DOD and the federal government classify procurements as either the purchase of goods or services. DOD procures many types of services ranging from research and development efforts on major weapon systems to operating military installations. Service contracts, because they involve the contractor providing a service rather than a good, by nature require different approaches in describing requirements and overseeing contractor performance than the purchases of goods. DOD spends more of its procurement funds on services than it does on goods. Moreover, DOD spends significantly more than any other federal agency on services. DOD spending on services has been increasing significantly over the last several years--about 66 percent since fiscal year 1999--to a level of $118 billion in fiscal year 2003 (see fig. 1). Surveillance and documentation that it occurred are required by the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS). Moreover, documentation is necessary to help ensure accountability over the surveillance process. Surveillance involves government oversight of contractors with the purpose of ensuring that the contractor (the service provider) performs the requirements of the contract and the government (the service receiver or customer) receives the service as intended. Surveillance begins with trained personnel being nominated for and assigned surveillance responsibilities, and then conducting surveillance actions throughout the performance period of the contract to ensure the government receives the services required by the contract. While surveillance is required by the DFARS, specific methods are not prescribed. DOD organizations use various methods to conduct surveillance, ranging from formal written assessments (monthly, semi- annually, or annually) of contractor performance prepared by DOD surveillance personnel to more informal observations or inspections of contractor performance by surveillance personnel. The methods used generally relate to the dollar value of the contract and the risk associated with the service being provided. Proper documentation of surveillance is required. Proper documentation is not only stressed in the DFARS but also in other DOD guidance that requires performance-based service contracts,--which DOD is requiring to be used more often in the acquisition of services--to have a surveillance plan. Surveillance of contractor performance should be documented as it is conducted. DOD guidance maintains that this documentation constitutes an official record and the surveillance personnel assessing performance are to use a checklist to record their observations of the contractor's performance. The guidance also concludes that all performance should be documented whether it is acceptable or not. Surveillance personnel are usually not considered part of DOD's acquisition workforce. Instead, surveillance personnel represent the DOD functional organization receiving the service and are usually assigned surveillance as an ancillary responsibility in addition to their primary job. For example, if a DOD weapon system program office (a functional organization) has a need to contract for professional support services, the program office would assist the contracting officer by defining contract requirements and methods of contractor performance and by nominating an official to serve as the surveillance personnel. Surveillance personnel are likely to be full-time employees of the DOD organization needing the service and are generally knowledgeable about the aspects of the service to be provided by the contractor. This knowledge is useful in assessing contractor performance. However, it is the contracting officer's responsibility to assign surveillance personnel and to ensure that surveillance is conducted on the contract. The surveillance personnel act as a liaison between the contracting officer and the contractor. If less than adequate contractor performance is noted by the surveillance personnel, they notify the contracting officer as a first step toward corrective action. Appendix II shows in more detail the roles of contracting officers and surveillance personnel. Congressional concern over the management of DOD's growing services procurement led Congress to include provisions in section 801 of the National Defense Authorization Act for Fiscal Year 2002 designed to improve management and oversight of services procurement and reinforce compliance with all applicable statutes, regulations, directives, and other requirements, regardless of whether the services were procured through DOD contracts or those of another agency. We have previously reported on section 801, but at that time DOD had not completely determined how to implement specifics of the legislation. In our prior report, we stated that DOD and the military departments had a management structure and a process in place for reviewing individual acquisitions valued at $500 million or more, but the approach did not provide a departmentwide assessment of how spending for services could be more effective. In October 2004, to help reinforce the requirements of section 801, DOD issued a policy designed to emphasize the proper use of other agencies' contracts. DOD spends billions of dollars every year using other agencies' contracts and is the largest purchaser of services from GSA's multiple award schedules program. The use of surveillance varied on the 90 contracts we reviewed. While 26 of the 90 DOD contracts we reviewed had insufficient surveillance, 64 contracts had sufficient, documented surveillance that in some instances was extensive. More specifically, 25 of the 26 contracts with insufficient surveillance were contracts for services that DOD obtained by using GSA contracts available under its multiple award schedules program. In addition, 13 surveillance personnel had not completed required training prior to being assigned surveillance responsibilities. Our review also found that 64 contracts had sufficient, documented surveillance and in some of these instances, surveillance was extensive. For the 90 DOD service contracts we reviewed, 26 of the contracts (29 percent) had insufficient surveillance in that they lacked assigned surveillance personnel or complete documentation of surveillance. Of these 26 contracts, 15 contracts had no surveillance personnel assigned. Additionally, 11 of the 26 contracts had insufficient documentation to show if surveillance was occurring. Table 1 summarizes our findings for the 90 contracts and shows that there were more instances of insufficient surveillance related to the Army contracts compared to the Navy. All of the Air Force contracts we reviewed had surveillance. (See app. III for a more detailed summary of the 90 contracts.) Our further analyses of the 90 contracts found only one common characteristic as to whether surveillance was affected by other contractual factors. Specifically, we found that of the 45 interagency contracts we reviewed where DOD awarded them using GSA's multiple award schedules program, 25 had insufficient surveillance. GAO has recently identified issues with DOD's use of interagency contracts in general and reported that they were not being effectively managed. We also found that the contract award amount was not always a good indication of the total value of the services that needed to be surveilled. While the award amount of the 90 contracts we reviewed was $385.7 million in fiscal year 2003, the amount of funds obligated on about one-half of these contracts had grown to about $1.5 billion as of November 2004. We found that for some of the 15 contracts without surveillance personnel assigned, the contract amounts have more than tripled over the course of the contract. For example, one Army contract for educational services was awarded for $271,690 but had increased to $900,125. We did not find that the sufficiency of surveillance was related to other factors, including type of service contract (fixed price or cost- reimbursable), type of services being procured, use of performance-based contract methods, or dollar value at award. For some of the contracts without sufficient documentation of surveillance, we asked the personnel how the government's interests were being protected. They told us they were conducting surveillance, but they had not been keeping documented records to verify surveillance had taken place. Surveillance training, despite DOD regulations requiring such training, was not always completed prior to personnel being assigned surveillance responsibilities. Such training explains their responsibilities and identifies methods of conducting surveillance. On the contracts we reviewed, 13 surveillance personnel had not received the required training. Without timely training, surveillance personnel may not know how to perform their duties. We found examples of this late training at each of the commands we visited including 10 instances at AFMC, 2 instances at NAVSEA, and 1 instance at ACA-North. In some cases, surveillance personnel had not completed training until several months after assignment to a contract. See table 2 for a summary of surveillance personnel training information. We found that 64 of the 90 contracts we reviewed had surveillance personnel who were assigned their surveillance responsibilities and were conducting and documenting surveillance. The 64 contracts included 20 that were awarded using GSA's multiple award schedules program. The amount of surveillance varied depending on the type of service being provided. In some instances, the surveillance was a very detailed, rigorous process. For example, one Navy contract we reviewed involved critical submarine hull repair. The surveillance on the services was extensive and involved Navy personnel and an independent specialist using live video to observe all the repairs in real time. For lower risk contracts, such as one involving maintenance of an Army recruiting internet site, surveillance was significantly less formal because the contractor and surveillance personnel actually shared office space and had daily interaction. If surveillance is done properly, it has the potential to identify poor contractor performance and mitigate problems on a contract. For example, on one of the contracts we reviewed, AFMC was having problems with a custodial contract worth approximately $3 million. The surveillance personnel assigned to the job followed the surveillance plan and documented observations and customer complaints that the contractor was not meeting some of the contract requirements for a few consecutive months. In each instance, the contractor was asked to re- perform the tasks that were deemed unacceptable and the surveillance personnel informed the contracting officer of the issues. As the problems continued, the contracting officer involved the contractor's corporate headquarters and arranged a meeting to resolve the underlying problems. Two main problems were identified. Some tasks the government expected to be performed were not in the contract, and the contractor was providing poor service on other tasks. Both of these problems were remedied and surveillance showed the contractor subsequently received high ratings. Another example where surveillance caught insufficient performance was on a NAVSEA contract worth approximately $14 million. The surveillance on this contract was structured so that the government would rate each contractor employee's performance. Two contract employees were not performing as required and the corporate headquarters subsequently replaced both of them within in a few months. NAVSEA and AFMC have policies that help ensure that surveillance begins as soon as possible on contracts. Both organizations require surveillance personnel to be assigned before or at contract award. Based on the contracts reviewed, we found that both organizations complied with their respective policies--each contract we reviewed had someone assigned to conduct surveillance. In contrast, the Army and ACA-North have no policy requiring surveillance personnel be assigned at or before contract award. Of the 26 contracts we identified as having insufficient surveillance, 16 were Army contracts, including 9 ACA-North contracts. The Air Force requires a team be created prior to the award of service contracts. This team is comprised of at least the contracting officer, a representative from the buying entity, and the surveillance personnel who will be assigned to the contract. This policy helps assure that surveillance is given a higher priority because the contract cannot be awarded until the team has met. Surveillance was not always given high priority by either the contracting or functional organizations, according to officials responsible for the contracts we reviewed. These officials told us getting the contracts awarded, and thus supporting the customer, takes priority over assuring trained surveillance personnel are assigned prior to contract award. The Army, unlike the Air Force and Navy organizations we visited, does not require surveillance personnel to be assigned to contracts prior to the contract award date. Officials also told us almost all surveillance personnel are not evaluated on their surveillance responsibilities in their performance assessments because surveillance is considered a part-time or ancillary activity. Also, some surveillance personnel feel they do not have sufficient hours during their normal workday to get the job done. Federal and DOD acquisition regulations do not require surveillance personnel to be assigned prior to contract award. Contracting officials from all three service commands as well as OSD and senior military acquisition policy officials stated that, in general, the priority of contracting offices is awarding contracts, not assuring that trained surveillance personnel are assigned early on so that surveillance can begin upon contract award. Contracting officials told us that their primary objective is to get the necessary contracts awarded in order to support the functional office (the service customer) and that delaying a contract award because of delays in the assignment or training of surveillance personnel does not normally occur. It is the assignment of surveillance personnel that is usually delayed until after contract award because contracting officers cannot assign them until they are nominated by the functional office. NAVSEA and AFMC, however, have recognized the importance of timely assignment and require contracting officers to assign surveillance personnel by contract award. The Army and ACA-North have no such requirement. For all the NAVSEA contracts we reviewed, surveillance personnel were timely assigned. A further indication that surveillance is not always given a high priority is that almost all personnel involved in our review are not rated on performance of their surveillance responsibilities. NAVSEA and Army policy indicates that surveillance responsibilities should at least be considered in performance ratings, and Army training material indicates that surveillance performance should be evaluated; however, in almost all cases, personnel were not being assessed on these responsibilities. Officials at NAVSEA told us they plan to issue a policy memo encouraging the functional organizations to include surveillance duties in performance ratings. While these efforts demonstrate a willingness to hold surveillance personnel accountable through ratings, they provide no plans or processes to help accomplish this. OSD and senior acquisition policy officials also acknowledge that assessing surveillance personnel on their responsibilities could improve accountability but told us this could require modifications to job descriptions, which could be a difficult task. Several Air Force and Navy personnel told us they do not always have sufficient time to focus on surveillance responsibilities; thus, possibly contributing to inadequate surveillance or leaving at risk the potential for not detecting contractor performance problems. Five NAVSEA surveillance personnel out of 17 we talked to told us they felt they did not have enough time, in a normal workday, to fully perform their surveillance duties. They told us they are usually assigned surveillance as a part-time duty to be done in additional to their regular, full-time job responsibilities. NAVSEA contract managers agreed that surveillance personnel at times do need to work additional hours to ensure surveillance is done. According to OSD and senior acquisition policy officials, this situation is occurring, in part, due to a reduction in the staffing of functional offices that nominate personnel to perform surveillance duties. DOD is in the process of implementing some initiatives that may help improve contract management and oversight practices. DOD has taken some steps to implement provisions in the National Defense Authorization Act for Fiscal Year 2002 designed to help improve the general management and oversight of service contract procurement and also recently issued a policy emphasizing the proper use of other agencies' contracts. DOD also recently established additional guidance on contract surveillance for cost-reimbursable and time and materials service contracts that states that surveillance personnel should be appointed to these types of service contracts during the early contract planning phase to help improve oversight. In addition, a recently revised Army acquisition instruction clarified surveillance requirements for certain types of service contracts for which the Army was not previously requiring surveillance. DOD has taken some steps to implement provisions in section 801 of the National Defense Authorization Act for Fiscal Year 2002, which was intended to improve DOD management and oversight of services procurement and reinforce compliance with all applicable statutes, regulations, directives, and other requirements, regardless of whether the services are procured through a DOD contract or other agencies' contracts. DOD also recently issued a policy placing emphasis on the proper use of other agencies' contracts, such as GSA's schedules program. Regarding establishment of a management and review structure for service contracts, we reported in September 2003 that DOD and the military departments each had a management structure in place for reviewing individual service contracts valued at $500 million or more prior to contract award, but that approach did not provide a departmentwide assessment of how spending for services could be more effective. During our current review, we found that DOD and the military departments continue to focus their efforts on activities that lead up to contract awards and do not track or assess the sufficiency of surveillance on service contracts regardless of their dollar value or risk. As a result, little has been done as part of implementing section 801 to specifically improve DOD surveillance practices. Section 801 of the act, as well as DOD policy, requires that certain data elements on service contracts be collected and analyzed to help support management decisions. The requirement applies to contracts for services valued at $100,000 or more. While DOD has been collecting data to comply with the act, no data related to contract surveillance is being collected because neither the act nor DOD guidance requires collection of this type of data. As a result, DOD is not tracking whether the assignment of surveillance personnel has taken place. Without this data, DOD and the military departments will likely continue to have limited visibility over the timely assignment of surveillance personnel and the results of surveillance. Further, DOD's October 2004 policy, which placed emphasis on the proper use of other agencies' contracts, does not specifically address surveillance. The policy focuses on ensuring that DOD's procurement processes and procedures are done correctly. As discussed earlier, surveillance on contracts awarded using interagency arrangements is an area where we found efforts could be improved--25 of the 26 contracts we determined to have insufficient surveillance were contracts using GSA's schedules program. In September 2004, OSD issued additional guidance to the military services on service contracts called cost-reimbursable and time and material contracts. The guidance stresses the need for the assignment of surveillance personnel for these contracts because they usually require significant government surveillance during contract performance to ensure the government receives good value. The additional DOD guidance was issued in response to a 2003 DOD Inspector General report that found surveillance was inadequate for 29 of 43 cost-reimbursable contract actions. The Inspector General found that surveillance personnel were designated in writing, as required, on only 21 of 43 contract actions. Further, for these 21 contracts, 13 had insufficient surveillance. DOD's September 2004 guidance was issued to help correct some of these inadequacies. Revised Army acquisition instructions, issued in April 2004, now require surveillance personnel to be assigned for a certain type of service contract called Contract Advisory and Assistance Services. Senior Army acquisition and other officials at the ACA-North told us that, in the past, these contracts required less surveillance because they were generally seen as lower risk; in addition, the officials noted that shortages of personnel in the functional offices also contributed to conducting less surveillance on this type of service contract. The Army was unable to provide us information on the quantity and dollar amounts associated with these contracts that did not have surveillance; as a result, we were unable to determine the overall significance of this issue. We are encouraged that the Army has now decided to require surveillance for this type of contract. However, the new acquisition instructions are not retroactive and therefore do not provide a means to require surveillance for Contract Advisory and Assistance Services contracts awarded prior to April 2004 and still in effect. 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. Ultimately, if surveillance is not being done, DOD can be at risk of paying contractors more than the value of the services they performed. Key to sufficient surveillance are personnel trained in how to conduct surveillance, assigned at or prior to contract award, held accountable for their surveillance duties, and conducting and documenting surveillance throughout the period of the contract. While DOD has taken some actions to improve management and oversight of service contracts, more can be done to ensure these practices are in place. To help improve service contract surveillance and further mitigate risk, we recommend that the Secretary of Defense ensure that the proper surveillance training of personnel and their assignment to service contracts occurs no later than the date of contract award; develop practices to help ensure accountability for personnel carrying out surveillance responsibilities; ensure that DOD's service contract review process and associated data collection requirements provide information that will provide more management visibility over contract surveillance; and revise the October 2004 policy on proper use of other agencies' contracts to include guidance on conducting surveillance of services procured from other agencies' contracts. Further, we recommend that the Secretary of Defense direct the Secretary of the Army to assign surveillance personnel to conduct surveillance, as appropriate, on ongoing Contract Advisory and Assistance Services contracts awarded prior to April 2004. DOD provided us with written comments on a draft of this report. DOD concurred with four of our recommendations and partially concurred with a fifth recommendation and identified actions it has taken or plans to take to address them. The comments appear in appendix IV. DOD partially concurred with our recommendation that the Secretary develop practices to help ensure accountability for personnel carrying out surveillance responsibilities. DOD stated that it will review the feasibility of including a performance goal in a contracting officer representative's (surveillance personnel) annual performance evaluation which would address the representative's performance of their surveillance duties. We believe DOD's willingness to review and determine the feasibility of this issue is a step in the right direction and we believe it could lead to a process that holds surveillance personnel accountable for their surveillance responsibilities. Whether this is done using annual performance evaluations or by other means, we believe it can only lead to more sufficient surveillance on DOD service contracts. We are sending copies of this report to the Secretaries of the Air Force, the Army, and the Navy; appropriate congressional committees; and other interested parties. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has questions concerning this report, please contact me at (202) 512-4841 or by e-mail at cooperd@gao.gov, or James Fuquay at (937) 258-7963. Key contributors to this report were R. Elizabeth DeVan, Johnetta Gatlin-Brown, Arthur James, Victoria Klepacz, John Krump, Jean Lee, Don Springman, and Robert Swierczek. To conduct our work, we selected and reviewed 90 Department of Defense (DOD) service contracts, each with a contract action for an amount over $100,000 in fiscal year 2003, and their associated surveillance records. For each contract, we reviewed surveillance actions for up to a 1-year period. Collectively, these contracts had a value of $385.7 million at the time of contract award. The majority of these contracts (59) were awarded primarily at three military commands within the military departments: (1) the Army Contracting Agency-North Region (ACA-North) at Fort Monroe, Virginia; (2) the Naval Sea Systems Command (NAVSEA) at the Navy Ship Yard, Washington, D.C.; and (3) the Air Force Materiel Command (AFMC) at Wright-Patterson Air Force Base, Ohio. Each of these organizations spends significant funding for services within their respective military department. An additional 31 primarily Army, Navy and Air Force contracts that were selected were awarded using the General Service Administration's schedules program; these contracts had been analyzed in a recent GAO review. (See app. III for a listing of the contracts we reviewed.) Our selection of contracts was not large enough to allow projection of our findings across DOD. In addition, it did not include research and development service contracts for weapon systems and construction contracts as the surveillance process typically differs for these types of service contracts. We met with procurement management officials at the three military commands as well as senior acquisition policy officials for each of the military departments and OSD. We also contacted contracting officials or surveillance personnel associated with all 90 contracts selected to discuss the surveillance on each contract. We reviewed the federal and DOD acquisition regulations and policies, as well as the instructions and regulations of the military departments and the commands we visited, to determine their processes for assigning surveillance personnel and performing surveillance on service contracts. To assess whether DOD's service contract management and oversight process developed to comply with section 801 of the National Defense Authorization Act for Fiscal Year 2002 addressed contract surveillance, we reviewed the implementation policies of OSD and the military departments along with their associated data collection efforts. We also discussed DOD's efforts with senior OSD acquisition officials. We conducted our review from January 2004 to February 2005 in accordance with generally accepted government auditing standards.

Summary:
The Department of Defense (DOD) is the federal government's largest purchaser of contractor services, spending $118 billion in fiscal year 2003 alone--an increase of 66 percent since fiscal year 1999. DOD is expected to rely increasingly on contractors to carry out its mission. In recent reports, DOD has identified inadequate surveillance on service contracts. This report examines how DOD manages service contract surveillance. It looks at the extent of DOD's surveillance on a selection of service contracts, reasons why insufficient surveillance occurred, and efforts to improve surveillance. Surveillance varied on the 90 contracts we reviewed. Surveillance was insufficient on 26 of the contracts we reviewed but was sufficient on 64 contracts. Fifteen had no surveillance because no personnel were assigned such responsibilities; the other 11 had assigned personnel but could not provide evidence of surveillance due to incomplete documentation. Also, some surveillance personnel did not receive required training before beginning their assignments. According to DOD officials, insufficient surveillance occurred because surveillance is not as important to contracting officials as awarding contracts and therefore, does not receive the priority needed to ensure that surveillance occurs. The Army, unlike the Air Force and Navy organizations we visited, does not require surveillance personnel to be assigned responsibility prior to contract award. We also found that surveillance personnel involved in our review were not evaluated on how well they perform their surveillance duties. Further, surveillance was usually a part-time responsibility and some personnel felt that they did not have enough time in a normal workday to perform their surveillance duties. DOD has taken steps to implement provisions in the National Defense Authorization Act for Fiscal Year 2002 intended to improve the general management and oversight of service contract procurement and, in October 2004, DOD issued a policy that emphasized the proper use of other agencies' contracts. However, these efforts did little to improve service contract surveillance. On a more specific item, DOD did issue guidance that now requires appointment of surveillance personnel during the early planning phases of cost-reimbursable and time and materials service contracts. At the military service level, in April 2004, the Army revised its acquisition instructions and began requiring surveillance on some professional support service contracts; but, the revision did not apply to those contracts awarded before the enactment date that were still in effect.