Service Contracts: Agencies Should Take Steps to More Effectively Use Independent Government Cost Estimates
Published: 2017-05-17T00:00:00

Fast Facts:
Independent government cost estimates help the government understand the potential cost of a contract. They're an important planning tool, especially for service contracts.
Some of the agencies that spend the most on service contracts may not be taking advantage of this tool: we found uneven guidance on when to use estimates.
We also found different levels of detail in the estimates themselves, which can affect how useful they are to contracting officers. The details help officers determine, for example, how reasonable a contractor's price is.
We made 5 recommendations to make better use of independent government cost estimates.

Highlights:
section_title: Why GAO Did This Study
paragraphs: IGCEs are the government's best estimate of a contract's potential costs—an important tool for both program and contracting officials to provide information when planning for and awarding contracts. IGCEs are particularly critical for service contracts—accounting for more than $270 billion in government contract spending in fiscal year 2015—to ensure the costs associated with labor are fully understood.
GAO was asked to review federal agencies' use of IGCEs. This report examines the extent to which (1) selected departments developed IGCEs for service contracts and (2) selected departments' IGCEs were useful in supporting the acquisition planning process.
To conduct this work, GAO selected six departments that in fiscal year 2015, the most current data available, were among the top spenders on services or had a high percentage of spending on services. GAO reviewed a random non-generalizable sample of 76 service contracts, and compared IGCEs and related documentation with GAO's cost estimating guide. GAO also conducted interviews with contracting and program officials.
section_title: What GAO Found
paragraphs: Officials at the departments in GAO's review—Defense, Homeland Security, Health and Human Services, Education, Labor, and Housing and Urban Development—developed independent government cost estimates (IGCE) for 62 of the contracts GAO reviewed. All of the departments in GAO's review have some guidance on IGCEs available—ranging from regulation to handbooks to checklists—with different emphasis on whether an IGCE is required. GAO found some cases where guidance dictated that an IGCE should have been prepared, but was not. According to officials, one reason for not preparing an IGCE was that the procurement was a task order issued under an existing contract. Federal internal control standards state that agencies should communicate quality information to achieve their objectives, such as including clear guidance for acquisition planning.
In the 62 contracts GAO reviewed with IGCEs, the IGCEs' use in acquisition planning varied—from determining funding needs to determining price reasonableness. The usefulness of an IGCE to a contracting officer depends in part on its supporting documentation, but most IGCEs did not document data sources and methodologies used (see figure) .
Lack of documented data sources and methodologies in an IGCE puts contracting officers at a disadvantage and could lead to additional, inefficient steps to validate IGCEs. Only two of the agencies in GAO's review had explicit guidance on what details to document in IGCEs, but officials were not always familiar with the available guidance. Instead, according to the officials GAO spoke with, they often follow program office practices and noted that training did not address how to develop and document an IGCE. GAO's cost estimating guidance and federal internal control standards emphasize the need for documentation, with GAO's guidance stating that well-documented cost estimates should describe the data sources used, underlying assumptions, and the estimating methodologies used to derive costs. Without clear guidance or more training on documentation of data sources and methodologies, departments may not be taking full advantage of this important acquisition tool.
section_title: What GAO Recommends
paragraphs: To improve the usefulness of IGCEs, GAO is making five recommendations, including that departments revise or clarify guidance or provide more training to help ensure IGCEs are prepared when required and are well-documented with clearly-stated data sources and methodologies. All six departments agreed with GAO's recommendations.

section_title: Letter
paragraphs: In fiscal year 2015, federal agencies obligated more than $270 billion, or  62 percent, of the government’s contract spending on service contracts to  help achieve their missions. Independent government cost estimates  (IGCE)—the government’s best estimate of a contract’s potential costs— are an important tool throughout the process of planning and awarding  service contracts. The IGCE supports efforts to ensure that the cost of  meeting the government’s requirements for the good or service being  acquired are known. IGCEs are also used by contracting officials to  compare offerors’ proposed prices, determine whether proposed contract  prices are reasonable, and to support contract price negotiations.
You asked us to review agencies’ policies and use of IGCEs in service  contracts. This report examines the extent to which (1) selected  departments developed IGCEs for service contracts, and (2) selected  departments’ IGCEs were useful in supporting the acquisition planning  process.
To assess the extent to which IGCEs were developed for selected service  contracts and were useful in supporting the acquisition planning process,  we reviewed a random, non-generalizable sample of 76 contracts from six  federal departments—the Departments of Defense, Education, Health  and Human Services, Homeland Security, Housing and Urban  Development, and Labor—that obligated money for service contracts in  fiscal year 2015, the most current data available at the time of our review.  Specifically, the six departments selected either had among the highest  total obligations for service contracts, or spent a large percentage of their  obligations for services during that time frame, according to data from the  Federal Procurement Data System-Next Generation (FPDS-NG). We  determined that FPDS-NG was sufficiently reliable for the purpose of  selecting departments based on their fiscal year 2015 obligations for  service contracts. Within the departments, we also used FPDS-NG to  select contracts from the agencies or contracting components that  accounted for a large share of service contracting obligations, which  include the Army and Air Force within the Department of Defense.  Overall, we selected 76 contracts and task orders in total—between 10  and 16 from each department—as shown in table 1. Of the 76, 37 were  task orders under indefinite delivery indefinite quantity (IDIQ) contracts— which are contracts that do not specify a precise amount of services to be  provided, but allow for issuing specific tasks to be performed by issuing  orders, as needed.
The 76 contracts and task orders were selected from randomly-generated  lists for each agency or component, which included all service awards  with obligations greater than the simplified acquisition threshold— $150,000—in fiscal year 2015. We chose a mix of competed (39) and  non-competed (37) awards, as well as different contract types and  services. We also selected at least one award at each agency with more  than $10 million in obligations in fiscal year 2015.
For each contract and task order selected, we requested and reviewed  available contract file documentation, including the IGCE, the statement  of work, and acquisition planning documents to understand how the IGCE  was developed. We also interviewed program and contracting officials for  each contract to determine how the IGCEs were developed and used,  and reviewed available guidance on IGCEs. We compared the IGCEs to  standards in GAO’s cost estimating guide and the departments’ guidance  on IGCEs to federal internal control standards.
We conducted this performance audit from December 2015 to May 2017  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.
subsections: section_title: Background
paragraphs: An IGCE is an estimate of the expected cost of a contract or task order.  IGCEs are developed by government personnel before soliciting  contractor proposals or making contract awards. A quality IGCE can  support both program and contracting officials throughout the phases of  the acquisition planning and award process. As shown in figure 1, in the  pre-solicitation phase of a procurement, IGCEs help program offices— which for the purposes of this report refer to the offices or requiring  activity that need the service—confirm that their estimated costs align  with the contract requirements for the service being acquired. Further,  IGCEs help establish contract cost goals to ensure funding is available to  meet expected contract costs. Moreover, although not required by the  Federal Acquisition Regulation (FAR) for most service contracts, IGCEs  can support contracting officials in establishing cost or price objectives if  they enter into contract negotiations. The FAR identifies the IGCE as one  of several tools available to establish that the contractor’s cost or price is  reasonable, and while determining price reasonableness by comparing  proposed prices in a competition to one another or by comparing  proposed prices to historical prices paid for the same or similar items is  preferred, the FAR provides the contracting officer discretion on when to  use what tools appropriate to the acquisition.
Service contracts involve the time and effort of the contractor to perform  an identifiable task, such as test and evaluation or facilities management,  rather than furnish a good or product. Service contract IGCEs may be  based on unit pricing—such as prices based per square foot like janitorial  services—or individual cost elements. IGCEs for cost elements may be  based on projected direct labor costs. Direct labor costs take into account  the categories of labor—for example, a senior program manager or an  entry-level research assistant—needed to meet the requirements of the  service acquired, as well as the number of hours required from each labor  category and the associated rates. IGCEs for service contracts may also  include additional cost elements, such as:  Indirect costs, which can include contractor overhead and fringe  benefits, such as employee health insurance costs, if not incorporated  into labor rates, and contract fee, if applicable; and
Other direct costs, which may include materials required or travel.
IGCEs can be developed for individual task orders under IDIQ contracts  as well as the base IDIQ contract. When IGCEs based on cost elements  are developed for task orders, some elements of the estimate, such as  labor rates associated with certain labor categories, may be established  in the base IDIQ contract. Depending on the estimating method used, the  task order’s IGCE may still need to estimate the level of effort—such as  number of people or hours expected—across the different labor  categories to perform the required tasks.
section_title: Most of the Contracts Reviewed Included IGCEs, but Guidance Varied on Whether IGCEs Were Required
paragraphs: For the majority of the service contracts and orders we reviewed, an  IGCE was prepared. In cases where no IGCE was prepared, agency  officials generally told us that an IGCE was not necessary for task orders  under an IDIQ contract, or that the contract work was for research and  development, for which it was too difficult to predict the costs. However,  we found cases where agency officials prepared IGCEs for task orders  and for research and development contracts and found them useful.  IGCEs are often developed by the program office’s contracting officer  representative—who is assigned to support contracting officers in  managing contractor performance—with varying levels of input and  review from program office staff. All of the departments in our review have  some guidance on IGCEs available—ranging from regulation to  handbooks to checklists—with different emphasis on whether an IGCE is  required. We found some cases where guidance dictated that an IGCE  should have been prepared, but was not.
subsections: section_title: Most Contracts Included IGCEs; Others Lacked IGCEs for Several Reasons
paragraphs: Although the FAR does not require IGCEs for most service contracts, 62  of the 76 service contract files we reviewed included them, as shown in  figure 2. These include awards ranging from a $600,000 task order for  information technology services to a $163 million contract to support  vaccine research and development.
Agency officials cited various reasons to explain why 14—half of which  were not competed—of the 76 contracts and task orders did not have  IGCEs. Officials generally could not find the IGCE, or stated that they did  not develop IGCEs for task order awards from IDIQ contracts or did not  develop IGCEs for research and development services because the  requirements are too difficult to estimate. Specifically we found:
Task orders: For six task orders under IDIQ contracts within the  Departments of Education, Defense (DOD), and Housing and Urban  Development (HUD), officials noted that they did not develop IGCEs  at the task order level. For two from the Department of Education,  officials explained that the task orders—one valued at $32.5 million  and the other at $433,000—were for volume-based loan services,  where pricing was established with the contractors when the base  IDIQ contract was awarded. According to senior Department of  Education officials, the contracting officer determined that creating  IGCEs at the task order level was not an efficient use of time and  resources because pricing per loan was fixed at the base contract  level. In another example, an Air Force contracting official, referring to  a $1.8 million task order from a noncompetitive IDIQ contract for  engineering and technical services, indicated that IGCEs for related  task orders were not needed because the Air Force has been  contracting for the services for more than 20 years and the task  orders are routine at this point.
Research and development: One competed contract and one  noncompetitive task order we reviewed without IGCEs were DOD  awards for research and development services. Officials explained  that since requirements are not always fully understood before the  proposals are received and analyzed—even in a noncompetitive  procurement—it is difficult to develop useful IGCEs. For example, for  a competed Air Force award, officials told us they relied on the  contractors’ innovation to address requirements and the program  office reviewed the proposals to ensure approaches were technically  sound and achievable.
However, in other instances, we found that agencies awarding task  orders and research and development contracts that had developed  IGCEs and found them to be useful. For example:
Task orders: We reviewed 27 task orders from IDIQ contracts where  IGCEs were developed. Army officials said they develop task order  IGCEs even when the labor rates are pre-negotiated in the base IDIQ  contract, in part because the IGCEs include other estimated costs,  such as travel expenses and other direct costs, which help contracting  officials understand the services the program office expects to  receive. Officials for several task orders we reviewed cautioned that it  is important for them to develop separate IGCEs specific to each task  order because the base IDIQ contract may not contain the level of  detail necessary to estimate requirements at the task order level. For  example, an IGCE for a $5.3 million DHS task order for information  technology included estimates for task-specific costs, such as labor  for equipment set-up, installation, and operation costs. The program  official noted that these costs were not detailed in the base IDIQ  contract.
Research and development: Eight of the research and development  contract files we reviewed had IGCEs. Officials from HHS said that  even when requirements are not fully understood, some labor  categories and related elements can be estimated in advance to give  officials points of comparison when reviewing proposals. According to  DHS officials, they used the IGCE as the primary government  estimate for the price analysis to determine price reasonableness  once contract proposals were submitted.
For most of the remaining contract awards where IGCEs were not  available, officials told us that IGCEs had been developed but could not  be located in the contract or task order files. In some cases, the contracts  were more than 6 years old and staff turnover and file transfers made it  difficult for us to obtain contract file documents. In a couple of cases,  officials said they did not create IGCEs, but used other resources—such  as audited rates—to examine costs and prices.
section_title: Program Offices Are Generally Responsible for Developing IGCEs
paragraphs: Program and contracting officials share responsibility for many acquisition  planning activities, but in the contracts we reviewed, staff in the program  office were primarily responsible for developing IGCEs. Officials from the  six departments we met with said that the contracting officer’s  representative (COR)—usually a person within the program office—most  often develops IGCEs. In some cases, CORs said they developed  IGCEs autonomously, using their experience with prior efforts to estimate  the level of effort necessary to meet requirements needed for the service  being acquired. For example, for a Department of Education contract  worth approximately $807,000, the COR explained that the program had  worked with the contractor on a similar effort in the past and as a result,  the COR had a thorough understanding of the labor categories and labor  hours necessary to meet requirements, so did not need input from other  sources to determine the level of work necessary. However in many  cases, CORs received input from other program office officials, such as  program managers or subject matter experts, during the IGCE  development process. According to officials, IGCEs are often reviewed  and approved within program offices as one of several documents in a  procurement request, before being sent to contracting officials. Program  office input ranges from informal discussions with peers and managers to  formal acquisition planning reviews, involving multiple stakeholders.
In at least four of the contracts we reviewed, officials said their IGCEs  were developed with input from sources outside the program office. For  example,
The Army’s Prototype Integration Facility—which supports DOD  program offices with design and development projects requiring a  rapid response—assists in the development of contracts by assigning  technical advisors to serve as CORs. An official from the facility told  us the technical advisors primarily draw on experience from other  efforts to help the program offices develop acquisition planning  documents, including the IGCE.
In at least two of the contracts we reviewed, the IGCEs were  developed by officials who have professional cost estimating  experience. For example, a $40 million contract from Army’s Fixed  Wing Program—which provides life-cycle management for the Army’s  fleet of fixed wing aircraft—had cost estimators imbedded in the  program to assist with development of cost estimates, including  IGCEs. According to an Army official, because the cost estimators  developed IGCEs for the various fixed wing projects, they were able  to identify similar efforts and access data to use in the development of  estimates. Similarly, the Office of Biometric Identity Management at  DHS has cost and budget specialists who helped develop the IGCE  for a $5 million engineering support contract.
In a $158 million sole-source HUD contract for information technology  services, the contracting officer used a third-party contractor with cost  estimating expertise who was familiar with the program to develop an  IGCE. According to HUD officials, the program office developed an  initial IGCE; however, the contracting officer did not think it was  adequate to support her determination of price reasonableness  because it did not include an analysis of how the estimated costs  were developed. The resulting IGCE produced by the third-party  contractor included more detailed analysis and information that  mapped to program requirements, and helped her conduct  negotiations with the offeror.
section_title: Department-level Guidance Varies on When to Prepare IGCEs
paragraphs: All of the departments in our review have some type of guidance on  IGCEs available—ranging from regulation to COR handbooks to  checklists—with different emphasis on whether an IGCE is required.  Table 2 outlines the different types of guidance available at the  departments we reviewed.
Three of the departments we reviewed—HHS, DHS, and the Department  of Labor—expressly address IGCEs in documents such as directives,  acquisition manuals, or guidebooks. For example, the HHS Directive for  Acquisition Planning states that IGCEs are required as part of the  acquisition plan, which is required for acquisitions greater than $150,000.  The DHS Acquisition Manual requires IGCEs for most proposed  negotiated acquisitions although it allows for several exemptions, such as  for acquisitions of commercial items and modifications to resolve cost  overruns. The Department of Labor developed a guidebook specific to  IGCEs, which states that cost or price estimates are required for awards  above the simplified acquisition threshold. The contracts and task orders  we reviewed from these departments all included IGCEs.
At the Department of Education, the guidance regarding IGCEs is less  clear and our review found that IGCEs were not always developed. The  Department does not have department-level guidance, but the Contracts  and Acquisitions Management (CAM) group—which is one of two  contracting activities at the Department—has a checklist for procurement  packages that references IGCEs. Education officials told us the CAM  guidance is available for use by the other contracting activity (Federal  Student Aid), but it is not required. Five of the 16 Education task orders  and contracts in our review—all of which were from Federal Student  Aid—did not have IGCEs.
Within HUD, we found two contracts without IGCEs, and department-level  guidance varied. Specifically, HUD’s acquisition best practices for cost- realism analysis notes the importance of the IGCE in acquisition planning  but does not state under what conditions they are required. More  recently, HUD developed a procurement request checklist listing IGCEs  as one of several required documents when program offices initiate new  procurements.
DOD—including Army and Air Force—has different levels of guidance  with respect to IGCEs, but it was not always followed. For example, the  Army FAR supplement is clear that an IGCE is required for every  procurement action over the simplified acquisition threshold, but 3 of the  10 Army awards we reviewed did not have IGCEs. Although the Air Force  does not have its own guidance for IGCEs, the DOD COR handbook is  applicable to Air Force procurements and requires IGCEs over the  simplified acquisition threshold, but only 2 of the 6 task orders we  reviewed had an IGCE. Further, DOD Instruction 5000.74 references the  use of IGCEs in service contracts, but does not clearly require them.  Federal internal control standards state that agencies should  communicate quality information to achieve their objectives. When  existing guidance is not followed or is not clear when it should be  followed, agency officials may not be taking advantage of this valuable  acquisition planning tool.
section_title: The Usefulness of IGCEs in Acquisition Planning Varied, and Most Did Not Include Supporting Documentation
paragraphs: In the 62 contracts we reviewed with IGCEs, the usefulness of IGCEs in  acquisition planning varied and most did not include supporting  documentation with details, such as the information sources and  methodologies used, that could help contracting officers more effectively  use IGCEs. Most of the IGCEs in GAO’s review—49 of 62—were not  well-documented, which in some cases limited their usefulness to  contracting officers; these officers had to perform additional, inefficient  steps to validate IGCEs so they could be used. Only two of the agencies  in our review (Army and DHS) had department-level guidance on what  details to document in the IGCEs.
subsections: section_title: Multiple Uses for IGCEs in the Acquisition Planning Process
paragraphs: Program and contracting officials identified multiple uses of the IGCE  throughout the acquisition planning process, such as helping program  offices determine the funding needed and supporting contracting officials  to help determine the reasonableness of an offeror’s proposal.
Understand funding needs. Officials from the six departments we  reviewed noted that IGCEs help programs understand their funding needs  for acquiring a service, and hence are an important tool to help ensure  the funding is available. Some officials said that the total value of the  IGCE ultimately has to be within the program’s available budget. But as  one HUD program official explained, if the contractor proposals exceed  the IGCEs, they may be able to request additional funding. Officials also  said that the IGCE helps determine the work they can afford and make  trade-offs before the contract is awarded.
Communicate information about requirements and contracting  approaches. IGCEs also communicate additional information about  program office requirements to contracting staff, providing information  helpful to supporting contracting officials’ work in awarding the contract,  often in conjunction with the statement of work and other requirements  documents. For example, a COR for a $3.8 million Department of  Education information technology contract told us that the IGCEs help  communicate expectations for procured services, including the labor mix  required to perform tasks and levels of expertise in each labor category,  to contracting officials. A DHS contracting officer for a research and  development contract also noted that the program staff ultimately have  the best idea of the mix of labor categories and hours needed to meet  their requirements, which they share through the lGCE.
Additionally, program officials described IGCEs as a key piece of the  acquisition planning phase that helps contribute to decisions about  contracting approaches. For example, a DHS program official for a $1.8  million contract for professional services said he discussed the IGCE’s  proposed labor mix with contracting officials, who recommended reducing  the number of labor categories to make it easier for small businesses to  compete for the work.
Evaluate against contractor’s proposed prices. Contracting officials at  all six departments explained that IGCEs provide a baseline for  evaluating offerors’ proposed costs and can be used to help determine  the reasonableness of offerors’ proposed costs. They also help  contracting officers identify potential areas for negotiation. For example,  an HHS contracting officer explained that she compares costs identified in  the IGCE with those in the contractors’ proposals to identify areas where  she can negotiate a better price.
Some officials noted that IGCEs are particularly important in sole source  contracting, as they rely more on IGCEs to determine price  reasonableness when they do not have multiple contractor proposals to  compare prices. Some officials emphasized that IGCEs can still be used  in a competitive environment to identify unreasonably low bids and to  determine whether vendors understand requirements. However, other  officials noted that in a competitive procurement, comparing proposed  prices against the IGCE is not the predominant method used to determine  price reasonableness. For example, a contracting officer from the Army  said she determines price reasonableness predominately from the cost  analysis of proposals developed by cost and pricing specialists rather  than the IGCE.
section_title: IGCEs Differ from Contract Value at Award for Various Reasons, but Differences Are Not Always Documented in Contract Files
paragraphs: Although usually developed by program offices, IGCEs are one of several  tools available to help contracting officers in the award process, which  ultimately requires that they determine the price of the contract to be fair  and reasonable. The usefulness of this tool—when used to determine  price reasonableness—depends in part on the quality of the estimate,  which can differ from the contract value at award for a variety of reasons.  As shown in figure 3, the 62 IGCEs we reviewed varied widely in how  close they were to the estimated value of the contract action when it was  awarded. More than half of the IGCEs—32 out of 62—were within 10  percent of the estimated value of the contract or task order at award, and  12 of these IGCEs were within 1 percent of the estimated value at award.  At the other end of the spectrum, among the 30 IGCEs that differed from  the contract value at award by more than 10 percent, 14 were more than  25 percent over or under the award value, with the IGCEs tending to be  higher than the awarded contract values.
A difference or similarity between the estimate and the final contract price  in and of itself is not problematic; however, if the differences or similarities  are not explained in the contract files, it can sometimes raise questions.
Officials explained that IGCEs can be close to the price at award for  various reasons. For example, there were several non-competed  contracts for existing requirements, such as follow-on contracts or short- term bridge contracts to an incumbent contractor, so that the expected  costs were well known. One IGCE for a $1.9 million Department of  Labor task order used the same labor mix as the existing award, with  rates that had already been established in an IDIQ, so the IGCE was  identical to the final task order award. In another case, the contractor’s  initial offer was higher than the IGCE, but the DHS contracting officer  used the IGCE as a basis to negotiate with the contractor, ultimately  negotiating the contract price down to almost the exact estimate in the  IGCE.
Differences, particularly significant ones, are also understandable in  certain instances when explained. For example, for a $30 million Air  Force contract for logistics support services, which was competed and  received multiple proposals, the source selection document explains that  the IGCE was higher than all of the proposals—39 percent higher than  the final contract value—because it did not account for cost savings  measures and management innovations offered by the contractors.  Additionally, the file notes that competition played a part in reducing the  prices offered. Of the 14 cases where the IGCE and the estimated value  at award differed by more than 25 percent, the IGCE values were higher  in 9 of the contract awards. Almost all of these contracts and task orders  were competed awards with multiple offers. Several contracting officers  credited competition with reducing the contracts’ estimated cost at award  compared to the IGCEs.
However, the differences between the IGCE and the contract value at  award were not always explained in the contract files, including 10 of the  14 cases where the IGCE differed by more than 25 percent. In another  example—for a non-competed $208 million HUD contract for financial  management support services—the contract value at award exceeded the  IGCE by more than $33 million. An analysis in the contract file indicates  that the IGCE was one of several sources of information that a  contracting official used to negotiate the award. A senior HUD contracting  official said that the quantities represented in the IGCE later changed,  which was taken into account during the negotiation. However, the  analysis does not state why the final contract value at award exceeded  the IGCE. Program officials said that they had little contact with the  contracting office and did not know why the contract was awarded for  more than the original estimate. Under the FAR, in a negotiated  acquisition where determination of a fair and reasonable price is based on  price analysis, the contracting officer must include in the contract file a  summary of the source and type of data used to support the  determination and documentation of fair and reasonable pricing including,  when used, IGCEs. When not documented, agencies may lose  information on how certain decisions were made during the procurement  process. Federal internal control standards say that transactions should  be completely and accurately recorded to maintain their relevance for  making decisions.
While the contract files we reviewed that had the largest difference  between the IGCE and the value of the contract at award generally did  not provide information as to why IGCEs differed from the estimated cost  at award, officials offered some general observations on what contributes  to such differences.
Limited data sources. Several contracting and program officials  noted that they rely largely—and sometimes exclusively—on historic  data for developing IGCEs, often from a predecessor contract for the  same requirement. The GAO cost estimating guidance identifies  historical cost information as a valuable resource, but some officials  said that reliance on historical data can result in inaccurate estimates  because the market can change over time.For example, an Army  contracting officer noted that labor rates for information technology  services in her area had decreased in recent years, but that may be  reflected in an IGCE based on data from a previously-awarded  contract.Further, for the two HUD contracts in which the IGCEs  overestimated the price at award by the greatest amounts, documents  in the contract files explained that their reliance on historic data  contributed to the difference.
In addition, the GAO cost estimating guidance notes that numerous  sources of suitable, relevant and available data represent a basic  characteristic of credible cost estimating. While some program  officials used a limited number of data sources to support their IGCEs,  other officials cited the importance of obtaining multiple sources. This  includes getting labor rate information from multiple contractors and  ensuring that the information reflects current market value. For  example, contracting officials at the Department of Labor explained  that they previously used historical data for developing IGCEs for  contracts awarded by Job Corps—an education and training program  for economically disadvantaged youth —but revised their approach to  incorporate other information, such as Bureau of Labor Statistic wage  rate data, to ensure that their IGCEs do not solely rely on data for  labor rate estimates from previously awarded contracts.
Reliance on Federal Supply Schedules. Officials cited another  factor contributing to inaccurate IGCEs is a reliance on the General  Services Administration’s (GSA) Federal Supply Schedule contract  prices and other resources that post pre-negotiated contractor labor  rates as a primary source. IGCEs based on these sources may not  take into account discounts that are customarily offered by vendors,  so may overestimate the contracts’ actual costs. In one example of a  task order with a value of $1.8 million at award, a contracting official  explained that the discounts applied to GSA schedule rates in the  proposals were the primary reason that the IGCE overestimated the  cost by 18 percent. In July 2015, we reported that the prices listed on  GSA schedule contracts can vary widely, and agencies must  remember to ask for discounts from listed prices.
New or undefined requirements. The accuracy of an IGCE can also  be affected by the level of familiarity with the requirement that the  contract action is to support. Contracting and program officials noted  that developing estimates is more difficult when the contract is  delivering a new requirement or the requirement is difficult to define.  For example, the IGCE for an HHS non-competed contract—awarded  under the urgency exception to competition—was a new requirement  for professional support services and almost 20 percent under the  $699,000 expected contract value at award. Once the requirement  has been established through one or more contracts over years, the  contracting officer said he can use these data to better estimate the  cost for future contracts.
For new requirements, an inaccurate IGCE might not necessarily  result in a bad outcome for the government. Contracting and program  officials cited examples of contractors providing unexpected  efficiencies or additional services that may not necessarily be  reflected in an IGCE. A Department of Education contracting officer  described a case in which the contractor added additional security  testing for an information technology system, which had not been  factored into the program office’s IGCE. Although the testing  increased the contract’s costs, she considered it worthwhile.
IGCEs dictated by budget. Contracting officers and program officials  said that budgets can influence the development of an IGCE so that it  may not fully reflect the actual cost of a contract but be dictated by  their actual budgets. Program officials from three agencies said that it  is more acceptable for IGCEs to overestimate contract costs or that  the IGCE will often function as a “ceiling” price to represent the budget  limit. For example, contracting officials for a $5.4 million Department  of Education award observed that when an IGCE is high, it is often  because the program office built it to match their budget, because  they would rather have a high estimate than have to request  additional funds. Additionally, a HUD contracting officer noted that  sometimes the programs may not recognize that the IGCE is  supposed to represent the actual cost of the contract, rather than the  amount of funding they have available. One DHS IGCE we reviewed  specifically included a line item identified as “additional funding”,  indicating that additional funds were expected to be available to  purchase more services. The contracting and program officials  indicated that the estimate was driven at least partially by funding  availability. Further, a DHS official for this contract said that the IGCE  did not necessarily reflect the specific cost of the $82.4 million task  order awarded off the information technology support contract  because the amount of services it planned to purchase was not  known at the time of award. Instead, the award, which was priced as a  cost-plus-fixed-fee order, covered information technology needs as  funding for services became available—so the IGCE reflected the  funding available for the contract.
section_title: Most IGCEs Lacked Supporting Documentation
paragraphs: GAO cost estimating guidance and federal internal control standards  emphasize the need for documentation, with GAO’s cost estimating  guidance stating that well-documented cost estimates describe the data  sources used, underlying assumptions, and the estimating methodologies  used to derive costs. To maximize the use of the IGCE as a high-quality  tool, having information about how it was developed, including sources of  data and methodology used, is important. In addition, we previously found  that documenting an IGCE’s methodology and data source in the contract  file helped inform future contracting and program officials about the  current contract when staff changed. As shown in figure 4, of the 62  IGCEs we reviewed, only 13 included such documentation. In one such  case—for a $45 million Army engineering support contract—the IGCE  included a statement that the estimate is based on costs from an existing  contract and an analysis of labor hours for similar programs. In contrast,  the IGCE for another engineering support contract, a $2.8 million award  from DHS, lists the number of hours and rates for different labor  categories but does not state the source of the information or how it was  compiled. In other cases, the IGCEs that were not documented well  included some details about their development and methodology in other  contract file documents, such as the acquisition plan or price analysis, but  this information was generally vague and did not include enough  information to provide support for the estimates. Figure 4 shows the  contract awards we considered well-documented at each department.
Several contracting officials we met with said that they need to  understand the assumptions and methodology of the IGCE, as well as the  data sources, to have confidence in the IGCE and to use it as a tool. For  example, the contracting officer for a $38 million HUD contract said she  did not use the IGCE to determine price reasonableness because she  ultimately questioned the validity of the IGCE’s data sources, which were  based on historical contracts although market conditions had changed.  When information supporting the IGCE is not readily available, some  contracting officers said they must take additional steps to obtain source  information and understand how the estimate was created—factors of a  credible estimate based on GAO’s cost estimating guidance—in order to  support their price reasonableness decisions. However, this may create avoidable inefficiencies. In several cases, contracting officials said that  when they have questions about the IGCE, they reach out to the program  office, but many said they could skip this step if the IGCEs were well- documented to begin with.
In other cases, the contracting officials said they created their own cost  estimates because they did not have confidence in the IGCE. For  example, a contracting official for one of the task orders we reviewed said  that she developed her own cost estimates because the program office’s  IGCE was not sufficiently detailed for her purposes. Another contracting  official for a $179 million contract award for financial management support  at the Department of Education said he found that the IGCEs prepared by  the program office are routinely too high, so he does his own analysis. In  yet another example, a DHS contracting officer showed us how an IGCE  she received mistakenly included costs that are covered under a different  task order and did not include needed travel estimates, so the contracting  officer had to do her own analysis to develop an accurate estimate.  Contracting officials at additional departments also said they do not find  IGCEs useful because, in their experience, program offices do not always  have the expertise available to put together a credible estimate. Without  supporting documentation, the effectiveness of the IGCE is weakened, as  contracting officers either cannot use it or must spend time gathering  information they can use.
section_title: Departments’ Guidance and Training Do Not Consistently Emphasize How to Develop or Document IGCEs
paragraphs: Federal internal control standards state that agencies should internally  communicate quality information to achieve their objectives, which can  include developing guidance for IGCEs, following existing IGCE  guidance, or providing training to support guidance. Without clear  guidance or training on how to develop and document IGCEs, agency  officials may not be in the best position to create useful, complete  estimates that will provide the most value in the acquisition planning  process. DOD (Army) and DHS provide sufficient, specific, department- level guidance regarding documentation needed for IGCEs, while other  departments’ guidance address this to varying degrees and are not  sufficient.
The DOD COR handbook says the IGCE should include a brief  narrative, including how the costs were developed and what reference  materials were used. The Air Force has no guidance. The Army’s  acquisition regulation supplement requires that IGCEs include a  narrative summary detailing how costs were developed and  supporting information (see sidebar).
The DHS Acquisition Manual also contains detailed documentation  requirements, stating that IGCEs must address the information used,  sources of data, and assumptions made for the requirements as  outlined in the Statement of Work in a contract.
Although DOD and DHS guidance specifically calls for information on how  the IGCE was prepared, as previously noted, it was not always followed.  When regulations or guidance are not followed to clearly document  IGCEs, agencies may be missing opportunities to more effectively plan  acquisitions. In the other departments in our review, guidance did not  clearly state that IGCEs should contain all the elements of a good  estimate per GAO’s cost estimating guide. For example:
The Department of Labor IGCE guidebook includes instructions on  developing IGCEs and suggests potential data sources to help  develop the cost estimates. While the guidebook’s IGCE templates  include fields to cite the source of the information used and the  rationale for the IGCE, the templates are not required.
The HHS directive for acquisition planning asks for a brief explanation  of how the IGCE was derived when examining costs.
HUD’s acquisition best practices guide for cost realism analysis— which would not be applicable to all procurements—suggests that  contracting officers document how the IGCE was calculated and what  sources were used to develop it.
The Department of Education’s CAM group has information on its  website stating that the basis for the numbers included in the IGCE  should be explained. The other contracting activity—Federal Student  Aid—does not have guidance on how IGCEs should be documented,  but officials said the CAM website is available throughout the  department.
One reason agency officials may not be following guidance is that the  CORs and program officials responsible for developing IGCEs look to  their program offices for guidance on IGCEs rather than the agency  guidance available to them. In fact, several people we interviewed were  not familiar with their agency’s guidance. Officials explained that they  predominantly learned how to prepare IGCEs through on-the-job training  from experienced staff, rather than through written guidance or formal  training. For example, HHS officials at the National Institutes of Health  explained the majority of what they learned in constructing IGCEs was  through their on-the-job training and experience. Officials noted that  existing guidance helps them understand the basic parts of IGCEs, but  they learn how to estimate the costs by actually preparing them on the  job. The lack of familiarity with agency guidance was also reflected in our  review of contract files. For example, DHS guidance requires that the  IGCE document sources and assumptions, yet in some cases the DHS  contracts and task orders we reviewed did not do so. For example, the  IGCE for a $2.8 million contract for professional engineering services did  not identify the information used or assumptions incorporated into the  estimate. This was in part because officials were not aware of  department-level requirements and were more likely to follow local  practices that did not emphasize IGCE documentation.
Further, few program officials said they had formal training on how to  develop IGCEs. Several said that the only training they had related to  IGCEs was through the standard COR training, which most of the  program officials responsible for IGCEs are required to take for their COR  certification. They reported, however, that the COR training did not  provide detailed information on how to build an IGCE, but rather focused  on its general definition and uses. For example, DHS, HHS, and  Department of Labor officials told us they took introductory IGCE training  through the Federal Acquisition Institute. The training includes a video on  the purpose of an IGCE in the acquisition process but did not explain how  to prepare one. In a few cases, officials said they had previous  experience that helped them understand how to build cost estimates. For  example, a contracting officer and program official for a HHS contract we  reviewed said they had business backgrounds that helped them become  familiar with various cost estimating techniques and helped them to  understand how detailed IGCEs can be used. One official also noted that  the businesses who contract with the government typically know more  about cost estimating processes than the government, which gives  contractors an advantage in pricing their work.
In some cases, program officials said they had developed templates to  prepare an IGCE for their individual acquisitions for a service. For  example, at HHS, the National Institute of Allergy and Infectious Diseases  provides online guidance for service contracts, including IGCE templates  for the COR. DHS’s Office of Procurement Operations also provides  IGCE templates. While several departments or their program offices  established templates or worksheets to help guide program officials in  developing IGCEs, Education and HHS program officials said that using  the templates is not a requirement, and only a few told us they actually  used the templates.
In general, program or contracting officials from five of the six  departments we reviewed said they would like more training or detailed  guidance to enhance their knowledge of developing IGCEs. In a limited  number of cases, officials said they developed and provided training in  response to a recognized need for more information on IGCEs. For  example,
Department of Labor officials said the Job Corps program established  a process for developing IGCEs and then offered a training course in  January 2016 to help standardize their approach. Officials for Job  Corps said this training is helping to improve consistency in preparing  IGCEs.
A contracting officer in another component of the Department of Labor  developed training slides for the offices he supports to help them  understand the role of IGCEs.
The Department of Education’s Contracts and Acquisitions  Management officials said they developed training and brownbag  discussions to share IGCE knowledge and experience with less  experienced CORs.
Without clear guidance or training on how to develop IGCEs, including  detailing the source and methodology information needed for a well- documented IGCE, agencies limit the IGCE’s effectiveness as an  acquisition planning tool.
section_title: Conclusions
paragraphs: An IGCE is an important part of the acquisition planning process, serving  as a key analytical and communication tool between the program office  and contracting officer about what is required for a service contract and  what it should cost. All of the agencies in our review acknowledge the  importance of IGCEs by including them in various types of guidance.  When no IGCE is prepared—particularly in sole source procurements  where competitive forces are not in play—the contracting officer may not  have full information on the program office’s needs or expected costs.  When guidance pertaining to IGCEs is not followed or not clear to whom it  applies, clarifying guidance or increasing awareness—through training or  reminding officials—can help improve use. This also applies to instances  where contracting officers do not have full information on what data  sources, methodologies, and assumptions the program office used to  develop the IGCE. IGCEs without these elements—which are noted as  key elements of a good estimate in GAO’s cost estimating guide—can  create inefficiencies in the acquisition planning process. Clear guidance  on what constitutes a good IGCE—including what information should be  factored into the estimate—may improve the quality of the acquisition  planning process, and efforts to increase awareness through training or  reminding officials may help improve the usefulness of the IGCEs.  Further, when contracting officials do not document differences between  the IGCE and the contract value at award, the government may be losing  important information on what happened in the procurement process,  including in some cases how key decisions were made. Documenting the  reasons for a difference between the estimates and the final contract  award value may help provide valuable information for future  procurements.
section_title: Recommendations for Executive Action
paragraphs: To ensure that IGCEs are optimized as a tool in the procurement planning  process, we recommend that the Secretaries of Defense and Housing  and Urban Development take the following action:
Take steps—such as clarifying guidance, providing additional training,  or issuing reminders to officials—to help ensure that guidance on  when to prepare an IGCE is followed.
To ensure that IGCEs are optimized as a tool in the procurement planning  process, we recommend that the Secretary of Education take the  following action:
Consider making Contracts and Acquisitions Management guidance  applicable to all agency procurements, and if so, take steps—such as  clarifying guidance, providing additional training, or issuing reminders  to officials—to help ensure that guidance on when to prepare an IGCE  is followed.
To ensure that IGCEs contain key information consistent with good cost  estimating practices, we recommend that the Secretaries of Defense and  Homeland Security take the following action:
Take steps to ensure that IGCE guidance is followed by, for example,  providing training or issuing reminders to officials.
To ensure that IGCEs contain key information consistent with good cost  estimating practices, we recommend that the Secretaries of Education,  Health and Human Services, Housing and Urban Development, and  Labor take the following action:
Revise or clarify guidance to require that IGCEs document data  sources, methodology, and assumptions, and take steps to help  ensure that guidance is followed by, for example, providing training or  issuing reminders to officials to include this information when  developing IGCEs.
To ensure that IGCEs are optimized as a tool in the procurement planning  process, we recommend that the Secretaries of Defense, Education,  Health and Human Services, Homeland Security, Housing and Urban  Development, and Labor take the following action:
Take steps to ensure that, when appropriate, contracting staff  document differences between IGCE and final contract award value in  the contract file.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Departments of Defense;  Education; Health and Human Services; Homeland Security; Housing and  Urban Development; and Labor for their review and comment. All of the  departments agreed with our findings and recommendations; their  responses are reproduced in appendices II through VII of this report. In  their responses, most of the agencies stated that they would address our  recommendations by revising guidance or providing training on IGCEs.  The Department of Labor pointed out that our sample represented a  relatively small percentage of Labor’s total contract awards; we clearly  state that our sample was non-generalizable. HUD also noted that the  IGCE is one of several tools available to a contracting officer; we added  more detail on this in the background of our report. Four of the  departments – the Departments of Education, Health and Human  Services, Homeland Security, and Labor – also provided technical  comments that we incorporated as appropriate.
We are sending copies of this report to the appropriate congressional  committees, the Secretaries of the Departments of Defense; Education;  Health and Human Services; Homeland Security; Housing and Urban  Development; and Labor, and other interested parties. In addition, this  report will be available at no charge on the GAO website at  http://www.http://www.gao.gov.
If you or your staff have any questions concerning this report, please  contact me at (202) 512-4841 or by e-mail at makm@gao.gov. Contact  points for our Offices of Congressional Relations and Public Affairs may  be found on the last page of this report. Key contributors to this report are  listed in appendix VIII.
section_title: Appendix I. Objectives, Scope and Methodology
paragraphs: This report addresses the extent to which (1) selected departments  developed independent government cost estimates (IGCE) for service  contracts, and (2) selected departments’ IGCEs were useful in supporting  the acquisition planning process.
To address both objectives, we reviewed a random, non-generalizable  sample of 76 contracts and task orders from six federal departments—the  Departments of Defense (DOD), Education, Health and Human Services  (HHS), Homeland Security (DHS), Housing and Urban Development  (HUD), and Labor—and interviewed program and contracting officials  associated with each award. These departments were selected based on  our analysis of fiscal year 2015 service obligations in the Federal  Procurement Data System-Next Generation (FPDS-NG), the most current  data available at the time of our review. We determined that FPDS-NG  was sufficiently reliable for the purpose of selecting departments based  on their fiscal year 2015 obligations for service contracts. Using FPDS- NG data, we selected six departments with the following characteristics:
Highest total obligations for services: DOD, HHS, and DHS were  among the top five federal agencies with obligations for service  contracts in fiscal year 2015. We did not select the two remaining  agencies—the Department of Energy and the National Aeronautics  and Space Administration—because they had a high percentage of  management and operating contracts or research and development  contracts, respectively, which we believed would limit the range of  contract types available for review.
Obligated a large percentage of their total obligations for  services: HUD and the Departments of Education and Labor were  among the top four agencies in terms of the percentage of total  obligations that went to service contracts in fiscal year 2015. The  fourth agency was the Department of Energy, which we had  previously decided not to review.
Within the selected departments, we also used FPDS-NG to identify the  agencies or contracting components that accounted for a large share of  service contracting obligations.
From the selected departments and subcomponents, we identified a total  of 76 contracts and orders—between 10 and 16 from each department— as shown in table 3.
To select the individual contract and task order awards, we generated a  random list of service contracts and task orders at each agency or  contracting component with obligations greater than the simplified  acquisition threshold—$150,000—in fiscal year 2015. We chose contracts  and task orders from these lists to ensure a roughly even number of  competed and non-competed awards from each department. We also  selected awards to obtain a mix of different contract types and services.  To ensure a range of contract values, we included at least one award at  each department with more than $10 million in obligations in fiscal year  2015.
To assess the first objective, the extent to which selected departments  developed IGCEs for service contracts, we requested and analyzed  available contract file documentation for the 76 contracts and task orders  selected. The documents reviewed included, where available, the IGCE,  the statement of work, and acquisition planning documents to understand  how the IGCE was developed. In cases where IGCEs were not located,  we verified this information with the departments. We also interviewed the  officials from the programs associated with each contract and order to  determine how the IGCE was developed and used. We analyzed the  federal acquisition regulation and department and contracting guidance to  understand the requirements and information available for developing  IGCEs. We compared the IGCEs to standards in GAO’s cost estimating  guide and the departments’ guidance on IGCEs to federal internal control  standards.
To assess the second objective, the extent to which selected  departments’ IGCEs were useful in supporting the acquisition planning  process, we also reviewed the contract file documentation available for  each of the 76 contracts and task orders selected, focusing on the IGCE  as well as documents such as source selection and price negotiation  memos. We also analyzed the available IGCEs to determine whether they  were well-documented, based on whether they identified the information  sources and assumptions used to develop the IGCE as described in GAO  cost estimating guidance. We interviewed contracting officials for the  awards to understand how they used IGCEs during the contract award  process. We also analyzed available guidance, including the federal  acquisition regulation and department and program office guidance and  tools to understand the requirements for developing and documenting  IGCEs and the information and resources available to assist staff in  developing IGCEs.
We conducted this performance audit from December 2015 to May 2017  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: Comments from the Department of Education
section_title: Appendix IV: Comments from the Department of Health and Human Services
section_title: Appendix V: Comments from the Department of Homeland Security
section_title: Appendix VI: Comments from the Department of Housing and Urban Development
section_title: Appendix VII: Comments from the Department of Labor
section_title: Appendix VIII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Tatiana Winger, Assistant  Director; Jennifer Dougherty; Alexis Olson; Matthew Shaffer; Suzanne  Sterling; Pete Anderson; Kurt Gurka: Julia Kennon; Rathanika Touch; and  Robin Wilson made key contributions to this report.