Defense Acquisitions: Improved Management and Oversight Needed to Better Control DOD's Acquisition of Services
Published: 2007-05-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Defense (DOD) is relying more and more on contractors to provide billions of dollars in services. Congress has pushed DOD to employ sound business practices when using the private sector for services. This testimony discusses DOD's (1) increasing reliance on contractors; (2) efforts to follow sound business practices when acquiring services; and (3) actions to improve its management and oversight of services. This testimony is based on GAO's work spanning several years as well as recent reports issued by the Inspectors General.
section_title: What GAO Found
paragraphs: Over the past decade, DOD has increasingly relied on contractors to provide a range of mission-critical services from operating information technology systems to providing logistical support on the battlefield. The growth in spending on services clearly illustrates this point. DOD's obligations on service contracts, expressed in constant fiscal year 2006 dollars, rose from $85.1 billion in fiscal year 1996 to more than $151 billion in fiscal year 2006, a 78 percent increase. While obligations increased, the size of the civilian workforce decreased. Moreover, DOD carried out this downsizing without ensuring that it had the requisite skills and competencies needed to manage and oversee service acquisitions. Overall, our work found that to a large degree, this growth in spending on services simply happened and was not a managed outcome. The lack of sound business practices--poorly defined requirements, inadequate competition, the lack of comprehensive guidance and visibility on contractors supporting deployed forces, inadequate monitoring of contractor performance, and inappropriate use of other agencies' contracts and contracting services--expose DOD to unnecessary risk, waste resources, and complicate efforts to hold contractors accountable for poor service acquisition outcomes. For example, DOD awarded contracts for security guard services supporting 57 domestic bases, 46 of which were done on an authorized, sole-source basis. The sole-source contracts were awarded by DOD despite recognizing it was paying about 25 percent more than previously paid for contracts awarded competitively. Further, the lack of sufficient surveillance on service contracts placed DOD at risk of being unable to identify and correct poor contractor performance in a timely manner and potentially paying too much for the services it receives. Overall, DOD's management structure and processes overseeing service acquisitions lacked key elements at the strategic and transactional levels. DOD has taken some steps to improve its management of services acquisition, including developing a competency model for its contracting workforce; issuing policies and guidance to improve its management of contractors supporting deployed forces and its use of interagency contracts; and developing an integrated assessment of how best to acquire services. DOD leadership will be critical for translating this assessment into policy and, most importantly, effective frontline practices. At this point, DOD does not know how well its services acquisition processes are working, which part of its mission can best be met through buying services, and whether it is obtaining the services it needs while protecting DOD's and the taxpayer's interests.

section_title: Letter
paragraphs: I am pleased to be here today to discuss challenges the Department of  Defense (DOD) faces in acquiring services to support its operations.  Although many of these challenges are long-standing, they have become  more apparent in recent years as the department’s reliance on contractors  has grown in size and scope. In fiscal year 2006, DOD obligated more than  $151 billion on service contracts, a 78 percent real increase since fiscal  year 1996. As you know, however, DOD does not always use sound  contracting practices when acquiring these services, and the department is  operating with a deficit of people with the right skills to support its  acquisitions. Consequently, DOD may not have always obtained good  value when buying billions of dollars of services at a time when serious  budget pressures face the nation.
The challenges faced by DOD in acquiring services are not new, but rather  are emblematic of a range of systemic and long-standing issues. In this  regard, we identified DOD contract management to be high risk because of  its vulnerability to fraud, waste, abuse, and mismanagement 15 years ago  and have reported on DOD’s long-standing problems with management  and oversight of support contractors since 1997. In January 2005, we  added the management of interagency contracting to our high-risk list.  DOD is the largest user of interagency contracts. In a report issued in July  2006, we concluded that with awards to contractors large and growing,  DOD will continue to be vulnerable to contracting fraud, waste, or misuse  of taxpayer dollars, and abuse. While DOD has acknowledged its  vulnerabilities and taken some actions to address them, many of the  initiatives are still in their early stages, and it is too soon to tell what  impact they may have.
Today, I would like to discuss DOD’s (1) increasing reliance on  contractors, (2) efforts to follow sound business practices when acquiring  services, and (3) actions to improve its management and oversight of  services. My statement is based on work that GAO has completed over the  past decade, which was conducted in accordance with generally accepted  government auditing standards. Additionally, my statement draws on  recent reports issued by the DOD Inspector General and the General  Services Administration (GSA) Inspector General.
subsections: section_title: DOD Increasingly Relies on Contractor- Provided Services
paragraphs: Over the past decade, DOD has increasingly relied on contractors to  provide a range of mission-critical services from operating information  technology systems to providing logistical support on the battlefield. The  growth in spending on services clearly illustrates this point. DOD’s  obligations on service contracts, expressed in constant fiscal year 2006  dollars, rose from $85.1 billion in fiscal year 1996 to more than $151 billion  in fiscal year 2006, a 78 percent increase. More than $32 billion—or   21 percent—of DOD’s obligations on services in fiscal year 2006 were for  professional, administrative, and management support contracts. Overall,  according to DOD, the amount obligated on service contracts exceeded  the amount the department spent on supplies and equipment, including  major weapon systems.
Several factors have contributed to the growth in service contracts. For  example, after the September 2001 terrorist attacks, increased security  requirements and the deployment of active duty and reserve personnel  resulted in DOD having fewer military personnel to protect domestic  installations. For example, the U.S. Army awarded contracts worth nearly  $733 million to acquire contract guards at 57 installations. Growth was  also caused by changes in the way DOD acquired certain capabilities. For  example, DOD historically bought space launch vehicles, such as the Delta  and Titan rockets as products. Now, under the Evolved Expendable  Launch Vehicle program, the Air Force purchases launch services using  contractor-owned launch vehicles. Similarly, the Air Force and Army  turned to service contracts for simulator training primarily because efforts  to modernize existing simulator hardware and software had lost out in the  competition for procurement funds. Buying training as a service meant  that operation and maintenance funds could be used instead of  procurement funds. Overall, however, our work found that to a large  degree, this growth simply happened and was not a managed outcome.
As the amount and complexity of contracting for services have increased,  the size of the civilian workforce has decreased. More significantly, DOD  carried out this downsizing without ensuring that it had the requisite skills  and competencies needed to manage and oversee service acquisitions.  Consequently, DOD is challenged in its ability to maintain a workforce  with the requisite knowledge of market conditions, industry trends, and  the technical details about the services they procure; the ability to prepare  clear statements of work; and the capacity to manage and oversee  contractors.
Participants in an October 2005 GAO forum on Managing the Supplier  Base for the 21st Century commented that the current federal acquisition  workforce significantly lacks the new business skills needed to act as  contract managers. In June 2006, DOD issued a human capital strategy that  acknowledged that DOD’s civilian workforce is not balanced by age or  experience. DOD’s strategy identified a number of steps planned over the  next 2 years to more fully develop a long-term approach to managing its  acquisition workforce. For example, DOD’s Director of Defense  Procurement and Acquisition Policy testified in January 2007 that DOD has  been developing a model that will address the skills and competencies  necessary for DOD’s contracting workforce. That model will be deployed  this year. The Director stated that this effort would allow DOD to assess  the workforce in terms of size, capability, and skill mix, and to develop a  comprehensive recruiting, training, and deployment plan to meet the  identified capability gaps.
A report we issued in November 2006 on DOD space acquisition provides  an example of downsizing in a critical area—cost estimating. In this case,  there was a belief within the government that cost savings could be  achieved under acquisition reform initiatives by reducing technical staff,  including cost estimators, since the government would be relying more on  commercial-based solutions to achieve desired capabilities. According to  one Air Force cost-estimating official we spoke with, this led to a decline  in the number of Air Force cost estimators from 680 to 280. According to  this official, many military and civilian cost-estimating personnel left the  cost-estimating field, and the Air Force lost some of its best and brightest  cost estimators. In turn, because of the decline in in-house resources,  space program offices and Air Force cost-estimating organizations are  now more dependent on support from contractors. For example, at   11 space program offices, contractors accounted for 64 percent of cost- estimating personnel. The contractor personnel now generally prepare  cost estimates while government personnel provide oversight, guidance,  and review of the cost-estimating work. Reliance on support contractors  raises questions from the cost-estimating community about whether  numbers and qualifications of government personnel are sufficient to  provide oversight of and insight into contractor cost estimates.
Turning to Iraq, DOD has relied extensively on contractors to undertake  major reconstruction projects and provide support to troops in Iraq. DOD  is responsible for a significant portion of the more than $30 billion in  appropriated reconstruction funds and has awarded and managed many of  the large reconstruction contracts, such as the contracts to rebuild Iraq’s  oil, water, and electrical infrastructure, as well as to train and equip Iraqi  security forces. Further, U.S. military operations in Iraq have used  contractors to a far greater extent than in prior operations to provide  interpreters and intelligence analysts, as well as more traditional services  such as weapons systems maintenance and base operations support.  These services are often provided under cost-reimbursement-type  contracts, which allow the contractor to be reimbursed for reasonable,  allowable, and allocable costs to the extent prescribed in the contracts.  Further, these contracts often contain award fee provisions, which are  intended to incentivize more efficient and effective contractor  performance. If contracts are not effectively managed and given sufficient  oversight, the government’s risk is likely to increase. For example, we  have reported that DOD needs to conduct periodic reviews of services  provided under cost-reimbursement contracts to ensure that services are  being provided and at an appropriate level and quality. Without such a  review, the government is at risk to pay for services it no longer needs.
section_title: DOD Does Not Consistently Use Sound Business Practices to Acquire Services
paragraphs: Our work, along with that of the Inspectors General, has repeatedly found  problems with the practices DOD uses to acquire services. Too often, the  department obtains services based on poorly defined requirements and  inadequate competition. Further, DOD’s management and use of  contractors supporting deployed forces suffers from the lack of clear and  comprehensive guidance, among other shortfalls. Similarly, DOD does not  always oversee and manage contractor performance, in part due to  capacity issues, once a contract is in place. Many of these problems show  up in the department’s use of other agencies’ contracts. Collectively, these  problems expose DOD to unnecessary risk, complicate efforts to hold  DOD and contractors accountable for poor acquisition outcomes, and  increase the potential for fraud, waste, or abuse of taxpayer dollars.
subsections: section_title: Poorly Defined Requirements
paragraphs: Poorly defined or broadly described requirements have contributed to  undesired service acquisition outcomes. To produce desired outcomes  within available funding and required time frames, DOD and its  contractors need to clearly understand acquisition objectives and how  they translate into the contract’s terms and conditions. The absence of  well-defined requirements and clearly understood objectives complicates  efforts to hold DOD and contractors accountable for poor acquisition  outcomes. Contracts, especially service contracts, often do not have  definitive or realistic requirements at the outset needed to control costs  and facilitate accountability. This situation is illustrated in the following  examples:  In June 2004, we found that during Iraqi reconstruction efforts, when  requirements were not clear, DOD often entered into contract  arrangements that introduced risks. We reported that DOD often  authorized contractors to begin work before key terms and conditions,  such as the work to be performed and its projected costs, were fully  defined. In September 2006, we reported that, under this approach,  DOD contracting officials were less likely to remove costs questioned  by auditors if the contractor had incurred these costs before reaching  agreement on the work’s scope and price. In one case, the Defense  Contract Audit Agency questioned $84 million in an audit of a task  order for an oil mission. In that case, the contractor did not submit a  proposal until a year after the work was authorized, and DOD and the  contractor did not negotiate the final terms of the contract until more  than a year after the contractor had completed the work. We will issue  a report later this year on DOD’s use of undefinitized contract actions.
In July 2004, we noted that personnel using the Army’s Logistics Civil  Augmentation Program (LOGCAP) contract in Iraq, including those  who may be called upon to write statements of work and prepare  independent government cost estimates, had not always received the  training needed to accomplish their missions. We noted, for example,  the statement of work required the contractor to provide water for  units within 100 kilometers of designated points but did not indicate  how much water needed to be delivered to each unit or how many  units needed water. Without such information, the contractor may not  be able to determine how to meet the needs of the Army and may take  unnecessary steps to do so. Further, we have reported that contract  customers need to conduct periodic reviews of services provided under  cost-reimbursable contracts to ensure that services provided are  supplied at an appropriate level. Without such a review, the  government is at risk of paying for services it no longer needs. For  example, the command in Iraq lowered the cost of the LOGCAP  contract by $108 million by reducing services and eliminating unneeded  dining facilities and laundries.
section_title: Inadequate Competition
paragraphs: Competition is a fundamental principle underlying the federal acquisition  process. Nevertheless, we have reported on the lack of competition in  DOD’s acquisition of services since 1998. We have reported that DOD has,  at times, sacrificed the benefits of competition for expediency. For  example, we noted in April 2006 that DOD awarded contracts for security  guard services supporting 57 domestic bases, 46 of which were done on an  authorized, sole-source basis. The sole-source contracts were awarded by  DOD despite recognizing it was paying about 25 percent more than  previously paid for contracts awarded competitively. In this case, we  recommended that the Army reassess its acquisition strategy for contract  security guards, using competitive procedures for future contracts and  task orders. DOD agreed and is in the process of revising its acquisition  strategy.
In Iraq, the need to award contracts and begin reconstruction efforts  quickly contributed to DOD’s using other than full and open competition  during the initial stages of reconstruction. While full and open competition  can be a tool to mitigate acquisition risks, DOD procurement officials had  only a relatively short time—often only weeks—to award the first major  reconstruction contracts. As a result, these contracts were generally  awarded using other than full and open competition. We recently reported  that DOD competed the vast majority of its contract obligations between  October 1, 2003, through March 31, 2006. We were able to obtain data on  $7 billion, or 82 percent, of DOD’s total contract obligations during this  period. Our ability to obtain complete information, however, on DOD  reconstruction contract actions was limited because not all DOD  components consistently tracked or fully reported this information.
section_title: Insufficient Guidance and Leadership to Manage Contractors Supporting Deployed Forces
paragraphs: Since the mid-1990s, our reports have highlighted the need for clear and  comprehensive guidance for managing and overseeing the use of  contractors that support deployed forces. As we reported in December  2006, DOD has not yet fully addressed this long-standing problem.
Such problems are not new. In assessing LOGCAP implementation during  the Bosnian peacekeeping mission in 1997, we identified weaknesses in  the available doctrine on how to manage contractor resources, including  how to integrate contractors with military units and what type of  management and oversight structure to establish. We identified similar  weaknesses when we began reviewing DOD’s use of contractors in Iraq.  For example, in 2003 we reported that guidance and other oversight  mechanisms varied widely at the DOD, combatant command, and service  levels, making it difficult to manage contractors effectively. Similarly, in  our 2005 report on private security contractors in Iraq, we noted that DOD  had not issued any guidance to units deploying to Iraq on how to work  with or coordinate efforts with private security contractors. Further, we  noted that the military may not have a clear understanding of the role of  contractors, including private security providers, in Iraq and of the  implications of having private security providers in the battle space.
In our view, establishing baseline policies for managing and overseeing  contractors would help ensure the efficient use of contractors in places  such as Iraq. DOD addressed some of these issues when it issued new  guidance in October 2005 on the use of contractors who support deployed  forces. However, as our December 2006 report made clear, DOD’s  guidance does not address a number of problems we have repeatedly  raised—such as the need to provide adequate contract oversight  personnel, to collect and share lessons learned on the use of contractors  supporting deployed forces, and to provide DOD commanders and  contract oversight personnel with training on the use of contractors  overseas before deployment. Since our December 2006 report was issued,  DOD officials indicated that DOD was developing a joint publication  entitled Contracting and Contractor Management in Joint Operations,  which is expected to be distributed in May 2007.
Our work has also highlighted the need for DOD components to comply  with departmental guidance on the use of contractors. For example, in our  June 2003 report we noted that DOD components were not complying with  a long-standing requirement to identify essential services provided by  contractors and develop backup plans to ensure the continuation of those  services during contingency operations should contractors become  unavailable to provide those services. Other reports highlighted our  concerns over DOD’s planning for the use of contractor support in Iraq,  including the need to comply with guidance to identify operational  requirements early in the planning process. When contractors are involved  in planning efforts early and given adequate time to plan and prepare to  accomplish their assigned tasks, the quality of the contractor’s services  improves and contract costs may be lowered.
DOD’s October 2005 guidance on the use of contractor support to  deployed forces went a long way to consolidate existing policy and  provide guidance on a wide range of contractor issues. However, as of  December 2006, we found little evidence that DOD components were  implementing that guidance, in part because no individual within DOD was  responsible for reviewing DOD’s and the services’ efforts to ensure the  guidance was being consistently implemented. In our 2005 report on  LOGCAP we recommended DOD designate a LOGCAP coordinator with  the authority to participate in deliberations and advocate the most  effective and efficient use of the LOGCAP contract. Similarly, in 2006 we  recommended that DOD appoint a focal point within the Office of the  Under Secretary of Defense for Acquisition, Technology, and Logistics—at  a sufficiently senior level and with the appropriate resources—dedicated  to leading DOD’s efforts to improve its contract management and  oversight. DOD agreed with these recommendations. In October 2006,  DOD established the office of the Assistant Deputy Under Secretary of  Defense for Program Support to serve as the office of primary  responsibility for contractor support issues, but the office’s specific roles  and responsibilities have not yet been clearly defined.
section_title: Inadequate Management and Assessment of Contractor Performance
paragraphs: GAO has reported on numerous occasions that DOD did not adequately  manage and assess contractor performance to ensure that the business  arrangement was properly executed. Managing and assessing post-award  performance entails various activities to ensure that the delivery of  services meets the terms of the contract and requires adequate  surveillance resources, proper incentives, and a capable workforce for  overseeing contracting activities. If surveillance is not conducted, not  sufficient, or not well documented, DOD is at risk of being unable to  identify and correct poor contractor performance in a timely manner and  potentially paying too much for the services it receives.
Our work has found, however, that DOD is often at risk. In March 2005, for  example, we reported instances of inadequate surveillance on 26 of   90 DOD service contracts we reviewed. In each instance, at least one of  the key factors to ensure adequate surveillance did not take place. These  factors are (1) training personnel in how to conduct surveillance,   (2) assigning personnel at or prior to contract award, (3) holding  personnel accountable for their surveillance duties, and (4) performing  and documenting surveillance throughout the period of the contract.  Officials we met with during our review expressed concerns about support  for surveillance. The comments included those of Navy officials who told  us that surveillance remains a part-time duty they did not have enough  time to undertake and, consequently, was a low-priority task.
More recently, in December 2006 we reported that DOD does not have  sufficient numbers of contractor oversight personnel at deployed  locations, which limits its ability to obtain reasonable assurance that  contractors are meeting contract requirements efficiently and effectively.  For example, an Army official acknowledged that the Army is struggling to  find the capacity and expertise to provide the contracting support needed  in Iraq. A LOGCAP program official noted that if adequate staffing had  been in place, the Army could have realized substantial savings on the  LOGCAP contract through more effective reviews of new requirements. A  Defense Contract Management Agency official responsible for overseeing  the LOGCAP contractor’s performance at 27 locations noted that he was  unable to visit all of those locations during his 6-month tour to determine  the extent to which the contractor was meeting contract requirements.
The lack of visibility on the extent of services provided by contractors to  deployed forces contributes to this condition. Without such visibility,  senior leaders and military commanders cannot develop a complete  picture of the extent to which they rely on contractors to support their  operations. We first reported the need for better visibility in 2002 during a  review of the costs associated with U.S. operations in the Balkans. At that  time, we reported that DOD was unaware of (1) the number of contractors  operating in the Balkans, (2) the tasks those contractors were contracted  to do, and (3) the government’s obligations to those contractors under the  contracts. We noted a similar situation in 2003 in our report on DOD’s use  of contractors to support deployed forces in Southwest Asia and Kosovo.  Our December 2006 review of DOD’s use of contractors in Iraq found  continuing problems with visibility over contractors. For example, when  senior military leaders began to develop a base consolidation plan,  officials were unable to determine how many contractors were deployed  and therefore ran the risk of over- or under-building the capacity of the  consolidated bases.
DOD’s October 2005 guidance on contractor support to deployed forces  included a requirement that the department develop or designate a joint  database to maintain by-name accountability of contractors deploying  with the force and a summary of the services or capabilities contractors  provide. The Army has taken the lead in this effort, and recently DOD  designated a database intended to provide improved visibility over  contractors deployed to support the military in Iraq, Afghanistan, and  elsewhere. According to DOD, in January 2007, the department designated  the Army’s Synchronized Predeployment & Operational Tracker (SPOT) as  the departmentwide database to maintain by-name accountability of all  contractors deploying with the force. According to DOD, the SPOT  database includes approximately 50,000 contractor names. Additionally, in  December 2006, the Defense Federal Acquisition Regulation Supplement  was amended to require the use of the SPOT database by contractors  supporting deployed forces.
section_title: Inappropriate Use of Interagency Contracts
paragraphs: In January 2005, we identified management of interagency contracts as a  high-risk area because of their rapid growth, limited expertise of users and  administrators, and unclear lines of accountability. Since DOD is the  largest user of interagency contracts in the government, it can ill-afford to  expose itself to such risks. Relying on other agencies for contracting  support requires sound practices. For example, under an interagency  arrangement, the number of parties in the contracting process increases,  and ensuring the proper use of these contracting arrangements must be  viewed as a shared responsibility that requires agencies to define clearly  who does what in the contracting process. However, the problems I  discussed previously regarding defining requirements, ensuring  competition, and monitoring contractor performance are frequently  evident in interagency contracting. Additionally, DOD pays a fee to other  agencies when using their contracts or contracting services, which could  potentially increase DOD costs.
Our work, as well as that of the Inspectors General, found competition- related issues on DOD’s use of interagency contracting vehicles. DOD is  required to foster competition and provide all contractors a fair  opportunity to be considered for each order placed on GSA’s multiple- award schedules, unless certain exceptions apply. DOD officials,  however, have on numerous occasions avoided the time and effort  necessary to award individual orders competitively and instead awarded  all the work to be performed to a single contractor. We found that this  practice resulted in the noncompetitive award of many orders that have  not always been adequately justified.
In April 2005, we reported that a lack of effective management controls— in particular insufficient management oversight and a lack of adequate  training—led to breakdowns in the issuance and administration of task  orders for interrogation and other services in Iraq by the Department of  the Interior on behalf of DOD. These breakdowns included:  issuing 10 out of 11 task orders that were beyond the scope of  underlying contracts, in violation of competition rules;    not complying with additional DOD competition requirements when  issuing task orders for services on existing contracts;    not properly justifying the decision to use interagency contracting;   not complying with ordering procedures meant to ensure best value for    not adequately monitoring contractor performance.
Because officials at Interior and the Army responsible for the orders did  not fully carry out their responsibilities, the contractor was allowed to  play a role in the procurement process normally performed by government  officials. Further, the Army officials responsible for overseeing the  contractor, for the most part, lacked knowledge of contracting issues and  were not aware of their basic duties and responsibilities.
In July 2005, we reported on various issues associated with DOD’s use of  franchise funds at the departments of the Interior and the Treasury— GovWorks and FedSource—that acquired a range of services for DOD.  For example, GovWorks did not receive competing proposals for work and  added substantial work to the orders without determining that prices were  fair and reasonable. FedSource generally did not ensure competition for  work, did not conduct price analyses, and sometimes paid contractors  higher prices for services than were specified in the contracts, with no  justification in the contract files. At both funds, we found that the files we  reviewed lacked clear descriptions of requirements the contractor was  supposed to meet. For its part, DOD did not analyze contracting  alternatives and lacked information about purchases made through these  arrangements. We also found DOD and franchise fund officials were not  monitoring contracts and lacked criteria against which contractor  performance could be measured to ensure that contractors provided  quality services in a timely manner.
We identified several causes for the lack of sound practices. In some  cases, there was a lack of clear guidance and contracting personnel were  insufficiently trained on the use of interagency contracting arrangements.  In many cases, DOD users chose the speed and convenience of an  interagency contracting arrangement to respond and meet needs quickly.  Contracting service providers, under a fee-for-service arrangement,  sometimes inappropriately emphasized customer satisfaction and revenue  generation over compliance with sound contracting policies and  procedures. These practices put DOD at risk of not getting required  services at reasonable prices and unnecessarily wasting resources.  Further, DOD does not have useful information about purchases made  through other agencies’ contracts, making it difficult to assess the costs  and benefits and make informed choices about the alternatives methods  available.
Similarly, the DOD Inspector General recently reported on issues with  DOD’s use of contracts awarded by the departments of the Interior and the  Treasury, GSA, and the National Aeronautics and Space Administration  (NASA). For example, in November 2006, the Inspector General reported  that DOD contracting and program personnel did not comply with  acquisition rules and regulations when using contracts awarded by NASA,  such as not always complying with fair opportunity requirements or not  adequately justifying the use of a non-DOD contracting vehicle. As a result,  the Inspector General concluded that funds were not used as intended by  Congress, competition was limited, and DOD had no assurance that it  received the best value. Additionally, the Inspector General found that  DOD used Interior and GSA to “park” funds that were expiring. The  agencies then subsequently placed contracts for DOD using the expired  funds, thereby circumventing appropriations law. The Inspector General  concluded that these problems were driven by a desire to hire a particular  contractor, the desire to obligate expiring funds, and the inability of the  DOD contracting workforce to respond to its customers in a timely  manner.
DOD and other agencies have taken steps to address some of these issues,  including issuing an October 2006 memorandum intended to strengthen  internal controls over the use of interagency contracts and signing a  December 2006 memorandum of understanding with GSA to work  together on 22 basic contracting management controls, including ensuring  that sole-source justifications are adequate, that statements of work are  complete, and that interagency agreements describe the work to be  performed. Similarly, GSA has worked with DOD to identify unused and  expired DOD funds maintained in GSA accounts. Further, according to the  Inspector General, Interior has withdrawn numerous warrants in response  to these findings.
section_title: DOD Needs a Management Structure to Oversee Service Acquisition Processes and Outcomes
paragraphs: Congress and GAO have identified the need to improve DOD’s overall  approach to acquiring services for several years. In 2002, we noted that  DOD’s approach to buying services was largely fragmented and  uncoordinated. Responsibility for acquiring services was spread among  individual military commands, weapon system program offices, or  functional units on military bases, and with little visibility or control at the  DOD or military department level. Despite taking action to address the  deficiencies and implement legislative requirements, DOD’s actions to date  have not equated with progress. DOD’s current approach to acquiring  services suffers from the absence of key elements at the strategic and  transactional levels and does not position the department to make service  acquisitions a managed outcome.
Considerable congressional effort has been made to improve DOD’s  approach to acquiring services. For example, in 2001, Congress passed  legislation to ensure that DOD acquires services by means that are in the  best interest of the government and managed in compliance with  applicable statutory requirements. In this regard, sections 801 and 802 of  the National Defense Authorization Act for Fiscal Year 2002 required DOD  to establish a service acquisition management approach, including  developing a structure for reviewing individual service transactions based  on dollar thresholds and other criteria. Last year, Congress amended  requirements pertaining to DOD’s service contracting management  structure, workforce, and oversight processes, among others.
We have issued several reports that identified shortcomings in DOD’s  approaches and its implementation of legislative requirements. For  example, we issued a report in January 2002 that identified how leading  commercial companies took a strategic approach to buying services and  recommended that DOD evaluate how a strategic reengineering approach,  such as that employed by leading companies, could be used as a  framework to guide DOD’s reengineering efforts. In September 2003, we  reported that DOD’s actions to implement the service acquisition  management structure required under Sections 801 and 802 did not  provide a departmentwide assessment of how spending for services could  be more effective and recommended that DOD give greater attention to  promoting a strategic orientation by setting performance goals for  improvements and ensuring accountability for achieving those results.
Most recently, in November 2006, we issued a report that identified a  number of actions that DOD could take to improve its acquisition of  services. We noted that DOD’s overall approach to managing services  acquisitions suffered from the absence of several key elements at both a  strategic and transactional level. The strategic level is where the  enterprise, DOD in this case, sets the direction or vision for what it needs,  captures the knowledge to enable more informed management decisions,  ensures departmentwide goals and objectives are achieved, determines  how to go about meeting those needs, and assesses the resources it has to  achieve desired outcomes. The strategic level also sets the context for the  transactional level, where the focus is on making sound decisions on  individual service acquisitions. Factors for good outcomes at the  transactional level include valid and well-defined requirements,  appropriate business arrangements, and adequate management of  contractor performance.
DOD’s current approach to managing the acquisition of services tended to  be reactive and did not fully addressed the key factors for success at either  the strategic or the transactional level. At the strategic level, DOD had not  developed a normative position for gauging whether ongoing and planned  efforts can best achieve intended results. Further, DOD lacked good  information on the volume and composition of services, perpetuating the  circumstance in which the acquisition of services tended to happen to  DOD, rather than being proactively managed. For example, despite  implementing a review structure aimed at increasing insight into service  transactions, DOD was not able to determine which or how many  transactions had been reviewed. The military departments had only  slightly better visibility, having reviewed proposed acquisitions accounting  for less than 3 percent of dollars obligated for services in fiscal year 2005.  Additionally, most of the service acquisitions the military services review  involved indefinite delivery/indefinite quantity contracts. DOD’s policy for  managing service acquisitions had no requirement, however, to review  individual task orders that were subsequently issued even if the value of  the task order exceeded the review threshold.
Further, the reviews tended to focus more on ensuring compliance with  applicable statutes, regulations, and other requirements, rather than on  imparting a vision or tailored method for strategically managing service  acquisitions. Our discussions with officials at buying activities that had  proposed service acquisitions reviewed under this process revealed that,  for the most part, officials did not believe the review significantly  improved those acquisitions. These officials indicated that the timing of  the review process—which generally occurred well into the planning  cycle—was too late to provide opportunities to influence the acquisition  strategy. These officials told us that the reviews would be more beneficial  if they were conducted earlier in the process, in conjunction with the  program office or customer, and in the context of a more strategic  approach to meeting the requirement, rather than simply from a secondary  or tertiary review of the contract.
At the transactional level, DOD tended to focus primarily on those  elements associated with awarding contracts, with much less attention  paid to formulation of service acquisition requirements and to assessment  of the actual delivery of contracted services. Moreover, the results of  individual acquisitions were generally not used to inform or adjust  strategic direction. As a result, DOD was not in a position to determine  whether investments in services are achieving their desired outcomes.  Further, DOD and military department officials identified many of the  same problems in defining requirements, establishing sound business  arrangements, and providing effective oversight that I discussed  previously, as the following examples show:    DOD and military department officials consistently identified poor  communication and the lack of timely interaction between acquisition  and contracting personnel as key challenges to developing good  requirements.
An Army contracting officer issued a task order for a product that the  contracting officer knew was outside the scope of the service contract.  The contracting officer noted in an e-mail to the requestor that this  deviation was allowed only because the customer needed the product  quickly and cautioned that no such allowances would be granted in the  future.
Few of the commands or activities could provide us reliable or current  information on the number of service acquisitions they managed, and  others had not developed a means to consistently monitor or assess, at  a command level, whether such acquisitions were meeting the  performance objectives established in the contracts.
To address these issues, we made several recommendations to the  Secretary of Defense. DOD concurred with our recommendations and  identified actions it has taken, or plans to take, to address them. In  particular, DOD noted that it is reassessing its strategic approach to  acquiring services, including examining the types and kinds of services it  acquires and developing an integrated assessment of how best to acquire  such services. DOD expects this assessment will result in a  comprehensive, departmentwide architecture for acquiring services that  will, among other improvements, help refine the process to develop  requirements, ensure that individual transactions are consistent with  DOD’s strategic goals and initiatives, and provide a capability to assess  whether service acquisitions are meeting their cost, schedule, and  performance objectives.
In closing, I would like to emphasize that DOD has taken, or is in the  process of taking, action to address the issues we identified. These  actions, much like the assessment I just mentioned, however, will have  little meaning unless DOD’s leadership can translate its vision into changes  in frontline practices. In our July 2006 report on vulnerabilities to fraud,  waste, and abuse, we noted that leadership positions are sometimes  vacant, that the culture to streamline acquisitions for purposes of speed  may have not been balanced with good business practices, and that even  in newly formed government-industry partnerships, the government needs  to maintain its oversight responsibility. Understanding the myriad causes  of the challenges confronting DOD in acquiring services is essential to  developing effective solutions and translating policies into practices. While  DOD has generally agreed with our recommendations intended to improve  contract management, much remains to be done. At this point, DOD does  not know how well its services acquisition processes are working, which  part of its mission can best be met through buying services, and whether it  is obtaining the services it needs while protecting DOD’s and the  taxpayer’s interests.
Mr. Chairman and members of the subcommittee, this concludes my  testimony. I would be happy to answer any questions you might have.
In preparing this testimony, we relied principally on previously issued  GAO and Inspectors General reports. We conducted our work in May 2007  in accordance with generally accepted government auditing standards.
section_title: Contact and Staff Acknowledgments
paragraphs: For further information regarding this testimony, please contact John P.  Hutton at (202) 512-4841 or huttonj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs can be found on the  last page of this testimony. Key contributors to this testimony were  Theresa Chen, Timothy DiNapoli, Kathryn Edelman, and John Krump.
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