Future Years Defense Program: How Savings From Reform Initiatives Affect DOD's 1999-2003 Program
Published: 1999-02-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a legislative requirement, GAO provided information on the Department of Defense's (DOD) Future Years Defense Program (FYDP), focusing on: (1) whether savings in DOD's fiscal year (FY) 1999-2003 FYDP were the result of DOD's Defense Reform Initiatives (DRI); (2) the extent to which savings and personnel reductions from competitive sourcing in the 1999-2003 FYDP were based on ongoing or planned studies of functions specifically identified under the Office of Management and Budget Circular A-76, and what percentage of the current costs of performing those functions were included from the projected savings from these studies; and (3) whether DOD components outsourced activities that included inherently governmental functions, without allowing civilian employees to compete under Circular A-76 procedures, or without following the study and notification requirements of 10 U.S.C. 2461.
section_title: What GAO Found
paragraphs: GAO noted that: (1) DOD expects savings from individual DRIs, but has not incorporated specific savings in the 1999-2003 FYDP from these initiatives, except in the areas of competitive sourcing and estimates relating to future base realignment and closure (BRAC) decisions; (2) DOD's 1999-2003 FYDP incorporated $6.2 billion of estimated savings from competitive sourcing between FY 1997 and 2003, but these estimated savings do not fully account for up-front investment costs, which could reduce the amount of actual savings in the short term; (3) the FYDP does provide a fuller estimate of the impact of investment costs associated with BRACs; (4) while DOD has requested additional BRAC rounds, Congress has not authorized them; (5) the Office of the Secretary of Defense expects DRIs to reduce personnel requirements but has not required the services to link specific reductions with individual initiatives; (6) savings from competitive sourcing reflected in the 1999 FYDP were not linked to specific functions under study or targeted for future studies; (7) in addition, DOD does not yet have the systems in place that can provide reliable cost information needed to precisely identify savings; (8) consequently, it is not feasible to accurately identify the current costs of functions to be studied or the potential savings as a percentage of these costs; (9) according to DOD, savings estimates incorporated in the FYDP represented broad projections based on the numbers of positions expected to be studied and historic savings data; (10) GAO's work has shown that historic savings estimates may have important limitations and may not accurately indicate likely current and future savings; (11) study plans of most DOD components have evolved over time, but in many cases they have not linked positions to be studied to specific functions and locations; (12) firm savings estimates probably will not be possible until individual studies are completed; (13) even then, these estimates would be subject to change; (14) procurement and commercial activities data systems do not identify the extent to which DOD components may be outsourcing functions without complying with Circular A-76 procedures or 10 U.S.C. 2461 congressional reporting requirements; and (15) such cases can be identified only when they are specifically raised by affected parties.

section_title: Letter
paragraphs: In its report on the National Defense Authorization Act for Fiscal Year 1999,  the House Committee on Armed Services noted that prior Department of  Defense (DOD) reform initiatives had not generated the anticipated savings  and had created difficulties because of premature budget reductions.   Accordingly, the report directed that we provide answers to a series of  questions pertaining to the support for savings and personnel reductions  contained in DOD’s fiscal year 1999 budget request and out-year budget  plans.  This report addresses the following questions:
What savings in DOD’s fiscal years 1999-2003 Future Years Defense  Program (FYDP)were the result of the Department’s Defense Reform  Initiatives (DRI)?
To what extent were the savings and personnel reductions from  competitive sourcing in the 1999-2003 FYDP based on ongoing or  planned studies of functions specifically identified under Office of  Management and Budget (OMB) Circular A-76, and what percentage of  the current costs of performing those functions were included from the  projected savings from these studies?
Did Defense components outsource activities that included inherently  governmental functions, without allowing civilian employees to  compete under Circular A-76 procedures, or without following the study  and notification requirements of 10 U.S.C. 2461?
subsections: section_title: Background
paragraphs: In May 1997, DOD completed a comprehensive review of national security  threats, risks, and opportunities facing the United States to 2015.  This  review, known as the Quadrennial Defense Review (QDR), was intended to  examine America’s defense needs and provide a blueprint for a strategy- based, balanced, and affordable defense program.  The QDR noted that  DOD had reduced active duty personnel by 32 percent between 1989 and  1997 while reducing personnel performing infrastructure functions by only  28 percent.  The report called for additional reductions in both military and  civilian personnel.  Our July 1998 report on the 1999-2003 FYDP noted that  the services planned to reduce military and civilian personnel by 175,000  and save $3.7 billion by 2003.  Our recent reviews of planned Defense  personnel reductions resulting from the QDR and the 1999-2003 FYDP  raised questions about DOD’s ability to achieve some of these reductions  and savings.
The changes in military strategy and capabilities enunciated in the QDR  and other reports have often been referred to as a revolution in military  affairs.  However, the QDR also recognized that DOD must undergo a  similar revolution in its business affairs.  To that end, the Secretary of  Defense chartered a study effort that resulted in the November 1997 DRI  report.  The report emphasized the need to reduce excess Cold War  infrastructure to free up resources for modernization.  The report identified  numerous initiatives to reengineer business practices, consolidate  organizations, eliminate unneeded infrastructure through additional base  closures, and conduct public/private competitive sourcing studies for  commercial activities.  Most of the potential savings identified in the report  were expected to result from BRACs and competitive sourcing studies.   Future BRAC actions were contingent on the Congress enacting legislation  authorizing additional closures, while competitive sourcing studies were to  be completed under the policy guidance of OMB.
The concept of competitive sourcing is not new.  Through the 1980s, DOD  encouraged the services and Defense agencies to conduct competitions  between the public and private sectors to determine who would be  responsible for performing selected functions that were being provided by  in-house staff.  These competitions were to be done under OMB Circular A-76.  Although DOD’s use of Circular A-76 was limited from the early to  mid-1990s, in 1995 DOD reestablished the competition program in the hope  of obtaining significant savings that could be used to fund modernization  and other priority needs.
Circular A-76 and its supplemental handbook specify a process to develop a  statement that defines the work to be done and a comparison of in-house  costs with contractor costs to determine who should perform the work.   Circular A-76 is limited to competitions for the conversion of recurring  commercial activities.  The handbook identifies circumstances under  which detailed cost studies may not be required, such as for the conversion  from performance by military personnel to contractor performance or if  the number of affected civilian positions is below a specific threshold.  It  also indicates instances in which Circular A-76 may not apply, such as for  restructured or reengineered functions.  Appendix I contains a more  detailed description of the A-76 process.
In addition, several laws affect competitive sourcing.  Some, such as 10 U.S.C. 2461 and 2462, affect the process of transferring work currently  being performed by civilian government employees to the private sector.   Section 2461, as amended by the National Defense Authorization Act for  Fiscal Year 1999 (P.L. 105-261), requires an analysis of the activity and a  comparison of the costs of having the activity performed by DOD civilian  employees and by a contractor to determine whether changing to  contractor performance will save money.  It also requires that DOD notify  the Congress of this analysis and provide other information before making   a change in performance.  Section 2462 requires the Secretary of Defense  to obtain needed supplies or services from the private sector, if a private-sector source can provide the supply or service at less cost, and  establishes criteria for conducting the cost comparison.
section_title: FYDP Shows Partial Costs and Savings Estimates From BRAC and Competitive Sourcing
paragraphs: DOD expects savings from individual DRIs but has not incorporated  specific savings from these initiatives in the FYDP, except in the areas of  potential BRAC and competitive sourcing.  Both have significant up-front  investment costs that can limit net savings in the short term.  The 1999-2003  FYDP shows a more complete accounting of these investment costs for  potential BRACs than it does for competitive sourcing, but the latter  provides the majority of DRI savings incorporated in the FYDP.  While  personnel reductions are programmed in the 1999-2003 FYDP and are  expected to represent a portion of savings from DRIs, DOD has not  required the services to link specific personnel reductions to individual  initiatives.  Some services, however, have projected personnel reductions  in conjunction with competitive sourcing studies.
subsections: section_title: FYDP Shows Net Costs for Early Years of Implementing Any New BRAC Rounds
paragraphs: We previously reported that BRAC actions can provide the basis for  significant savings in infrastructure costs.  However, while savings can  begin to accrue even as costs are being incurred to implement BRAC  decisions, it can take several years for net savings to begin accruing on an  annual recurring basis.  The 1999-2003 FYDP reflects this situation,  showing a net cost for projected BRAC decisions between fiscal year 1999  and 2003.
The 1999-2003 FYDP incorporated some savings from future BRAC rounds,  but these savings were offset by implementation costs, resulting in net  costs of $832 million for fiscal year 2002 and $1.45 billion for fiscal year 2003.  DOD showed these net costs in the FYDP as a Department-level  contingency account but did not allocate them to individual services.   Beyond the FYDP period, DOD expects the two additional rounds of base  closures to result in about $3.4 billion in annual savings after the closures  are completed and implementation costs have been offset.
We reported in November that DOD’s method of estimating costs and  savings for future BRAC rounds was limited, principally because it  assumed that savings from future base closures would closely resemble  savings from the 1993 and 1995 BRAC rounds, adjusted for inflation.  While  DOD’s estimate may be appropriate for planning purposes, its precision is  limited because the costs of future BRAC rounds might not parallel those of  the prior two rounds.  Previous base closures frequently involved facilities  that were of low military value and were the least costly to implement.   Often those closures required the shortest time for savings to offset  implementation costs.  Generally, DOD did not choose to close facilities  that required higher implementation costs or longer periods to recover  savings.  More precise cost estimates will probably not be available until  DOD actually studies implementation scenarios for specific BRAC actions  and puts in place more reliable cost accounting systems.  However, BRAC  history suggests that future implementation costs could be greater than  those in previous rounds and the closures could thus take longer to  produce net recurring savings.
section_title: Projected Competitive Sourcing Savings Are Significant but Do Not Fully Account for Investment Costs
paragraphs: DOD’s 1999-2003 FYDP projected $6.2 billion in savings from competitive  sourcing between fiscal year 1997 and 2003.  However, as we previously  reported, the projected savings do not fully account for the up-front  investment costs associated with completing the studies and implementing  the results.  Though recurring savings from competitive sourcing could be  substantial in the long term, it will take longer to begin achieving these  savings than DOD has projected, and net savings during the 1999-2003  period will be less than projected.
In formulating their fiscal year 1999 budget, Defense components identified  over 200,000 positions that would be subjected to competitive sourcing  studies between 1997 and 2003.  Table 1 shows the projected savings and  the number of positions to be studied by fiscal year as summarized in  documents supporting the President’s fiscal year 1999 budget submission.
Our February 1999 report on competitive sourcing goals noted that, like  BRACs, competitive sourcing studies and implementing actions require up-front investments that should be considered when estimating net  savings. We also reported that the estimates of competition savings  provided to the Congress in 1998 had limitations and that several factors  were likely to reduce savings in the short term.  We further noted that DOD  had not fully identified the resources associated with the studies or the  personnel separation costs likely to be needed for implementation.  The  Navy was the only component that had deducted some estimated  investment costs when calculating the savings presented to the Congress in  DOD’s April 1998 report on competitive sourcing.
section_title: Linkage of Specific Personnel Reductions With Individual Defense Reform Initiatives Is Limited
paragraphs: Personnel reductions are programmed in the 1999-2003 FYDP and are  expected to represent a portion of savings from DRIs.  DOD officials told us  that they had not required the services to target specific personnel  reductions to individual initiatives.
The Army programmed a reduction of 9,600 civilian staff on the assumption  that 20 percent of the positions studied would be eliminated. The Army  programmed the 20-percent reduction based on the assumption that the 20-percent savings would result whether the government or a contractor  won the A-76 competitions.  Army officials said they made this assumption  because they did not want to be seen as preselecting the winner.  The Army  recognizes, however, that it will likely separate more personnel based on  the historical trends of contractors winning about 50 percent of the  competitions.  The Army did not program any reductions in military  positions as a result of competitive sourcing and planned to make up for  military personnel shortages elsewhere by transferring the military  personnel from positions competed to other military duties.
The Navy and the Marine Corps did not program any potential military or  civilian personnel cuts as a result of competitive sourcing.  According to  Navy officials, the Navy’s overall objective is to achieve savings through  competition, and personnel savings are a consequence and not a goal of the  program.  Further, Navy officials said they believed that establishing a goal  for personnel reductions would send a negative message to staff and would  affect morale.
The Air Force was more aggressive in identifying personnel reductions  from competitive sourcing and programmed about 26,000 military and  19,300 civilian position reductions between fiscal year 1997 and 2003,  according to its final budget submission.  The Air Force’s programmed  reduction of all military positions to be competed was based on the belief  that if a position could be competed, it did not have to be staffed by military  personnel.  Generally, the Air Force programmed reductions in civilian  positions on the assumption that private contractors would win 60 percent  of the competitions and that the competitions would last 2 years.
Officials at the Office of the Secretary of Defense (OSD) were aware that  the services used different methods to show the effects of competitive  sourcing on personnel and funding and that the fiscal year 1999 FYDP  reflects these different approaches.  The Deputy Under Secretary for  Industrial Affairs and Installations established a task force to ensure that  consistent and comparable approaches are used to estimate personnel and  dollar savings in future budget submissions.  Subsequently, the Acting  Director of the Office of the Secretary of Defense’s Program Analysis and  Evaluation Office issued guidance incorporating the task force’s  recommendations, which required Defense components to program both  dollar savings and personnel reductions for the 2000-2005 FYDP.  Further,  the DOD Comptroller required Defense components to specifically identify  investment and transition costs and report both gross and net savings in  their fiscal year 2000 budget submissions.
section_title: Competitive Sourcing Savings Were Projected Using Historic Experience But Were Not Linked to Specific Study Plans
paragraphs: Savings from ongoing and future competitive sourcing studies as projected  in the 1999 FYDP were the result of broad-based estimates drawn from  previous experience.  When the FYDP was being prepared, the projections  were not linked to specific functions then under study or planned for future  study.  Consequently, it is not feasible to link projected savings with the  current cost of individual functions.  In previous reports, we urged caution  in the use of historical savings assumptions in the absence of any efforts to  adjust these assumptions for changes that can occur over time and that  may reduce savings.  The 1999-2003 FYDP was not based on detailed  competitive sourcing plans developed by the services and other Defense  components.  These plans continue to evolve, and specific functions to be  studied by location are mostly yet to be determined.
subsections: section_title: Historic Data Used to Project Future Savings
paragraphs: The estimated competitive sourcing savings included in the 1999-2003  FYDP were largely based on numbers of positions expected to be studied,  average personnel costs per position, and average savings rates estimated  by using historical data from prior competitions.  Savings rates varied  among the services.  Our previous work has already shown that there are  important limitations to using historical savings estimates because they  may not provide an accurate indication of likely future savings.
The services’ cost savings estimates ranged between 20 and 30 percent; the  Navy projected savings of more than 30 percent where functions performed  by military personnel would be competed.  These estimates, as shown in  table 2, represented what the services believed to be conservative  achievable savings based on historical experience.
While we believe that competitive sourcing competitions are likely to  produce savings, we have previously urged caution when estimating the  amount of savings likely to be achieved. The estimates used in the FYDP  are based on savings estimates calculated at the end of competitive  sourcing competitions.  These estimates can change over time because of  changes in the scope of the work or mandated wage increases.  We  previously noted that continuing budget and personnel reductions could  make it difficult to sustain the levels of previously projected savings.  We  also recognized that larger savings are likely to occur when positions filled  by military personnel are converted to civilian or contractor performance.
Finally, we previously noted limitations in DOD’s efforts and capabilities to  track changes in program costs and savings after the results of  competitions are implemented.  Actual savings data has not been captured.   Our February 1999 report noted the need for improvements in the  databases used to record the results of competitive sourcing  competitions.
section_title: Specific Study Plans Continue to Evolve
paragraphs: Study plans of most Defense components linking the number of positions  to be studied with specific functions and locations are still evolving, and  estimated savings will not be known until the studies are completed.   Consequently, it is not feasible to identify the current costs of functions to  be studied and their potential savings rates.   In our February 1999 report,  we concluded that clearer indications of actual savings will require that  Defense components develop mechanisms to track actual savings over  time in order to validate continuing savings from completed competitions.
None of the services based fiscal year 1999 budgets or 1999-2003 FYDP  submissions on a completed multiyear study plan for their competitive  sourcing program, although the Air Force was furthest along.  Our  February 1999 report on competitive sourcing goals noted that most  Defense components lacked detailed plans identifying the numbers of  positions by function expected to be studied over the next few years.   Detailed planning to implement the program has been largely delegated to  components and field activities.  These activities are responsible for  determining which specific functions are suitable candidates for  competitions and whether there are sufficient positions to meet overall  competition goals.  In addition, according to service officials, some or all of  the major commands were given numbers of positions to compete and  savings goals, and it is up to them to determine how best to meet the goals.
OSD on December 9, 1998, directed each component to develop multiyear  competition plans consistent with and presented at the same time as their  fiscal year 2001-2005 Program Objective Memorandum.  OSD directed that  these plans should include, by fiscal year, the functions and numbers of  positions to be competed.
section_title: Perceived Efforts to Bypass Circular A-76 and Related Legislation Difficult to Identify
paragraphs: The Committee questioned whether Defense components may have  outsourced some activities, possibly even some involving inherently  governmental functions, without following the procedures of OMB Circular A-76 or meeting the 10 U.S.C. 2461 requirements for congressional  notification.  Other than specific cases brought to our attention,  procurement and commercial activities data systems do not identify the  extent to which Defense components may be outsourcing functions  without complying with these procedures or requirements.
Circular A-76 does not apply to inherently governmental activities.  Defense  components are currently reviewing to what extent the functions  performed by DOD personnel are inherently governmental or otherwise  exempted from A-76 competitive sourcing.  DOD expects to report the  results to the Congress early this year, but the results were not available for  our review when we completed our work.
We have been asked to review two reengineering cases, one in the Army  and one in the Air Force, in which affected parties expressed the belief that  Circular A-76 procedures and 10 U.S.C. 2461 requirements should have  been followed.  We are currently studying these cases and expect to report  on them in the near future.
section_title: Conclusions
paragraphs: The costs and savings associated with Defense Reform Initiatives  incorporated in DOD’s 1999-2003 FYDP include partial costs and savings  from competitive sourcing and additional BRAC initiatives.  While savings  are expected from other initiatives, DOD has not required the services to  calculate the specific savings to be obtained from them.  Likewise, while  personnel reductions are included in the FYDP and some are expected to  result from DRIs, DOD has not required the components to link any  personnel reductions with specific DRI elements.  Also, questions exist  about the precision of savings expected from BRAC and competitive  sourcing.  DOD assumed there would be additional base closures; however,  the required legislative authorization has not been given.  Further, the  BRAC savings estimate, should future rounds occur, has limitations in  terms of projecting short-term savings that might be realized.  Competitive  sourcing savings incorporated in the 1999-2003 FYDP were determined  using broad estimates based on prior competitive sourcing experience, but  they were not linked to specific positions and functions currently under  study or planned for study at specific locations.
There is no systematic way to identify whether components outsource  functions without following the requirements of OMB Circular A-76 or the  procedures of 10 U.S.C. 2461.  Such cases can be identified only when they  are specifically raised.
We are currently reviewing two such allegations and expect to report on  them individually in the near future.
We recently recommended that the Secretary of Defense require Defense  components to assess whether available resources are sufficient to execute  the numbers of planned competitions within the envisioned time frames  and make the adjustments needed to ensure adequate program execution.
We also recommended that the Secretary require Defense components to  reexamine and adjust competitive sourcing study targets, milestones,  expected net short-term savings, and planned operating budget reductions  as necessary.  Accordingly, we are not making additional recommendations  in this report.
section_title: Agency Comments and Our Evaluation
paragraphs: We requested comments on a draft of this report from the Secretary of  Defense.  On February 4, 1999, Department and service representatives  from their respective competitive sourcing offices provided us with the  following comments on the draft.
The representatives generally concurred with the information presented in  the report.  DOD officials reiterated their previously stated position that  they have developed an aggressive competitive sourcing program by  planning to compete nearly 229,000 positions by fiscal year 2005.  They  acknowledged that their program has met a number of challenges;  however, they believe none of these challenges are insurmountable.  They  stated that through the program and budget review process, the  Department reviews the competitive sourcing study targets, milestones,  and objectives of the program to measure advancement toward its goals  and that adjustments are made to the program as necessary.  Further, they  stated that several important improvement and oversight tools are being  worked into the competitive sourcing program during calendar year 1999  that will address our concerns.  More specifically, according to these  officials, the DOD Competitive Sourcing Master Plan will, among other  things, identify by fiscal year the functions and number of component  positions to be competed by fiscal year 2005.  Also, they stated each  component is undertaking a series of program improvement initiatives that  includes (1) identifying best practices, (2) assisting installation/activity  execution, (3) developing internal communications and training, and (4) improving management information systems.  DOD officials also stated  that the components have not completed enough studies, thus far, to  establish a baseline that would necessitate the reevaluation of their  milestones and objectives and that as more studies are conducted, they will  be able to better refine and adjust their study savings objectives.
While we support DOD’s efforts to institute more comprehensive oversight  tools and program improvement initiatives, we did not review any of these  efforts because they have not yet been fully implemented, and we are  therefore not in a position to comment on them.  However, as we  previously reported, we continue to believe that DOD needs to reassess the  competitive sourcing study targets, milestones, expected short-term  savings, and planned operating budget reductions now.  The issues involve  more than the number of competitions completed; they also involve the  extent the planned announcements of competitions have been made and  whether there are sufficient resources to complete them.  This is of  concern especially because of the large number of studies planned for  announcement in fiscal years 1998 and 1999 and the delays encountered in  getting the fiscal year 1998 studies under way.  If similar delays are  encountered in fiscal year 1999, they could seriously affect future program  execution and DOD’s ability to achieve results in a timely manner.
In addition, officials reiterated the Department’s disagreement with our  statement that the precision of its future base closure costs was limited and  that average net costs of future BRAC rounds will be higher than DOD  estimated by using the cost experience of previous rounds.  As we  previously reported, our intent was to suggest that there are reasons to  expect greater costs to close bases during any future implementation  period than during the previous BRAC rounds because many bases with  lower implementation costs and quicker offsets of closure costs have  already been realigned or closed.  Thus, the higher costs likely to be  incurred in the future could reduce the net savings achieved during the  implementation period.  Nevertheless, we believe that future BRAC rounds  can still result in significant savings.
DOD also provided technical comments on our report, which we have  incorporated as appropriate.
section_title: Scope and Methodology
paragraphs: To determine the savings included in the 1999-2003 FYDP that were the  result of DRIs, we reviewed budget documents and discussed the issue  with representatives from the DOD Comptroller’s office and the Army, the  Navy, and the Air Force.  We also drew on other work that we had  underway or completed relating to competitive sourcing and the DRI.
To determine the basis used to project competitive sourcing savings and  personnel reductions in the 1999-2003 FYDP and whether they were based  on studies of specific functions, we reviewed competitive sourcing budget  submissions and the assumptions underlying the savings calculations.  We  also held discussions with service officials responsible for budget  formulation and competitive sourcing program management.  Further, we  drew on work we had previously performed to evaluate DOD’s competitive  sourcing plans and programs, and to review the results of recently  completed competitions.
To determine whether Defense components outsourced inherently  governmental functions without allowing civilian employees to compete or  did not meet the requirements of 10 U.S.C. 2461, we reviewed pertinent  laws and other directives and discussed the issue with cognizant service  officials.
We conducted our review from November 1998 to January 1999 in  accordance with generally accepted government auditing standards.
We are sending copies of this report to the Chairmen of the Senate  Committees on Armed Services and on Appropriations and the House  Committee on Appropriations; the Secretaries of Defense, the Army, the  Navy, and the Air Force; the Commandant of the Marine Corps; the  Director, Office of Management and Budget; and other interested  congressional committees.  Copies will be made available to others upon  request.
Please contact me at (202) 512-8412 if you or your staff have any questions  concerning this report.  Major contributors to this report are listed in  appendix II.
section_title: The A-76 Process
paragraphs: In general, the A-76 process consists of six key activities: (1) developing a  performance work statement and quality assurance surveillance plan; (2)  conducting a management study to determine the government's most  efficient organization (MEO); (3) developing an in-house government cost  estimate for the MEO; (4) issuing a Request for Proposals or Invitation for  Bids; (5) evaluating the proposals or bids and comparing the in-house  estimate with a private-sector offer or interservice support agreement and  selecting the winner of the cost comparison; and (6) addressing any  appeals submitted under the administrative appeals process, which is  designed to ensure that all costs are fair, accurate, and calculated in the  manner prescribed by the A-76 handbook.
Figure I.1 shows an overview of the process.  The solid lines indicate the  process used when the government issues an Invitation for Bids, requesting  firm bids on the cost of performing a commercial activity.  This type of  process is normally used for more routine commercial activities, such as  grass-cutting or cafeteria operations, where the work process and  requirements are well defined.  The dotted lines indicate the additional  steps that take place when the government wants to pursue a negotiated,  "best value" procurement. While it may not be appropriate for use in all  cases, this type of process is often used when the commercial activity  involves high levels of complexity, expertise, and risk.
Most Efficient Organization (MEO) activities Additional steps required for request for  proposals (RFP)
The circular requires the government to develop a performance work  statement.  This statement, which is incorporated into either the Invitation  for Bids or Request for Proposals, serves as the basis for both government  estimates and private sector offers.  If the Invitation for Bids process is  used, each private sector company develops and submits a bid, giving its  firm price for performing the commercial activity.  While this process is  taking place, the government activity performs a management study to  determine the most efficient and effective way of performing the activity  with in-house staff.  Based on this "most efficient organization," the  government develops a cost estimate and submits it to the selecting  authority.  The selecting authority concurrently opens the government's  estimate along with the bids of all private sector firms.
According to the Office of Management and Budget’s (OMB) A-76 guidance,  the government's in-house estimate wins the competition unless the private  sector's offer meets a threshold of savings that is at least 10 percent of  direct personnel costs or $10 million over the performance period.  This  minimum cost differential was established by OMB to ensure that the  government would not contract out for marginal estimated savings.
If the Request for Proposals--best value process--is used, the Federal  Procurement Regulation and the A-76 supplemental handbook require  several additional steps.  The private sector offerors submit proposals that  often include a technical performance proposal and a price.  The  government prepares an in-house management plan and cost estimate  based strictly on the performance work statement.  On the other hand,  private sector proposals can offer a higher level of performance or service.
The government's selection authority reviews the private sector proposals  to determine which one represents the best overall value to the government  based on such considerations as (1) higher performance levels, (2) lower  proposal risk, (3) better past performance, and (4) cost to do the work.   After the completion of this analysis, the selection authority prepares a  written justification supporting its decision.  This includes the basis for  selecting a contractor other than the one that offered the lowest price to  the government.  Next, the authority evaluates the government's offer and  determines whether it can achieve the same level of performance and  quality as the selected private sector proposal.  If not, the government must  then make changes to meet the performance standards accepted by the  authority.  This ensures that the in-house cost estimate is based upon the  same scope of work and performance levels as the best value private sector  offer.  After determining that the offers are based on the same level of  performance, the cost estimates are compared.  As with the Invitation for  Bids process, the work will remain in-house unless the private offer is (1) 10 percent less in direct personnel costs or (2) $10 million less over the  performance period.
Participants in the process--for either the Invitation for Bids or Request for  Proposals process--may appeal the selection authority's decision if they  believe the costs submitted by one or more of the participants were not  fair, accurate, or calculated in the manner prescribed by the A-76  handbook.
section_title: Major Contributors to This Report
subsections: section_title: National Security and International Affairs Division, Washington, D.C.
section_title: Chicago Field Office
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