduced if decision-makers have no assurance as to whether corrective actions were taken.
section_title: What GAO Recommends
paragraphs: GAO recommends that the Secretary of Defense direct component heads to discuss in their certification letters all required inventory review elements, as well as how instances where contractors are performing inherently governmental functions were resolved. DOD generally concurred with our recommendations, but indicated that the Secretarys involvement was not necessary. GAO believes it is, as discussed in the report.

section_title: Letter
paragraphs: The Department of Defense (DOD) is the federal government’s largest  purchaser of contractor-provided services, reporting about $199 billion in  obligations for contracted services in fiscal year 2011. DOD relies on  contractors to perform various functions, such as professional and  management support, medical services, information technology support,  and weapon system and intelligence support. While there are benefits to  using contractors to perform services for the government, our prior work  has shown that reliance on contractors to support core missions can  place the government at risk of becoming overly reliant on contractors to  perform closely associated with inherently governmental functions or  creating circumstances in which contractors perform functions deemed  inherently governmental. Over the past decade, our work has also  identified the need for DOD to obtain better data on its contracted  services to enable it to make more strategic decisions.begun a number of efforts to gain better insight into its acquisition of  services, these efforts have had mixed success to date.
In recent years, Congress has enacted legislation to improve DOD’s  ability to manage its acquisition of services; to make more strategic  decisions about the right workforce mix of military, civilian, and contractor  personnel; and to better align resource needs through the budget process  to achieve that mix. For example, Section 2330a of title 10 of the U.S.  Code requires DOD to annually compile and review an inventory of  activities performed by contractors pursuant to contracts for services to,  among other things, help provide better insight into the number of  contractor full-time equivalents (FTE) providing services to the  department and the functions they are performing and determine whether  any of these functions warrant conversion to DOD civilian performance.
DOD has submitted annual inventories for fiscal years 2007 through  2011, the most recent submitted on August 27, 2012.
Section 803(c) of the National Defense Authorization Act for fiscal year  2010 directed GAO to report for 3 years on the inventory of activities  performed pursuant to contracts for services that are to be submitted by  the Secretary of Defense for fiscal years 2009, 2010, and 2011  respectively. To respond to this mandate, we first issued a report in  January 2011 that assessed the approaches used to compile the fiscal  year 2009 inventories. In that report, we recommended that DOD  develop a plan of action to facilitate the department’s stated intent of  collecting contractor manpower data directly from contractors and to  address other limitations in its approach to meeting the statutory inventory  requirements, including those specific to the Federal Procurement Data  System-Next Generation (FPDS-NG). This system has a number of  limitations, including that it does not identify more than one type of service  purchased for each contract action.
GAO, Defense Acquisitions: Further Actions Needed to Improve Accountability for DOD’s  Inventory of Contracted Services, GAO-12-357 (Washington, D.C.: Apr. 6, 2012). of authority, responsibility, and accountability for conducting an inventory  review and resolving instances where functions being performed by  contractors are identified as inherently governmental functions. DOD  agreed it was imperative for the components to do so, but noted that its  December 2011 guidance regarding the submission and review of the  fiscal year 2011 inventories, while not prescribing individual component  management practices, requires component heads to certify completion  of and results from the reviews.
This report is our third and final review in response to the mandate and  focuses on DOD’s fiscal year 2011 inventory. We assessed (1) the  progress DOD has made in compiling the inventory of contracted services  and the status of efforts to collect contractor manpower data and (2) the  extent to which the defense components complied with DOD’s December  2011 guidance for reporting on their reviews of the fiscal year 2011  inventories.
To conduct our work, we reviewed relevant guidance related to the  inventory compilation and review processes and interviewed officials from  the Office of the Under Secretary of Defense for Acquisition, Technology  and Logistics (AT&L); Office of Defense Procurement and Acquisition  Policy; the Office of the Under Secretary of Defense for Personnel and  Readiness (P&R); the Office of the Under Secretary of Defense  (Comptroller); the departments of the Army, Navy, Air Force; and two  selected DOD components—the Defense Logistics Agency (DLA) and  Defense Information Systems Agency (DISA)—based on the number of  contractor FTEs they identified.
To assess the progress DOD has made in compiling the inventory of  contracted services and the status of efforts to collect contractor  manpower data, we analyzed 31 components’ inventory submissions and  all memorandums accompanying their inventory submissions to  determine the methodologies used to compile their fiscal year 2011  inventory and to calculate or estimate the number of contractor FTEs and  obtained information on the department’s efforts to collect contractor  manpower data. We include DOD’s estimate of overall obligations and  contractor FTEs for fiscal year 2011 in this report. We did not  independently assess the accuracy or reliability of the underlying data  supporting the components’ inventories of contracted services. However,  our previous work identified data limitations with DOD components using  data from FPDS-NG as the basis for their inventories. We discuss these  limitations in the report, as appropriate.
To assess the extent to which components complied with DOD’s  December 2011 guidance on the inventory review process, we reviewed  all 29 fiscal year 2011 inventory review certification letters submitted by  DOD components as of April 2013. We assessed the letters to determine  if components reported on the six elements in DOD’s guidance for the  inventory review, including the selection criteria and methodologies used  to conduct the reviews, the extent to which contractors were found to be  performing certain functions, to include inherently governmental and  closely associated with inherently governmental, and to the extent  necessary, a plan to realign performance of such functions to government  performance. A detailed description of our scope and methodology is  included in appendix I.
We conducted this performance audit from October 2012 to May 2013 in  accordance with generally accepted auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  audit objectives.
subsections: section_title: Background
paragraphs: In part to improve the availability of information on and management of  DOD’s acquisition of services, in fiscal year 2002 Congress enacted  section 2330a of title 10 of the U.S. Code, which required the Secretary of  Defense to establish a data collection system to provide management  information on each purchase of services by a military department or  defense agency. The information to be collected includes, among other  things, the services purchased, the total dollar amount of the purchase,  the form of contracting action used to make the purchase, and the extent  of competition provided in making the purchase.
The inventory is to include a number of  the function and missions performed by the contractor;  the contracting organization, the component of DOD administering the  contract, and the organization whose requirements are being met  through contractor performance of the function;  the funding source for the contract by appropriation and operating  agency;  the fiscal year the activity first appeared on an inventory;  the number of contractor employees (expressed as FTEs) for direct  labor, using direct labor hours and associated cost data collected from  contractors; a determination of whether the contract pursuant to which the activity  is performed is a personal services contract, a summary of the information required by section 2330a(a) of title 10  of the U.S. Code.
As implemented by DOD, components are to compile annual inventories  of activities performed on their behalf by contractors and submit them to  AT&L, which is to formally submit a consolidated DOD inventory to  Congress no later than June 30. Since this provision was implemented  DOD-wide, the primary source used by DOD components, with the  exception of the Army, to compile their inventories has been FPDS-NG.  The Army developed its Contractor Manpower Reporting Application  (CMRA) in 2005 to collect information on labor-hour expenditures by  function, funding source, and mission supported on contracted efforts,  and has used CMRA as the basis for its inventory. CMRA captures data  directly reported by contractors on services performed at the contract line  item level, including information on the direct labor dollars, direct labor  hours, total invoiced dollars, the functions and mission performed, and the  organizational unit on whose behalf the services are being performed. In  instances where contractors are providing different services under the  same order, or are providing services at multiple locations, contractors  can enter additional records in CMRA to capture information associated  with each type of service or location. It also allows for the identification of  services provided under contracts for goods.
Within 30 days after it is submitted to Congress, the inventory is to be  made public. Within 90 days of the date on which the inventory is  submitted to Congress, the Secretaries of the military department and  heads of the defense agencies responsible for activities in the inventory  are to complete a review of the contracts and activities for which they are  responsible and ensure that any personal services contracts in the  inventory were properly entered into and performed appropriately; that the  activities in the inventory do not include inherently governmental  functions; that to the maximum extent practicable, the activities on the list  do not include any functions closely associated with inherently  governmental functions; and that activities that should be considered for  conversion to DOD civilian performance have been identified.
In January 2011, Congress amended section 2330a(c) of title 10 of the  U.S. Code to specify that P&R, AT&L, and Comptroller are responsible for   Section 2330a(c) was also issuing guidance for compiling the inventory. amended to state that DOD is to use direct labor hours and associated  cost data collected from contractors as the basis for the number of  contactor FTEs identified in the inventory, though it provided that DOD  may use estimates where such data are not available and cannot  reasonably be made available in a timely manner.
Congress provided further direction on the collection of FTE information  for contractor employees in the Department of Defense and Full-Year  Continuing Appropriations Act, 2011 by providing not less than $2 million  to both the Navy and Air Force to leverage the Army’s CMRA to  document the number of full-time contractor employees, or their  equivalent in the inventory. The services and the directors of the defense  agencies in coordination with P&R were to report to the Congressional  defense committees within 60 days of enactment of that act on their plans  for documenting the number of full-time contractor employees or their  equivalent.
In December 2011, section 936 of the National Defense Authorization Act  for Fiscal Year 2012 amended section 2330a of title 10 of the U.S. Code  to clarify the types of contracted services to be inventoried, including  contracts for goods to the extent services are a significant component of  performance, as identified in a separate line item of a contract. This  section also directed the secretary of the military department or head of  the defense agency responsible for activities in the inventory to develop a  plan, including an enforcement mechanism and approval process, to provide for the use of the inventory to make determinations regarding  the most appropriate mix of military, civilian, and contractor personnel  to perform its mission; ensure that the inventory is used to inform strategic workforce provide for appropriate consideration of the conversion of certain  planning;  facilitate the use of the inventory for budgetary purposes; and  activities, to include those closely associated with inherently  governmental functions, critical functions, and acquisition workforce  functions, to performance by government employees.
Section 2463 of title 10 of the U.S. Code requires the Secretary of  Defense to make use of the inventory of contracted services to identify  certain functions performed by contractors, to include closely associated  with inherently governmental functions, critical functions and acquisition  workforce functions, and ensure that special consideration is given to  converting those functions to civilian performance.
Further, the National Defense Authorization Act for Fiscal Year 2010  provided for a new section 115b in title 10 of the U.S. Code that requires  DOD to annually submit to the defense committees a strategic workforce  plan to shape and improve the civilian workforce. Among other  requirements, the plan is to include an assessment of the appropriate mix  of military, civilian, and contractor personnel capabilities. P&R is  responsible for developing and implementing the strategic plan in  consultation with AT&L. The act also added section 235 to title 10 of the  U.S. Code, which requires that the Secretary of Defense include (in the  budget justification materials submitted to Congress) information that  clearly and separately identifies both the amount requested for the  procurement of contract services for each DOD component, installation,  or activity and the number of contractor employee full-time equivalents  projected and justified for each DOD component, installation, or activity  based on the inventory of contracts for services and associated reviews.
Collectively, these statutory requirements mandate the use of the  inventory and the associated review process to enhance the ability of  DOD to identify and track the services provided by contractors, achieve  accountability for the contractor sector of its total workforce, help identify  functions for possible conversion from contractor performance to DOD  civilian performance, support the development of DOD’s annual strategic  workforce plan, and project and justify the number of contractor FTEs  included in its annual budget justification materials. Figure 1 illustrates the  relationship among the related statutory requirements.
section_title: DOD Has Ongoing Efforts to Collect Contractor Manpower Data, but Data System Issues Have Not Been Resolved
paragraphs: Over the past year and a half, DOD has taken its first steps to implement  a November 2011 plan to collect contractor manpower data from  contractors. These steps included directing components to start collecting  direct labor hours and associated costs from contractors and initiating  efforts to develop and implement a department-wide data collection  system based on the Army’s CMRA to collect and store inventory data,  including contractor manpower data. AT&L and P&R officials estimate  that the new system will be available in fiscal year 2014, with DOD  components reporting on most of their contracted services by fiscal year  2016. DOD, however, is still working on key decisions related to security,  funding, and other technological issues and has not developed an  implementation plan with specific time frames or milestones to help  ensure DOD remains on track to develop its planned data collection  system. For the fiscal year 2011 inventory, DOD components generally  used the same compilation processes used in the previous year. As such,  with the exception of the Army, which already collects contractor  manpower data and other key information using its CMRA data collection  system, the remaining components obtained most of their inventory  information from FPDS-NG, a system that does not collect contractor FTE  information and has other limitations, which limit its utility for purposes of  compiling a complete and accurate inventory.
subsections: section_title: DOD Has Taken Initial Steps to Implement a Department-wide Data Collection System
paragraphs: DOD has taken steps to meet legislative requirements to develop a data  collection system that provides management insight on contracted  services and collects the required data points for each contracted service,  including information on the number of contractor FTEs. In April 2011,  Congress passed the Department of Defense and Full-Year Continuing  Appropriations Act, 2011, which among other things, required the  secretaries of the military departments and the directors of the defense  agencies, in coordination with P&R, to submit plans for documenting the  number of contractor FTEs. In response, in November 2011 DOD  issued a plan to collect contractor manpower data and document  contractor FTEs, and provided for short-term and long-term actions  intended to meet the requirements of 10 U.S.C. § 2330a. DOD stated that  it was committed to assisting components as they implement their plans,  especially those currently without reporting processes or infrastructure in  place, by leveraging the Army’s CMRA system, processes, best practices,  and tools to the maximum extent possible. Part of the long-term plan is to  develop a comprehensive instruction for components to use on the  development, review, and use of the inventories and for the Office of the  Deputy Chief Management Officer, P&R, and other stakeholders to form a  working group to develop and implement a common data system to  collect and house the information required for the inventory, including  contractor manpower data. DOD noted in its plan that it expects the data  system to be operational and DOD components to be reporting on most  of their service contracts by fiscal year 2016.
Over the past year and a half, DOD took a number of actions to  implement its November 2011 plan.
DOD published a Federal Register notice as required by the  Paperwork Reduction Act, in February 2012, seeking public  comment on its proposal to allow DOD components to collect certain  key information directly from contractors, including the number of  direct labor hours associated with the provision of each service. The  Office of Management and Budget approved DOD’s request in May  2012.
In November 2012, the Under Secretaries for P&R and AT&L issued a  joint memorandum that instructed components to ensure all actions to  procure contracted services, including contracts for goods with  defined requirements for services, include a requirement for the  contractor to report all contractor labor hours required for performance  of the services provided. The joint memorandum further instructed  that data will be reported using an Enterprise-wide Contractor  Manpower Reporting Application (eCMRA) and provided that the  eCMRA website would be available to receive data to support the  fiscal year 2013 inventory. Additionally, standard language, which was  developed in a collaborative effort between AT&L, P&R, and the DOD  components, is to be included in new statements of work and  modifications to existing contracts.
According to AT&L and P&R officials, DOD expects more than  270,000 contracts or orders to be modified across the department,  with most contracts containing the language by fiscal year 2016. The  Navy and Air Force began implementing the requirement to collect  direct labor hours from contractors by modifying or including the  reporting requirement in all their current and future service contracts  in October and November 2012, respectively. The Army has  previously included this requirement in its contracts.
AT&L officials have also been working to develop a new provision to  implement the reporting requirements in the Defense Federal  Acquisition Regulation Supplement. As part of their efforts, they have  initiated a case to the Defense Acquisition Regulation Council, but as  of April 2013, the case is still pending.
Further, the Navy and Air Force have each taken steps to develop their  own interim system to collect and store contractor manpower data based  on the Army’s CMRA system. According to P&R and AT&L officials, the  remaining DOD components will all share an interim CMRA-based  system to collect and store their contracted services data. The Army and  the Air Force will provide support for this component shared system;  however, individual components will retain responsibility for ensuring the  accuracy of the contracted services information reported into the CMRA  system, which will later be used to compile the inventories.
In January 2013, P&R, in collaboration with DOD’s Deputy Chief  Management Officer, initiated efforts to develop and implement the  department-wide eCMRA system that will replace the interim CMRA  systems to collect and store information about all contracted services,  including contractor reported labor hours and associated costs. The  working group, comprised of officials from the Deputy Chief Management  Office—whose role is to act as facilitator for the implementation of the  system—and representatives from the military departments, has met  several times as of April 2013 to discuss features of the new system.
P&R and AT&L officials stated that the department remains on track to  meet the time frames outlined in DOD’s November 2011 plan and  indicated that they anticipate having the data collection system  operational by fiscal year 2014. According to working group officials,  however, the working group is still working on key decisions related to  security, funding, and other technological issues and has not developed  an implementation plan with specific time frames or milestones to help  ensure DOD remains on track to meet its goals. Based on our  discussions with several working group members, there is an unresolved  issue about whether DOD components should use one department-wide  system as planned or continue using the individual interim CMRA  systems that have been developed. Some working group officials stated  that using the multiple CMRA systems currently available was sufficient  and would allow DOD to report accurate inventory data sooner.  Conversely, other working group officials stated that a department-wide  system would be less expensive to operate and upgrade and would be  less of a burden on contractors because they would only have to interface  with one DOD system. Working group officials did not provide any time  frames for which a resolution to the issue would be made. Doing so in a  timely fashion, as well as developing a plan of action with anticipated time  frames and necessary resources, as we have previously recommended,  would help facilitate the department’s stated intent of collecting contractor  manpower data.
section_title: DOD’s Inventory of Contracted Services Continues to Be Based Primarily on FPDS-NG
paragraphs: In December 2011, AT&L and P&R issued guidance for the submission of  the fiscal year 2011 inventory of contracted services. The guidance  instructed the military departments and DOD components to use all  reporting tools at their disposal to compile their inventories. In addition, it  noted that the Director, Defense Procurement and Acquisition Policy  would provide each component that has acquisition authority with a data  set from the FPDS-NG that should be used to cross check the information  that the components had compiled. The December 2011 guidance noted  that most components were not currently collecting direct labor hours  from contractors; therefore it identified five methodologies components  could use singularly or in combination to estimate or calculate the number  of contractor FTEs in their inventories. For example, components could  collect direct labor hour information from contractors, or calculate the  number of contractor FTEs by using a formula provided by P&R, which  was based in part from information extrapolated from the manpower data  collected by the Army from its contractors.
Thirty-one DOD components submitted inventories for fiscal year 2011, collectively reporting an estimated 710,000 contractor FTEs providing  services to DOD with obligations totaling about $145 billion (see table  1).
A component’s inventory submission may encompass contracts awarded on behalf of  another component. For example, contracts for the Defense Acquisition University are  reported by the Office of the Director, Administration and Management.
In comparison, for fiscal year 2010, DOD reported that 23 components  submitted inventories, and estimated that about 623,000 contractor FTEs  provided services with obligations totaling about $121 billion. DOD  officials cautioned against comparing the number of contractor FTEs for  fiscal year 2010 and fiscal year 2011 because components used different  methodologies to estimate contractor FTEs, there were changes in the  types of services that were to be included in the inventories, and other  factors. For example, for the fiscal year 2010 inventory, DOD estimated  contractor FTEs using one methodology for all components, other than  the Army, while for the fiscal year 2011 inventory, those components  used a variety of methodologies to estimate contractor FTEs.
Of the 31 components that submitted a fiscal year 2011 inventory of  contracted services, only 2 components reported that they collected direct  labor hour information from contractors—the Army, which uses CMRA,  and the Defense Test Resource Management Center. Of the remaining  components, 18—including the Air Force and Navy, which together  represent almost half of the contractor FTEs in the inventory—reported  that they used information extrapolated from Army manpower data and  FPDS-NG to calculate an estimate of the number of contractor FTEs; 6  components reported that they used a variety of methodologies, including  information from independent government estimates and contractor  technical proposals; and 5 components did not identify the methodology  used to estimate the number of contractor FTEs.
As we have previously reported, the FPDS-NG system has several  limitations that limit its utility for purposes of compiling a complete and  accurate inventory, including not being able to identify and record more than one type of service  purchased for each contracting action entered into the system, not being able to capture any services performed under contracts that  are predominantly for supplies, not being able to identify the requiring activity specifically, not being able to determine the number of contractor FTEs used to  perform each service.
Over the years, DOD has made a number of changes to address some of  the limitations posed by using FPDS-NG, but not all of the limitations  have been totally addressed. According to AT&L and P&R officials, the  Army’s CMRA system, as well as the CMRA-based systems now being  used by the Air Force and Navy, will help the military departments  overcome a number of the FPDS-NG limitations.
In addition to the limitations posed by using FPDS-NG as a source for  compiling the fiscal year 2011 inventories, DOD experienced challenges  with correctly identifying all services that were to be reported in the  inventory. According to P&R and AT&L officials, the Air Force identified  omissions of about $8 billion during its final review, for which the Air  Force conducted a cross-check of its inventory data by comparing the  FPDS-NG data set provided by Director, Defense Procurement and  Acquisition Policy to its financial management system. AT&L and P&R  officials noted that the omissions were primarily for services provided to  the Air Force pursuant to a contract action conducted by other DOD  components, and services provided to other DOD components pursuant  to contract actions conducted by the Air Force. AT&L and P&R officials  explained that they decided to report the omissions as “other DOD inputs”  to avoid any further delays in submitting DOD’s fiscal year 2011 inventory  to Congress. According to Navy officials, the Navy did not identify errors,  but noted that they did not use other systems to cross-check their  inventory data. Army officials told us that the Army reported contracted  services for which the Army was the requiring organization, but stated  that other components may not have reported contracted services  performed on their behalf pursuant to contract actions for which the Army  was the procuring agency.
GAO-12-357.
section_title: Most Components Certified That They Conducted an Inventory Review, but Provided Limited Information to Gauge Review Efforts
paragraphs: Consistent with DOD’s December 2011 guidance on the inventory review,  most components certified that they conducted the inventory review, but  provided only limited information of their review methodologies, results of  their review, or use of the inventory to inform annual program reviews and  budget processes. As of April 2013, 29 of the 31 components certified  that they had completed a review of their inventory. AT&L and P&R  officials stated that the requirement to submit certification letters  represented a significant improvement over prior years’ reviews when  DOD could not determine whether or not the required reviews were  conducted and believed that the letters provided useful insights into the  components’ processes and methodologies for conducting the reviews.  Our analysis indicates, however, that none of the components reported  on all six elements required in the guidance. For example, about half of  the component letters provided limited or no information on the  methodology used to perform the reviews. In addition, components  provided limited information on their efforts to ensure appropriate  government control when contractors were performing closely associated  with inherently governmental functions. Further, while the Army and Air  Force identified instances where contractors were performing inherently  governmental functions and unauthorized personal services, they did not  report whether they fully resolved these issues.
subsections: section_title: DOD’s Fiscal Year 2011 Guidance Improved Accountability for the Inventory Reviews
paragraphs: In December 2011, AT&L and P&R issued guidance to components  directing them to review at least 50 percent of their inventories and to the  maximum extent possible, give priority to contracts not previously  reviewed or those that may present a higher risk of inappropriate  performance. In addition, heads of components were required to provide  a letter to P&R by November 25, 2012, certifying completion of the  inventory review and at a minimum include a discussion on the following  six elements: an explanation of the methodology used to conduct the reviews and  criteria for selection of contracts to review; delineation of the results in accordance with all applicable title 10  provisions and the December 2011 guidance;  the identification of any inherently governmental functions or  unauthorized personal services contracts, with a plan of action to  either divest or realign such functions to government performance;  the identification of contracts under which closely associated with  inherently governmental functions are being performed and an  explanation of steps taken to ensure appropriate government control  and oversight of such functions, or if necessary, a plan to either divest  or realign such functions to government performance;  the identification of contracted services that are exempt from private  sector performance in accordance with DOD Instruction 1100.22,  which establishes policies and procedures for determining the  appropriate manpower mix; require special consideration under 10  U.S.C. § 2463; or are being considered for cost reasons, to be  realigned to government performance;the actions being taken or considered with regards to annual program  reviews and budget processes to ensure appropriate reallocation of  resources based on the reviews conducted.
According to AT&L and P&R officials, the letters were intended to ensure  that the components conducted the required review of their inventories,  and documented the extent to which contractors were found to be  performing certain functions to include inherently governmental and  closely associated with inherently governmental and, to the extent  necessary, provided for a plan to realign performance of such functions to  government performance. DOD could also modify the statement of work  or the manner of its performance to ensure that the work performed is not  inherently government or divest or discontinue the work. In cases where  contractors are performing activities that are closely associated with  inherently governmental functions, DOD is required to ensure appropriate  government control and oversight of such functions.
As of April 2013, 29 of the 31 components required to review their  inventories had submitted a certification letter, while the Air Force  submitted an interim letter based on a review of 30 percent of the  contracts that it had completed at that time. The Air Force provided us  with updated figures based on their review of about 80 percent of their  contract actions, which we incorporated in this report. However, the Air  Force has yet to submit a formal letter to P&R certifying the results of its  review. AT&L and P&R officials stated that the requirement to submit  certification letters represented a significant improvement over prior  years’ reviews when DOD could not determine whether or not the  required reviews were conducted and believed the letters provided useful  insights into the components’ processes and methodologies for  conducting the reviews.
section_title: Components Provided Limited Information in Certification Letters
paragraphs: Our analysis of the 29 component certification letters found that none  discussed all six elements required in guidance. Further, certification  letters varied significantly in terms of the information and insights  provided for the methodologies components used to review their  inventories, the results of the reviews, and use of the inventory to inform  annual program reviews and budget processes, as illustrated in the  following examples.
Methodology and Selection Criteria: Sixteen of the 29 components  provided information on both the criteria and methodology used to  conduct their reviews. These components represent about 38 percent  of the total contractor FTEs submitted in the inventory. However, the  level of detail provided in the certification letters varied. For example,  the Army, which noted in its certification letter that it reviewed more  than 50 percent of its contracted functions, provided a detailed  explanation of its selection criteria and review methodology.
In its inventory submission, the Army explained that it has a two- pronged approach to reviewing the activities in the inventory. First, it  uses a pre-award process that includes detailed checklists to help  assess whether the proposed contract includes services that are  inherently governmental functions or inappropriate personal services,  and to identify services that are closely associated with inherently  governmental functions. For example, to identify work that is closely  associated with inherently governmental functions, the checklists ask  whether the contractor will be providing services related to budget  preparation, feasibility studies, and acquisition planning, among  others. Second, it uses a post-award review, the Panel for  Documentation of Contractors, to review information provided by  commands to make certain determinations such as whether a  contractor’s performance of closely associated with inherently  governmental functions has evolved into the performance of  inherently governmental functions. The panel also evaluates whether  sufficient capacity exists to oversee the contracted workforce. This  process allowed the Army to identify over 900 contractor FTEs  performing inherently governmental functions and over 44,000  contractor FTEs performing closely associated with inherently  governmental functions.
In contrast, the Department of Defense Education Activity indicated its  review was conducted by comparing data from the inventory with  information gathered through their contract writing system database.  The component provided no additional information on its  methodology.
Based on the reported methodologies, we could not determine  whether several components took into consideration the way an  activity is performed or administered as part of their inventory reviews,  which was required by the December 2011 guidance. For example,  U.S. Special Forces Command indicated in its certification letter that  all the contracts in its inventory were reviewed before award by the  Special Operations Command Requirements Evaluation Board. The  command did not indicate whether reviews were conducted after  contracts were awarded. While the Office of Federal Procurement  Policy directs agencies to confirm before award that the services to be  procured do not include inherently governmental work, it also directs  agencies to review on an ongoing basis the functions performed by  contractors to ensure that the work being performed is appropriate.  It was unclear based on our analysis of the certification letters,  however, whether U.S. Special Forces Command, as well as several  other components, took into consideration the way a contract is  performed or administered as part of their inventory reviews.
Inventory Review Results: All 29 components included a discussion of  inherently governmental functions and unauthorized personal services  in their letters. However, 4 of the 29 components did not discuss  whether contractors were performing functions closely associated with  inherently governmental functions, and 20 of the 29 components did  not discuss contracted services that are exempt from private sector  performance. Therefore, we could not determine if these components  considered these types of activities when conducting their inventory  reviews or whether no instances were found.
Two components—the Army and Air Force—identified contractors  performing inherently government functions or unauthorized personal  services. The other 27 components indicated that they did not have  contractors performing any of these activities. Table 2 summarizes the  number of contractor FTEs the Army and Air Force identified.
The Army, in its certification letter, noted that it planned to use term or  temporary employees and/or military special duty personnel while  awaiting insourcing approval of functions at risk of inherently  governmental performance or otherwise lacking statutory authority. In  January 2013, however, the Secretary of the Army froze civilian hiring,  terminated temporary employees and prohibited extensions of term  appointment without a specific exception to mission critical activities.  In subsequent discussions with Army officials, we found that the  Army, as of April 2013, had not developed a plan to address all  instances in which contractors were performing inherently  governmental functions or providing unauthorized personal services.  Similarly, in follow-up discussions with Air Force officials, they told us  that they are still discussing resolution of the instances identified with  their manpower and personnel communities, as well as the affected  major commands.
Twelve of the 29 components identified contractors performing closely  associated with inherently government functions (see table 3), 13  components noted that they did not have contractors performing these  functions, and 4 did not discuss this element in their certification letter.  Since DOD’s guidance did not specify how components were to report  the number of instances identified, components discussed the  instances they found in a variety of ways. For example, the Army and  the Air Force were able to provide us with the number of contractor  FTEs performing closely associated with inherently governmental  functions, while the Navy identified the number of contracts and the  Defense Logistics Agency identified the percent of contracts that  included this type of activity. As a result, it is difficult to determine how  many contractors are performing closely associated with inherently  governmental functions. Further, our prior work has found that DOD  contracts for significant amounts of professional, administrative and  management support services, a significant portion of which were  services that closely supported inherently governmental functions. Based on our prior work, it is not clear that DOD components  accurately identified the extent to which their contractors are  performing such functions during their inventory reviews.
GAO, Defense Acquisitions: Further Actions Needed to Address Weaknesses in DOD’s  Management of Professional and Management Support Contracts, GAO-10-39  (Washington, D.C.: Nov. 20, 2009).
Closely associated with inherently  governmental functions   44,541contractor FTEs  The Navy did not identify the number of  contractor FTEs, but noted they have 25  contracts that contained these functions.
The agency did not identify the number of  contractor FTEs in current contracts, but noted  they have contracts that contained these  functions.
The agency did not identify the number of  contractor FTEs, but noted that 4.5 percent of  their sample of more than 50 percent of contract  actions contained these functions.
The agency did not identify the number of  contractor FTEs, but noted that they had  contractors performing these functions.
The components did not identify the number of  contractor FTEs, but reported that 24 out of 950  contracts consolidated from the three  components had contractors performing these  functions.
The agency did not identify the number of  contractor FTEs, but noted that several contracts  contained these functions.
The commands did not identify the number of  contractor FTEs, but noted that “some  requirements” contained these functions.
The 12 components’ certification letters varied in the level of detail  provided regarding the form of government control and oversight of  contractors performing closely associated with inherently  governmental functions. For example, the Defense Logistics Agency  noted that it limits contractors’ exercise of discretion, assigns sufficient  government employees to oversee the work, and identifies contractors  and their products to ensure they are not being confused with those of  government employees. In contrast, the Defense Advanced Research  Projects Agency, stated that it awards and administers contracts in  compliance with all applicable procedures, but did not provide further  detail.
Finally, 9 of the 29 components discussed contracted services that  are exempt from private sector performance. None of these  components reported having services exempt from private sector  performance.
Annual program reviews and budget processes: Fifteen of the 29  components that submitted review certification letters reported that  they had used the information from their inventory reviews for annual  program reviews or budget processes. For example, the Defense  Contract Management Agency noted that it uses a review board to  analyze service contracts on a monthly basis to look at requirements,  follow-on contracts, and exercise of contract options proposed in the  near future. In addition, it is currently assigning priorities and targeting  reduction and conversions from contractors to government positions.  These changes in priorities or workforce realignment would entail a  change where funds are requested in budget justification materials. In  another example, the U.S. Special Operations Command noted that it  uses a requirements approval system to evaluate requirements,  eliminate redundancies, and identify activities to be insourced. In  addition, the Army has indicated that their inventory and inventory  review were used to inform total workforce management reviews,  including planned efforts to implement spending reductions for  services that are closely associated with inherently governmental  functions, and its fiscal year 2014 budget submission. None of the  components, however, provided details on specific budgetary actions  they took.
section_title: The Fiscal Year 2012 Inventory Review Guidance Requires Components to Provide Additional Information
paragraphs: DOD issued revised guidance applicable to the components’ fiscal year  2012 inventories in February 2013. DOD components are expected to  review 80 percent of their inventories and respond to the same six  elements as they were required to do in fiscal year 2011, but the  components will also be required to provide additional information on the  funds and the number of contractor FTEs associated with the following  functions: unauthorized personal services lacking statutory authority, authorized personal services, and commercial functions.  inherently governmental functions,  closely associated with inherently governmental functions,  critical functions,  In addition, components are to provide an explanation of the degree to  which the functions are part of overseas contingency operations, or  reimbursable functions not currently in the component’s budget estimate  for contracted services. Further, components are to report on the actions  taken with respect to the functions described above, including whether  the contract where these functions reside is continuing or modified, or  whether the function was insourced or divested.
section_title: Conclusions
paragraphs: Since fiscal year 2002, Congress has directed DOD to increase visibility  into the purchase of services by the department, in part through the  establishment of a data collection system that would allow it to identify  each activity being performed by contractors and make informed  workforce mix and budgetary decisions. With the exception of the Army,  DOD’s overall progress to date can be characterized as a series of  incremental, ad hoc steps, often taken in response to congressional  direction. Over the past 18 months, DOD has been able to reach internal  agreement on a way forward to collect contractor manpower data directly  from contractors and has taken certain tangible steps toward this goal,  such as by requiring components to begin modifying more than 270,000  contracts and task orders and to require new contracts to include  provisions to require contractors to report direct labor hours, the types of  functions being performed, and other information into interim CMRA  systems. Nevertheless, it will be at least another year before DOD may  have a department-wide eCMRA system in place to collect inventory  data, such as manpower data directly from contractors and 2 more years,  at the earliest, until it may have all components in compliance with  inventory reporting requirements. Further, there are a number of  challenges and unresolved issues that require continued management  attention. For example, while DOD indicates that it remains on track to  have a departmentwide data collection system in place in fiscal year  2014, the working group DOD established in January 2013 is still working  on key decisions related to security, funding, and other technological  issues and has not developed an implementation plan with anticipated  time frames and necessary resources to help ensure DOD remains on  track to meet its goals, as we recommended in 2011.
Similarly, DOD’s December 2011 guidance has helped ensure that most  components are reviewing their inventories. DOD also believes that the  certifications by components have provided it better insights into the  processes used and results of the reviews. Our review, however,  indicates that the certifications often did not address or provided only  limited information on the six elements that were called for by DOD’s  December 2011 guidance. Most significantly, the letters were inconsistent  in describing the methodology used to identify and review the inventories,  the actions taken or planned to be taken by the military services to  address instances in which contractors were found to be performing  inherently governmental functions or unauthorized personal services, or  how these and other components were providing adequate government  oversight of contractors who were performing work closely associated  with inherently governmental functions. For example, the Army and Air  Force identified instances where contractors were performing inherently  governmental functions and unauthorized personal services, but did not  report whether they fully resolved these issues. Further, based on our  review of the certification letters, it is unclear the extent to which the  differences in the approaches used to conduct the reviews contributed to  the wide variation of instances identified with regard to contractors  performing work that is closely associated with inherently governmental  functions. For example, the Army identified over 44,000 contractor FTEs  performing work closely associated with inherently government functions,  while 13 components did not identify any instances where contractors  were performing these functions.
Having the ability to identify and report instances of contractors  performing inherently governmental functions, unauthorized personal  services, or those closely associated with inherently governmental  functions is one of the key benefits that the inventory is to provide to  DOD, as it allows DOD to ensure contractors are performing appropriate  work and to decide on the appropriate course of action should the reviews  find that not to be the case. However, that value is significantly reduced if  decision-makers have no assurance on whether corrective action was  taken. DOD’s February 2013 guidance that governs the fiscal year 2012  inventory review attempts to improve accountability of the funds allocated  to certain high risk functions and obtain better insight into the resolution of  instances where contractors are performing inherently governmental  functions or unauthorized personal services. The results, however, hinge  on the extent to which the components comply with the guidance. Based  on this year’s results, whether the components do so is not a foregone  conclusion.
section_title: Recommendations for Executive Action
paragraphs: To ensure that the inventory of contracted services reviews provide  greater context and value to DOD leadership, we recommend that the  Secretary of Defense direct component heads to take the following two  actions:
Comply with DOD’s February 2013 guidance, by ensuring that all  required inventory review data elements, including a comprehensive  description of their inventory review methodology, are addressed in  their certification letters; and
Provide updated information in certification letters on how they  resolved the instances of contractors performing inherently  governmental functions or unauthorized personal services in prior  inventory reviews.
section_title: Agency Comments and Our Evaluation
paragraphs: DOD provided us with written comments on a draft of this report. DOD  agreed with one recommendation and partially concurred with one  recommendation. DOD’s written response is reprinted in appendix II.  DOD also provided technical comments, which were incorporated as  appropriate.
DOD concurred with our recommendation that to provide greater context  and value to DOD leadership, DOD should direct component heads to  comply with its February 2013 guidance and ensure that all required  inventory review data elements, including a comprehensive description of  their inventory review methodology, are addressed in their certification  letters. DOD did not believe that it was necessary for the Secretary of  Defense to provide additional guidance, but rather indicated that AT&L  and P&R, which have lead responsibility for the inventory, will  disseminate our report to the components with a reminder that each  component must specifically address each item listed in the fiscal year  2012 inventory of contracted services guidance. While we appreciate  DOD’s actions to address the recommendation, the fact that none of the  components fully addressed each element contained in AT&L and P&R’s  previous guidance underscores, in our view, the need for more direct  involvement by the Secretary to ensure compliance.
DOD partially concurred with our recommendation that component heads  provide updated information in certification letters on how they resolved  the instances of contractors performing inherently governmental functions  or unauthorized personal services in prior inventory reviews. DOD stated  that while it agreed with the intent to ensure complete information is  provided in certification letters regarding how component heads resolved  instances of contractors performing inherently governmental or  unauthorized personal services, DOD believes that the focus should be  on the current and future reviews of the inventory of contracted services,  rather than a correction of prior inventory reviews. To do so, DOD stated  that AT&L and P&R will ask each component to include in the fiscal year  2012 certification letters any updated information on how they resolved  the instances of contractors performing inherently governmental functions  or unauthorized personal services in prior inventory reviews. DOD added  that the fiscal year 2013 inventory of contracted services guidance will be  updated to include this requirement when it is published in February  2014. Subsequently, DOD stated that any instances of contractors  performing inherently governmental functions or unauthorized personal  services recorded in prior inventory reviews that persist will be included  and documented in the fiscal year 2012 and future review processes.  DOD said it will verify that the certification letters contain a complete and  accurate description of all required data elements, including actions taken  to resolve outstanding issues related to contractors performing inherently  governmental functions and unauthorized personal services prior to  closing the respective review process. We agree that such an approach, if  successfully implemented, would meet the intent of our recommendation.
We are sending copies of this report to the Secretary of Defense and  interested congressional committees. In addition, the report is available at  no charge on the GAO website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or dinapolit@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on   the last page of this report. GAO staff who made contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope and Methodology
paragraphs: Section 803(c) of the National Defense Authorization Act for Fiscal Year  2010 directs GAO to report for 3 years on the inventory of activities  performed pursuant to contracts for services that are to be submitted by  the Secretary of Defense for fiscal years 2009, 2010, and 2011,  respectively. To satisfy the mandate for 2012, we assessed (1) the  progress DOD has made in compiling the inventory of contracted services  and the status of efforts to collect contractor manpower data, and (2) the  extent to which the defense components complied with DOD’s December  2011 guidance for reporting on the review of the fiscal year 2011  inventories.
In performing our work we obtained pertinent documents and interviewed  cognizant officials from the Office of the Under Secretary of Defense for  Acquisition, Technology and Logistics (AT&L); Office of the Under  Secretary of Defense for Personnel and Readiness (P&R); the Office of  the Under Secretary of Defense (Comptroller); Office of Defense  Procurement and Acquisition Policy; Deputy Chief Management Officer;  the departments of the Army, Navy, and Air Force; and two DOD  components–the Defense Logistics Agency (DLA) and Defense  Information Systems Agency (DISA).
To assess the progress DOD has made in compiling the inventory of  contracted services and the status of efforts to collect contractor  manpower data, we reviewed the December 2011 guidance issued by  AT&L and P&R related to the inventory compilation processes. We  analyzed 31 DOD components’ fiscal year 2011 inventory submissions  and all memorandums accompanying the inventory submissions, to  determine the methodologies and processes used when compiling the  fiscal year 2011 inventories and calculating or estimating the number of  contractor full time equivalents (FTE). We focused on the Army, Navy, Air  Force, DLA, and DISA because they had among the largest service  contract obligations and contractor FTEs in the fiscal year 2011 inventory.  We include DOD’s estimate of overall obligations and contractor FTEs for  fiscal year 2011 in this report. We did not independently assess the  accuracy or reliability of the underlying data supporting the components’  inventories of contracted services. However, our previous work identified  data limitations with DOD components using data from the Federal  Procurement Data System-Next Generation (FPDS-NG) as the basis for  their inventories. We discuss these limitations in the report, as  appropriate.
In addition, we assessed DOD’s progress in developing a common data  system to collect and house contractor manpower data for the entire  department. We reviewed guidance issued by AT&L and P&R on  modifying new and existing contracts to require reporting of contractor  manpower data, and discussed the implementation by the Air Force,  Navy, and DOD components of an interim data system. We also  interviewed officials from AT&L, P&R, and the Office of the Deputy Chief  Management Officer, and the military services to obtain the status of  efforts in developing and implementing a department-wide data system to  collect and house contractor manpower information.
To assess the extent to which DOD components followed DOD’s  guidance on the review of their fiscal year 2011 inventory, we analyzed  29 inventory certification letters submitted to P&R as of April 2013. We  assessed the letters to determine if components reported on the six  elements in DOD’s guidance for the inventory review, including the  selection criteria and methodologies used to conduct the inventory  reviews, a listing  of the results of their compliance with applicable Title 10  provisions, workforce issues identified, whether the workforce issues had  been resolved, identification of contracted services that are exempt from  private sector performance, and actions being taken or considered with  regards to annual program reviews and budget processes. We also  followed-up with appropriate Army and Air Force officials to determine  how they resolved workforce issues identified in their fiscal year 2009  inventory reviews. We did not assess whether the reported data or  guidance met legislative requirements for the inventory review. In  addition, we also did not independently assess the reliability and accuracy  of the review certification information.
We conducted this performance audit from October 2012 to May 2013 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Department of Defense
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgements
paragraphs: In addition to the contact named above, Cheryl Andrew, Margaret A. Best,  Laura Greifner, Katheryn S. Hubbell, Julia Kennon, John Krump, LeAnna  Parkey, Guisseli Reyes-Turnell, and Wendy P. Smythe made key  contributions to this report.