Defense Contracts: Contracting for Military Food Services under the Randolph-Sheppard and Javits-Wagner-O'Day Programs
Released: 2007-10-30T00:00:00

Letter

Background

The Randolph-Sheppard Act created a vending facility program in 1936 to provide blind individuals with more job opportunities and to encourage their self-support. The program trains and employs blind individuals to operate vending facilities on federal property. While Randolph-Sheppard is under the authority of the Department of Education, the states participating in this program are primarily responsible for program operations. State licensing agencies, under the auspices of the state vocational rehabilitation programs, operate the programs in each state. Federal law gives blind vendors under the program a priority to operate cafeterias on federal property. Current DOD guidance implementing this priority directs that a state licensing agency be awarded a contract if its contract proposal is in the competitive range. In fiscal year 2006, all of the activities of the Randolph-Sheppard program generated $692.2 million in total gross income and had a total of 2,575 vendors operating in every state except for Wyoming.

In 1938 the Wagner-O’Day Act established a program designed to increase employment opportunities for persons who are blind so they could manufacture and sell certain goods to the federal government. In 1971, the Javits-Wagner-O’Day Act amended the program to include people with other severe disabilities and allowed the program to provide services as well as goods. The JWOD Act established the Committee for Purchase, which administers the program. The Committee for Purchase is required by law to designate one or more national nonprofit agencies to facilitate the distribution of federal contracts among qualified local nonprofit agencies. The designated national agencies are the National Industries for the Blind and NISH, which represent local nonprofit agencies employing individuals who are blind or have severe disabilities. These designated national agencies charge fees for the services provided to local nonprofit agencies. Effective on October 1, 2006, the maximum fee is 3.83 percent of the revenue of the contract for the National Industries for the Blind, and 3.75 percent for NISH. The purpose of these fees is to provide operating funds for these two agencies. In fiscal year 2006, more than 600 JWOD nonprofit agencies provided the federal government with goods and services worth about $2.3 billion. The JWOD program provided employment for about 48,000 people who are blind or have severe disabilities.

Military dining contracts under the Randolph-Sheppard and JWOD programs provide varying levels of service, ranging from support services to full-food services. Support services include activities such as food preparation and food serving. Full-food service contracts provide for the complete operation of facilities, including day-to-day decision making for the operation of the facility. As of October 17, 2006, DOD had 39 Randolph-Sheppard contracts in 24 different states. These contracts had an annual value of approximately $253 million and were all for full-food services. At the same time, DOD had 53 JWOD contracts valued at $212 million annually. Of these, 39 contracts were for support services and 15 were for full-food service. Figure 1 shows the distribution of Randolph- Sheppard and JWOD contracts with DOD dining facilities across the country.

In 1974, amendments to the Randolph-Sheppard Act expanded the scope of the program to include cafeterias on federal property. According to a DOD official, when DOD began turning increasingly to private contractors rather than using its own military staff to fulfill food service functions in the 1990s, state licensing agencies under the Randolph-Sheppard program began to compete for the same full-food services contracts for which JWOD traditionally qualified. This development led to litigation, brought by NISH, over whether the Randolph-Sheppard Act applied to DOD dining facilities. Two decisions by federal appeals courts held that the Randolph- Sheppard Act applied because the term “cafeteria” included DOD dining facilities. The courts also decided that if both programs pursued the full- food service contracts for DOD dining facilities, Randolph-Sheppard had priority.

Congress enacted section 848 of the National Defense Authorization Act for Fiscal Year 2006 requiring the key players involved in each program to issue a joint policy statement about how DOD food services contracts were to be allocated between the two programs. In August 2006, DOD, Education, and the Committee for Purchase issued a policy statement that established certain guidelines, including the following: The Randolph-Sheppard program will not seek contracts for dining support services that are on the JWOD procurement list, and Randolph- Sheppard will not seek contracts for operation of a dining facility if the work is currently being performed under the JWOD program; JWOD will not pursue prime contracts for operation of dining facilities at locations where an existing contract was awarded under the Randolph- Sheppard program (commonly known as the “no-poaching” provision).

For contracts not covered under the no-poaching provision, the Randolph-Sheppard program may compete for contracts from DOD for full-food services; and the JWOD program will receive contracts for support services. If the needed support services are on the JWOD procurement list, the Randolph-Sheppard contractor is obligated to subcontract for those services from JWOD. In affording a priority to a state licensing agency when contracts are competed and the Randolph-Sheppard Act applies, the price of the state licensing agency’s offer will be considered to be fair and reasonable if it does not exceed the best value offer from other competitors by more than 5 percent or $1 million, whichever is less.

Congress enacted the no-poaching provision in section 856 of the National Defense Authorization Act for Fiscal Year 2007. A recent GAO bid protest decision determined that adherence to the other provisions of the policy statement was not mandatory until DOD and the Department of Education change their existing regulations. As of July 2007, neither agency had completed updating its regulations.

Randolph-Sheppard Places Blind Individuals in Managerial Roles, while JWOD Employs Persons with Disabilities in Less Skilled Jobs

The Randolph Sheppard and JWOD programs utilize different operating procedures to provide dining services to DOD. For the Randolph-Sheppard program, state licensing agencies act as prime contractors, and train and license blind vendors to operate dining facilities. For the JWOD program, the Committee for Purchase utilizes NISH to act as a central nonprofit agency and match DOD needs for dining services with local nonprofit agencies able to provide the service. JWOD employees generally fill less skilled jobs such as cleaning dining facilities or serving food.

Randolph-Sheppard Relies on State Licensing Agencies to Place Blind Vendors as Managers of Dining Facilities

Education is responsible for overseeing the Randolph-Sheppard program, but relies on state licensing agencies to place blind vendors as dining facility managers. The Department of Education certifies state licensing agencies and is responsible for ensuring that their procedures are consistent with Randolph-Sheppard regulations. According to our survey, state licensing agencies act as prime contractors on Randolph-Sheppard contracts, meaning that they hold the actual contract with DOD. The state licensing agencies are responsible for training blind vendors to serve as dining facility managers and placing them in facilities as new contracting opportunities become available. According to our survey, the state issues the vendor a license to operate the facility upon the successful completion of the training program. Furthermore, many states said this process often includes both classroom training and on-the-job training at a facility. Figure 2 depicts how the Randolph-Sheppard program is generally structured.

Responding to our survey, state licensing agencies reported that all blind vendors have some level of managerial responsibility for each of the 39 Randolph-Sheppard contracts. Specific responsibilities may include managing personnel, coordinating with military officials, budgeting and accounting, and managing inventory. An official representing state licensing agencies likened the vendor’s role to that of an executive and said the vendor is responsible for meeting the needs of his or her military customer. At one facility we visited, the vendor was responsible for general operations, ensuring the quality of food, and helped develop new menu selections. Of the 37 contracts where the state licensing agencies provided information regarding whether the blind vendor visits his or her facility, all stated that their blind vendors visit their facilities, and in most cases are on site every day. Additionally, most state licensing agencies told us that they have an agreement with the blind vendor that lays out the state licensing agency’s expectations of the blind vendor and defines the vendor’s job responsibilities.

Most state licensing agencies rely on private food service companies to provide the expertise to help operate dining facilities. According to our survey, 33 of the 39 Randolph-Sheppard contracts relied on a food service company—known as a teaming partner—to provide assistance in operating dining facilities. The survey showed that in many cases, the blind vendor and teaming partner form a joint venture company to operate the facility with the vendor as the head of the company. The teaming partner can provide technical expertise, ongoing training, and often extends the vendor a line of credit and insurance for the operation of the facility. Officials representing state licensing agencies told us that states are often unable to provide these resources, and for large contracts these start-up costs may be beyond the means of the blind vendor and the state licensing agency. According to our survey, the teaming partner may assist the state in negotiating and administering the contract with DOD. Additionally, state licensing agencies told us that they often enter into a teaming agreement that defines the responsibilities of the teaming partner.

For 6 of the 39 contracts, the state licensing agencies reported that the blind vendor operates the dining facility without a teaming partner. We visited one of these locations and learned that the vendor has his own business that he uses to operate the facility. This particular vendor had participated in the Randolph-Sheppard program for almost 20 years and operated various other dining facilities.

In our survey, state licensing agencies reported that vendors in about half (20 of 39) of the contracts are required to employ individuals who are blind or have other disabilities, while others have self-imposed goals. In other cases there may be no formal hiring requirements, but the state licensing agency encourages the blind vendor to hire individuals with disabilities. Based on survey responses we received for 30 contracts, we calculated that the percentage of persons with disabilities working at Randolph-Sheppard dining facilities ranged from 3 percent to 72 percent, with an average of 18 percent.

The Committee for Purchase Works with NISH and Local Nonprofit Agencies to Employ Individuals with Disabilities in DOD Dining Facilities

The Committee for Purchase works with NISH to match DOD’s need for services with nonprofit agencies able to provide food services. For military food service contracts, NISH acts as a central nonprofit agency and administers the program on behalf of the Committee for Purchase. In this role, NISH works with DOD to determine if it has any new requirements for dining services. When it identifies a need, NISH will search for a nonprofit agency that is able to perform the required service. NISH then facilitates negotiations between DOD and the nonprofit agency, and submits a proposal to the Committee for Purchase requesting that the specific service be added to the JWOD procurement list. If the Committee for Purchase approves the addition, DOD is required by the Federal Acquisition Regulation (FAR) to obtain the food service from the entity on the procurement list. In some instances, a private food service company is awarded a military dining facility contract and then subcontracts with a JWOD nonprofit agency to provide either full or support food services. For example, the Marine Corps awarded two regional contracts to Sodexho—a large food service company—to operate its dining facilities on the East and West Coasts. Sodexho is required by its contracts to utilize JWOD nonprofit agencies and uses these nonprofit agencies to provide food services and/or support services at selected Marine Corps bases. Figure 3 depicts the JWOD program structure.

Most JWOD employees at military dining facilities perform less skilled jobs as opposed to having managerial roles. At the facilities we visited, we observed that employees with disabilities (both mental and physical) performed tasks such as mopping floors, serving food, and cleaning pots and pans after meals. Officials from NISH said this is generally true at JWOD dining facilities, including facilities where the nonprofit agency provides full-food service. Additionally, we observed—and NISH confirmed—that most supervisors are persons without disabilities. At one facility we visited, for example, the nonprofit supervisor oversees employees with disabilities who are responsible for keeping the facility clean and serving food. The Committee for Purchase requires that agencies associated with NISH perform at least 75 percent of their direct labor hours with people who have severe disabilities. For nonprofit agencies with multiple JWOD contracts, the 75 percent direct labor requirement is based on the total for all of these contracts. Therefore one contract may be less than 75 percent but another contract must be greater than 75 percent in order for the total of these contracts to meet the 75 percent requirement. NISH is responsible for ensuring that nonprofit agencies comply with this requirement, and we previously reported that it performs site visits to all local nonprofit agencies every three years, in order to ensure compliance with relevant JWOD regulations. At the three JWOD facilities we visited, officials reported that the actual percentage of disabled individuals employed was 80 percent or higher. Table 1 provides a comparison of the Randolph-Sheppard and JWOD programs’ operating procedures.

Programs Differ Regarding How Contracts Are Awarded and Priced, and How Program Beneficiaries Are Compensated

The Randolph-Sheppard and JWOD programs have significant differences in terms of how contracts are awarded and priced, and in the compensation provided to beneficiaries who are blind or have other disabilities. Under the Randolph-Sheppard program, federal law provides for priority for blind vendors and state licensing agencies in the operation of a cafeteria. This priority may come into play when contracts are awarded either by direct noncompetitive negotiations or through competition with other food service companies. Regardless of how the contract is awarded, the prices are negotiated between the state licensing agency and DOD. Under the JWOD program, competition is not a factor because DOD is required to purchase food services from a list maintained by the Committee for Purchase. Contracts are awarded at fair market prices established by the Committee for Purchase. The two programs also differ in terms of how program beneficiaries are compensated. Under the Randolph-Sheppard program, blind vendors generally receive a share of the profits, while JWOD beneficiaries receive hourly wages and fringe benefits under federal law or any applicable collective bargaining agreement. Randolph-Sheppard blind vendors received, on the average, pretax compensation of about $276,500 annually, while JWOD workers at the three sites visited earned on average $13.15 per hour, including fringe benefits.

Significant Differences Exist in How Randolph- Sheppard and JWOD Contracts Are Awarded and Priced

Although contracts for food services awarded under the Randolph- Sheppard and JWOD programs use the terms and conditions generally required for contracts by the FAR, the procedures for awarding and pricing contracts under the two programs differ considerably. Under the Randolph-Sheppard program, Education’s regulations provide for giving priority to blind vendors in the operation of cafeterias on federal property, provided that the costs are reasonable and the quality of the food is comparable to that currently provided. The regulations provide for two procedures to implement this priority. First, federal agencies, such as the military departments, may engage in direct, noncompetitive negotiations with a state licensing agency. Of the eight Randolph-Sheppard contracts we reviewed in detail, six had been awarded through direct negotiations with the state licensing agency. In most of the eight cases, the contract was a follow-on to an expiring food service contract. The second award procedure involves the issuance of a competitive solicitation inviting proposals from all potential food service providers, including the relevant state licensing agency. The solicitation will specify the criteria for evaluating proposals, such as management capability, past performance, and price, and DOD will use these criteria to evaluate the proposals received. When the competitive process is used, DOD policy provides for selecting the state licensing agency for award if its proposal is in the “competitive range.” Of the eight Randolph-Sheppard contracts we reviewed, only two involved a solicitation open to other food service providers, and there was no case in which more than one acceptable proposal was received such that DOD was required to determine a competitive range.

The prices of contracts under the Randolph-Sheppard program are negotiated between DOD and the state licensing agency, regardless of whether DOD uses direct negotiations or seeks competitive proposals. Negotiations in either case typically begin with a pricing proposal submitted by the state licensing agency, and will then involve a comparison of the proposed price with the prices in previous contracts, an independent government estimate, or the prices offered by other competitors, if any. In some cases, DOD will seek the assistance of the Defense Contract Audit Agency (DCAA) in assessing various cost aspects of a proposal. All of the Randolph-Sheppard contracts we reviewed were generally firm, fixed price. Some had individual line items that provided for reimbursing the food service provider for certain costs incurred, such as equipment maintenance or replacing items. In most cases, the contract was for a base year, and provided for annual options (usually four) that may be exercised at the discretion of DOD. Of the 39 Randolph-Sheppard contracts within the scope of our review, the average price for the current year of the contract was about $6.5 million. Table 2 shows the 8 Randolph- Sheppard contracts in our sample with selected contract information.

Under Part 8 of the FAR, the JWOD program is a mandatory source of supply, requiring DOD to award contracts to the listed nonprofit entity at fair market prices established by the Committee for Purchase. There is no further competition. Table 3 shows the 6 JWOD contracts in our sample with selected contract information.

Randolph-Sheppard Vendors Generally Receive a Percentage of Profits, and JWOD Beneficiaries Are Paid Hourly Wages According to Federal Law

Compensation for Randolph-Sheppard blind vendors is computed differently from compensation paid to JWOD disabled workers. For the Randolph-Sheppard program, blind vendors’ compensation is generally based on a percentage of the profits generated by the dining facilities’ operations. Based on the 37 survey responses where we could determine the basis of how blind vendors’ compensation was computed, 34 reported that that the vendor’s compensation was computed either entirely, or in part, based on the profits generated by the dining facility contract. For compensation based entirely on the facilities’ profits, the blind vendor received from 51 to 65 percent of the profits. For those blind vendors that were compensated partially based on profits, their compensation was based on fixed fees, administrative fees or salaries, and a percentage of the profits. Where compensation was not based on profits, these three blind vendors received either a percentage of the contract value or a fixed base fee. Figure 4 shows the annual compensation received by blind vendors for military food services contracts, within specified ranges, and the average compensation for each range.

As shown in figure 4, 15 of 38 Randolph-Sheppard blind vendors’ annual compensation was between $100,000 and $200,000. Overall, blind vendors working at DOD dining facilities received average annual compensation of about $276,500 per vendor. These figures are based on pretax earnings. We did not collect compensation information for employees of the blind vendors or employees of the teaming partners.

For the JWOD program, for most workers—including those with and without a disability—the compensation is determined by either federal law or collective bargaining agreements. The Service Contract Act (SCA) was enacted to give employees of contractors and subcontractors labor standards protection when providing services to federal agencies. The SCA requires that, for contracts exceeding $2,500, contactors pay their employees, at a minimum, the wage rates and fringe benefits that have been determined by the Department of Labor to be prevailing in the locality where the contracted work is performed. However, the SCA hourly rate would not be used if there is a collective bargaining agreement that sets a higher hourly wage for selected workers. According to NISH, the collective bargaining hourly rates are, in general, 5 to 10 percent higher than the SCA’s wage rates. Of the six JWOD contracts in our sample, Holloman Air Force Base and the Marine Corps’ eastern and western regional contracts had collective bargaining agreements. For the three JWOD sites visited, we obtained an estimate of the average hourly wages, average hourly fringe benefits rates, and average number of hours worked and computed their annual wages. The average hourly wage for the three JWOD sites was $13.15 including fringe benefits. Table 4 shows the average annual wages that an employee earned.

Another law that can affect the disabled worker’s wages is section 14(c) of the Fair Labor Standards Act, which allows employers to pay individuals less than the minimum wage (called special minimum wage rates) if they have a physical or mental disability that impairs their earning or productive capacity. For example, if a 14(c) worker’s productivity for a specific job is 50 percent of that of experienced workers who do not have disabilities that affect their work, and the prevailing wage paid for that job is $10 dollars per hour, the special minimum wage rate for the 14(c) worker would be $5 dollars per hour. None of the three JWOD sites we visited applied the special minimum wage for any of their disabled workers.

Concluding Observations

The Randolph-Sheppard and JWOD programs have a common goal of serving individuals who are blind or have severe disabilities, and who are generally underrepresented in the workforce. However, these programs operate differently regarding how contracts are awarded and priced, and are designed to serve distinct populations through different means— particularly with respect to compensation for program participants. This is true for contracts with military dining facilities. The blind vendors who participate in the Randolph-Sheppard program seek to become entrepreneurs by gaining experience managing DOD dining facilities. In this respect, although most of these vendors require the assistance of a private food service teaming partner, they are compensated for managing what can be large, complicated food service operations. By contrast, because the participants of the JWOD program perform work activities that require less skill and experience, and who might otherwise not be able to secure competitive employment, they are compensated at a much lower rate than the Randolph-Sheppard vendors. In this regard, it is apparent that the two programs are designed to provide very different populations with different types of assistance, and thus, it is difficult to directly compare them, particularly with respect to compensation.

Agency Comments and Our Evaluation

We provided a draft of this report to the Committee for Purchase, the Department of Defense, and the Department of Education for review and comment. The Committee for Purchase had no comments. DOD concurred with the draft and also provided technical comments for our consideration. We considered all of DOD’s technical comments and revised the draft as appropriate. The DOD comment letter is attached as appendix II.

The Department of Education provided clarifications and suggestions in a number of areas. First, Education was concerned about comparing the earnings of the blind vendors under the Randolph-Sheppard program and the compensation provided to the food service workers under the JWOD program. The agency suggested we compare the earnings of the blind vendors with the earnings of employees of the JWOD nonprofit agencies who perform similar management functions. We agree that there are significant differences in their responsibilities, but we were required to report on the compensation of the “beneficiaries” of the two programs, which are blind managers for the Randolph-Sheppard program and hourly workers for the JWOD program. Our report highlights these differences. Our report also highlights in a number of places the difficulty in comparing the compensation of the two groups of beneficiaries. We were not required to report on the earnings of the management personnel of the nonprofit agencies, and we did not collect this information.

Second, Education urged that we fully describe the permitted uses of the set-aside fees charged by the state licensing agencies, and that we recognize that there is a similar assessment under the JWOD program. We have revised the report to point out that the Randolph-Sheppard set-aside may be used to fund the operation of the state licensing agencies. We also added language to a footnote to table 3 to recognize that the JWOD contract amounts include a fee that is used to fund the operations of the central nonprofit agency. Third, Education questions our description of the price negotiations that occur between DOD and the state licensing agencies. We believe our report is both clear and accurate on this point as written. In addition, DOD did not have any comments or questions about how we described price negotiations for the Randolph-Sheppard program.

Fourth, Education questioned our discussion of the numbers of persons with disabilities employed under the two programs. Specifically, Education pointed out that the requirement under the JWOD program that at least 75 percent of the direct labor hours be performed by persons with disabilities applies in the aggregate to all work performed by a nonprofit entity, not at the contract level. We have revised the report to reflect this. And finally, Education sought clarification concerning the extent commercial food service companies are used as teaming partners under the Randolph-Sheppard program or as subcontractors under the JWOD program. We have revised figures 2 and 3 of the report to more accurately reflect the use of these companies. The comment letter from Education is attached as Appendix III.

We will send copies of this report to interested congressional committees, the Secretary of Defense, the Secretary of Education, and the Chairperson of the Committee for Purchase, as well as other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact George Scott at (202) 512-7215 or scottg@gao.gov or William Woods at (202) 512-8214 or woodsw@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 IV.

Appendix I: Scope and Methodology

To accomplish our research objectives, we interviewed officials from the Department of Defense (DOD), the Department of Education, the Committee for Purchase, and organizations representing both the Randolph-Sheppard and Javits-Wagner-O’Day (JWOD) programs. We also reviewed pertinent documents and regulations governing both programs. We reviewed a sample of 14 contracts—8 Randolph-Sheppard contracts and 6 JWOD contracts. For these contracts, we requested the source selection memorandum, the acquisition plan, the basic contract, and the statement of work. For two of these contracts, the Randolph-Sheppard prime contractor for full-food services subcontracted with a JWOD nonprofit agency for support services. We determined that it was not feasible to review a representative sample of contracts based on our preliminary work, which indicated wide variations in how the two programs are structured and how the Randolph-Sheppard program is administered from state to state. For these reasons, we selected a number of contracts to review in order to ensure representation of both programs, as well as ensure a balance of contracts based on dollar value, size of military facility, branch of the military, and geographic location. As the sample was not representative, results of our review cannot be projected to the entire universe of contracts. In addition, we visited the military installation for 5 of the 14 contracts in our sample in order to observe dining facilities and their operations, as well as interview pertinent officials and staff, including the blind vendor or JWOD agency management whenever possible. Again, these five locations were selected to ensure representation of both programs, as well as variation in geographic location, contract size, and military branch. In terms of beneficiary compensation, we limited our review to Randolph-Sheppard blind vendors and JWOD workers. For the JWOD program, we obtained average hourly wages, average hourly fringe benefits, and average total hours worked during the year for JWOD employees at selected sites. We did not obtain compensation amounts for the managerial employees for any JWOD nonprofit agencies.

To obtain information on the relationships between state licensing agencies and blind vendors, we conducted a survey of the 24 state licensing agencies we determined to have Randolph-Sheppard military dining contracts. We asked questions regarding the roles and responsibilities of blind vendors, the vendor’s relationship with the state licensing agencies, and the role played by teaming partners. We administered this survey between April and July 2007. We pretested this survey with program directors and modified the survey to take their comments into account. All 24 state licensing agencies responded to our survey for a response rate of 100 percent and provided information for 39 military dining facilities contracts. Additionally, we requested information for the 40 blind vendors with military dining contracts to determine their annual compensation. For the 39 contracts, there were 40 blind vendors as one contract utilized two vendors. We received compensation information for 38 of the 40 blind vendors.

Appendix II: Comments from the Department of Defense

Appendix III: Comments from the Department of Education

Appendix IV: GAO Contacts and Staff Acknowledgments

Staff Acknowledgments

Jeremy D. Cox (Assistant Director), Richard Harada (Analyst-in-Charge), Daniel Concepcion, Rosa Johnson, and Sigurd Nilsen made significant contributions to all aspects of this report. In addition, Susannah Compton and Lily Chin assisted in writing the report and developing graphics. John Mingus provided additional assistance with graphics. Walter Vance assisted in all aspects of our survey of state licensing agencies as well as providing methodological support. Doreen Feldman, Daniel Schwimer, and Alyssa Weir provided legal support.

Related GAO Products

Federal Disability Assistance: Stronger Federal Oversight Could Help Assure Multiple Programs’ Accountability. GAO-07-236. Washington, D.C.: January 26, 2007.