DOD has implemented a number of initiatives to generate savings from reductions in its civilian and contract workforces in recent years. For example, in August 2010, the Secretary of Defense directed DOD to undertake department-wide efficiency initiatives to reduce duplication, overhead, and excess across the department. Among other things, the efficiency initiatives specified that DOD should freeze (or cap) the civilian workforce at the fiscal year 2010 levels for fiscal years 2011 through 2013. In 2012 the Senate Committee on Armed Services cited the need to maintain the appropriate balance between the civilian and contract workforce and to achieve the expected savings from reductions in both workforces, and Congress enacted provisions to limit DOD’s service contracts. Section 808 of the NDAA for Fiscal Year 2012 limited DOD’s total obligations for contract services in 2012 and 2013 to the amount requested for these services in the fiscal year 2010 President’s Budget Request. The limit does not apply to contract services for military construction, research and development, and services funded for overseas contingency operations. Additionally, it provides for two adjustments to the spending limit above fiscal year 2010 budgeted levels. DOD may adjust contract services spending above 2010 levels to account for (1) funding increases associated with contract services that were transferred from overseas contingency operations to the base budget and (2) the cost of additional civilian personnel positions over fiscal year 2010 levels. As shown in table 1, DOD identified an aggregate spending limit of $56.47 billion for fiscal year 2012 and $57.46 billion for fiscal year 2013. The spending limit identified in the Act applied to the entire department; therefore, components could exceed their individual targets but DOD would still be in compliance with the law if total spending for contract services across the entire department was less than the aggregate spending limit. Section 808 contract services spending limits ended after fiscal year 2013, but Congress extended the spending limit through fiscal While year 2014 in section 802 of the NDAA for Fiscal Year 2014.spending limit requirements currently expire at the end of fiscal year 2014, draft legislation contains a provision to extend the spending limit requirement through fiscal year 2015. Congress has also enacted legislation to improve the availability of information on DOD’s acquisition of services and to help the department make more strategic decisions about the right workforce mix of military, civilian, and contractor personnel. In fiscal year 2002, Congress enacted section 2330a of Title 10 of the U.S. Code, which required the Secretary of Defense to establish a data collection system to provide management information on each purchase of services by a military department or defense agency. In 2008, Congress amended section 2330a of Title 10 of the U.S. Code to require the Secretary of Defense to submit an annual inventory of contracted services performed for or on behalf of DOD during the preceding fiscal year. This annual inventory submission includes, among other things, the number of contractor full time equivalents and the associated direct labor cost for these positions. Following the submission of the inventory, the secretaries of the military departments and heads of the defense agencies are to complete a review of the contracts identified in the inventory to ensure, among other things, that the activities do not include inherently governmental functions—which are those that require discretion in applying government authority—such as the determination of budget policy. The review should also ensure that to the maximum extent practicable, the activities do not include any closely associated with inherently governmental functions, which are those that may be at risk of becoming inherently governmental due to the manner in which the contractor performs the work, among other things. Upon completion of this review, the secretaries of the military departments and heads of the defense agencies submit a certification letter to the Office of Personnel and Readiness that outlines the results and any corrective actions to be taken to ensure that contractors are not performing inherently governmental functions and to monitor the use of contractors for closely associated with inherently governmental functions. Section 808 of the NDAA for Fiscal Year 2012 further reinforced these requirements by instructing DOD to issue guidance requiring the components to reduce funding by 10 percent for fiscal years 2012 and 2013 for contracts identified with personnel performing closely associated with inherently governmental functions. Section 808 also instructed DOD to establish guidance to conduct a reduction of funding by 10 percent for fiscal years 2012 and 2013 for contracts identified with personnel performing on staff augmentation contracts, which it identifies, in relevant part, as contracts for personnel who are subject to the direction of a government official other than the contracting officer for the contract. Unlike the aggregate spending limit, the statutory requirement for guidance on reductions in funding for closely associated with inherently governmental functions and staff augmentation are directed to each component; therefore, the reductions are expected to take place at each component, rather than an aggregate reduction across the department. The section 808 requirement to reduce funding for closely associated with inherently governmental functions and staff augmentation expired in September 2013; however, Congress modified the requirements in section 802 of the NDAA for Fiscal Year 2014, extending the time period for DOD to implement the full 20 percent reduction for both the closely associated with inherently governmental and staff augmentation functions through fiscal year 2014. The fiscal year 2014 period is also referred to as a carryover year—whatever required reductions that DOD did not take in fiscal years 2012 and 2013 are required to be taken in 2014. While implementing both the civilian and contract services limitations, the department faced uncertainty about funding levels associated with the automatic, across-the-board cancellation of budgetary resources, known as sequestration. sequestration of budgetary resources, resulting in a $37 billion reduction in DOD’s discretionary budget, which includes funding for contract services. As we reported in June 2014, the department implemented an administrative furlough of the civilian workforce to help achieve these reductions, but contract services were not subject to these furloughs and DOD continued to use contracted support under existing contracts. Sequestration was a result of the Budget Control Act of 2011 (Pub. L. No. 112-25 (2011), as amended). The Budget Control Act of 2011, as implemented by the Office of Management and Budget, required spending cuts of $37 billion from DOD’s budget in fiscal year 2013 through across-the-board, proportional reductions in funding provided in the appropriations acts for most defense accounts, including accounts related to DOD’s civilian workforce and contracted services. DOD exceeded its spending limit by $1.72 billion in fiscal year 2012 and spent approximately $500 million less than its limit in fiscal year 2013. However, DOD reported spending $1.34 billion more than the limit in fiscal year 2012 and $1.81 billion less than its limit in fiscal year 2013 because the DOD Comptroller’s office—responsible for calculating DOD spending limits and setting spending targets—inconsistently calculated exclusions from the contract services spending limits. Varied implementation of fiscal controls hampered military department efforts to adhere to the spending limits. In fiscal year 2012, DOD exceeded the spending limit because each of the military departments exceeded their respective spending targets. Military department budget officials explained that they took limited steps to adhere to spending targets in fiscal year 2012 due to late guidance from the Office of the Deputy Secretary of Defense. After exceeding the spending targets in fiscal year 2012, some components improved planning and implemented stronger fiscal controls over contract services, such as monitoring spending during the year and prioritizing mission needs to assist in funding decisions, helping DOD meet its spending limit for fiscal year 2013. DOD reported spending more than its identified limit on contract services in fiscal year 2012 by $1.34 billion and less than its limit in fiscal year 2013 by $1.81 billion. However, the DOD Comptroller’s office inconsistently calculated adjustments by excluding certain categories of expenditures from the spending limit. By doing so, DOD overstated its calculated spending limit of $56.47 billion by approximately $400 million in 2012 and its spending limit of $57.46 billion by $1.31 billion in 2013, as indicated in figure 1. In addition to the transfer of contract services funding from overseas contingency operations, DOD’s calculation of the spending limit consists of two primary elements: (1) the funding of contract services categories identified in the 2010 President’s budget request and (2) the cost of increases in the civilian workforce over 2010 levels. The NDAA for Fiscal Year 2012 permits DOD to exclude spending for military construction, research and development, and services funded for overseas contingency operations in determining its spending limit. DOD’s June 2012 guidance instructs the components to exclude these services, but also permits excluding other services from federal sources and medical care, which are not specifically identified for exclusion in the law. A Comptroller official said that DOD excluded other services from federal sources because this category includes services purchased on behalf of other federal agencies, such as through the use of interagency agreements, in addition to DOD purchases. The official indicated that DOD was unable to distinguish between services purchased for other federal agencies and those purchased for DOD and therefore excluded the entire category. Additionally, the Comptroller official explained that the exclusion of contracted medical care from the spending limit was done to ensure that medical care was not reduced for service members. Moreover, the DOD Comptroller’s office included approximately $248 million in research and development funds in the spending limit for both fiscal year 2012 and 2013, while excluding all actual research and development spending from its calculation of adherence to the limit for fiscal year 2013. As a result of this error, DOD overstated the limit by $248 million. The Comptroller’s office acknowledged this inclusion as a coding error and plans to appropriately exclude research and development expenditures from its spending limit in future years. In addition to excluding certain services from the spending limit, section 808 also permits DOD to increase its spending on contract services above 2010 levels to adjust for cost increases associated with its civilian workforce. However, our analysis found that the DOD Comptroller office’s calculation for the civilian workforce adjustment was not consistently applied.