Share-in-savings contracts fall under the umbrella of performance-based contracting, in which a federal agency specifies the outcome or result it desires and lets the contractor decide how best to achieve the desired outcome. In theory, share-in-savings contracting can provide a number of potential benefits to both an agency and its contractor. For example, an agency can ask a contractor to provide up-front funding, in which case most of the financial risk of the project shifts from the government to the contractor. The agency also can leverage the contractor’s stake in the success of a project since the contractor receives payment only after demonstrating that the project—a new or upgraded information technology system, for example—saves the agency money. Unexpected problems, such as a delay in system installation, could erase some of the projected savings, so the contractor has an incentive to effectively manage overall costs, schedule, and performance. In short, the contractor is paid for results, not just for effort. Because of the increased financial risk a contractor assumes, a contractor can earn a greater return with a share-in- savings contract compared to the return on a traditional contract. In 1996, the Clinger-Cohen Act authorized limited pilot programs to test the feasibility of share-in-savings contracts for information technology. In 2002, the E-Government Act expanded authority to award share-in-savings contracts in fiscal years 2003 through 2005 to acquire information technology solutions and provided incentives for agencies to enter into such contracts. For example, agencies are allowed to retain, in their information technology accounts, any savings above amounts paid to their contractors. The act required the OMB to report to Congress on the number of share-in-savings contracts entered into under this initiative. In December 2004, the OMB reported that no contracts for information technology projects had been awarded. In 2003, we issued two reports related to the use of share-in-savings contracts. Our January 2003 report, which focused on commercial use of share-in-savings contracting, found that this approach can be an effective technique to motivate contractors to generate savings and revenues for clients. To be successful, though, clients and contractors need to agree on goals and objectives and how to achieve them. Our March 2003 correspondence to OMB addressed the need for OMB’s Office of Federal Procurement Policy to ensure that members of the federal acquisition workforce understand and appropriately apply the authority of the E-Government Act of 2002. The Department of Energy has used share-in-savings contracting for technology solutions to reduce energy consumption. Congress authorized the department, among other federal agencies, to use a type of share-in- savings contract for private financing of energy-efficiency improvements in federal facilities. Rather than use up-front appropriations from Congress, the department asked energy service contractors to contribute the up-front costs for identifying a federal facility’s energy needs as well as buying, installing, operating, and maintaining energy-efficient equipment to reduce energy bills. In return, the contractors get a share of the energy savings generated by the improvements. We have found that agencies that have used energy savings performance contracts have reduced their energy consumption and achieved other goals. We have raised questions, however, about the use of share-in-savings contracts for energy-efficiency improvements. For example, a number of factors may cause third-party financing of long-term capital improvement projects to be more expensive than the direct use of available appropriated funds. This is so because the interest rate paid by a contractor for needed capital typically would be higher than if the improvements were funded through appropriations. Inevitably, by opting to use a share-in-savings contract, the federal agency would have to take into account the contractor’s higher cost of financing than if the agency had funded the project itself. Another area of concern is how share-in- savings contracts should be reflected in the federal budget, an issue about which federal budget agencies disagree. On the one hand, OMB believes that share-in-savings budget authority, contract obligations, and outlays should be recognized on a year-to-year basis. In other words, only the first year’s costs, not the cumulative annual costs of energy share-in-savings contracts, would need to be reflected in the agency’s budget in the year the contract is awarded. On the other hand, the Congressional Budget Office believes that the budget should reflect long term share-in-savings contract commitments as new obligations at the time the contract is signed, consistent with government accounting principles. In a recent report, we raised similar concerns. Finally, the extent to which energy savings cover costs remains uncertain, and we have recommended more oversight of energy savings performance contracts and other steps to ensure cost-effectiveness. Final regulations to implement the share-in-savings authority in the E-Government Act of 2002 have yet to be published. Additional guidance on the use of this method also lags behind the progress made in establishing a share-in-savings program office and providing agencies with some share-in-savings tools and related training. The E-Government Act required that the Federal Acquisition Regulation (FAR) be revised by mid-September 2003 to implement the share-in- savings authority contained in the act. It was not until July 2004, however, that a proposed revision to the FAR was published in the Federal Register for public comment. As of July 2005, the final FAR rule was still awaiting approval by OMB’s Office of Federal Procurement Policy. The act also required the OMB to develop guidance for techniques to permit agencies to retain a portion of resulting financial savings after payment of the contractor’s share of the savings. OMB officials told us they plan to develop a broader policy memorandum providing agencies with additional guidelines to ensure share-in-savings contracting success. As of July 2005, the policy memorandum had not been issued. OMB officials indicated, however, that implementing regulations and share-in-savings guidance would be completed in the near future. The act assigned GSA responsibility for helping federal agencies identify information technology projects as potential share-in-savings candidates and for providing guidance on determining share ratios and baselines from which savings may be measured. GSA established a share-in-savings program office in February 2003, and in July of that year launched two Web-based tools to help agencies identify and evaluate share-in-savings opportunities. The Business Case Decision Tool is designed to assist agencies in developing business cases on the basis of realistic baseline costs to ensure that use of share-in-savings contracts would be cost- effective. The Proposal Evaluation Tool is used to evaluate the merits of contractor share-in-savings proposals. According to the program office director, agencies started using the Business Case Decision Tool in September 2003. As of March 2005, various agencies have used the tool to conduct 219 analyses, resulting in the identification of 15 information technology projects as potential share-in-savings candidates. Although some of these 15 potential projects are still under consideration, various steps remain to be completed, and none has yet resulted in a share-in- savings contract award. GSA hired a contractor to train agencies in identifying suitable share-in- savings projects, structuring solicitations, and analyzing proposals. The training, which has been available to agencies since July 2004, is a 2-day course and costs $650 per student. As of March 21, 2005, a total of 21 federal acquisition employees from six agencies had taken the training. The same training is now being offered by the Federal Acquisition Institute, an entity within OMB charged with developing the curriculum needed to train the civilian agency workforce. Two classes have been scheduled, one in June 2005, and the other before the E-Government Act’s authority expires in September 2005. The Federal Acquisition Institute may exercise an option to provide five additional share-in-savings training classes in fiscal year 2006. Finally, in July 2004, GSA established blanket purchase agreements with six contractors; each of which is a major information technology solution provider with commercial share-in-savings contracting experience. A blanket purchase agreement is a simplified method of filling the government’s anticipated repetitive needs for supplies or services by establishing charge accounts with qualified sources of supply. The agreements may subsequently be used by agencies to procure specific goods or services. As of June 2005, however, since no share-in-savings project is ready for the contracting phase, no agencies have used the blanket purchase agreements. Officials from 11 agencies cited several reasons the share-in-savings contracting authority for information technology has not led to the award of share-in-savings contracts. Reasons include a lack of final implementing regulations and OMB guidance on how to budget and account for retained savings and the difficulty of determining baseline costs. Some officials said contractors are reluctant to get involved in share-in-savings contracts because the return on investment is believed to be too low. In addition, officials told us that even though contractors would provide up-front funding for a share-in-savings contract, some amount of appropriated funds would still be required. Officials also said that too few acquisition personnel have been trained to use this innovative contracting technique. Agency officials told us they are reluctant to use share-in-savings contracting until the FAR implementing regulations are finalized. Because share-in-savings contracting is considered innovative within the federal government, agency officials said they need clear regulations to understand when and how to use this technique. We also highlighted the need for guidance in our March 2003 correspondence to OMB’s Office of Federal Procurement Policy.