[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                    PERFORMANCE-BASED ACQUISITIONS:
                CREATING SOLUTIONS OR CAUSING PROBLEMS?

=======================================================================

                                HEARING

                               before the

                     COMMITTEE ON HOMELAND SECURITY

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 8, 2008

                               __________

                           Serial No. 110-112

                               __________

       Printed for the use of the Committee on Homeland Security
                                     

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                     COMMITTEE ON HOMELAND SECURITY

               Bennie G. Thompson, Mississippi, Chairman

Loretta Sanchez, California          Peter T. King, New York
Edward J. Markey, Massachusetts      Lamar Smith, Texas
Norman D. Dicks, Washington          Christopher Shays, Connecticut
Jane Harman, California              Mark E. Souder, Indiana
Peter A. DeFazio, Oregon             Tom Davis, Virginia
Nita M. Lowey, New York              Daniel E. Lungren, California
Eleanor Holmes Norton, District of   Mike Rogers, Alabama
Columbia                             David G. Reichert, Washington
Zoe Lofgren, California              Michael T. McCaul, Texas
Sheila Jackson Lee, Texas            Charles W. Dent, Pennsylvania
Donna M. Christensen, U.S. Virgin    Ginny Brown-Waite, Florida
Islands                              Gus M. Bilirakis, Florida
Bob Etheridge, North Carolina        David Davis, Tennessee
James R. Langevin, Rhode Island      Paul C. Broun, Georgia
Henry Cuellar, Texas                 Candice S. Miller, Michigan
Christopher P. Carney, Pennsylvania
Yvette D. Clarke, New York
Al Green, Texas
Ed Perlmutter, Colorado
Bill Pascrell, Jr., New Jersey

       Jessica Herrera-Flanigan, Staff Director & General Counsel

                     Rosaline Cohen, Chief Counsel

                     Michael Twinchek, Chief Clerk

                Robert O'Connor, Minority Staff Director

                                  (II)


                            C O N T E N T S

                              ----------                              
                                                                   Page

                               Statements

The Honorable Bennie G. Thompson, a Representative in Congress 
  From the State of Mississippi, and Chairman, Committee on 
  Homeland Security:
  Oral Statement.................................................     1
  Prepared Statement.............................................     2

                               Witnesses

Mr. Thomas W. Essig, Chief Procurement Officer, Department of 
  Homeland Security:
  Oral Statement.................................................     4
  Prepared Statement.............................................     5
Mr. John Hutton, Director, Acquisition and Sourcing Management, 
  Government Accountability Office:
  Oral Statement.................................................    11
  Prepared Statement.............................................    13
Ms. Anne F. Reed, President and Chief Executive Officer, 
  Acquisition Solutions:
  Oral Statement.................................................    22
  Prepared Statement.............................................    23
Mr. Alan Chvotkin, Executive Vice President and Counsel, 
  Professional Services Council:
  Oral Statement.................................................    30
  Prepared Statement.............................................    32

                                Appendix

Questions From Chairman Bennie G. Thompson.......................    55


                    PERFORMANCE-BASED ACQUISITIONS:
                CREATING SOLUTIONS OR CAUSING PROBLEMS?

                              ----------                              


                         Thursday, May 8, 2008

                     U.S. House of Representatives,
                            Committee on Homeland Security,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10:05 a.m., in Room 
311, Cannon House Office Building, Hon. Bennie G. Thompson 
[chairman of the committee] presiding.
    Present: Representatives Thompson, Dicks, Jackson Lee, 
Etheridge, Cuellar, and Pascrell.
    Chairman Thompson [presiding]. The Committee on Homeland 
Security will come to order.
    For the sake of the witnesses, just as we were about to 
come, we got a notice that they will have five votes very 
shortly. I am certain our attendance is reflective of people 
wanting to move into the Capitol and do the votes before they 
come. It is my hope that we can do at least the opening 
statements, and then come back for the question-and-answer 
period, which should be pretty good. I want to thank Mr. 
Etheridge for coming to the committee so we can begin.
    The committee is meeting today to receive testimony on 
Performance-Based Acquisitions: Creating Solutions or Causing 
Problems. Performance-based contracting allows the government 
to issue contracts without specifying what goods or services it 
wants to buy. Instead, the government can issue a statement 
describing the problem it wants solved and have the private 
sector propose solutions. This approach can provide the needed 
flexibility to promote innovations by businesses, or it can be 
a recipe for chaos.
    Let me just give you a few highlights of the department's 
experience with performance-based contracting. Emerge2 was a 
performance-based contract to develop a department-wide 
financial management system. It did not have clear or complete 
requirements. After spending $52 million, the department 
scrapped the program.
    Deepwater is a performance-based contract program to 
modernize the Coast Guard fleet. In August, 2006, the 
department's inspector general recommended that the Coast Guard 
increase oversight of the program and better define 
requirements. This would help ensure that the contractor's 
activities met program goals. The department couldn't follow 
the IG's recommendations. By August, 2007, it had spent $1 
billion on a program that has become well known for producing 
ships that would not float.
    Project 28 of SBINet was a performance-based contract to 
enhance border security. Not only has the program been 
repeatedly delayed, but it has not yet met the department's 
needs. DHS accepted this project and paid the contractor, but 
said that most of the work must be redone. American taxpayers 
have already spent $20 million on this project and now DHS is 
saying that they will need at least $40 million to fix it.
    I will provide additional examples of performance-based 
contracting gone wrong, but I will spare you the sad litany. 
But I will say this: There are strict rules that govern the 
issuance of performance-based contracts. Moreover, GAO has 
found that strong organizational systems must be in place to 
effectively implement this kind of contract.
    At a minimum, there must be an adequate number of trained 
and knowledgeable procurement staff. There must also be active 
involvement between program managers and procurement staff. 
Finally, there must be oversight to assure that contractors are 
meeting expectations. Without these basic organizational 
features, performance-based contracting will not succeed. DHS 
does not have these basic features.
    Structurally, the chief procurement officer is hamstrung. 
He does not have direct line authority over procurement 
operations within the components. At the same time, the 
procurement operations are not fully staffed. GAO reports that 
as of February, 2008, DHS only had 60 percent of the necessary 
procurement personnel on board.
    I appreciate that the new chief procurement officer is 
trying to make changes, and that he is under the gun to comply 
with the Office of Management and Budget's mandated 40 percent 
use of performance-based contracting. Given these 
circumstances, it should come as no surprise that costly 
mistakes happen, staff attrition grows, inadequate planning 
continues, and the cycle of ineptitude and waste goes on. But 
when we are spending the taxpayer's money, complacency about 
the weaknesses in DHS' procurement shop is not acceptable.
    Let me be clear: I am not suggesting that we throw the baby 
out with the bathwater. However, I am suggesting that we adjust 
the water temperature, switch our grand of soap, and replace 
the sponge. We cannot keep doing the same thing in the same way 
and expect different results.
    The American people deserve our best efforts and our 
assurance that their money is being spent wisely. When it comes 
to performance-based contracts, they have received neither.
    [The statement of Chairman Thompson follows:]

           Prepared Statement of Chairman Bennie G. Thompson

    Performance-based contracting allows the government to issue 
contracts without specifying what goods or services it wants to buy. 
Instead, the government can issue a statement describing the problem it 
wants solved and have the private sector propose solutions.
    This approach can provide the needed flexibility to promote 
innovations by businesses.
    Or it can be a recipe for chaos.
    Let me just give you a few highlights of this Department's 
experience with performance-based contracting:
   Emerge2 was a performance-based contract to develop a 
        department-wide financial management system. It did not have 
        clear or complete requirements. And after spending $52 million, 
        the Department the program.
   Deepwater is a performance-based contract program to 
        modernize the Coast Guard fleet. In August 2006, the 
        Department's Inspector General recommended that the Coast Guard 
        increase oversight of the program and better define 
        requirements. This would help ensure that the contractor's 
        activities meet program goals. The Department couldn't follow 
        the IG's recommendations. By August 2007, it had spent $1 
        billion on a program that has become well-known for producing 
        ships that would not float.
   ``Project 28'' of SBINet was a performance-based contract to 
        enhance border security. Not only has the program been 
        repeatedly delayed but it has not met the Department's needs. 
        DHS accepted this project and paid the contractor but said that 
        most of the work must be redone. American taxpayers have 
        already spent $20 million on this project and now, DHS is 
        saying that they will need at least another $40 million to fix 
        it.
    I could provide additional examples of performance-based 
contracting gone wrong, but I will spare you the sad litany.
    But I will say this--there are strict rules that govern the 
issuance of performance-based contracts.
    Moreover, GAO has found that strong organizational systems must be 
in place to effectively implement this kind of contract.
    At a minimum, there must be an adequate number of trained and 
knowledgeable procurement staff. There must also be active involvement 
between program managers and procurement staff. Finally, there must be 
oversight to assure that contractors are meeting expectations.
    Without these basic organizational features, performance-based 
contracting will not succeed. DHS does not have these basic features.
    Structurally, the Chief Procurement Officer is hamstrung. He does 
not have direct line authority over procurement operations within the 
components. At the same time, the procurement operations are not fully 
staffed. GAO reports that as of February 2008, DHS only had 60% of the 
necessary procurement personnel on board.
    I appreciate that the new chief procurement officer is trying to 
make changes. And that he is under the gun to comply with the Office of 
Management and Budget's mandated 40% use of performance-based 
contracting.
    Given these circumstances, it should come as no surprise that: 
costly mistakes happen, staff attrition grows, inadequate planning 
continues, and the cycle of ineptitude and waste goes on.
    But when we are spending the taxpayer's money, complacency about 
the weaknesses in DHS' procurement shop is not acceptable.
    Let me be clear.
    I am not suggesting that we throw the baby out with the bathwater.
    However, I am suggesting that we adjust the water temperature, 
switch our brand of soap, and replace the sponge. We cannot keep doing 
the same thing in the same way and expect different results.
    The American people deserve our best efforts and our assurance that 
their money is being spent wisely. When it comes to performance-based 
contracts, they have received neither.

    Chairman Thompson. In the absence of a minority member on 
the committee present, we will go directly to our panel of 
witnesses. I welcome the panel of witnesses. Our first witness 
is Mr. Thomas Essig, the chief procurement officer of the 
Department of Homeland Security. He is the lead executive 
responsible for management, administration and oversight of the 
department's acquisition operations.
    Our second witness is Mr. John Hutton, director of 
acquisition and sourcing management at the Government 
Accountability Office. Mr. Hutton has been with GAO for over 30 
years.
    Our third witness is Ms. Anne Reed. Ms. Reed is chief 
executive officer of Acquisition Solutions, a research and 
consulting company that specializes in advising Federal 
agencies on acquisition issues.
    Our fourth witness is Mr. Alan Chvotkin. Mr. Chvotkin is 
the senior vice president and counsel for Professional Services 
Council, which is a trade association of over 300 small-, 
medium-, and large-size companies that do business with the 
Federal Government.
    Without objection, the witnesses' full statements will be 
inserted in the record.
    I now ask each witness to summarize his or her statement 
for 5 minutes, beginning with Mr. Essig of DHS.

   STATEMENT OF THOMAS W. ESSIG, CHIEF PROCUREMENT OFFICER, 
                DEPARTMENT OF HOMELAND SECURITY

    Mr. Essig. Chairman Thompson, Ranking Member King, and 
members of the committee, thank you for this opportunity to 
appear before you to discuss the Department of Homeland 
Security's use of performance-based acquisition. I am the 
department's chief procurement officer, CPO, and I am 
responsible for the management, administration, and oversight 
of the department's acquisition program.
    I am a career Federal employee with more than 30 years of 
public service in the acquisition career field. I previously 
held several senior acquisition positions with the Navy 
Department before joining DHS in May of 2006. I am certified at 
level III, the highest level, in both the contracting and 
program management career fields at both DHS and the Department 
of Defense.
    Performance-based acquisition, or PBA, is a method of 
acquisition that provides the potential for the Federal 
Government to tap into private industry innovation and its 
commercial best practices in order to achieve better mission 
results. The focus of PBA is on the desired outcome, rather 
than the process.
    In last year's report to the Office of Federal Procurement 
Policy and Congress, however, the Acquisition Advisory Panel 
noted that there was some debate as to the value of this 
technique. Some noted challenges in implementation, especially 
for those who define ``requirements'' within the program 
management community. Other recommended that several categories 
of requirements be excluded from consideration for PBA, 
including staff augmentation requirements and requirements that 
necessitate absolute performance standards based on health and 
safety considerations.
    In my experience, a key factor required for successful PBA 
is a thorough understanding of the requirement by all parties. 
The term ``requirement,'' however, can mean different things to 
different people. From the perspective of the user, which 
includes our first responders and law enforcement personnel, 
the requirement is a user-defined need. From the contracting 
perspective, however, the requirement is what the contract 
identifies, no more and no less.
    That can be a source of problems downstream when the 
product or service that is delivered meets the contract's 
requirements, but not the users. A key aspect of successful 
PBA, therefore, is the ability to translate user needs into 
measurable outcome-based requirements. That is not just a 
contracting function and requires a team effort from a wide 
range of functional specialists.
    The level of acquisition sophistication possessed by 
program procurement and other personnel involved in the process 
also plays a key role in the ability of an agency to 
successfully initiate and manage a portfolio of PBAs. 
Successful PBAs require considerable effort by a highly skilled 
requirements and acquisition workforce.
    DHS is a relatively new department created after the events 
of September 11. Given the nature of our mission and continuing 
staffing shortages in the full range of acquisition functions, 
it is essential that we pursue PBA in a judicious manner. Our 
goal is to increase both the quantity and quality or our PBAs, 
while continuing to meet essential mission requirements.
    This week, GAO released its report on PBAs. In that report, 
they recommended that DHS implement three actions. As detailed 
more fully in my written statement, we concur with those 
recommendations. DHS is committed to increasing its use of 
quality PBAs whenever practicable and appropriate, and my 
office will continue to lead the DHS acquisition community in 
this effort.
    Personnel from my office have been actively engaged in 
OFPP's PBA interagency working group and we recently sponsored 
an Excellence in Contracting series training event for DHS on 
PBA that was conducted jointly by OFPP and GSA. In addition to 
providing PBA policy and training support, my office is charged 
with performing oversight of all DHS contracting activities.
    During scheduled procurement management reviews by my 
contract oversight team, PBA is addressed to ascertain whether 
such contracts include the fundamental PBA elements such as 
performance-based statements of work, corresponding performance 
metrics, and a quality assurance surveillance plan.
    We have also implemented a number of initiatives to improve 
and validate the accuracy of the data in our Federal 
procurement data system and we are an active member of the OFPP 
government-wide group working to improve that system.
    To summarize, PBAs are a sound acquisition management tool 
for a wide range of requirements. As noted by the Acquisition 
Advisory Panel, the mandate is clear: improve the effectiveness 
and appropriate use of PBA. A key aspect of effective PBA is 
the ability to translate user needs into measurable outcome-
based requirements. Effective PBAs also require considerable 
up-front efforts and are not right for every procurement.
    Given the nature of the DHS mission, the organizational 
maturity of our new department, and the continuing staffing 
shortages in the full range of acquisition functions, it is 
essential that we pursue PBAs in a judicious manner. It is my 
job to ensure we do that.
    Thank you, Mr. Chairman, for your interest in and continued 
support of the DHS acquisition program and the opportunity to 
testify before the committee about the department's use of PBA. 
I would be glad to answer any questions you or other members of 
the committee may have for me.
    [The statement of Mr. Essig follows:]

                      Statement of Thomas W. Essig
                              May 8, 2008

    Chairman Thompson and Members of the committee, thank you for this 
opportunity to appear before you to discuss the Department of Homeland 
Security's (DHS) acquisition program in conjunction with the hearing 
entitled ``Performance-Based Acquisitions: Creating Solutions or 
Causing Problems?''. I am the Chief Procurement Officer (CPO) for the 
Department.
    As the CPO, I am the lead executive responsible for the management, 
administration and oversight of the Department's acquisition programs. 
In that capacity, I oversee and support eight procurement offices 
within DHS--U.S. Customs and Border Protection (CBP), Federal Emergency 
Management Agency (FEMA), U.S. Immigration and Customs Enforcement 
(ICE), Transportation Security Administration (TSA), United States 
Coast Guard (USCG), United States Secret Service (USSS), Federal Law 
Enforcement Training Center (FLETC), and the Office of Procurement 
Operations (OPO). My office provides the acquisition policies, 
procedures, training and workforce initiatives that enable our 
acquisition professionals to support mission accomplishment while also 
being good stewards of taxpayer dollars.
    Before addressing the subject of today's hearing, ``Performance-
Based Acquisitions: Creating Solutions or Causing Problems?'', I would 
like to take this opportunity to summarize my background and convey my 
top priorities as the CPO. I am a career Federal employee, with more 
than 30 years of public service in the acquisition career field. I 
began my Federal career in 1976 when I entered the Navy's Contracting 
Intern Development Program. My initial assignment was with the Naval 
Sea Systems Command (NAVSEA), where I served as a contract specialist 
supporting various Naval weapon systems and shipbuilding programs. I 
was selected as a member of the Senior Executive Service in 1995 and 
served as the Director of the Surface Systems Contracts Division of 
NAVSEA. I have also held Senior Executive Service positions with the 
Navy Department as the Executive Director of the Office of Special 
Projects, Director of the Navy Engineering Logistics Office, and 
Director for Program Analysis and Business Transformation in the Office 
of the Assistant Secretary of the Navy for Research, Development, and 
Acquisition. I joined DHS in May 2006 as the Deputy Chief Procurement 
Officer and was selected as the Chief Procurement Officer in late 
December 2007. While most of my career has been in the area of 
contracting, my assignments have also given me responsibility for 
leadership of other critical acquisition functions. As a result, I am 
certified at Level III (the highest level) in both the contracting and 
program management career fields at both the Department of Defense 
(DoD) and DHS.
    As you are aware, DHS is a relatively new Department, created after 
the events of September 11. Due to the scope of our mission and the 
challenges inherent in the creation of a new Department, we initially 
found ourselves short staffed and focused almost exclusively on one 
goal--mission accomplishment. At times, however, that was at the 
expense of the quality of the business deal. Since then, we have 
implemented a number of initiatives to improve our level of performance 
and ensure that our business deals enable us to both accomplish our 
mission and provide for good stewardship of taxpayer dollars.
    Earlier this year, I identified my top priorities for fiscal year 
2008. As those priorities are particularly relevant to today's topic, I 
would like to summarize them here.

                    PRIORITY 1: QUALITY CONTRACTING

    This goal was initially put in place by my predecessor, Ms. Elaine 
Duke. While we have made significant improvements in this area, more 
remains to be done to ensure quality contracting over the entire life 
cycle of the contract, from preparing the statement of work to closeout 
of the contract. In support of this priority, my office intends to 
continue to develop a policy framework to facilitate the Department's 
ability to meet its acquisition-related mission requirements, even in 
the face of urgent requirements. Our initiatives include, but are not 
limited to the following:
Goal: To Make Good Business Deals
   Improve the level and quality of our competitions by 
        establishing competition goals for each of the Components and 
        recognizing significant achievements through a competition 
        award program;
   Achieve DHS small business goals;
   Stay current on acquisition policy matters by being an 
        active member of the Civilian Agency Acquisition Council 
        (CAAC), by leading the DHS Chief Acquisition Officer (CAO) 
        Council, and by issuing DHS-wide policy guidance and training 
        based on identified competency gaps;
   Advise Components on implementation of recommendations from 
        DHS Oversight reviews;
   Ensure that acquisition personnel provide timely and 
        accurate data entries into the Federal Procurement Data 
        System--Next Generation (FPDS-NG) and the Past Performance 
        Information Retrieval System (PPIRS) acquisition systems;
   Encourage Component Heads of Contracting Activities (HCAs) 
        to leverage cost and pricing expertise from within the Office 
        of the Chief Procurement Officer (OCPO) and other agencies, 
        such as the Defense Contract Audit Agency (DCAA), the Defense 
        Contract Management Agency (DCMA), or Navy Price Fighters 
        Pricing, to ensure business deals are well supported and 
        documented to reflect fair and reasonable prices; and
   Establish a DHS-wide Acquisition Knowledge Management 
        toolkit.
    Goal: To perform effective contract administration.--In addition to 
ensuring our contract awards represent good business deals, we must 
perform effective administration of those contracts in order to ensure 
we get what we bargained for. In order to perform effective contract 
administration, my office intends to implement initiatives that include 
the following:
   Ensure proper contract administration is performed on all 
        DHS contracts, to include obtaining support from organizations 
        such as DCMA, especially with regard to Earned Value 
        Management;
   Provide just-in-time contract administration training 
        through the development of several online job-aids, to include 
        training and policy guidance on proper role of Contracting 
        Officer Technical Representatives (COTRs); and
   Develop a Government Furnished Equipment (GFE) ``Roadshow'' 
        to acquaint professionals with significant changes to policy on 
        administration of GFE.

               PRIORITY 2: QUALITY ACQUISITION MANAGEMENT

    We also recognize that you don't achieve program success through 
good contracting alone.
    Goal: To improve the quality of program management throughout 
DHS.--In order to deliver capabilities to meet the Department's mission 
on schedule and within budget, my office is in the process of 
strengthening program management, including the related functions such 
as cost analysis, logistics, systems engineering, and test and 
evaluation, by implementing initiatives that include the following:
   Complete ``Quick-Look'' reviews of Department Level 1 
        acquisition programs as a rapid assessment tool to identify 
        high risk area, as well as a more in-depth ``Deep Dives'' 
        review when needed;
   Leverage insight gained from these reviews to refine 
        Departmental acquisition policies and processes, and provide 
        governance support to Component Program Managers;
   Implement program success metrics to provide an 
        ``automated'' look into the health of our key programs;
   Re-engineer the DHS Investment and Acquisition Review 
        Processes;
   Address concerns regarding the certification of acquisition 
        personnel through various DHS training programs;
   Empower Program Managers and hold them accountable; and
   Facilitate improvement of practices and execution of 
        programs through the DHS Program Management and Test and 
        Evaluation Councils.

                       PRIORITY 3: QUALITY PEOPLE

    Neither of the first two goals can be achieved without a highly 
skilled and motivated acquisition workforce.
    Goal: To build and sustain the DHS Acquisition Workforce.--In order 
to build a world class acquisition workforce, I am implementing 
initiatives that include the following:
   Provide centralized hiring for acquisition and procurement 
        personnel through DHS-wide vacancy announcements and exercise 
        the recently granted re-employed annuitant authority and pursue 
        direct hire authority for the contracting career field in order 
        to resolve personnel shortages;
   Standup of the Acquisition Professionals Career Program as 
        an entry level vehicle to satisfy the long term need for 
        qualified acquisition personnel with 66 participants in fiscal 
        year 2008 and 100 participants in fiscal year 2009;
   Fund an Acquisition Workforce Training program to deliver 
        unified training of personnel by developing their knowledge, 
        skills and abilities to make good business deals; and
   Establish new Acquisition Workforce Certification 
        requirements for acquisition personnel by revising these 
        certification requirements to align with OMB and DoD policy.

                 PERFORMANCE-BASED ACQUISITIONS (PBAS)

    Federal agency usage of outcome-based service contracts, or PBAs, 
has been a topic of interest within the procurement community for more 
than 20 years. It is seen by many as a method of acquisition that 
provides for the potential for the Federal Government to tap into 
private industry innovation and its commercial best practices to 
achieve better mission outcomes than are achieved through traditional 
Government acquisition approaches. The focus of PBA is on the outcome 
rather than the process; the Federal Government is buying performance 
and results and is not focused on the processes or activities that our 
contractors utilize to achieve these desired outcomes.
    In last year's report to the Office of Federal Procurement Policy 
(OFPP) and Congress, the Acquisition Advisory Panel noted that during 
its public deliberations, there was some debate as to the value of this 
technique. Witness testimony, as well as written public statements, was 
mixed on PBA merits. Some questioned the validity of PBA for Federal 
Government uses after more than a decade of attempts to implement the 
methodology have failed to produce expected results. Others, however, 
noted significant successes using PBA. And though an OFPP study found 
generally positive results, the Panel found no systematic 
governmentwide effort to assess fully the merits of the process. Many 
witnesses spoke to the challenges in implementing the technique, most 
of which focused on the acquisition workforce, especially those who 
define requirements within the program management community. Commercial 
organizations told the Panel that implementing the technique can be 
difficult, particularly in identifying the appropriate performance 
standards to measure. A number of witnesses suggested that several 
categories of requirements be excluded from the pool of acquisitions 
that should be considered for PBA, including staff augmentation 
requirements, such as program office support, and, requirements that 
necessitate absolute performance standards based on health and safety 
considerations, such as management of a nuclear facility where there is 
no room or desire for flexibility or innovative solutions. Further, the 
Panel noted that FPDS-NG reporting errors and the lack of meaningful 
data with respect to both PBA usage and successful outcomes continue to 
plague the Federal acquisition community.
    Nevertheless, PBA has become widely accepted as a sound contract 
management method within the Federal Government for a wide range of 
requirements. Despite the difficulties noted in the Advisory Panel's 
report, PBA remains the preferred commercial technique seen as critical 
to obtaining transformational and innovative solutions. Ultimately, the 
Acquisition Advisory Panel determined that its statutory mandate was 
clear: improve the effectiveness and appropriate use of PBA.
    It is OFPP who provides active leadership with respect to the 
implementation and reporting of PBAs throughout the Federal Government. 
In response to OFPP's requirement, DHS submitted its initial 
Performance-Based Acquisition Management Plan to OFPP on October 1, 
2006. This Management Plan includes mission details by our respective 
Component contracting offices; management support strategies to ensure 
that PBAs are used within DHS to the maximum extent practicable; policy 
and guidance issued to encourage the use of PBAs; a summary of the 
acquisition process for PBAs including key roles and responsibilities; 
service categories where PBAs are primarily used; reporting 
requirements; and training initiatives.
    In my experience, a key factor required for successful PBAs is a 
thorough understanding of the requirement by all parties. The term 
``requirement,'' however, is used throughout the acquisition process 
and can mean different things to different people. From the perspective 
of the user--which includes our first responders and law enforcement 
personnel--the requirement is a user defined need. From the perspective 
of the contracting officer and contractor, however, the requirement is 
what the contract identifies--no more and no less. That can be the 
source of problems downstream when the product or service that is 
delivered meets the contract's requirement, but not the user's. A key 
aspect in successful performance-based acquisitions, therefore, is the 
ability to translate the user need into measurable, outcome-based 
requirements that all parties--including the user--understand and agree 
to. That is not just a contracting function and consequently requires a 
team effort from a wide range of functional specialists. It is also a 
labor intensive process that must be completed prior to award of the 
contract.
    Furthermore, PBAs are not right for every requirement. In complex 
service acquisitions, where user requirements may change during the 
course of the contract, the approach could be disadvantageous. In such 
a situation, the contract would ``require'' services that are not what 
the user actually needs.
    While the benefits of PBA are many, the sophistication of both 
program, procurement and other offices involved in the process plays a 
key role in the ability of any agency to successfully initiate and 
manage a portfolio of PBAs. PBA usage requires considerable effort on 
the front-end of the process by a highly skilled requirements and 
acquisition workforce. Likewise, during contract administration, PBA 
requires a labor intensive effort of contractor surveillance that 
places further demands on the respective program management offices.
    In my discussion of my top priorities for 2008, I mentioned the 
need for us to ensure that our business deals enable us to both 
accomplish our mission and provide for good stewardship of taxpayer 
dollars. PBAs can be an effective tool for accomplishing that. However, 
given the nature of our mission, the organizational maturity of our new 
Department, and the continuing staffing shortages in the full range of 
acquisition functions, it is essential that we pursue PBAs in a 
judicious manner. Our goal is to increase both the quantity and quality 
of our PBAs, while continuing to meet our essential mission 
requirements.

        GAO REPORT ON DHS' USE OF PERFORMANCE-BASED ACQUISITIONS

    This week, the GAO released its report, ``DEPARTMENT OF HOMELAND 
SECURITY, Better Planning and Assessment Needed to Improve Outcomes for 
Complex Service Acquisitions''. GAO was asked to (1) evaluate the 
implementation of a performance-based approach in the context of 
service acquisitions for major, complex investments, and (2) identify 
management challenges that may affect DHS' successful acquisitions for 
major investments, including those using a performance-based approach. 
In its report, the GAO made the following recommendations:

``To increase DHS's ability to achieve improved outcomes for its 
service acquisitions, including those that are performance-based, we 
recommend that the Secretary of Homeland Security implement the 
following three actions:
``(1) routinely assess requirements for major, complex investments to 
ensure that they are well-defined and develop consistently measurable 
standards linked to those requirements;
``(2) at a department-wide level, systematically evaluate the outcomes 
of major investments and relevant contracting methods; and
``(3) continuously improve the quality of FPDS-NG data to facilitate 
the ability to accurately identify and assess the use and outcomes of 
various contracting methods.''

    We concur with those recommendations and offer the following with 
respect to the report's three recommendations:
    In response to the first two recommendations, DHS is committed to 
increasing its use of quality PBAs whenever practicable and 
appropriate, and my office will continue to lead the DHS acquisition 
community in this effort. PBA training sessions have been provided to 
the entire acquisition community, including a recent OFPP/GSA sponsored 
event. Further, we have centralized our training program, making the 
Department better positioned to maximize the use of available training 
resources and to deliver needed training to a greater percentage of the 
acquisition workforce.
    I am working to strengthen acquisition and procurement by 
institutionalizing solid processes that will support our ability to 
maximize our use of PBA, including the following actions:
    A. Strengthening the requirements and investment review processes. 
        We are currently developing a new Department-wide requirements 
        process and re-engineering our investment and acquisition 
        review process;
    B. Reviewing the major programs and investments to ensure that the 
        requirements are clear, cost estimates are valid, technology 
        risks are properly assessed, schedules are realistic, contract 
        vehicles are proper, and the efforts are well managed. We have 
        held one formal Deputy Secretary IRB and projecting one per 
        month. DHS is also beginning the process of conducting paper 
        IRBs and Deputy Under Secretary for Management IRBs, as well as 
        establishing Acquisition Program Baselines (APBs) and 
        authorizing execution to the APB for all Level 1 and 2 
        programs;
    C. Building the capability to manage complex efforts by ensuring 
        that program offices are properly structured and staffed with 
        the right people and skills to ensure efficient and effective 
        program management and oversight; and to aggressively hire 
        where we have known shortages; and
    D. Examining best practice metrics in use by other departments with 
        the intent to start implementation this year.
    The Acquisition Program Management Division (APMD) within OCPO 
began operations in August 2007. The division was established to 
provide policy, oversight and support for the Department's acquisition 
programs. To date, APMD has performed Quick Look assessments of thirty-
seven Level 1 programs and has overseen Deep Dive reviews of the SBInet 
and Advance Spectroscopic Portal (ASP) programs. APMD has provided 
advice and guidance to a number of programs, particularly in the area 
of cost benefit analysis. Currently the APMD team is focused on an 
aggressive Investment and Acquisition process re-engineering effort. 
The effort includes replacing DHS Management Directive 1400 Investment 
Review Process, establishing revised investment and acquisition 
decision procedures, as well as processes for acquisition program 
baselining, periodic reporting, acquisition of services, and other 
initiatives as they are identified.
    We are also working to ensure that DHS obtains qualified 
acquisition professionals. Competition for these professionals is 
intense within the Washington, DC area. To resolve these personnel 
shortages, we are intensifying our human capital planning efforts to 
minimize skill and competency gaps as well as minimize our critical 
vacancies and reliance on contractors. We are also conducting staffing 
studies to better define our acquisition workforce needs. Our 
acquisition workforce currently includes both program managers and 
contract specialists. As part of our human capital planning efforts, we 
will be identifying other required acquisition career fields such as 
test and evaluation, systems engineering, logistics, and cost 
estimating. We are aggressively working to ensure that each acquisition 
position, upon definition, is encumbered by an acquisition professional 
trained and certified at the appropriate level. To this end, we are 
continuously reviewing and updating our Acquisition Training Program, 
the underpinning of a good certification program. We are utilizing the 
Defense Acquisition Workforce Improvement Act framework to develop DHS 
certification standards. We have also centralized a number of 
recruiting activities including issuing Department-wide vacancy 
announcements. Our centralized recruitment efforts to date have focused 
primarily on contracting professionals. Expansion to other acquisition 
career fields will occur as each series is defined and Department-wide 
needs are identified. This initiative supplements our Components' on-
going recruitment efforts with a goal of recruiting the best candidates 
available. This year, the Department received funding for the standup 
of the Acquisition Professional Career Program, which will be our 
primary source of entry level acquisition personnel, providing both on 
the job and formal classroom training. Our goal is to grow this program 
to 300 positions by fiscal year 2011 to fill our critical acquisition 
needs.
    Personnel from OCPO have been actively engaged in OFPP's 
Performance-Based Acquisition Interagency Working Group. The Group has 
worked to enhance OFPP's PBA Seven Steps Guidance and make available 
appropriate samples. And, OCPO recently sponsored a widely attended and 
well received ``Excellence in Contracting'' series training event on 
PBA that was conducted jointly by OFPP and the General Services 
Administration.
    Acquisitions for services within DHS currently represent a 
significant portion of the agency's procurement dollars, and we 
recognize the need to ensure that our complex service acquisitions meet 
the program needs that serve to support the overall DHS mission. In 
addition to providing PBA policy and training support, my office is 
charged with performing oversight of all DHS contracting activities to 
include monitoring the usage and reporting of PBAs.
    Further, as part of regularly conducted OCPO procurement management 
reviews of DHS Components, PBA is addressed to ascertain whether such 
contracts include the fundamental PBA elements such as performance-
based statements of work and corresponding performance metrics, and to 
ensure that a quality assurance surveillance plan is in place and used 
to validate contractor compliance with contract-mandated outcomes. 
Additionally, on a quarterly basis, Component PBA data is reviewed to 
compare PBA goals to outcomes, and feedback capability is being added 
to this process in the fourth quarter of this fiscal year.
    In response to GAO's third recommendation, as part of OCPO's 
oversight reviews, the accuracy of the FPDS-NG data is validated for 
the review sample, including whether the contract has been properly 
coded as performance-based. Additionally, OCPO is an active member of 
the Office of Federal Procurement Policy governmentwide group that is 
working to improve FPDS-NG, including the re-competition of the service 
provider. OCPO has also established a Governance Board whereby OCPO 
reaches out to the DHS Components to improve upon the Department's data 
collection.

                                SUMMARY

    PBA is a sound acquisition management method for a wide range of 
requirements and can be critical to the attainment of innovative 
commercial solutions. A key aspect of successful implementation of PBA, 
however, is the ability to translate user needs into measurable, 
outcome-based requirements. The effort is not just a contracting 
function and requires a team effort from a wide range of acquisition 
specialists. PBAs also require considerable effort up front and are not 
right for every requirement. Given the nature of DHS' mission, the 
organizational maturity of our new Department, and the continuing 
staffing shortages in the full range of acquisition functions, it is 
essential that we pursue PBAs in a judicious manner.
    Thank you, Mr. Chairman for your interest in and continued support 
of the DHS Acquisition Program and for the opportunity to testify 
before the committee about the Department's use of Performance-Based 
Acquisitions. I would be glad to answer any questions you or other 
Members of the committee may have for me.

    Chairman Thompson. Thank you for your testimony.
    I now recognize Mr. Hutton of GAO to summarize his 
statement for 5 minutes.

 STATEMENT OF JOHN HUTTON, DIRECTOR, ACQUISITION AND SOURCING 
          MANAGEMENT, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Hutton. Mr. Chairman, members of the committee, thank 
you for inviting me here today to discuss the Department of 
Homeland Security's planning and assessment of complex service 
acquisitions. DHS spends billions of dollars a year acquiring a 
variety of services to help address its homeland security 
mission.
    To help improve service acquisition outcomes, Federal 
procurement policy calls for agencies to use a performance-
based approach to the maximum extent practicable. A 
performance-based approach represented a shift from specifying 
the way in which contractors should perform work, to specifying 
acquisition outcomes.
    Key characteristics of this approach include a performance 
work statement that describes outcome-oriented requirements, 
measurable performance standards, and quality assurance 
surveillance. If properly implemented, these characteristics 
can help ensure that contract services meet cost, schedule and 
performance requirements.
    My testimony based on a report we are releasing today will 
focus on how contract outcomes were influenced by how well DHS 
components defined and developed the contract requirements and 
measurable performance standards, and the need for improved 
assessment and oversight to ensure better outcomes.
    First, our work emphasized the importance of clearly 
defined requirements to achieving desired outcomes and 
measurable performance standards to ensure control and 
accountability. This finding is consistent with our broader 
body of work on service acquisitions.
    For the eight major investments at three DHS components we 
reviewed, we found that they all had outcome-oriented 
requirements. However, contracts for four of these investments 
did not have what we would say are well-defined requirements or 
a complete set of measurable performance standards, or both, at 
the time of the contract award or start of work.
    These contracts experienced costs overruns, schedule 
delays, or did not otherwise meet performance expectations. For 
example, systems development contracts for two major 
investments lacked both well-defined requirements and 
measurable performance standards prior to the start of work, 
and both experienced less than desirable outcomes.
    Two examples, for the automated commercial environment task 
order 23, a trade software modernization effort, requirements 
were not fully defined at contract award, thus affecting the 
establishment of measurable performance standards and valid 
cost or schedule baselines for assessing contractor 
performance. The need to redefine requirements contributed to 
schedule delays and cost increases.
    Another is the Secure Border Initiative, Project 28, which 
lacked some well-defined requirements and measurable 
performance standards. For example, the task order was awarded 
before operational requirements and systems justifications were 
finalized.
    Conversely, we found that contracts with well-defined 
requirements linked the measurable performance standards, 
delivered results within budget, and provided a quality 
service. For example, contracted security services under TSA's 
screening partnership program at one airport had well-defined 
requirements and measurable performance standards linked to the 
contract requirements. This was an improvement from our prior 
reviews of the program, and in terms of expected outcomes, the 
contractor achieved a cost under-run during the first 5 months 
of the contract and exceeded most requirements.
    I would now like to highlight our findings related to the 
need for improved assessment and oversight to ensure better 
outcomes in acquiring services. Reliable data are essential to 
overseeing and assessing the implementation of contracting 
approaches, acquisition outcomes, and making informed 
management decisions.
    However, DHS does not have reliable data from the 
government-wide procurement database or at the department-wide 
level to systematically monitor, evaluate or report on service 
acquisitions, including those that are performance-based. For 
example, our review of 138 selected contracts DHS identified as 
performance-based showed that about one-half had none of the 
required performance-based elements. About 30 percent of them 
had all three elements.
    We and others have noted that inaccurate Federal 
procurement data is a longstanding government-wide concern. It 
is not just a DHS issue. Further, DHS representatives 
responsible for procurement oversight indicated they have not 
conducted systematic assessments, including costs, benefits, 
and other outcomes of a performance-based approach.
    To its credit, DHS established a work group to leverage 
some knowledge among their DHS components to improve the 
implementation of performance-based acquisitions, and DHS 
representatives are also working with OFPP to develop a best 
practices guide on measurable performance standards and to 
gather some good examples of performance-based contracts.
    The report we are releasing today recommends that DHS take 
several actions to increase its ability to achieve improved 
outcomes for its service acquisitions, including those that are 
performance-based. These actions include, one, routinely 
assessing requirements for complex investments to ensure they 
are well defined and developing measurable standards linked to 
those requirements, and systematically evaluating outcomes of 
major investments and improving the quality of data to help 
identify and assess use of various contracting methods.
    Mr. Chairman, other members of the committee, this 
concludes my prepared statement. I would be pleased to respond 
to any questions that you may have.
    [The statement of Mr. Hutton follows:]

                   Prepared Statement of John Hutton
                              May 8, 2008

 DEPARTMENT OF HOMELAND SECURITY: BETTER PLANNING AND OVERSIGHT NEEDED 
            TO IMPROVE COMPLEX SERVICE ACQUISITION OUTCOMES
   GAO HIGHLIGHTS: HIGHLIGHTS OF GAO-08-765T, A TESTIMONY BEFORE THE 
        COMMITTEE ON HOMELAND SECURITY, HOUSE OF REPRESENTATIVES

Why GAO Did This Study
    The Department of Homeland Security (DHS) has relied on service 
acquisitions to meet its expansive mission. In fiscal year 2006, DHS 
spent $12.7 billion to procure services. To improve service acquisition 
outcomes, Federal procurement policy establishes a preference for a 
performance-based approach, which focuses on developing measurable 
outcomes rather than prescribing how contractors should perform 
services.
    This testimony focuses on how contract outcomes are influenced by 
how well DHS components have defined and developed contract 
requirements and performance standards, as well as the need for 
improved assessment and oversight to ensure better acquisition 
outcomes.
    GAO's statement is based on its report being released today, which 
reviewed judgmentally selected contracts for eight major investments at 
three DHS components--the Coast Guard, Customs and Border Protection 
(CBP), and the Transportation Security Administration (TSA)--totaling 
$1.53 billion in fiscal years 2005 and 2006; prior GAO and DHS 
Inspector General reviews; management documents and plans; and related 
data, including 138 additional contracts, primarily for basic services 
from the Coast Guard, CBP, TSA, and Immigration and Customs 
Enforcement.

 DEPARTMENT OF HOMELAND SECURITY: BETTER PLANNING AND OVERSIGHT NEEDED 
            TO IMPROVE COMPLEX SERVICE ACQUISITION OUTCOMES

What GAO Found
    Over the past several years, GAO has found that appropriate 
planning, structuring, and monitoring of agency service acquisitions, 
including those that are performance-based, can help minimize the risk 
of cost overruns, delayed delivery, and unacceptably quality. Several 
prior GAO and DHS Inspector General reviews of major DHS investments 
using a performance-based approach point to such shortcomings. While 
all of the contracts GAO reviewed at the Coast Guard, CBP, and TSA had 
outcome-oriented requirements, contracts for four of the eight 
investments did not have well-defined requirements, or a complete set 
of measurable performance standards, or both at the time of contract 
award or start of work. These service contracts experienced cost 
overruns, schedule delays, or did not otherwise meet performance 
expectations. In contrast, contracts for the other four investments had 
well-defined requirements linked to measurable performance standards 
and met the standards for contracts that had begun work.
    In managing its service acquisitions, including those that are 
performance-based, DHS has faced oversight challenges that have limited 
its visibility over service acquisitions and its ability to make 
informed acquisition management decisions. Notably, the department 
lacks reliable data on performance-based service acquisitions. About 
half of the 138 contracts identified by DHS as performance-based had 
none of the elements DHS requires for such contracts: a performance 
work statement, measurable performance standards, or a quality 
assurance surveillance plan. Such inaccurate data limit DHS's ability 
to perform management assessments of these acquisitions. In addition, 
the Chief Procurement Officer, who is responsible for departmentwide 
procurement oversight, has not conducted management assessments of 
performance-based service acquisitions.
    To help DHS improve outcomes for its service acquisitions, 
including those that are performance-based, GAO recommended that DHS 
routinely assess requirements for complex investments to ensure that 
they are well-defined, and develop consistently measurable performance 
standards linked to those requirements. GAO also recommended that DHS 
systematically evaluate the outcomes of major investments and relevant 
contracting methods and improve the quality of data to facilitate 
identifying and assessing the use of various contracting methods. DHS 
generally concurred with GAO's recommendations, noting some 
departmental initiatives to improve acquisition management.
    Mr. Chairman and Members of the committee, thank you for inviting 
me here today to discuss the Department of Homeland Security's (DHS) 
planning and assessment of its complex service acquisitions. To meet 
its expansive homeland security mission, DHS spends billions of dollars 
on service acquisitions for critical trade, transportation, and border 
security investments. In fact, more than 80 percent of DHS's total 
procurement dollars are spent on services. Prior GAO work has found 
that appropriate planning, structuring, and monitoring of acquisitions 
is critical to ensuring that the services provided meet the 
government's needs.\1\ To help improve service acquisition outcomes, 
Federal procurement policy calls for agencies to use a performance-
based approach to the maximum extent practicable. This approach 
includes a performance work statement that describes outcome-oriented 
requirements, measurable performance standards, and quality assurance 
surveillance. If properly implemented, these characteristics can help 
ensure that contracted services meet cost, schedule, and performance 
requirements. Other factors, such as pressure to get programs up and 
running, additional external requirements, and technological challenges 
also impact the ability to achieve good acquisition outcomes.
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    \1\ For example, GAO, Defense Acquisitions: Tailored Approach 
Needed to Improve Service Acquisition Outcomes, GAO-07-20 (Washington, 
D.C.: Nov. 9, 2006).
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    While a performance-based approach has been widely accepted, we 
have found that agencies face certain challenges in implementing the 
approach--especially for complex or major investments. My testimony 
today will focus on the particular challenges DHS has confronted. 
Specifically, I will discuss how contract outcomes are influenced by 
how well DHS components have defined and developed contract 
requirements and performance standards. I will also discuss the need 
for improved assessment and oversight to ensure better outcomes.
    My statement is based on our report that is being released 
today.\2\ This report focused on contracts for major investments with 
complex service acquisitions at the Coast Guard, Customs and Border 
Protection (CBP), and the Transportation Security Administration 
(TSA)--three of the DHS components reporting among the highest 
obligations for performance-based service acquisitions in fiscal years 
2005 and 2006. We conducted this performance audit in accordance with 
generally accepted government auditing standards. Those standards 
require that we plan and perform the audit to obtain sufficient, 
appropriate evidence to provide a reasonable basis for our findings and 
conclusions based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings and conclusions 
based on our audit objectives.
---------------------------------------------------------------------------
    \2\ GAO, Department of Homeland Security: Better Planning and 
Assessment Needed to Improve Outcomes for Complex Service Acquisitions, 
GAO-08-263 (Washington, D.C.: Apr. 22, 2008).
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                                SUMMARY

    Over the past several years, we have found that if agency service 
acquisitions, including those that are performance-based, are not 
appropriately planned, structured, and monitored, there is an increased 
risk that the government may receive products or services that are over 
budget, delivered late, and of unacceptable quality. Several prior GAO 
and DHS Inspector General reviews of major DHS investments using a 
performance-based approach point to such shortcomings. For the report 
we are releasing today, we reviewed contracts for eight major 
investments at the Coast Guard, CBP, and TSA and found that all had 
outcome-oriented requirements--as required in acquisition regulations 
and policy. However, contracts for four of these investments did not 
have well-defined requirements, or a complete set of measurable 
performance standards, or both at the time of contract award or start 
of work. These service contracts experienced cost overruns, schedule 
delays, or did not otherwise meet performance expectations. In 
contrast, service contracts for the other four investments had well-
defined requirements linked to measurable performance standards and 
performed within budget meeting the standards in all cases where 
contractors had begun work. DHS components conducted quality assurance 
surveillance, and for the contracts that had negative outcomes, 
surveillance helped to identify contractor performance weaknesses and 
corrective action was taken.
    In managing its service acquisitions, including those that are 
performance-based, DHS has faced oversight challenges, including a lack 
of reliable data and systematic management reviews. Although 
contracting and program staff at DHS components told us that they used 
a performance-based approach to the maximum extent practicable, the 
department does not have reliable data to facilitate required reporting 
or perform management assessments of these acquisitions. Our review of 
an additional 138 contracts, which were primarily for basic services, 
found that about half of the contracts coded by DHS as performance-
based had none of the three elements DHS requires: a performance work 
statement, measurable performance standards, or a quality assurance 
surveillance plan. Inaccurate data limit DHS's visibility over service 
acquisitions and the department's ability to make informed acquisition 
management decisions. The Chief Procurement Officer (CPO), who has 
responsibility for departmentwide procurement oversight, has begun some 
initial review of performance-based service acquisitions, but has not 
conducted management assessments of this acquisition method.

                               BACKGROUND

    Over the last decade, the use of Federal service contracting has 
increased and now accounts for over 60 percent of Federal procurement 
dollars spent annually. A performance-based approach to Federal service 
contracting was introduced during the 1990's, representing a shift from 
specifying the way in which contractors should perform work to 
specifying acquisition outcomes. Regardless of the contracting method, 
focusing on outcomes and collaboration among multiple stakeholders in 
the contracting process has been acknowledged as sound contract 
management. In 2000, Federal procurement law established a performance-
based approach as the preferred acquisition method for services.\3\ The 
Federal Acquisition Regulation requires all performance-based service 
acquisitions to include:
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    \3\ Floyd D. Spence National Defense Authorization Act for Fiscal 
Year 2001, Pub. L. No. 106-398  821(a) (2000) required that the 
Federal Acquisition Regulation (FAR) be revised to establish a 
preference for the use of a performance-based approach in the 
acquisition of services, which was done in FAR 37.102(a), providing 
that performance-based acquisition is the preferred method for 
acquiring services and generally is to be used to the maximum extent 
practicable. In addition, this act established a preference for using 
firm fixed-price contracts or task orders--where a specified price is 
paid regardless of the contractor's incurred costs--when using a 
performance-based approach for service acquisitions.
---------------------------------------------------------------------------
   a performance work statement that describes outcome-oriented 
        requirements in terms of results required rather than the 
        methods of performance of the work;
   measurable performance standards describing how to measure 
        contractor performance in terms of quality, timeliness, and 
        quantity; and
   the method of assessing contract performance against 
        performance standards, commonly accomplished through the use of 
        a quality assurance surveillance plan.\4\
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    \4\ FAR 37.601; FAR 37.602(b); FAR 37.604. A fourth element, 
performance incentives, is required where appropriate.
---------------------------------------------------------------------------
    A 1998 Office of Federal Procurement Policy (OFPP) study on 
performance-based contracts--based largely on contracts for basic 
services, such as janitorial or maintenance services--showed that a 
number of anticipated benefits had been achieved, including reduced 
acquisition costs, increased competition for contracts, and improved 
contractor performance.\5\ However, implementing a performance-based 
approach is often more difficult for complex acquisitions, such as 
information technology, than it is for basic services, because agencies 
begin with requirements that are less stable, making it difficult to 
establish measurable outcomes. Such complex acquisitions may need to 
have requirements and performance standards continually refined 
throughout the life-cycle of the acquisition for a contractor to 
deliver a valuable service over an extended period of time. OFPP also 
has noted in policy that certain types of services, such as research 
and development, may not lend themselves to outcome-oriented 
requirements.
---------------------------------------------------------------------------
    \5\ Office of Management and Budget, Office of Federal Procurement 
Policy, A Report on the Performance-Based Service Contracting Pilot 
Project, May 1998.
---------------------------------------------------------------------------
    To encourage agencies to apply a performance-based approach to 
service acquisitions, the Office of Management and Budget (OMB) 
established governmentwide performance targets, which increased to 50 
percent of eligible service contract dollars for the current fiscal 
year. In January 2007, the congressionally mandated Acquisition 
Advisory Panel reported that performance-based acquisition has not been 
fully implemented in the Federal Government, despite OMB encouragement, 
and recommended that OMB adjust the governmentwide target to reflect 
individual agency assessments and plans.\6\ In May 2007, OMB's OFPP 
issued a memo providing that agencies, at a minimum, were expected to 
meet targets established and report on them in their management plans. 
In response, DHS's CPO established a performance-based target of 25 
percent for fiscal year 2007, increasing to 40 percent by fiscal year 
2010, that was included in DHS's Performance-Based Management Plan. The 
Acquisition Advisory Panel also recommended that OFPP issue more 
explicit implementation guidance and create an ``Opportunity 
Assessment'' tool to help agencies identify when they should consider 
using this acquisition method.
---------------------------------------------------------------------------
    \6\ Report of the Acquisition Advisory Panel to the Office of 
Federal Procurement Policy and the U.S. Congress, January 2007.
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    REQUIREMENTS AND STANDARDS DEFINITION INFLUENCE PROGRAM OUTCOMES

    Our work has found that performance-based acquisitions must be 
appropriately planned and structured to minimize the risk of the 
government receiving services that are over cost estimates, delivered 
late, and of unacceptable quality.\7\ Specifically, we have emphasized 
the importance of clearly defined requirements to achieving desired 
results and measurable performance standards to ensuring control and 
accountability. Prior GAO and DHS Inspector General reviews of complex 
DHS investments using a performance-based approach point to a number of 
shortcomings. For example, in June 2007, we reported that a 
performance-based contract for a DHS financial management system, 
eMerge2, lacked clear and complete requirements, which led to schedule 
delays and unacceptable contractor performance.\8\ Ultimately, the 
program was terminated after a $52 million investment. In March 2007, 
we similarly reported that the Coast Guard's performance-based contract 
for replacing or modernizing its fleet of vessels and aircraft, 
Deepwater, had requirements that were set at unrealistic levels and 
were frequently changed.\9\ This resulted in cost escalation, schedule 
delays, and reduced contractor accountability. The DHS Inspector 
General has also indicated numerous opportunities for DHS to make 
better use of sound practices, such as well-defined requirements.\10\
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    \7\ GAO-07-20.
    \8\ GAO, Homeland Security: Departmentwide Integrated Financial 
Management Systems Remain a Challenge, GAO-07-536 (Washington, D.C.: 
June 21, 2007).
    \9\ GAO, Coast Guard: Status of Efforts to Improve Deepwater 
Program Management and Address Operational Challenges, GAO-07-575T 
(Washington, D.C.: Mar. 8, 2007).
    \10\ See for example, Department of Homeland Security Inspector 
General, Major Management Challenges Facing the Department of Homeland 
Security, OIG-08-11 (Jan. 2008), and Department of Homeland Security 
Inspector General, Transportation Security Administration's Information 
Technology Managed Services Contract, OIG-06-23 (Feb. 2006).
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    Consistent with our prior work, definition of requirements and 
performance standards influenced outcomes for the eight complex 
investments we reviewed. In using a performance-based approach, sound 
contracting practices dictate that required contract outcomes or 
requirements be well-defined, providing clear descriptions of results 
to be achieved. While all eight contracts for these investments had 
outcome-oriented requirements, the requirements were not always well-
defined.\11\ Further, contracts for half of the investments did not 
have a complete set of measurable performance standards. Appendix I 
provides a summary of our analysis of the requirements, performance 
standards, and outcomes for the eight performance-based contracts for 
major investments we reviewed.
---------------------------------------------------------------------------
    \11\ FAR 2.101 specifically provides that a performance work 
statement for performance-based acquisitions describe the required 
results in clear, specific, and objective terms with measurable 
outcomes.
---------------------------------------------------------------------------
    Complex investments with contracts that did not have well-defined 
requirements or complete measurable performance standards at the time 
of contract award or start of work experienced either cost overruns, 
schedule delays, or did not otherwise meet performance expectations. 
For example, contracts for systems development for two CBP major 
investments lacked both well-defined requirements and measurable 
performance standards prior to the start of work and both experienced 
poor outcomes. The first, for DHS's Automated Commercial Environment 
(ACE) Task Order 23 project--a trade software modernization effort--was 
originally estimated to cost $52.7 million over a period of 
approximately 17 months.\12\ However, the program lacked stable 
requirements at contract award and, therefore, could not establish 
measurable performance standards and valid cost or schedule baselines 
for assessing contractor performance. Software requirements were added 
after contract award, contributing to a project cost increase of 
approximately $21.1 million, or 40 percent, over the original estimate. 
Because some portions of the work were delayed to better define 
requirements, the project is not expected to be completed until June 
2009--about 26 months later than planned.
---------------------------------------------------------------------------
    \12\ Begun in 2001, ACE is intended to replace and supplement 
existing cargo processing technology and will be developed and deployed 
in a series of increments. The goals of ACE include: (1) Supporting 
border security by enhancing analysis and information sharing with 
other government agencies and providing CBP with the means to decide 
before a shipment reaches the border if it should be targeted or 
expedited and (2) streamlining time-consuming and labor-intensive tasks 
for CBP personnel and the trade community through a national trade 
account and single Web-based interface. Task Order 23 was the sole 
focus of our review.
---------------------------------------------------------------------------
    The second, Project 28 for systems development for CBP's Secure 
Border Initiative (SBInet)--a project to help secure a section of the 
United States-Mexico border using a surveillance system--did not meet 
expected outcomes due to a lack of both well-defined requirements and 
measurable performance standards. CBP awarded the Project 28 contract 
planned as SBInet's proof of concept and the first increment of the 
fielded SBInet system before the overall SBInet operational 
requirements and system specifications were finalized. More than 3 
months after Project 28 was awarded, DHS's Inspector General reported 
that CBP had not properly defined SBInet's operational requirements and 
needed to do so quickly to avoid rework of the contractor's systems 
engineering. We found that several performance standards were not 
clearly defined to isolate the contractor's performance from that of 
CBP employees, making it difficult to determine whether any problems 
were due to the contractor's system design, CBP employees, or both. As 
a result, it was not clear how CBP intended to measure compliance with 
the Project 28 standard for probability of detecting persons attempting 
to illegally cross the border. Although it did not fully meet user 
needs and its design will not be used as a basis for future SBInet 
development, DHS fully accepted the project after an 8-month delay.\13\ 
In addition, DHS officials have stated that much of the Project 28 
system will be replaced by new equipment and software.
---------------------------------------------------------------------------
    \13\ GAO, Secure Border Initiative: Observations on the Importance 
of Applying Lessons Learned to Future Projects, GAO-08-508T 
(Washington, D.C.: Feb. 27, 2008).
---------------------------------------------------------------------------
    Conversely, we found that contracts with well-defined requirements 
linked to measurable performance standards delivered results within 
budget and provided quality service. For example, contracted security 
services at the San Francisco International Airport for TSA's Screening 
Partnership Program had well-defined requirements, and all measurable 
performance standards corresponded to contract requirements--an 
improvement from our prior reviews of the program.\14\ The requirements 
for gate, checkpoint, and baggage screening services clearly stated 
that the contractor should use technology and staff to prevent 
prohibited items from entering sterile areas of the airport and should 
work to minimize customer complaints while addressing in a timely 
manner any complaints received. The performance standards assessed how 
often screeners could successfully detect test images of prohibited 
items in checked baggage; the percentage of audited records and 
inspected equipment, property, and materials that were well-kept, 
operational, and recorded on maintenance logs; and whether all new 
hires received the required training before assuming their screening 
responsibilities. In terms of expected outcomes, the contractor 
achieved a 2.2 percent cost underrun during the first 5 months of the 
contract and exceeded most requirements.
---------------------------------------------------------------------------
    \14\ GAO, Aviation Security: Preliminary Observations on TSA's 
Progress to Allow Airports to Use Private Passenger and Baggage 
Screening Services, GAO-05-126 (Washington, D.C.: Nov. 19, 2004), and 
Aviation Security: Progress Made to Set Up Program Using Private-Sector 
Airport Screeners, but More Work Remains, GAO-06-166 (Washington, D.C.: 
Mar. 31, 2006).
---------------------------------------------------------------------------
   UNRELIABLE DATA AND LACK OF MANAGEMENT REVIEW CONSTRAIN OVERSIGHT

    In managing its service acquisitions, including those that are 
performance-based, DHS has faced oversight challenges, including a lack 
of reliable data and systematic management reviews. DHS contracting and 
program representatives told us that they use a performance-based 
approach to the maximum extent practicable. However, DHS does not have 
reliable data--either from the Federal Procurement Data System--Next 
Generation (FPDS-NG), the governmentwide data base for procurement 
spending, or at a departmentwide level--to systematically monitor or 
evaluate or report on service acquisitions, including those that are 
performance-based. Reliable data are essential to overseeing and 
assessing the implementation of contracting approaches, acquisition 
outcomes, and making informed management decisions. Moreover, the Chief 
Procurement Officer (CPO), who has responsibility for departmentwide 
procurement oversight, has begun some initial review of performance-
based service acquisitions, but has not conducted systematic management 
assessments of this acquisition method.
    Our analysis of information provided by contracting representatives 
at the Coast Guard, CBP, Immigration and Customs Enforcement (ICE), and 
TSA showed that about 51 percent of the 138 contracts we identified in 
FPDS-NG as performance-based had none of the required performance-based 
elements: a performance work statement, measurable performance 
standards, and a method of assessing contractor performance against 
performance standards. Only 42 of the 138 contracts, or 30 percent, had 
all of the elements, and about 18 percent had some but not all of the 
required performance-based acquisition elements (see table 1).

                      TABLE 1.--REVIEW OF PERFORMANCE-BASED ELEMENTS ON SELECTED CONTRACTS
----------------------------------------------------------------------------------------------------------------
                                                    Customs
                                         Coast        and     Immigration  Transportation    Total    Percentage
     Performance-based  Elements         Guard      Border    and Customs      Security    Contracts   of Total
                                                  Protection  Enforcement  Administration              Contracts
----------------------------------------------------------------------------------------------------------------
All elements.........................         18           3           0             21           42        30.4
Some elements........................         16           0           5              4           25        18.1
No elements..........................         20           5          34             12           71        51.5
                                      --------------------------------------------------------------------------
      Total..........................         54           8          39             37          138       100.0
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of DHS review of 138 contracts coded as performance-based in FPDS-NG.

    Lacking reliable FPDS-NG data, reports on the use of performance-
based contracts for eligible service obligations are likely inaccurate. 
Data reported on the use of performance-based contracts by service 
types--ranging from basic, such as janitorial and landscaping, to 
complex, such as information technology or systems development--
requested by OFPP in July 2006--are also likely misleading. The 
Acquisition Advisory Panel and DHS's CPO also have raised concerns 
regarding the accuracy of the performance-based designation in FPDS-NG. 
The Acquisition Advisory Panel's 2007 report noted from its review at 
10 Federal agencies that 42 percent of the performance-based contracts 
the panel reviewed had been incorrectly coded.
    Inaccurate Federal procurement data is a long-standing 
governmentwide concern. Our prior work and the work of the General 
Services Administration's Inspector General have noted issues with the 
accuracy and completeness of FPDS and FPDS-NG data.\15\ OMB has 
stressed the importance of submitting timely and accurate procurement 
data to FPDS-NG and issued memos on this topic in August 2004 and March 
2007. Accurate FPDS-NG data could facilitate the CPO's departmentwide 
oversight of service acquisitions, including those that are 
performance-based.
---------------------------------------------------------------------------
    \15\ For example, GAO, Reliability of Federal Procurement Data, 
GAO-04-295R (Washington, D.C.: Dec. 30, 2003); GAO, Improvements Needed 
to the Federal Procurement Data System--Next Generation, GAO-05-960R] 
(Washington, D.C.: Sept. 27, 2005); and General Services Administration 
Inspector General, Review of the Federal Procurement Data System--Next 
Generation (FPDS-NG), Report Number A040127/O/T/F06016 (March 2006).
---------------------------------------------------------------------------
    At a departmentwide level, CPO representatives responsible for 
procurement oversight indicated that they have not conducted systematic 
assessments including costs, benefits, and other outcomes of a 
performance-based approach. To improve the implementation of 
performance-based acquisitions, CPO representatives established a work 
group in May 2006 to leverage knowledge among DHS components. They also 
noted that they are working with OFPP to develop a best practices guide 
on measurable performance standards and to gather good examples of 
performance-based contracts. In addition, the CPO has implemented a 
departmentwide acquisition oversight program, which was designed with 
the flexibility to address specific procurement issues, such as 
performance-based service acquisitions, and is based on a series of 
component-level reviews.\16\ Some initial review of performance-based 
acquisitions has begun under this program, but management assessment or 
evaluation of the outcomes of this acquisition method has not been 
conducted.
---------------------------------------------------------------------------
    \16\ GAO, Department of Homeland Security: Progress and Challenges 
in Implementing the Department's Acquisition Oversight Plan, GAO-07-900 
(Washington, D.C.: June 2007).
---------------------------------------------------------------------------
                     CONCLUSION AND RECOMMENDATIONS

    Consistent with Federal procurement policy, DHS has emphasized a 
performance-based approach to improve service acquisition outcomes. 
However, in keeping with our prior findings, DHS's designation of a 
service acquisition as performance-based was not as relevant as the 
underlying contract conditions. Sound acquisition practices, such as 
clearly defining requirements and establishing complementary measurable 
performance standards, are hallmarks of successful service 
acquisitions. In the cases we reviewed as well as in prior findings 
where these key elements were lacking, DHS did not always achieve 
successful acquisition outcomes. The report we are releasing today 
recommends that the Secretary of Homeland Security take several actions 
to increase DHS's ability to achieve improved outcomes for its service 
acquisitions, including those that are performance-based. These actions 
include routinely assessing requirements for complex investments to 
ensure that they are well-defined and developing consistently 
measurable standards linked to those requirements; systematically 
evaluating outcomes of major investments and relevant contracting 
methods; and improving the quality of FPDS-NG data to facilitate 
identifying and assessing the use of various contracting methods. DHS 
generally concurred with our recommendations, noting some departmental 
initiatives under way to improve acquisition management. However, the 
department's response did not address how the CPO's process and 
organizational changes at the departmental level will impact component-
level management and assessment of complex acquisitions to improve 
outcomes. Improving acquisition management has been an ongoing 
challenge since the department was established and requires sustained 
management attention.
    Mr. Chairman, this concludes my prepared statement. I would be 
pleased to respond to any questions that you or other members of the 
committee may have at this time.

                                      APPENDIX I.--KEY CHARACTERISTICS OF EIGHT PERFORMANCE-BASED SERVICE CONTRACTS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Well-defined Requirements (    Measurable Performance
    Major Investment by Component              Service                      \1\ )                 Standards ( \2\ )                  Outcomes
--------------------------------------------------------------------------------------------------------------------------------------------------------
Coast Guard:
    Response Boat Medium............  Research, analysis, and   ( \3\ ).....................  ( \3\ )..................  Contractor submitted all
                                       financial and                                                                      required documentation on
                                       information management.                                                            time; met project management
                                                                                                                          quality standards; and
                                                                                                                          maintained electronic
                                                                                                                          archiving and restoration
                                                                                                                          standards.
Customs and Border Protection:
    Automated Commercial Environment  Trade systems software    ( \5\ ).....................  ( \4\ )..................  Costs increased by 40 percent
                                       development (task order                                                            ($21.1 million). More than a
                                       23).                                                                               year behind schedule;
                                                                                                                          unplanned software redesign.
    National Prime Integration......  Maintenance of equipment  ( \3\ ).....................  ( \4\ )..................  Costs increased by 53 percent
                                       used at border                                                                     ($24 million). Maintenance
                                       crossings, airports,                                                               wait times were longer than
                                       and seaports.                                                                      planned.
    SBInet..........................  Project 28 border         ( \5\ ).....................  ( \4\ )..................  DHS rejected initial acceptance
                                       surveillance systems                                                               of Project 28. The project was
                                       development and                                                                    delayed 8 months with final
                                       fielding.                                                                          acceptance in February 2008.
                                                                                                                          DHS noted that the contractor
                                                                                                                          met the requirements, but the
                                                                                                                          project did not fully meet
                                                                                                                          DHS's needs and the technology
                                                                                                                          will not be replicated in
                                                                                                                          future SBInet development.
Transportation Security
 Administration:
    Electronic Baggage Screening      Maintenance for           ( \3\ ).....................  ( \3\ )..................  Contractor exceeded the
     Program.                          explosive trace                                                                    performance standard for
                                       detection machines.                                                                machine downtime with a score
                                                                                                                          1 hour less than required and
                                                                                                                          operated at cost through the
                                                                                                                          second quarter of fiscal year
                                                                                                                          2007.
    Screening Partnership Program...  Passenger screening       ( \3\ ).....................  ( \3\ )..................  Contractor exceeded most
                                       services at one airport.                                                           performance standards; for
                                                                                                                          example: threat detection
                                                                                                                          performance and false alarm
                                                                                                                          rates exceeded the quality
                                                                                                                          standards. Contractor had cost
                                                                                                                          underrun of 2.2 percent
                                                                                                                          ($677,000).
    Secure Flight...................  Maintaining data base     ( \3\ ).....................  ( \5\ )..................  Initial contractor planning
                                       used to screen airline                                                             reports were inadequate;
                                       passenger data.                                                                    system experienced operational
                                                                                                                          downtime; surveillance reports
                                                                                                                          identified poor contractor
                                                                                                                          performance. Contractor
                                                                                                                          generally met timeframes and
                                                                                                                          delivered within budget.
    Transportation Worker             Issuing identification    ( \3\ ).....................  ( \3\ )..................  Outcomes not available at the
     Identification Credential.        credentials to maritime                                                            time of our review.
                                       workers.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: GAO analysis.
( \1\ ) Well-defined requirements should provide clear descriptions of results to be achieved at the time of the award or start of work and primary
  requirements should not change substantially following contract award.
( \2\ ) The set of measurable performance standards for a contract enables the government to assess all aspects of the contractor's work in terms of
  quality, timeliness, and quantity. The contract's performance standards are also linked to the requirements.
 Legend: ( \3\ ) Contract met or mostly met the criteria; ( \4\ ) contract partially met the criteria; ( \5\ ) contract did not meet the criteria.


    Chairman Thompson. Thank you very much.
    It is my intention to complete the witness testimony. We 
will recess the committee and come back for questions.
    Ms. Reed, for 5 minutes please.

   STATEMENT OF ANNE F. REED, PRESIDENT AND CHIEF EXECUTIVE 
                 OFFICER, ACQUISITION SOLUTIONS

    Ms. Reed. Thank you, Chairman Thompson and members of the 
committee. I represent Acquisition Solutions, a company that 
helps public sector organizations leverage the acquisition 
process to better achieve their public mission results.
    I commend and thank the committee for holding this hearing 
to examine how the Department of Homeland Security can best use 
the principles of performance-based acquisition to secure the 
Nation and our infrastructure.
    Our commitment to performance-based acquisition as a 
company extends back more than a decade. We were able to be the 
industry partner on the interagency team that first developed 
and documented the seven steps to performance-based 
acquisition, an innovative methodology endorsed by the Office 
of Federal Procurement Policy as guidance to promote the use of 
performance-based acquisition throughout the Federal 
Government.
    Through our more than 12 years of research, training and 
consulting work with acquisition professionals in the Federal 
arena, we have gained a number of insights into best practices 
and we understand more about what the factors are that increase 
risk when you implement performance-based acquisition. So my 
observations today are drawn from our experiences, as well as 
our interactions with the government professionals who are 
performing performance-based acquisitions.
    I also just want to take a brief moment, since this is 
Public Service Recognition Week, to acknowledge the performance 
of the acquisition professionals in Homeland Security, as well 
as across the government. While not the topic of the hearing 
today, the acquisition workforce is somewhat stressed, and I 
really want to commend each of the individuals who work in this 
arena.
    I agree with my fellow panelists that the focus of a 
performance-based acquisition is around accountability and 
around the mission results, which means you have to understand 
what the objectives are in the beginning. So it is not just 
about compliance. It really is about knowing what the 
objectives are and being able to deliver solutions that will 
meet the ultimate program direction.
    The Federal acquisition regulation does define the process 
as having only three key elements: outcomes focused on results, 
rather than compliance; measurable performance standards; and 
methods of assessing contractor performance. The seven steps 
goes further than that and develops an approach that focuses on 
building communications channels, both within the agency 
looking at integrated project teams so that you understand from 
across the department what the objectives are.
    There is a common meeting of the mind on what outcomes you 
are seeking from that particular contract, and then developing 
communication channels with industry to, No. 1, understand the 
art of possible solutions, but No. 2, to help industry more 
thoroughly understand what outcomes government is seeking so 
that when they propose those solutions and innovative 
approaches, they are doing so with the full slate of 
information.
    It is this collaborative process that we believe really 
reduces the risk in complex acquisitions. It does create an 
opportunity for transformational solutions, which are often 
lost if we continue to use an acquisition process that is just 
like the one that has been used for the last 25 years or 30 
years. You lose that opportunity for innovation and industry 
being able to bring in solutions that might not otherwise be 
understood or experienced by government.
    We also believe that it is critically important to plan for 
post-award management. A significant investment needs to be 
made even as you are preparing for the acquisition to develop 
the capacity within government to measure and monitor the 
performance and to align the government's procurement and 
program office with the contractor's program office. Failure to 
make that investment in sufficient time also is one of the 
major risk factors in a performance-based acquisition.
    We heartily endorse the use of the quality assurance 
surveillance plans. We actually recommend that industry be 
involved in preparing those plans and that even that be a 
collaborative effort. We also strongly endorse the need for 
training, and not just at the beginning of the acquisition, but 
even all the way through the life-cycle of the program because 
people change.
    Thank you.
    [The statement of Ms. Reed follows:]

                   Prepared Statement of Anne F. Reed
                              May 8, 2008

    Chairman Thompson, Ranking Member King, and members of the 
committee, I represent Acquisition Solutions, Inc. (Acquisition 
Solutions), a company that helps public-sector organizations leverage 
the acquisition process to better achieve government missions. I 
commend the Chairman and Ranking Member for holding this hearing to 
examine how the Department of Homeland Security can best use the 
principles of performance-based acquisition (PBA) to secure our Nation, 
its people, and our infrastructure and economy.
    Thank you for this opportunity to testify on a topic for which we 
have an abundance of both experience and passion. Our commitment to 
performance-based approaches to acquisition in the public sector 
extends back many years. Acquisition Solutions' research, training, and 
consulting work with acquisition professionals over the past decade 
have yielded insights into best practices--as well as practices or 
factors that increase risk--in implementing performance-based 
acquisition. My testimony today offers a basic overview of the key 
tenets of PBA, challenges to its implementation, and keys to success 
based not only on our corporate experience but also on the insight and 
knowledge obtained from government acquisition professionals who have 
front-line practical experience implementing PBA.
    Inasmuch as this is Public Service Recognition Week, let me also 
take a moment to recognize all those dedicated public servants who 
support the government's acquisition processes. While not the topic of 
this hearing, today's acquisition workforce confronts many challenges 
that also affect the government's ability to implement PBA. We all owe 
a debt of gratitude to these hard-working professionals who do their 
best every day to meet the complex demands of today's dynamic Federal 
acquisition process.

                 WHAT IS PERFORMANCE-BASED ACQUISITION?

    What is performance-based acquisition? The Federal Acquisition 
Regulation (FAR) defines PBA as ``an acquisition structured around the 
results to be achieved as opposed to the manner by which the work is to 
be performed.''

``For example, an agency sought help promoting a Federal program to 
increase public participation. The agency established an objective of 
increasing public participation by 5 percent annually and solicited 
proposals for help in promoting the program to achieve that objective. 
In the words of the agency project manager, `[F]ederal bureaucrats 
don't know much about advertising. That's not what we do. So let's hire 
people who know what they're doing, who are tried and tested.' Several 
vendors competed for the contract offering a variety of approaches to 
the promotional campaign as well as to how to track results. The 
winning contractor has proven an exemplary partner, and the contract 
has enabled the agency to exceed its goals for increased 
participation.''

    The key, of course, is holding the contractor accountable for 
achieving the results proposed and ensuring that the results proposed 
are consistent with the program's performance objectives.
    The FAR defines performance-based acquisitions as having three 
mandatory elements: (1) Work stated in terms of outcomes or results, 
rather than a stated method of performance; (2) measurable performance 
standards; and, (3) a method of assessing contractor performance. A 
recommended fourth element is the use of appropriate performance 
incentives. The first three elements comprise a ``litmus test'' for 
determining whether a solicitation or contract truly is performance-
based. The FAR permits agencies to use either a performance work 
statement (PWS) or a statement of objectives (SOO). In response to a 
SOO, offerors develop performance work statements to reflect their 
respective proposed solutions to achieve the stated objectives.

               THE PERFORMANCE-BASED SEVEN STEPS PROCESS

    Acquisition Solutions was the industry partner on the interagency 
team that developed the original Seven Steps to Performance-Based 
Acquisition guide (focused on the acquisition of services). That 
innovative methodology prescribed the following seven steps for success 
with PBA:
    1. Establish an integrated project team;
    2. Describe the problem that needs solving;
    3. Examine private-sector and public-sector solutions;
    4. Develop a performance work statement or statement of objectives;
    5. Decide how to measure and manage performance;
    6. Select the right contractor;
    7. Manage performance.
The Office of Federal Procurement Policy has endorsed the Seven Steps 
approach to PBA as guidance to promote the use of PBA throughout the 
Federal Government.
    The intent of the Seven Steps guide is to make the concept of 
performance-based acquisition accessible and logical for all and to 
shift the paradigm from traditional ``acquisition think'' and simple 
contract compliance to an environment of collaborative, performance-
oriented teamwork with a focus on program performance, improvement, 
innovation, and accountability.
    Performance-based acquisition offers the potential to dramatically 
transform the nature of service delivery and permit the Federal 
Government to tap the enormous creative energy and innovative nature of 
private industry. How can this be done? By implementing the Seven Steps 
approach--combined with what we call the Six Disciplines of 
Performance-based Project Management:
    1. Cultural Transformation;
    2. Strategic Linkage;
    3. Governance;
    4. Communication;
    5. Risk Management;
    6. Performance Management.
We emphasize the Six Disciplines of Performance-based Project 
Management because contract award represents just the beginning of the 
acquisition life cycle--success is defined by achievement of the 
program objective.
    The following chart represents the sequence of the Seven Steps as 
refined by and interwoven with the Six Disciplines.



    In short, the Seven Steps methodology takes a life-cycle approach 
that operates on the premise that agencies fare best when they contract 
for results instead of mere compliance with predetermined government 
solutions. The acquisition process should focus on what the contractor 
must deliver to support mission accomplishment, not dictate how the 
contractor should accomplish the work.

``In the marketing contract example mentioned previously, the agency 
described its objective as a 5 percent increase in public participation 
in the program and looked to the marketing industry for how to promote 
the program to generate that increase. The agency monitors performance 
against the desired results of the marketing program, that is, in terms 
of its effect on participation levels. The agency and the contractor 
identify issues and opportunities through constant communication. They 
work together to resolve issues and capture opportunities. The contract 
has enabled the agency to exceed expectations for increasing 
participation in the program.''

                      OPPORTUNITIES AND CHALLENGES

    So if the legal and regulatory intent for performance-based 
acquisition are clear--to structure an acquisition around the results 
to be achieved--and there is a defined methodology and defined 
disciplines for performance, why are there challenges? Federal policy 
has encouraged performance-based contracting for more than 25 years. 
Yet progress has been slow for many reasons.
    PBA offers a structured, collaborative process to reduce risk in 
complex acquisitions. Legislative reforms have mandated a more mission-
focused acquisition process and offered the potential to speed the 
contracting process, but they did not make Federal acquisition simpler. 
The scale, scope, and urgency of programs are greater than ever before. 
Addressing these monumental challenges in compressed timeframes often 
demands service-based solutions that involve developmental components 
and draw on contributions across many industry sectors, which compels 
multiple contractors to join in complicated teaming alliances. 
Acquisition success also often requires communications on highly 
sensitive and controversial topics that involve coordination with many 
stakeholder groups, including specific constituencies both inside and 
outside the government. Following the Seven Steps process with the Six 
Disciplines of Performance-based Project Management promotes alignment 
around objectives that all stakeholders agree constitute ``success'' 
and increases transparency in the process, which lays the foundation of 
accountability for both the government and the contractor.
    PBA creates an opportunity for cultural transformation, to focus on 
results. Making the shift to focus on outcomes versus specified tasks 
or levels of effort requires a transformation in culture, perspective, 
and thinking. Without training and other support for implementing PBA 
techniques, many government acquisition professionals still follow a 
procurement process that first requires the development of a detailed 
statement of work or a specification that prescribes how the contractor 
should perform the work and then rely on monitoring compliance with 
that specification to manage execution. Many who take on this task 
believe a ``tight spec is a good spec,'' that the contractor must be 
told exactly what to do, how to do it, what labor categories to 
provide, what minimum qualifications to meet, and how many hours to 
work. But what if the contractor follows the government's instructions 
to the letter and the result is still unacceptable? It is the 
government's tightly specified ``solution'' that is at fault, not the 
contractor's performance. The government and, ultimately, the public 
bear the risk and consequences of failure.
    PBA focuses on achieving clarity and consensus on objectives that 
foster alignment of all stakeholders around common goals to enable 
acquisitions to move forward efficiently to successful execution. In 
the rush to ``get to award''--a rush sometimes imposed on acquisition 
professionals--agencies often do not invest enough time up front to 
define clear objectives that take into account all stakeholder 
interests. Getting alignment on objectives facilitates defining 
requirements and establishing metrics directly linked to delivering 
results that all stakeholders agree constitute ``success.''
    Recognizing that the contracting community cannot implement 
performance-based contracting on its own, changes made to FAR part 37 
in January 2006 mandated that program offices describe government needs 
using PBA methods. These changes acknowledged that, in fact, many 
stakeholders have an impact on the execution of any program, 
particularly in the case of large and complex services acquisition 
programs.
    Laws, policies, and regulations have transformed the acquisition 
process dramatically, to operate with a mission-based and program-based 
focus. Accordingly, acquisition teams must get input and draw on the 
skills of individuals from many different functional areas. In addition 
to technical and contracting staff, for example, program, financial, 
public affairs, and oversight offices add value to successful 
acquisition teams. These individuals add fresh perspective, insight, 
energy, and innovation to the process--but they may lack some of the 
background and experience in contracting and program management that 
acquisition often requires.
    On the industry side, many companies have been frustrated by a 
system that doesn't allow them to offer or deliver their best 
solutions. However, others have become comfortable with the old process 
of simply giving the customers what they ask for--not necessarily what 
they need. Under that traditional approach, accountability for program 
results rests solely with the government, and the contractor is 
accountable only for meeting the contract specifications. Performance-
based acquisition practices call for a different understanding of 
acquisition by both government and industry, one that promotes a more 
equitable allocation of risk and responsibility, where success requires 
a partnership between the government and the contractor to deliver 
results.
    Planning for and investing in post-award management lays the 
foundation for an effective partnership for PBA success in the critical 
delivery phase of the acquisition life cycle. The intense focus on 
contract formation and award too often leads agencies to underestimate 
the challenge of managing to deliver results, as well as the need to 
identify, assess, monitor, and manage risks in performance. We are 
struck by the fact that when challenges emerge, many involve managing 
the implementation of contracts after award. Unfortunately, the Federal 
Government is at least as short on experienced program and project 
managers as it is short on contracting officers and contract 
specialists.

``Regarding particularly complex contracts, Federal acquisition 
professionals have shared sentiments such as, `This was new. It was 
developmental. It was risky. And we assumed up front that [being] 
performance-based, the contractor comes in, proposes a solution, we 
evaluate the solution, we accept it, we provide money for it, we set up 
an incentive fee structure, and then we take a step back. Well, as it 
turns out there was no taking a step back. As a matter of fact one of 
the issues is that it required more resources to manage than anyone 
expected.' ''

    To help improve the acquisition community's understanding of PBA, 
including managing risk in complex programs, Acquisition Solutions has 
stimulated discussions and debate focused on the experiences of those 
who have awarded performance-based acquisitions and dealt with the 
challenges of managing performance.

``In one example, the government program manager shared that `We knew 
that we needed to find a way to manage costs and schedule, and we 
talked about an Earned Value Management System. But I think that we 
really didn't put it into place. I would say those elements that were 
really needed for this type of [contract] . . . from a risk management 
plan to an issue resolution to a change management plan. We needed to 
have put [those] in place before hand, and started that, other than 
just talking about and setting up a framework.' ''

    We have captured these experiences to share through publications 
and at conferences with the larger community seeking to understand and 
implement performance-based acquisition. Indeed, these lessons learned 
can apply to conducting and managing complex procurements of any type.

                   KEYS TO PERFORMANCE-BASED SUCCESS

    Let me summarize some of the key findings and observations we have 
collected with respect to PBA.

Take Time To Analyze and Understand the Real Requirement and Real 
        Objectives
    Start with the end in mind. One practitioner said, ``We didn't know 
at the beginning whether we had a project management requirement, an 
information technology requirement, or an engineering requirement.'' As 
it turned out, the requirement was all those things and more. Another 
observed that this is really hard work and may at times require a 
champion with highly developed facilitation skills. He observed, 
``People who can't define requirements also can't define objectives.'' 
Following the Seven Steps process and investing the time up front to 
get clarity and consensus on objectives facilitates defining clear 
requirements and establishing metrics that promote alignment, to enable 
the acquisition team to move forward to meet those objectives 
efficiently and effectively.

Take Time With Market Research, Especially if the Acquisition Will Lead 
        to Transformational Change
    Learn from the experiences of others to determine what has worked 
well and what has not. Market research with industry and similarly 
situated organizations provides Federal agencies with a powerful tool 
to avoid ``reinventing the wheel''--to capitalize on past success and 
avoid pitfalls that others have suffered. In our discussions with 
Federal PBA practitioners, one practitioner credited his agency's year 
of market research as important to transformational change management. 
But agencies often believe they already have done their homework. 
Another practitioner observed that his agency had at first considered 
more market research to be wasted time, but it ultimately helped inform 
the development of the statement of objectives and ``it paid off in the 
end.'' The highly successful performance-based acquisition won kudos 
from the program office.

Plan for Post-Award Contract Management at the Start
    FAR 7.105 provides that written acquisition plans must address 
contract administration, but mission-critical performance-based buys 
require much more comprehensive planning. We also find higher PBA 
success rates when agencies employ performance-based project management 
disciplines from the outset and maintain continuity of the project team 
throughout the acquisition life cycle. I have described an approach to 
performance-based management that sets forth six disciplines: cultural 
transformation, strategic linkage, governance, communication, risk 
management, and performance monitoring. Planning for--and beginning to 
execute--these disciplines begins early in the acquisition life cycle.
    For example, doing a performance-based acquisition lays the 
foundation for cultural transformation. It takes training and readiness 
on many levels: an understanding of performance-based techniques, a 
ready attitude, a well-prepared team (with structure, policies, and a 
communications plan), and the management skills to oversee performance-
based contract work. Other success factors include: (1) Evaluating the 
competing contractors' proposed approaches to contract performance 
management and measurement; and, (2) keeping the critical members of 
the government team on the project after award. Strategies for 
governance, risk management, and performance monitoring are especially 
important during the pre- and post-award phases. To ensure a smooth 
startup and to lay the foundation for delivery success, the acquisition 
plan must include investment to ensure that the agency has adequate 
resources to staff program and contract management functions from the 
outset after award.

Take Necessary Steps To Ensure Clarity in What the Government Is Buying 
        Under the Contract in Terms of Performance, Cost, and Schedule
    Pay close attention to the contractor's proposed work breakdown 
structure to ensure that it reflects a thoughtful plan with adequate 
resources to manage performance risks and deliver results in line with 
agency objectives. This evaluation is critical. One practitioner said, 
``Once contract performance was under way, we weren't sure what we 
agreed to.'' That required a lot of discussions. Another said, ``The 
contractor submitted a work breakdown structure that didn't address 
refinement of the requirements.'' Another observed that ``a critical 
part of a performance-based evaluation is the quality of the 
contractor's work breakdown structure and what it conveys about 
performance risk. Is it comprehensive, and does it identify a well-
conceived approach to getting the desired outcome results? Does it 
reflect an understanding of the agency's objectives?''
    Are you buying the work activities--generally not under a 
performance-based contract--or are you buying the results of those 
activities, in the terms of performance metrics, specified results or 
outcomes, or service-level agreements? Payment should be tied to 
results, not moving through a list of planned activities. Another 
practitioner noted, ``If the contract is structured for payment based 
on results, and not for activities, then the contractor is on the hook 
to achieve the results. The risk of performance is the contractor's.'' 
Metrics must be established before contract award, preferably in the 
heat of competition, and link directly to achieving the desired 
results.

Make Sure the Contractor's Incentives Are Aligned With What's Best for 
        the Agency and the Program
    There is an old adage that says, ``What gets measured gets done.'' 
It is critical, therefore, to take care in crafting the incentives for 
a performance-based contract, so that the incentives appropriately 
motivate the contractor to deliver the desired results. Even better 
than aligned objectives are objectives that become an inherent part of 
the contractual structure.

``One practitioner told us, `The best incentive is one that is built 
in. A great example was a contract for loan servicing. The objective 
was for a loan-servicing contractor to ensure that mortgage loan 
payments were collected from the debtors on time. We were giving a lot 
of thought to how we should incentivize the contractor to reduce the 
delinquent loans. Then we learned [through market research with 
industry leaders] that the industry practice is that the loan server 
only gets paid for performing loans! In the commercial market, they 
receive a percentage of every loan payment and therefore have a built-
in incentive to maximize the number of performing loans. This negated 
the need for extensive award or incentive fee boards and calculations. 
This was a real eye-opener . . . and clearly an inherent incentive.'
``Another practitioner said, `One way to ensure that incentives are 
appropriate to the effort is to encourage offerors to propose them. 
Many times, the incentives proposed will be more closely aligned with 
the desired outcomes than those the government would have crafted. It 
also is a great method to see if the offerors really understand the 
linkage between what they recommend be measured and the government's 
objectives. What they identify as measures and metrics, where they set 
the bar for performance, and the linkage between the metrics and the 
government's objectives are powerful discriminators in the source 
selection.' ''

Consider the Life-Cycle Implications of the Solution
    Some solutions have a long cost or logistics tail in their 
implementation. ``We made companies responsible for design and 
development without considering maintenance,'' said one Federal 
practitioner. As a result, every vehicle delivered under that contract 
has multiple pumps, of various configurations and manufacturers, 
creating a logistics nightmare. ``You must consider configuration 
standardization and control, maintainability, and logistics.''

Start Right, Provide Resources, and Manage Through It
    To ensure a smooth startup and lay the foundation for delivery 
success, agencies must devote adequate resources to staff program and 
contract management functions from the outset after award. Begin 
thinking about managing the contract early in the acquisition planning 
phase, and culminate the plans with a formal contract management plan 
that is reviewed during the contract's kick-off meeting immediately 
after award. Use that meeting to reiterate the governance model, 
communications strategy, risk management process, and performance 
monitoring approach.
    From the moment of contract award, ask, ``How are we going to be 
successful?'' Monitor contractor performance beginning the day of 
contract award. If it appears there is not a shared understanding of 
performance, fix it immediately. In the cases discussed at our forum in 
which performance problems emerged, agency teams recognized the problem 
within the first few months and began to take action to correct it. One 
practitioner said his team had used monitoring tools and had found out 
faster than they would have otherwise that ``the ship was about to hit 
the shoals.''

Manage Risk
    Organizations that practice PBA are more attuned to identifying, 
assessing, and managing risk than are compliance-based organizations. 
Under the compliance model, risk often is ambiguous; the contract 
simply requires the contractor to perform. However, if the government 
directs the work or micromanages the contractor, who is responsible for 
failures? This question frequently is the crux of performance delays 
and contract disputes. Performance-based acquisition focuses on 
achieving results and highlights the need to manage risk. In the PBA 
environment, the government and contractor work together to identify, 
assess, and mitigate risks before problems occur.
    The risks most likely to have a significant impact on the project 
need to be identified through analysis and should be prioritized, and 
someone needs to be assigned to develop mitigation actions. Then the 
risks must be tracked and reported on a regular basis.

Understand and Plan for the Impact That Budgetary Issues Can Have on 
        Your Performance-Based Contract
    While it is current policy that firm-fixed-price contracts are the 
preferred contract type (versus time-and-materials [T&M] contracts), 
there are some significant challenges inherent in funding a major 
fixed-price acquisition. Civilian agencies cannot incrementally fund 
fixed-price contracts. Yet the funding process often is not designed to 
fund major services acquisitions--such as systems acquisitions--up 
front.

``One Federal PBA practitioner noted, `We have a carefully negotiated 
quality assurance surveillance plan based on ``go live'' . . . so I can 
order pieces if I had to, but I'd lose the built-in incentives.' She 
concluded that there is a `huge gap between theory and reality.' These 
are unintended consequences from the budget cycle. The result is that 
Federal agencies continue to struggle with adjusting contracts to 
accommodate different funding levels from Congress--these changes 
result in longer performance periods and changed requirements, which 
increase costs.
``Another said, `Having to fully fund fixed-price contracts, we got 
that in spades. We were shifting from cost plus to a fixed price, so we 
had been incrementally funding. Then the [contracting officer] says, 
``you know you can't incrementally fund this fixed-price contract.'' We 
`reworked the stream' and now award in September so we can fund the 
next year's entire body of work.'
``A third practitioner indicated he had moved all his agency's contract 
starts to January to avoid funding difficulties associated with 
continuing resolutions.''

    Perhaps the greatest challenge is imposed by finance organizations 
that insist on quarterly (or in some instances monthly) allocations of 
operations and maintenance budgets. While this may be easier for the 
finance organizations, it raises havoc with contracting. Quarterly 
allocations force cost-plus or T&M contract types, as they are the only 
ones that can be incrementally funded. In addition, this funding 
allocation quadruples (or worse) the number of transactions the 
contracting office must process.
    Agencies also have encountered a ``color of money'' issue. In one 
case, an agency evaluated and selected one offer as high technical, low 
cost, but despite major efforts to find a way to take advantage of the 
solution, the agency team was unable to ``rewicker the funding stream'' 
to match the solution. One way to avoid this situation is to release 
funding information to contractors so you receive executable proposals.

Get Offerors To Develop Quality Assurance Surveillance Plans
    Several practitioners told us that having each competing offeror 
develop a quality assurance surveillance plan (QASP) for monitoring and 
measuring performance was the ``key'' to their successful performance-
based acquisitions. Rather than the government teams developing metrics 
for success and a plan for monitoring progress against those metrics, 
they required the contractor to put forward the metrics and plan. The 
measures proposed provide insight into how well the contractor 
understands the agency objectives and requirements while the rigor of 
the proposed monitoring plan provides a gauge of the offeror's 
commitment to delivering a solution to meet those objectives.
    ``It was a good competition,'' said one practitioner. ``We got good 
cost, good technical, and a good QASP. It really showed who was 
serious. The performance-based acquisition unseated the long-term 
incumbent. Competition is your only friend.'' Another said, ``You get a 
good idea if they are serious based on what they put into their QASP.''

Ensure the Government's Team Is Trained and Incentivized To Manage the 
        Contract Post-Award
    Program and contracting personnel must understand the government's 
role and every incentive to promote the contractor's success in meeting 
shared objectives. Meeting today's complex challenges requires a 
combined effort from government and industry, with Federal agencies 
providing domain expertise about the mission and constraints on 
delivery to enable industry to tailor technology and leading practices 
to deliver the optimal solution. All members of the post-award 
management team--program and contracting--should have training in PBA 
principles to ensure operation from shared perspective focused on 
working with the contractor to ensure results. Maintaining continuity 
on the government team and ensuring succession planning plays a 
critical role in enabling the government to take a consistently 
collaborative approach to managing performance throughout the 
acquisition life cycle.
    For developmental-type efforts, the program team will be the source 
for most of the requirements. The implementation contractor will be 
working closely with the government, especially during the requirements 
build-out process. The quality of the end package is directly 
determined by the quality of the requirements and the software 
development process and resources being applied. Discipline is a must 
on both sides. ``It does no good to have a [Capability Maturity Model] 
level 5 developer, if you are a level 0 user,'' said one practitioner.
    Employing the Six Disciplines of Performance-Based Management from 
the start and maintaining continuity on the government team throughout 
the acquisition life cycle helps agencies improve post-award contract 
management. In November 2006, the Partnership for Public Service issued 
an excellent report on this critical issue, titled ``Creating Momentum 
in Contract Management.'' Many Federal agencies, including the 
Department of Homeland Security, participated in this project, and the 
Government Accountability Office participated as an observer on the 
working group that developed the report. Implementing the practices and 
recommendations included in that report would represent a big step 
forward.
                               CONCLUSION

    Performance-based acquisition is all about accountability and 
results. The Seven Steps to Performance-Based Acquisition endorsed by 
the Office of Federal Procurement Policy establishes a road map to 
successful PBA that has been proven to increase the chances for 
success. This road map includes the key elements of focusing on 
objectives and results; encouraging open communications through market 
research and enabling industry to provide solutions; and laying a solid 
foundation for effective post-award performance-based program 
management.
    Contract award is not the end; it is the beginning of contract 
performance. A performance-based or result-oriented approach does not 
mean the government can abdicate responsibility for results. Rather, 
PBA contemplates that the government will focus intensely on what it 
knows best--its objectives--and look to industry partners to propose 
solutions--based on their experiences and knowledge of the 
marketplace--that will best meet those objectives. Yet, the ultimate 
key is held by the agency in its conduct of contract performance 
management.
    It is precisely because today's projects are so large and complex--
and because the workforce needs to be sure their time is focused on 
increasing the chances for a successful outcome--that performance-based 
acquisition is such an important tool. In complex programs it often is 
impossible to know detailed requirements up front and therefore 
unrealistic to expect a straight path to the ultimate solution. 
Delivering results requires a collaborative partnership--the government 
working with the contractor to overcome challenges and seize 
opportunities throughout performance to achieve a shared goal.
    Performance-based contracting and program management processes work 
when applied as intended with discipline and rigor. They keep the focus 
on mission outcomes and align government and the industry service 
provider in accountability for achieving common objectives to serve the 
public interest.

    Chairman Thompson. You will have plenty of time to 
elaborate. I want to get through the testimony before we 
recess.
    Mr. Chvotkin, for 5 minutes.

   STATEMENT OF ALAN CHVOTKIN, EXECUTIVE VICE PRESIDENT AND 
             COUNSEL, PROFESSIONAL SERVICES COUNCIL

    Mr. Chvotkin. Mr. Chairman, thank you for your invitation 
and the opportunity to address the provocative question raised 
in the title of today's hearing.
    I submit that performance-based acquisition as a technique 
is neither the solution nor the cause of problems within DHS or 
other Federal agencies. I can tell you without fear of 
contradiction that a performance-based acquisition is among the 
hardest type of contracts for the government to write and for a 
contractor to successfully compete for an execute.
    It requires a knowledgeable, well-trained government 
acquisition workforce, including program managers, agency 
senior managers, and others. There is a lot of repetition and a 
lot of unanimity on this panel, I am sure, about those key 
elements. It also requires a willingness by the agency to work 
in partnership with the contractors awarded these contracts. It 
takes innovation and risk-taking by contractors as well.
    When properly executed, performance-based acquisitions 
generate substantial benefits. A true performance-based 
approach incentivizes and rewards innovation and enables the 
government to identify and take advantage of solutions that 
might not otherwise have been evident.
    A true performance-based acquisition also effectively 
balances the substantial risk assumed by the performing 
contractor with appropriate rewards. DHS, among others has been 
working diligently to create that balance and incentivize that 
innovation. While some have criticized performance-based 
acquisition because it appears to give contractors too much 
control over a program and its elements, the fact is that when 
such an acquisition is properly structured and managed, the 
government establishes the program requirements and retains 
full control over the program.
    At the same time, one of the fundamental purposes of 
performance-based approaches is to enable the presentation of 
new and different solutions. Thus, it is essential that the 
contractor be given appropriate latitude to propose such 
solutions.
    In short, from the perspective of the private sector, 
performance-based acquisition is a highly desirable form of 
contracting, yet is also highly risky and sometimes a feared 
strategy. Done right, it works exceptionally well. Done poorly, 
performance-based acquisition places inordinate attention and 
risk on the government and on the contractors.
    Moreover, one cannot cherry-pick the elements that are 
critical to the success of a performance-based acquisition. It 
is a strategy with many intertwined parts, each of which must 
be properly executed. PBA is not a contracting exercise. It 
requires a broad, integrated strategy that relies on much more 
than the active involvement of a contracting officer.
    The first element, the performance work statement, is 
perhaps the most important element of a PBA, and the single 
greatest predictor of success. The full involvement of senior 
managers within the agency and the multidisciplinary team led 
by the program manager or end-user are essential to the 
development of the performance statement. Without them, the 
prospect for success drops significantly because there is less 
chance that the performance work statement will accurately 
reflect the current state and the desired end-state.
    It is also at this point that the government must be alert 
to the risk of morphing the performance work statement into a 
design spec that minimizes the opportunity for bidders to offer 
innovative approaches--one of the principal reasons for using 
the performance-based approach.
    It is not whether a performance-based acquisition as a 
technique uniquely creates solutions or causes problems. 
Success or failure is not wholly dependent on the acquisition 
methodology. The better question to ask is whether the 
department or agency has the skills and resources to use this 
technique successfully.
    As to the better answers, this committee is well aware of 
the management challenges facing the chief procurement officer 
at the department and its operating agencies. It starts, but 
certainly doesn't stop, with attracting and retaining qualified 
acquisition professionals and ensuring they have the tools.
    The CPO has developed some useful internal oversight 
techniques. These are valuable steps that can have a beneficial 
impact on the department's acquisition over time, and we salute 
the department for the strides it has made to date and stand 
ready to support them in any way we can.
    But more can and should be done. There needs to be an 
emphasis on the important role of program management within the 
department. There needs to be an acknowledgement of the impact 
on the business relationship between the agency and the 
contractor during the agency's internal formulation of the 
acquisition strategy. Finally, there needs to be up-front 
coordination with the independent oversight organizations so 
that their post-award reviews appropriately evaluate the 
contract.
    Mr. Chairman, performance-based acquisitions are a valuable 
tool that must be available to the agency to bring innovation 
and experience to fulfilling an agency's mission. But PBA's 
require a different level of expertise in the agency, in the 
contractor, and in the oversight community. When done right, 
the results are impressive. We are committed to working with 
the department and others to finding those solutions and 
ensuring it is done right.
    Thank you for the invitation to provide this testimony. I 
look forward to the committee's questions.
    [The statement of Mr. Chvotkin follows:]

                  Prepared Statement of Alan Chvotkin
                              May 8, 2008

                              INTRODUCTION

    Mr. Chairman, thank you for your invitation and the opportunity to 
appear before this committee to address the provocative question in the 
title of today's hearing: ``Performance-Based Acquisitions: Creating 
Solutions or Causing Problems.'' I submit that performance-based 
acquisitions as a technique are neither the solution nor the cause of 
problems within the Department of Homeland Security or other Federal 
agencies. Understanding the characteristics of Federal performance-
based acquisitions and the appropriate roles and responsibilities of 
each of the parties involved in the formation, execution and monitoring 
of these awards will raise a different set of question and likely lead 
this committee and others to a different set of answers.
    I am Alan Chvotkin, Executive Vice President and Counsel of the 
Professional Services Council (PSC). PSC is the national trade 
association of the government professional and technical services 
industry. This year, PSC and the Contract Services Association of 
America merged to create a single, unified voice representing the full 
range and diversity of the government services sector. Solely focused 
on preserving, improving, and expanding the Federal Government market 
for its members, PSC's more than 330 member companies represent small, 
medium, and large businesses that provide Federal agencies with 
services of all kinds, including information technology, engineering, 
logistics, facilities management, operations and maintenance, 
consulting, international development, scientific, social, 
environmental services, and more. Together, the association's members 
employ hundreds of thousands of Americans in all 50 States.
    I have been at the association for more than 7 years. Prior to my 
joining PSC, I had the privilege of working for a large 
telecommunications company where I had senior program management 
responsibility as well as supervising the contracting, pricing and 
proposal development teams. I have won and lost Federal performance-
based acquisitions.
    I can tell you without fear of contradiction that a performance-
based acquisition is among the hardest types of contracts for the 
government to write and for a contractor to successfully compete for 
and execute. It requires a knowledgeable, well-trained, government 
acquisition workforce, including program managers, agency senior 
managers, and others who have a critical role in formulating the 
agency's requirements and desired outcomes. It also requires a 
willingness by the agency to work in partnership with the contractors 
awarded these contracts. It takes innovation and risk-taking by 
contractors, too.
    It is also clear that when properly executed, performance-based 
acquisitions can and often do generate substantial benefits for the 
government agency. A true performance-based approach incentivizes and 
rewards innovation and enables the government to identify and take 
advantage of solutions that might not otherwise have been evident. A 
true performance-based acquisition also effectively balances the 
substantial risk assumed by the performing contractor with appropriate 
rewards.
    The Department of Homeland Security, among others, has been working 
diligently to create that balance and incentivize that innovation. 
While some have criticized performance-based acquisition because it 
appears to give contractors too much control over a program and its 
elements, the fact is that when such an acquisition is properly 
structured and managed, the government establishes the program 
requirements and retains full control over the program. At the same 
time, one of the fundamental purposes of performance-based approaches 
is to enable the presentation of new and different solutions. Thus, it 
is essential that the contractor be given appropriate latitude to 
propose such solutions.
    In short, from the perspective of the private sector, performance-
based acquisition is a highly desirable form of contracting yet is also 
a highly risky and sometimes feared strategy. Done right, it works 
exceptionally well. However, done poorly, performance-based acquisition 
places inordinate attention and risk on the contractor. Moreover, one 
cannot cherry-pick the elements that are critical to the success of a 
performance-based acquisition. It is a strategy with many intertwined 
parts, each of which must be properly executed.
    PSC has long been active in the congressional and regulatory 
discussions about performance-based acquisitions. In addition, from 
2005 through 2007, we co-chaired a working group of six trade 
associations that participated extensively in presenting information 
to, and commenting on the work of, the Services Acquisition Reform Act 
Acquisition Advisory Panel.\1\
---------------------------------------------------------------------------
    \1\ Created by Congress in Section 1423 of the Services Acquisition 
Reform Act (Title XIV of the fiscal year 2004 National Defense 
Authorization Act (Pub. L. 108-136). Often referred to as the ``1423'' 
Panel or the Acquisition Advisory Panel, the Panel submitted its final 
report to Congress in January 2007. See http://acquisition.gov/comp/
aap/finalaapreport.html.
---------------------------------------------------------------------------
What is a Performance-Based Acquisition?
    The Federal Acquisition Regulations define the term ``performance-
based acquisition'' (PBA) to mean an acquisition structured around the 
results to be achieved as opposed to the manner in which the work is to 
be performed.\2\ It is an ``outcome-oriented'' approach rather than a 
``design-oriented'' approach. Congress has provided that the use of 
performance-based acquisition is the preferred method for acquiring 
services \3\ and PBA methods should be used to the maximum extent 
practicable except for specifically designated services, such as 
construction or utilities, with separate contracting approaches.\4\ The 
Office of Management and Budget's Office of Federal Procurement Policy 
(OFPP) issued a memorandum in May 2007, titled ``Using Performance-
Based Acquisition to Meet Program Needs--Performance Goals, Guidance 
and Training,'' that provided performance goals and PBA learning assets 
to ensure that the acquisition strategy is used effectively.\5\ A 
second memo, issued in December 2007, provided fiscal year 2008 
performance-based performance goals.\6\ In compliance with the OFPP 
guidance, the Department of Homeland Security has issued its own goals.
---------------------------------------------------------------------------
    \2\ See Part 2.101 of the Federal Acquisition Regulations (FAR).
    \3\ See Section 821 of the fiscal year 2001 National Defense 
Authorization Act (Pub. L. 106-398).
    \4\ See FAR 37.102(a)(1).
    \5\ The memo is available at: http://www.whitehouse.gov/omb/
procurement/pbsa/pba_revised_052207.pdf.
    \6\ The memo is available at: http://www.whitehouse.gov/omb/
procurement/pbsa/pba_2008_memo.pdf.
---------------------------------------------------------------------------
    Occasionally, you may see references to ``performance-based 
contracting'' or ``performance-based services contracting'' or 
``performance-based services acquisition.'' There are differences 
between these terms. In fact, PBA is not a ``contracting'' exercise. It 
requires a broad, integrated acquisition strategy that relies on much 
more than the active involvement of a contracting officer. As such, 
today I will use the term ``performance-based acquisition'' or ``PBA'' 
as defined in the Federal Acquisition Regulations (FAR).
    The FAR lists three (but actually identifies four) primary 
characteristics of a PBA. The first required characteristic is for a 
performance work statement or statement of objectives. A statement of 
objectives (SOO) is prepared by the government and includes six 
mandatory minimum elements: (1) Purpose; (2) scope or mission; (3) 
period and place of performance; (4) background; (5) performance 
objectives (i.e. required results); and (6) any operating 
constraints.\7\ A performance work statement (PWS)--a statement of work 
that describes the required results in clear, specific and objective 
terms with measurable outcomes \8\--may be prepared by the government 
from the SOO and provided as part of a solicitation or prepared by a 
contractor as part of their bid responding to an agency's solicitation 
that contains only an SOO.\9\
---------------------------------------------------------------------------
    \7\ See FAR 37.602(c).
    \8\ See FAR 2.101; emphasis added.
    \9\ See FAR 37.602(a).
---------------------------------------------------------------------------
    This performance work statement is perhaps the most important 
element of a PBA and the single greatest predictor of success. The FAR 
is explicit that agency program officials are responsible for 
accurately describing the need to be filled, or the problem to be 
resolved, through a contract in a manner that will ensure full 
understanding and responsive performance by contractors.\10\ The full 
involvement of senior managers within the agency and the multi-
disciplinary team led by the program manager or end-user are essential 
to the development of the performance statement; without them, the 
prospect for success drops significantly because there is less chance 
that the SOO or PWS will accurately reflect the current state and the 
desired end-state. It is also at this point that the government must be 
alert to the risk of morphing the PWS into a ``design spec'' that 
minimizes the opportunity for bidders to offer innovative approaches to 
the identified solution--one of the principle reasons for using the 
performance-based approach.
---------------------------------------------------------------------------
    \10\ See FAR 37.102(e).
---------------------------------------------------------------------------
    The second characteristic is having measurable performance 
standards (i.e. in terms of quality, timeliness, quantity, etc.).\11\ 
These performance standards establish the performance level required by 
the government for the contractor to meet the contract requirements. 
The standards must be measurable and structured to permit a fair and 
accurate assessment of the contractor's performance.\12\ Yet these 
measures must also be directly tied to the outcomes to be achieved, 
should be limited in number and scope, and must take into account the 
cost to the government and the contractor of developing and reporting 
on any specific measure. But these performance standards should not be 
rigid and perpetual. At the outset of the procurement, it is possible 
that both the government and the contractor will not be able to 
identify the best set of performance indicators to measure the desired 
outcomes. As time passes and the government's and the contractor's 
experience grows in implementation, there should be a regular 
reassessment of the measurements used to determine outcome achievement 
to ensure that the parties are measuring the right thing. This is not 
meant to, and should not be used to, let either party ``off the hook'' 
for poor performance or merely to ``re-baseline'' a procurement to hide 
problems.
---------------------------------------------------------------------------
    \11\ See FAR 37.601(b)(2).
    \12\ See FAR 37.603.
---------------------------------------------------------------------------
    The third characteristic is the method of assessing contractor 
performance against the performance standards.\13\ The most common 
method for assessing contractor performance is the requirement for the 
government to have a quality assurance surveillance plan (QASP). The 
government may either prepare the QASP or require the contractor to 
submit a proposed plan for the government's use with its proposal.\14\ 
Here again, the FAR clearly places important responsibilities on the 
government to ensure that ``sufficiently trained and experienced 
officials are available within the agency to manage and oversee the 
contract administration function.''\15\
---------------------------------------------------------------------------
    \13\ See FAR 37.601(b)(2).
    \14\ See FAR 37.604.
    \15\ See FAR 37.102(h).
---------------------------------------------------------------------------
    The fourth characteristic is the use of performance incentives 
where appropriate. In my experience, performance incentives should be 
used in PBAs as part of a well-thought out business arrangement. When 
used, these incentives must correspond to the performance standards set 
forth in the contract.\16\ Incentives can be monetary or non-monetary, 
but they should be ``positive'' in nature and focused on the outcomes 
to be achieved. Of course, the contract should include appropriate 
remedies for the government where the contractor's performance 
warrants. But there is an important point to be made here: the 
contractor can and should be held accountable for the performance under 
its control. Too often all of the risk is shifted to the contractor and 
``blame'' and penalties are imposed on the contractor for contract 
funding shortfalls, changed government requirements, or program issues 
beyond its control. As an example of this risk shifting, in the fiscal 
year 2008 DHS Appropriations Act, Congress limited the department's use 
of award fee contracts unless those contracts are linked to successful 
acquisition outcomes, specified in terms of cost, schedule, and 
performance;\17\ while we acknowledge the premise that a contractor 
should not be rewarded for its own non-performance, neither this 
provision nor its legislative history shows any appreciation for the 
effect of actions wholly outside the contractor's control. We are 
awaiting the implementing guidance for this provision from the 
department.
---------------------------------------------------------------------------
    \16\ See FAR 37.601(a)(3).
    \17\ See Section 556 of the fiscal year 2008 Department of Homeland 
Security Appropriations Act, included in Division E of the Consolidated 
Appropriations Act (Pub. L. 110-161).
---------------------------------------------------------------------------
    In addition to these characteristics, Congress has provided an 
order of preference of contract types to be used by agencies in 
achieving its mission needs. They are: (1) a firm-fixed price 
performance-based contract or task order; (2) a performance-based 
contract or task order that is not firm-fixed price; and (3) a contract 
or task order that is not performance-based.\18\ Too often, however, 
the government misreads the provision and explores only firm-fixed 
price contracts for PBAs. As the committee knows, in a firm-fixed price 
contract, the contractor generally assumes all of the risk of 
performance--and it prices that risk and the competitive marketplace 
accordingly when competing for work. The use of only firm-fixed price 
contracts could be a short-sighted approach that excludes other 
appropriately recognized acquisition strategies which might better meet 
the agency's need and foster even greater competition among offerors.
---------------------------------------------------------------------------
    \18\ See footnote 3 supra; See FAR 37.102(a)(2).
---------------------------------------------------------------------------
    Finally, there is the important element of contract 
administration--to make sure that the program and contract are 
implemented according to the acquisition strategy. At this stage, it is 
essential that the oversight community, which has an important role to 
play in validating performance, does not come in after the fact and 
audit to an unrelated set of agency regulations and ``design'' rules 
inapplicable to the PBA.

                            PBAS ARE NOT NEW

    PBAs are not a new technique. One of the earliest government 
documents addressing them is the 1980 pamphlet issued by the Office of 
Management and Budget's Office of Federal Procurement Policy (OFPP) 
entitled ``A Guide for Writing and Administering Performance Statements 
of Work for Services Contracts.'' In April 1991, OFPP issued a 
superceding policy letter (91-2) on services contracting that also 
focused on performance-based contracts. While that policy letter has 
also been rescinded, the FAR has been updated more recently to address 
the calendar year 2000 congressional direction for the preferred use of 
the PBAs and other more recent experiences.

                           SEVEN STEPS GUIDE

    Early in this decade, six Federal agencies, led by the Commerce 
Department, in conjunction with the private sector firm Acquisition 
Solutions, prepared and widely distributed the ``Seven Steps to 
Performance-Based Services Acquisition;''\19\ this seven steps guide is 
a valuable resource for Federal agencies to understand the regulatory 
requirements and provide practical information on how to prepare for 
and implement a PBA. But it is just a guide and all of us who work with 
PBAs recognize that there is no ``one size fits all'' PBA; it must be 
tailored to the specific agency needs. In fact, it is not a coincidence 
that the first five of the seven steps are required to be executed by 
the government before ever issuing the solicitation. Selecting the 
contractor is step six! The final step is managing performance after 
contract award.
---------------------------------------------------------------------------
    \19\ ``Seven Steps To Performance-Based Acquisitions,'' available 
at http://acquisition.gov/comp/seven_steps/index.html.
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               ACQUISITION ADVISORY PANEL RECOMMENDATIONS

    As I noted above, the congressionally chartered Acquisition 
Advisory Panel was tasked, in part, with reviewing performance-based 
acquisitions.\20\ The Panel made several findings and offered ten 
recommendations for action to improve the usefulness of PBAs.
---------------------------------------------------------------------------
    \20\ See footnote 1, supra, and specifically Chapter 2.
---------------------------------------------------------------------------
    Of significance, the Panel concluded that agencies remain unsure of 
when to use PBAs, incentives are not used effectively, and poor data 
makes it difficult to understand where and how PBAs are used. In fact, 
the Panel found that many of the awarded contracts listed in the 
Federal Procurement Data System failed to comply with one or more of 
the FAR's characteristics of a PBA. When asked to verify the proper 
coding of contracts, many agencies could not or would not validate this 
designation. We have seen examples of where agencies have coded 
contracts as performance-based because of the goals that have been 
levied on agencies, only to have to subsequently reclassify them after 
careful post-award analysis.
    PSC was pleased to co-chair a multi-association working group that 
actively participated in the public sessions of the panel; our working 
group provided testimony before that panel, submitted extensive written 
material to the panel on examples of successful PBAs, and submitted 
extensive comments on the interim and final Panel recommendations. Our 
full comments on the panel's final report on PBAs are included as an 
attachment to this statement.\21\
---------------------------------------------------------------------------
    \21\ The full text of the Industry Working Group's comments on the 
Acquisition Advisory Panel's final report is also available at: http://
www.pscouncil.org/pdfs/MAResponseTo1423Panel.pdf.
---------------------------------------------------------------------------
                               CONCLUSION

    At the outset, I suggested that greater information about PBAs 
might lead the committee to ask a different set of questions and pursue 
a different set of solutions.
    It is not whether PBA, as an acquisition technique, uniquely 
creates solutions or causes problems. Success or failure is not wholly 
dependent on the acquisition methodology. The better question to ask is 
whether a department or agency has the skills and resources to use this 
PBA technique since there is a greater responsibility put on the 
acquiring agency to get the ``upstream'' issues right, including most 
significantly the statement of objectives, the performance work 
statement and the measurement techniques.
    As to the better answers, this committee is well aware of the 
management challenges facing the Chief Procurement Officer (CPO) at the 
Department of Homeland Security and its operating agencies. It starts, 
but certainly doesn't stop, with attracting and retaining qualified 
acquisition professionals and ensuring they have the tools and 
resources to successfully execute the department's mission. They've 
been hard at it, but the competition among agencies for this skilled 
workforce is intense, not just in the Washington area but across the 
country.\22\ Contractors are competing for this same talent pool.
---------------------------------------------------------------------------
    \22\ For example, in response to the ``Gansler'' Commission report, 
the new Army Contracting Command is committed to hiring more than 700 
contracting professionals around the country over the next 3 years plus 
an additional 200 interns in each of the next 3 years. See ``Army 
Contracting Command to hire mid-career employees, interns,'' Federal 
Times, April 21, 2008, at 4.
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    The CPO has developed some useful internal oversight techniques, 
including requiring business cases, conducting investment review board 
sessions, and creating an Acquisition Program Management Division to 
provide oversight and support to the department's programs. These are 
valuable steps that can have a beneficial impact on the department's 
acquisitions over time, including those major acquisition programs that 
are already under contract. We salute the department for the strides it 
has made to date, and stand ready to support them in any way we can.
    But more can and should be done.
    There needs to be an emphasis on the important role of program 
management within the department, including their training on necessary 
critical skills and the use of PBAs. There needs to be an 
acknowledgement of the impact of the business relationship between the 
agency and the contractor during the agency's internal formation of the 
acquisition strategy applicable to any procurement, not just to PBAs. 
Finally, there needs to be up front coordination with the independent 
oversight organizations so that their post-award reviews appropriately 
evaluate the contract.
    Mr. Chairman, performance-based acquisitions are a valuable tool 
that must be available to the agency to bring innovation and experience 
to fulfilling an agency's mission. But PBAs require a different level 
of expertise in the agency, the contractor, and the oversight 
community. When done right, the results are impressive. We are 
committed to finding those solutions to ensuring it is done right.
    Thank you for the invitation to provide this testimony. I would be 
pleased to answer any questions.

  APPENDIX 1.--Final Response and Comment of the Aerospace Industries 
 Association, Contract Services Association, Government Electronics & 
Information Technology Association, Information Technology Association 
 of America, National Defense Industrial Association, and Professional 
  Services Council to the Recommendations of the Acquisition Advisory 
                                 Panel
                             March 7, 2007

  MULTI-ASSOCIATION COMMENTS ON THE SECTION 1423 ACQUISITION ADVISORY 
                  PANEL'S FINAL PANEL RECOMMENDATIONS
                CHAPTER 2--PERFORMANCE-BASED ACQUISITION

    Industry has reviewed Chapter 2 of the Acquisition Advisory Panel 
report on Performance-Based Acquisition and is in agreement with the 
findings. The Acquisition Advisory Panel has captured points and issues 
raised by the Multi-Association Working Group in our comments as well 
as our testimony. The Panel has also captured in the Findings 
significant failures, challenges, cultural barriers and organizational 
constructs that inhibit Performance-based Services Acquisition (PBSA) 
success. Industry supports these findings.
    The Panel's recommendations are a start but require much investment 
and OFPP intervention in order for PBSA to succeed; however, the 
recommendations address some, but not all, of the findings.
Finding 1: Despite OMB Target, Agencies Remain Unsure When To Use PBSA
    Recommendation 1.--OMB's governmentwide quota of requiring 40 
percent of acquisitions be performance-based should be adjusted to 
reflect individual agency assessments and plans for using PBSA.

            MULTI-ASSOCIATION RESPONSE
    Industry supports this recommendation, agreeing that a one-size-
fits-all quota should be abandoned. It is not clear, however, how OMB 
plans to review each agency's analysis of its unique acquisition 
portfolio based on clearer OFPP PBSA guidance as reflected in the 
agency's Acquisition Performance Plan. It is also unclear to what 
extent plans are tied to transformational versus transactional 
engagements.
    Recommendation 2.--FAR Part 7 and 37 should be modified to include 
two levels of Performance-based Acquisitions: Transformational and 
Transactional. OFPP should issue more explicit implementation guidance 
and create a PBSA ``Opportunity Assessment'' tool to help agencies 
identify when they should consider using performance-based acquisition 
vehicles.

            MULTI-ASSOCIATION RESPONSE
    Industry supports the recommendation to create two categories of 
PBSAs to distinguish transformational from transactional acquisitions. 
We also support the development of an ``Opportunity Assessment'' tool 
for determining when PBSA is appropriate, but are concerned about how 
the tool will be developed and would caution against the development of 
a simple check box-type tool. There are too many variables that can 
determine the appropriateness of a PBSA. For example, while an agency 
might have a ``transformational'' requirement, it may not be possible 
for the agency to baseline their particular measurement and whether the 
measurement is even realistic and important to the end goals.
    Industry is also concerned that the transactional acquisition as 
described too closely resembles the current PBSA practice of calling an 
acquisition performance-based and then directing what work is to be 
done by the contractor. The cost is already constrained by the contract 
price and quality and timeliness are reflected in the hoped-for past 
performance evaluation. These are not true performance-based 
acquisitions. The Panel report states that under this type of PBSA, the 
government would be ``willing to assume the risk that the work being 
done may not solve the baseline need/problem.'' But this assumption is 
contrary to the purpose for PBSA, where the goal is to identify a 
problem or need and have the contractors determine the best means for 
finding a solution.
Finding 2: PBSA Solicitations and Contracts Continue To Focus on 
        Activities and Processes, Rather Than Performance and Results
Finding 3: PBSA's Potential for Generating Transformational Solutions 
        to Agency Challenges Remains Largely Untapped
Finding 4: Within Federal Acquisition Functions, There Still Exists a 
        Cultural Emphasis on ``Getting To Award''
Finding 5: Post-Award Contract Performance Monitoring and Management 
        Needs To Be Improved

            MULTI-ASSOCIATION RESPONSE
    Industry believes that Transformational PBSA and OFPP guidance must 
focus on the Panel's comment to Finding 3: ``The Panel concedes that 
defining a strategic vision and compelling an institution to coalesce 
around it are extremely difficult endeavors. Stove-piped organizations 
and institutional and cultural conservatism greatly inhibit the ability 
to define and execute against strategic objectives. The right people 
must be involved, including senior leadership and vital stakeholders, 
to bring a broad perspective on what to buy, as well as which vehicle 
to use. If the critical parties are not at the table, it is extremely 
difficult to break through cultural barriers that inhibit success.''
    We also note the Panel's concern for the tendency of contractors to 
``not to be open to a broader set of responses outside the government's 
original SOW.'' The reason for this ``tendency'' is because contractors 
are fearful of losing a bid if they do not closely mimic the 
government's statement of work in their responses. As a result, many 
competitions are reduced to careful alignment of proposals with the 
government's specific approach and/or price shoot-outs, and the 
potential for innovation is largely forfeited. Industry does not see 
any recommendation or required direction to OFPP to insure that these 
concerns are addressed.
    Recommendation 3.--Publish a best practices guide on development of 
measurable performance standards for contracts.

            MULTI-ASSOCIATION RESPONSE
    Industry generally supports the recommendation for OFPP to issue a 
Best Practices Measurements Guide but such a recommendation requires 
more clarification.
    The references to a ``Measurement Chain'' and ``Logic Model'' 
frameworks are unclear. The discussion in the last paragraph on 
Baseline & Outcome Measurement is also unclear. Baselines are essential 
for any successful PBSA and must always be a measurement that can be 
well articulated in a final contract. Further, the Panel recommends 
under Limiting Measures setting a limitation on the scope of 
performance measures in PBSA's, which seems to be reasonable. However, 
the recommendation never defines what measures are acceptable and which 
ones are not necessary. It simply says that measures should be limited 
to a ``sampling.''
     Finally, the evolution of measures is a topic emphasized in the 
recommendations as ``WILL and MUST'' changes over time. This is a 
significant topic that requires focused understanding and 
sophistication. Expectations must be realistic and not set to arbitrary 
hurdles.
    Recommendation 4.--Modify FAR Part 7 and 37 to include an 
identification of the government's need/requirements by defining a 
``baseline performance case'' in the PWS or SOO. OFPP should issue 
guidance as to the content of Baseline Performance Cases.

            MULTI-ASSOCIATION RESPONSE
    Industry supports the creation of a Baseline Performance Case. 
However, establishing the baseline performance state and state-of-
practice assessments will require in-depth training as well as 
overcoming a cultural hurdle in that understaffed contracting 
activities will seek the ``easiest'' way to answer the Baseline 
Performance Case requirements. Unless done diligently, the resulting 
Baseline Performance Case will not solve the underlying problem of 
clearly defining needs and requirements upfront.
    Recommendation 5.--Improve post-award contract performance 
monitoring and management, including methods for continuous improvement 
through the creation and communication of a ``Performance Improvement 
Plan'' that would be appropriately tailored to the specific 
acquisition.

            MULTI-ASSOCIATION RESPONSE
    Performance Improvement Plans as described are found in industry 
practices and industry would support the development of these plans in 
the course of post-award management of PBSA contracts. Such plans allow 
the contractor to provide evolving input as to how they should be 
assessed for performance, while allowing the objectives of the contract 
to evolve with changing needs. However, OFPP needs to provide crisp 
guidance as to when and how performance improvement plans are used and 
advise how such plans provide a diminishing return in multi-year 
contracts. This recommendation requires focused understanding and 
sophistication that may not be present in current usage of PBSAs.
    Recommendation 6.--OFPP should provide improved guidance on types 
of incentives appropriate for various contract vehicles.

            MULTI-ASSOCIATION RESPONSE
    Industry supports this recommendation for OFPP to take the lead by 
using the PBSA interagency working group to catalogue the various types 
of incentives appropriate for use in PBSA efforts, critique how the 
incentives are being applied, assess the applicability of award fee and 
award term approaches to PBSA and discuss the challenges posed in 
managing PBSA's under existing budget and appropriation rules that 
limit multi-year financial commitments and incentive-based budget 
projections. In addition, in order to maximize the use of PBSA's to 
their fullest, industry recommends a legislative solution to these 
budgeting problems.
    Recommendation 7.--OFPP should revise the 7-step process to reflect 
the Panel's new PBSA recommendations.

            MULTI-ASSOCIATION RESPONSE
    Industry agrees with this recommendation to revise the 7-step 
process subject to these comments.
    Recommendation 8.--Contracting Officer Technical Representatives 
(COTR's) in PBSA's should receive additional training and be re-
designated as Contracting Officer Performance Representatives (COPR's).

            MULTI-ASSOCIATION RESPONSE
    Industry strongly agrees with Recommendation 8, but questions how 
OFPP plans to address the comment in Finding 3 regarding cultural 
change to enable transformational PBSAs. While training and designating 
a COPR will facilitate better transactional PBSAs, additional training 
and oversight does not address fundamental organizational and cultural 
barriers of a transformational PBSA.
Finding 6: Available Data Suggests That Contract Incentives Are Still 
        Not Aligned To Maximize Performance and Continuous Improvement

            MULTI-ASSOCIATION RESPONSE
    This finding is more closely related to Recommendations 5 and 6 
regarding continuous improvement and guidance on incentives.
Finding 7: The FPDS Data Are Insufficient and Perhaps Misleading 
        Regarding Use and Success of PBSA
    Recommendation 9.--Improved data on PBSA usage and enhanced 
oversight by OFPP on proper PBSA implementation using an ``Acquisition 
Performance Assessment Rating Tool'' or A-PART.

            MULTI-ASSOCIATION RESPONSE
    Requiring agencies to use the A-PART tool with an enhanced 
checklist will not be a panacea of successes. Transactional/
Transformational PBSA contracts require understanding and 
sophistication and a checklist will only provide OFPP with data that 
shows agencies in fact followed a process.
    Industry supports the recommendation that FPDS be amended to better 
capture data regarding PBSAs and to adequately differentiate between 
transformational and transactional performance-based acquisitions and 
their task and delivery orders.
    Recommendation 10.--OFPP should undertake a systematic study on the 
challenges, costs and benefits of using performance-based acquisition 
techniques 5 years from the Panel's delivery of its final report.

            MULTI-ASSOCIATION RESPONSE
    Industry supports the recommendation for a study on PBSA but 
analyses must be more regularly done to provide value to policymakers.

    Chairman Thompson. Thank you.
    As you see, my colleagues have already departed to make the 
vote. We have five votes. I anticipate about 11:15 a.m. we will 
be ready to convene, subject to the order of the floor. We will 
recess the hearing until that time, 11:15 a.m.
    [Recess.]
    Chairman Thompson. We will call the recess meeting back to 
order. We have some other members who will be coming shortly.
    Let me thank the witnesses for their absolute cooperation 
in this endeavor. We thought it would be five votes, and it 
ended up being 10 votes. It is now raining outside, so people 
who had bright ideas of coming above ground had to go back and 
try to come under.
    As you know, this is to Mr. Essig, I will start the 
questioning off since we have completed the testimony. In your 
testimony, you stated that it is essential that the department 
pursue performance-based acquisition in a judicious manner. 
Given the outcome of some of our performance-based 
acquisitions, such as SBINet's Project 28, ACE, and Deepwater, 
what plans are being made to ensure that the department is more 
selective in choosing to use an outcome-oriented acquisition 
strategy?
    Mr. Essig. As I mentioned in my opening comments, one of 
the characteristics that is absolutely essential for successful 
PBA is to be able to accurately articulate what the requirement 
is to all personnel involved, to translate those initial user 
needs into contracting language that can be measured and 
enforced.
    We have a number of initiatives underway within the 
department to improve our performance in that area. Let me talk 
just for a moment about what we are doing for our investment 
review process. Over the past 6 to 12 months, we have been 
engaged in a review of our level I programs. Those are the 
highest dollar-value programs in the department.
    We are continuing that review, but along the way we have 
identified a number of systemic or process issues for the way 
we basically manage and approve our programs in the department. 
One of the systemic issues we identified was that today we have 
no departmental requirements process. As a result, we have had 
historically some major problems on the program formulation 
side.
    So even though, as I mentioned in my opening comments, 
clear measurable performance measures are required for 
successful PBAs, it is not something we have done historically 
in the department. We found, for example, that about 50 percent 
of our level I programs do not today have what we call 
acquisition program baselines.
    What those documents are, basically, they articulate the 
performance that is required from the program, the timeframe we 
expect that will be able to deliver that capability, and how 
much it will cost. These are essential tools for us to be able 
to understand what our requirement is and make a decision 
basically as to whether or not we should pursue programs.
    So what are we doing about this? Well, we are in the 
process of re-engineering the department's processes for 
requirements determination and for investment and acquisition 
program decisions. Now, my office is leading the re-engineering 
for the acquisition program decisions. We are doing that, 
again, for a couple of reasons. One, we recognize that this 
department represents the merger of 22 different agencies, and 
that the programs we have today were approved under whatever 
processes were in place in those predecessor organizations.
    We want to put a process in place for DHS that applies to 
all of our programs, that ensures that we have the basic 
discipline in the process to ensure that before we go to 
contract, we identify exactly what the user requirement is, 
that we have taken the up-front time that is required to 
translate that user requirement into system performance 
specifications and into contract language.
    We are also in the process, for example, of making sure we 
understand how the users do their business today. We refer to 
that as a concept of operations. Before we deliver a capability 
to our border patrol agents, for example, we want to make sure 
we understand how the Border Patrol does its job today.
    All of that is critical to basically spending the time up-
front before we make decisions on which programs to pursue, 
which programs to fund, that we understand again the capability 
that will be delivered, the timeframe that is required to 
develop the capability, and the amount of money that will be 
required. That will serve as the basis for making program 
decisions as to which we decide to pursue and which we do not.
    Chairman Thompson. So now you are saying that right now you 
are 50 percent there with this process? Or where are we?
    Mr. Essig. We have two companion documents we are looking 
at. One covers the program execution phase, which is where we 
are talking about the investment review process. It replaces 
the current directive we have on capital investment decisions. 
That one is in the process. We are going to implement that in 
two phases. The first phase will be the program outline. It 
will identify what the decision process is and who the decision 
authorities are.
    The second portion of that, the second phase will be 
specific guidance for major categories of DHS spend. We will 
have capital investments in one category. We will have services 
acquisition in another category. We will have, for example, 
off-the-shelf expendable commodities in a third category.
    The reason for that is that we understand that while each 
of those are significant spend categories, and each of those 
requires a headquarters-level look, the amount of the detail in 
the look whether or not it involves research and development 
effort or is simply providing off-the-shelf commodities, means 
that the decision process will be different.
    Chairman Thompson. I appreciate that. I want to get a 
couple of questions to a couple of other people.
    Is it your testimony that you presently have the capability 
in-house to do everything you are proposing?
    Mr. Essig. Yes, sir.
    Chairman Thompson. So you need----
    Mr. Essig. Let me clarify, if I could: In-house as 
supplemented by agreements we have with the Defense Acquisition 
University and our FFRDCs who provide subject-matter expertise.
    Chairman Thompson. Okay.
    Now, Mr. Hutton, did you look at the capacity of DHS to 
perform these procurements that we are talking about at this 
point, in the review?
    Mr. Hutton. Mr. Chairman, what Mr. Essig has outlined is 
very critical to gaining improved outcomes at the DHS. We have 
some ongoing work right now where we are looking at that 
investment review process--where have they been, where are they 
now, and where are they headed, and what is the level of 
resources they will need to get there.
    I think that this is a very critical piece that is going to 
help enforce better outcomes. But the key here, sir, is that 
when we have looked at service acquisitions more generally 
across government, there are a couple ways of looking at it. 
One, we encourage that the agencies take a strategic approach, 
looking at it from a strategic level, and looking at it from a 
transactional level.
    At the strategic level, we are arguing that you need 
sustained leadership and you need sound processes with 
discipline, and ensuring that these processes are adhered to, 
and that you need good information to be sure that you are 
getting good outcomes. So right now, we are looking at some of 
the activities that Mr. Essig is describing to you.
    I must emphasize that these are very critical and some of 
these assessments have been going on and this consideration of 
changing their investment review process has been underway for 
a few years now. There is much more activity and action going 
on right now to help improve that process, but we hope when we 
issue a report later this year we will have more insights on 
what is their ability to do that.
    Chairman Thompson. So is it your belief right now that 
internally there is enough capacity at the department to get us 
where we need to be?
    Mr. Hutton. I think, sir, that when you look at it from an 
individual project level, we do point out that they are still 
trying to fill key positions to help them gain good outcomes, 
whether it be on the programmatic side, certain types of 
specialties, as well as on the contracting side. I think they 
have a workforce plan underway which is another area that we 
are actually focusing on as well in another study, and looking 
at their ability to plan and fill their acquisition workforce 
needs. So I would say right now, sir, that there are still some 
positions that they are looking to fill.
    Chairman Thompson. Let me try to play out for everybody to 
have a chance to answer. When we look at the type of 
procurements we are talking about and start asking questions, 
generally it comes back to the committee for various reasons 
that because of the manner in which it went out, the oversight 
and the measurement that would normally be there we didn't 
have.
    Project 28--I will just put it out as an example. That 
procurement became very controversial because we really 
couldn't get an explanation of the procurement to the committee 
that was satisfactory. So every time we had a hearing that 
talked about it, it appeared to be a moving target. So that the 
initial procurement from the beginning did not actually reflect 
the end-product, so the expectations that were put out at first 
were not.
    So it happened that we have a lot of contractors coming 
back to the committee saying, you know, if they had put that 
out first in the procurement, we could have bid. We could have 
done a number of things, but because the procurement was 
structured one way and modified along the way, we didn't have 
the capacity, one, to compete, but had we known it was going to 
be changed--and I guess, Mr. Chvotkin, some of the people who 
came to us were members of your organization who said that, we 
work for the government all the time, but these kinds of 
performance-based acquisitions sometimes lead us not to compete 
because there is not enough for us to really put the pencil to, 
and we are not willing to take the risk.
    Mr. Chvotkin. Yes, Mr. Chairman. I think you have put your 
finger exactly on the heart of the issue. As I pointed out in 
my statement, these are among the most difficult types of 
contracts for an agency to write and among the most difficult 
for a contractor to compete for and then execute.
    While I don't know as much about the SBINet program as this 
committee does and wouldn't propose to comment on it, it was a 
proof-of-concept. The agency sought various technical solutions 
and actually had robust competition at the front-end around it. 
Now, there were questions about the scope of the requirements 
and whether that was clear.
    So I think the unanimity you see among the panel today may 
be unique in the testimony that normally comes before this 
committee, is around the philosophy around performance-based 
contracts. But let me point out that the alternative is a 
design. The alternative is that the Department of Homeland 
Security itself establish the requirements and then compete 
against a fixed set of requirements. That often either 
minimizes the flexibility or the innovation in the procurement.
    That is why my opening line in the testimony, and my last 
comment on this one is that it is not the technique. It is the 
ability of the agency to define its requirements in a 
comprehensive and understandable way that fosters the best 
opportunity for competition.
    Chairman Thompson. Mr. Hutton.
    Mr. Hutton. I would just add to that that I think Mr. Essig 
made the point very succinctly in his statement, when you think 
about requirements, it is from the aspect of what the contract 
says and what the user needs, and how well you define and 
articulate those requirements. I know in a couple of the cases 
that we looked at, when they were at the point of defining 
their requirements and they looked at the sufficient number of 
people that they needed at that time to help execute a program 
with good outcomes, they were down to the 10 percent level in 
terms of people available to help get that acquisition off to a 
good start.
    So requirements are just super, super important. It has 
been reinforced across all four here, but it is also to make 
sure that you have the program people connected, the 
contracting people connected, and the extent to which and where 
you are in the phase that the contractors are on board.
    Chairman Thompson. I want to thank you.
    Ms. Reed, given your experience in this area, when would 
you think it would be wise for the Federal Government to use 
contracts like this? Or do you think it is wise? If so, why?
    Ms. Reed. I do believe that performance-based acquisition 
offers some real opportunity for government to get innovative 
solutions. What we have seen is that some folks in government 
are very used to a specification-based approach. They have 
trained many of us in the industry to expect that, and it is 
easy to respond back to the section C and say, this is what you 
want; this is what I will deliver. It is easy to price that.
    But it does require and really offer an opportunity to 
industry who have had experience with delivering solutions in 
other agencies, other governments, to be able to share that 
kind of knowledge and experience with each individual 
procurement, and the process that is used for performance-based 
acquisition enables that kind of communication so that you can 
create an objective and find a solution that offers a better 
outcome for the American public.
    Chairman Thompson. Thank you.
    I will yield now to the gentleman from New Jersey, Mr. 
Pascrell.
    Mr. Pascrell. Thank you, Mr. Chairman.
    Mr. Essig, I believe that performance-based contracting 
offers a number of benefits in specific situations. It is clear 
that the mandatory cap for performance-based contracting forced 
upon each Federal department is yet another effort by this 
administration to guarantee more work for private contractors, 
with contracts that contain few specifics and suffer from lax 
oversight.
    I think that this is, Mr. Chairman, a larger pattern of 
behavior that we have seen. This administration believes that 
many private contractors should be given a free hand and be 
trusted implicitly not to choose their own profit margin over 
providing quality and cost-efficient products and services paid 
for by the American taxpayer, and we are talking about 
protecting the American public on the homeland.
    This pattern has been demonstrated time and time again. The 
relative failure of Project 28 to work as advertised on the 
U.S.-Mexican border, which I understand, Mr. Chairman, has been 
shut down. Is that correct?
    Chairman Thompson. The only thing I can say is that the 
press reports it, but we have not been told officially.
    Mr. Pascrell. I am sure the secretary will tell the press 
before he tells us, but that is his prerogative. We are 
irrelevant.
    But anyway, there are various military contracts that have 
been given to KBR in Iraq where it has been proven to be rife 
with inconsistencies and worse. That is not the subject of my 
question to you. It is the job of the inspector general's 
office, the OIG, to fight waste, fraud and abuse, as far as I 
know, and the GAO's report--thank God for the GAO, I pray every 
weekend for the GAO--that you survive.
    The GAO report on performance-based contracting shows that 
this is clearly in many instances not occurring in DHS, which 
can only be the case if the OIG's office at DHS has either not 
been given the necessary resources. You do refer in the GAO 
report to staffing deficiencies--very clear, very specific--so 
that they can investigate. If you don't have enough people and 
if you don't have them properly trained, you are not going to 
investigate, period. Or its findings are being ignored--that is 
another possibility--or undermined.
    So Mr. Essig, as the chief procurement officer for the 
department, will you answer the question of why the OIG has not 
been able to control waste, fraud and abuse that often seems to 
be rampant in the department's contracting practices. Could you 
answer that question please, sir?
    Mr. Essig. Yes, sir. You actually had several points in 
that question. The first one concerns the impact of the 
Federal-wide goals for performance-based acquisition. This 
year, I believe those goals were increased to 50 percent, but 
OFPP gave individual departments and agencies the opportunity--
--
    Mr. Pascrell. Who is OFPP?
    Mr. Essig. I am sorry--the Office of Federal Procurement 
Policy.
    Mr. Pascrell. Thank you. I just wanted to make sure in my 
own mind. We hear these letters every day, you know.
    Mr. Essig. They gave each individual agency the opportunity 
to use different goals for their department based on where that 
department was in maturity level and past performance 
capability. As I mentioned in my----
    Mr. Pascrell. Where is the department in maturity level, 
DHS?
    Mr. Essig. Two things, I think it was a year or 2 ago, we 
established goals for DHS which did in fact differ from the 
top-level goals given to us by the Office of Federal 
Procurement Policy.
    Mr. Pascrell. Did you know that, Mr. Chairman?
    Chairman Thompson. No, sir.
    Mr. Pascrell. Okay. Thank you.
    Mr. Essig. Quantitative goals. We are taking a look at 
those. I believe we established goals for ourself for this year 
at 25 percent of our actions, rather than the 50 percent that 
is recommended. In actual performance, however, I would say we 
have fallen short of that 25 percent goal. Now, that in and of 
itself is not a major concern to me until at least I have an 
opportunity to understand why that is the case.
    One thing, for example, is we recognize, and I think GAO 
has recognized, that the data in the Federal procurement data 
system which identifies the percentages that we are meeting is 
not an accurate database. So one of the things we are doing is 
we are conducting my review, my contract operations group as 
part of its periodic procurement management review, is we are 
looking to make sure that contracts that are coded as 
performance-based did in fact have the essential elements for 
good, effective PBAs.
    Mr. Pascrell. So Mr. Essig, you admit before the committee 
today that in order to do what needs to be done to make your 
job a lot easier, we need reliable data. Okay? Do you agree 
with that?
    Mr. Essig. I agree with that.
    Mr. Pascrell. You agree with that. And that right now, the 
data in the system is, in many cases, inaccurate. Do you agree 
with that?
    Mr. Essig. I think we have made tremendous progress in the 
last year. We recently at individual component levels went 
through to validate the accuracy of the data in our 2007 
database. I believe we have cleaned that up. I think it is in 
much better shape than it has ever been. I would say while of 
course there will still be some inaccuracies, I think they are 
nothing close to what they were years ago.
    Mr. Pascrell. Why do you think, looking back, there was not 
a more reliable database? I mean, that is pretty basic. You 
can't move. You can't go out to bid. You can't contract unless 
you know what you need, and what you need is dependent upon a 
look at your database. It is pretty basic. I don't think there 
is any rocket science involved here. Why wasn't that done?
    Mr. Essig. A couple of things. One, first off, what we have 
been talking about on the database was whether or not we were 
meeting the quantitative goals for performance-based 
acquisitions. That question alone does not mean we are not able 
to do a good job of executing effective PBAs on a case-by-case 
basis. So whether or not the database reflects accurate 
quantities of PBAs really doesn't prevent us from doing a 
better job on putting them in place in the first place.
    Mr. Pascrell. But if you start out with faulty data, if you 
start out with data that is unreliable, you can have the 
greatest process in the world and totally logical, you would 
not come out with the truth. How can you do that? I would like 
to know how you do that.
    Mr. Essig. From a performance-based requirement, as a 
matter of fact there is a guidebook on OFPP's website on 
performance-based acquisition. There is a seven-step process 
which is identified in a lot of detail as to the proper way of 
putting together a PBA. If those steps were followed, the 
success rate should be high regardless of whether or not the 
historical database for contract awards accurately reflected 
how many PBAs we had.
    Mr. Pascrell. Do you take any exception to any of the 
recommendations that have been made by the GAO office?
    Mr. Essig. In this audit report?
    Mr. Pascrell. Yes.
    Mr. Essig. No.
    Mr. Pascrell. You accept their recommendations?
    Mr. Essig. Yes, sir.
    Mr. Pascrell. So my next question would be, how long do you 
think, since you are doing some of it already, but how long 
until we get to the point where these recommendations are 
implemented, rather than simply perfunctory? How long will it 
take?
    Mr. Essig. The key is making sure that the workforce is 
fully trained and knowledgeable about what the requirement is.
    Mr. Pascrell. When is that going to be done?
    Mr. Essig. We have actually been doing that to date. As I 
mentioned in my opening comments, we recently completed what we 
call an excellence in contracting series, the training 
opportunities for the acquisition workforce. We have conducted 
over the past year two training sessions in PBA, the most 
recent one being jointly provided both by OFPP and GSA as to 
the proper ways of doing PBAs.
    We are in my contracting oversight group, again as part of 
our procurement review processes, taking a sampling of 
contracts that have been coded as PBAs to see whether or not 
they were done correctly.
    Mr. Pascrell. Well, that leads me to my final question, and 
thank you for your patience, Mr. Chairman. You can now 
understand, and I think I can be so bold to speak for both 
sides on this issue. Mr. King will correct me if I am out of 
line here. We are so concerned about this transition period, 
where we are moving from one administration to whatever 
administration, that we have some good solid data as to what 
needs to be done.
    It is very uncomfortable. It makes me very anxious on such 
a critical area as homeland security. We all pound our chests 
about it and want to protect America and our families and our 
streets. When we see these things happening, we know that there 
is a breakdown in the system, or there never was a system in 
the first place.
    We are very anxious about handing over to the next 
administration, your department handing over to the next 
administration. We haven't even been supplied with where we are 
at on this committee, unless there is breaking news. We have 
not. We have no breaking news. It is May. I am not comfortable 
about that and I am sure you are not either.
    Mr. Essig. Actually, I have a very specific task given to 
me to accomplish this year before the change in administration.
    Mr. Pascrell. Tell us about it.
    Mr. Essig. It is to have that revised, that re-engineered 
investment review process in place and up and running in the 
department. Now, over the course of the past year, we have 
identified again the systemic weaknesses of the current 
processes and procedures in the department. We know what we 
need to fix. We know how to fix it. We are in the process of 
doing that.
    In February of this year, the deputy under secretary for 
management issued a memorandum, the first of a series of 
memorandums, which will identify and roll out the new 
investment review process for the department. What it did was 
identify the critical need for acquisition program baselines. 
Again, these are the documents which identify the capabilities, 
the costs, and the schedule required for individual programs. 
It effectively becomes the contract between the program manager 
and the department for that program.
    We have identified that a significant portion of our 
programs do not have those to date, and that needs to be 
remedied. My office is actively working with individual 
programs, one after the other. We are working through those to 
establish the program that do not have APBs to establish them. 
That will be done this year.
    I issued a subsequent or companion memo that is the second 
portion of our roll-out of the revised process in March of this 
year. What it did was identify for the components that we had 
completed our review of what we called the quick-look 
assessments. We had identified a number of systemic issues, and 
we recognized that a number of the programs did really not have 
clear guidance and direction from the department as to whether 
or not their program was authorized to proceed and, if so, what 
milestones it needed to complete and dates for completion it 
had to accomplish if it was going to be allowed to continue in 
the future. That will result in documentation called the 
acquisition decision memorandum for every level I program at 
DHS. That will also be completed this year.
    Mr. Pascrell. Now, you provided this to the secretary, this 
new information that you are gathering, the new standards that 
you are gathering, this new baseline that you are establishing?
    Mr. Essig. We have briefed the deputy secretary on this. He 
is aware of what we are doing. We have basically the memos I 
mentioned from the deputy under secretary and myself that were 
issued to all component heads.
    Mr. Pascrell. Mr. Chairman, can I follow this up with one 
question to Ms. Reed?
    Chairman Thompson. Yes.
    Mr. Pascrell. If you will allow me to do that.
    Ms. Reed, the culture--let me be so kind as to call it a 
culture--of the procurement workforce may involve viewing the 
award as the final step in the process. In performance-based 
contracts, though as you well know, better than me, the award 
is an intermediate step, isn't it, Ms. Reed? What are you 
thoughts on how do we change that culture? I think that this is 
essential, Mr. Chairman, to what we are trying to get at here 
in terms of transparency, contracts that make sense, and buying 
what we need.
    Ms. Reed.
    Ms. Reed. I think one of the ways in which you address that 
is recognizing--and this is one of the real values I see to the 
performance-based acquisition process--is it recognizes that an 
acquisition isn't solely the responsible of a contracting 
officer. It is the responsibility of the program manager. There 
is a community of people and a community of interests that need 
to be addressed with these acquisitions. This process requires 
that community of people to come together early on and together 
determine what the outcomes are going to be.
    That I think is one of the key parts of this cultural 
shift. It is no longer being a lone ranger, and now working 
more in tandem across the department and across the interests 
to address the need.
    Mr. Pascrell. Thank you.
    Thank you, Mr. Essig, for your service to your country.
    Mr. Essig. If I could just add one thing to that. Earlier 
this year, I identified my top three priorities for the 
department. I sent that to all of the heads of contracting 
activities at DHS, as well as all of the component heads. I 
identified three priorities. Priority No. 1 was quality 
contracting. I clearly identified that I was talking about the 
life-cycle of the contract, not just to award, but over the 
administration close-out of that contract action.
    Priority No. 2 was quality acquisition management. It 
brings in all of the things that Ms. Reed was just speaking 
out--the members of the team, the program managers, the systems 
engineers, our life-cycle cost estimators. Okay? That group.
    Priority No. 3 is quality people. It is building the 
capability in our acquisition workforce to know how to do this 
job, how to do it effectively, to make sure that we have 
centralized training, that we understand what capabilities and 
what certification requirements each function in this area has 
to have. So I think we are doing that.
    Chairman Thompson. Thank you very much, Mr. Pascrell.
    There are a couple of things I want to get to.
    Mr. Essig, you referenced some memos that you have 
prepared. We would like for you to provide those memos to the 
committee.
    Mr. Essig. Certainly, I would be happy to.
    Chairman Thompson. The other question is more a structural 
question. As the chief procurement officer for DHS, do you have 
line authority as to the different departments under DHS--
Customs and Border Protection, Coast Guard, Immigration and 
Customs Enforcement, Transportation Security Administration--to 
those various procurement entities?
    Mr. Essig. You have probably heard the term ``dual 
accountability'' that we have at DHS. One of the things you 
will see on an organization chart is the operational reporting 
chain for heads with contracting activity. Unfortunately, what 
you don't see on that chart is the other side of line 
authority, and that is the flow of contracting authority within 
the department.
    I recently had to brief some people and I put a second 
line. There were some green arrows that I had which I 
identified clearly what the line authority was for contracting 
actions in the department. It goes from the secretary and 
deputy secretary to the under secretary for management. From 
there, it goes to me as the chief procurement officer. That 
authority then is delegated by me in writing to the heads of 
the contracting activity who can then flow that down to the 
specific contracting officers.
    So even though those heads with contracting activity on the 
organizational chart at line reports within their component, 
the contracting line authority flows directly through me to 
them. So in answer to your question, sir, I believe I have all 
the authority I need to properly enforce procurement actions 
within the department.
    Chairman Thompson. We will come back to that, but I want to 
ask Mr. Hutton if in fact his review produced that same line of 
authority within the other departments.
    Mr. Hutton. If I may just make sure I understand the 
question. Were you asking if Mr. Essig----
    Chairman Thompson. Well, there is a question as to whether 
or not the chief procurement officer has enough authority to 
run the operation. To be quite honest, I don't think he has it. 
I want to give it to him. I know he is an appointee. He can't 
run under the bus willingly, but I am just trying to help us 
structure the organization so that if there is somebody in 
Customs and Border Protection that is not following the 
directives, he can stop them. But it has to be based on some 
authority vested in him as the chief procurement officer.
    We ran into this same issue in personnel, that departments 
have their own people, and so the people in DHS don't have 
anything to do with it. But we have a management operation in 
DHS and we have five or six personnel systems. So if we have a 
Department of Homeland Security, then that department should 
flow down to every entity below it. That is where I am going.
    Mr. Hutton. Thank you. You may know that GAO has been 
talking about the dual accountability, as Mr. Essig described, 
for several years because we had some questions about the fact 
that whether some components under the management directive 
were directly under some of their acquisition processes in the 
department, like Secret Service and I believe Coast Guard.
    We also had questions about that authority, and if for 
example the chief procurement officer saw some serious problems 
in one of the components, would they have the authority to go 
in there and say fix it? Or would the chief procurement 
officer, if they wanted to help influence the acquisition 
workforce in that component agency, would they have the 
authority to do so?
    About not quite a year ago, in another setting in a 
hearing, we learned that the DHS considered the under secretary 
for management to be the chief acquisition officer. That was 
something a little new for us to hear that. We also heard that 
the components that I described earlier would be brought under 
the management directives.
    Mr. Essig is probably in a better place to tell you what 
the current status of that is, because we do follow up on that 
issue to see if in fact these have been formalized because I 
think it has to be formalized to be effective. We talk about 
transition issues. You can't work on personalities for a long 
period of time. You have to have disciplined formal processes.
    So what he described is my current understanding, but as I 
mentioned earlier, as we look this, we have some ongoing work 
right now. We are looking at the investment review process, for 
example, and the workforce process. These are issues that we 
are constantly trying to keep up-to-date on because it all 
comes to if there is a problem, the proof in the pudding is, 
can the change be made? Or do you have to go way high up into 
the organization?
    Chairman Thompson. That is the concern that we have. We ran 
into it with Deepwater. We saw some contracting issues from a 
procurement standpoint with Deepwater, but we couldn't stop it 
because of the procurement peculiarities that existed at the 
time. Our effort is to try to streamline that so if there are 
things going wrong, we want to be able to stop it.
    Mr. Pascrell. Mr. Chairman.
    Chairman Thompson. Yes, the gentleman from New Jersey.
    Mr. Pascrell. What if we were to ask, and have already 
asked, for a GAO review of transitional abilities? That should 
be going on in every department. In Homeland Security, we have 
had a difficult time getting information about this. I think 
that is true. Correct?
    Chairman Thompson. That is correct.
    Mr. Pascrell. I think, not to try to give you more work, 
which you have a lot of, but I would like to see an overview of 
not only procurement, but the entire process of what is going 
on in Homeland Security and the transition, since this is such 
a critical area for us, to see where we are so that the next 
administration and the next Congress can move accordingly. Is 
that in order to ask for something to that degree? I think it 
is important. I think it would answer a lot of the questions 
that we have here today.
    Chairman Thompson. Absolutely. Under Secretary Snyder 
promised in another hearing to provide us with all that 
information. It is my understanding that if we don't get it 
within the expected time, that we can proceed.
    Mr. Pascrell. But the GAO is overseeing this and giving us 
what is really happening. We didn't get a lot of the reports we 
were supposed to get. We got a lot of reports that were late, 
and we got reports that were not accurate. I think the GAO can 
help us along those lines.
    Chairman Thompson. I think we can make the request. I am 
not sure from a timeliness standpoint we can get anything back.
    Mr. Hutton, do you want to comment?
    Mr. Hutton. Mr. Chairman, I just want to say that as we 
have done in the past in GAO, we do think about transition 
issues. I know that with DHS in particular, we issued a very 
large report last year which was like a report card on where 
DHS is 5 years later. We do think about these transition 
issues. If what we have done in the past continues, we will be 
addressing transition issues to help support the Congress in 
any way that we can on what we see are the issues.
    Chairman Thompson. We will follow up with a request for 
that.
    Let me refer you to this whole issue of coding in our 
database. According to your report, you looked at 138 
contracts, and 51 percent of those contracts had zero 
information relative to a performance work statement, 
measurable performance standards, and a method of assessing 
contractor performance against performance standards.
    Now, Mr. Essig, that is a serious dilemma, I think, for the 
department, if in just a random selection of contracts 51 
percent of them come up with none of the basic tenets of 
performance-based contracting or procurement requirements. This 
totaled some $347 million in contracts.
    Now, you have said to the committee that you have put in 
place certain things that would not allow contracts like that 
to go forward. Can you tell the committee with some degree of 
certainty that no contracts relative to performance-based 
contracts will go out without all the required elements in 
place before?
    Mr. Essig. Specifically to the question of can I say that 
no contracts will go out with all the elements, no sir, that 
would not be possible for me to be able to certify that there 
will be no errors made by any member of the DHS acquisition 
workforce.
    Chairman Thompson. I really don't mean to cut you off, but 
we should have enough checks and balances built into the 
system.
    Mr. Hutton, could you help the committee understand how we 
could push a contract out without assurances that it meets some 
standards?
    Mr. Hutton. Well, if I can link back to the question about 
the data reliability. What that data suggests to me is does 
that mean that the intent was to do performance-based and they 
just didn't do it well? Or does it just mean that the 
procurements were coded improperly in the system?
    I think when we talked about targets earlier, if the 
targets are being used to drive some response for a performance 
metric and it really doesn't emphasize the importance of the 
quality of that acquisition, then I would think that is an 
issue, if agencies are looking at that target and are maybe 
trying to use performance-based when it may not be the best 
situation for that particular situation. Or it just may be a 
matter of just coding, so meeting a particular performance 
level.
    I guess targets are nice when they help to incentivize and 
drive people towards a desired outcome, but you can't lose 
sight of just saying, yes, we ticked it off; this is a 
performance-based or not. I think the better approach at an 
agency level is to look at are we applying this approach in the 
best manner, doing the right thing, having good requirements, 
having good performance standards, having good surveillance. 
Looking at the nature of the outcomes we are getting--are these 
quality outcomes? That is where the focus really should be.
    Chairman Thompson. Well, if in fact you reviewed the 
contracts and you found that 51 percent of them had none of 
those things, how do we fix it?
    Mr. Hutton. Okay. Well, let me mention first that the 
congressionally mandated Acquisition Advisory Panel issued a 
report with about 90 recommendations back in January, I 
believe. GAO commented on that report. One of the chapters 
dealt with the data across government. What the Acquisition 
Advisory Panel found, among other things, is that it is 
inaccurate and incomplete. It is not just a DHS issue with the 
FPDS data. It is not reliable for analysis. The processes for 
capturing and reporting on this data need to be improved.
    So I believe there were a dozen, maybe 15 recommendations 
that the Acquisition Advisory Panel made. I believe for this 
particular issue, they were mostly made to the OMB Office of 
Federal Procurement Policy to take steps to get at some of 
these root causes of what we are talking about.
    Chairman Thompson. Well, I guess the elementary concern for 
me is that we are putting procurements out in the marketplace. 
If the data or the coding is improper, how are we able to 
measure the product coming back? How does a company do what is 
expected when it may or may not be a proper procurement?
    I guess, Ms. Reed and Mr. Chvotkin, I guess I need some 
help with this just from my perspective. If we know that a lot 
of what is coming out may or may not be accurate, how can your 
members adequately compete in the marketplace?
    Mr. Chvotkin. Mr. Chairman, I think there are two related 
issues. The first, as to the coding, one mechanism that comes 
to my mind is that Mr. Essig talked about the Investment Review 
Board and the quick review that they are doing of procurements. 
Today, the coding is done by the contracting officer without 
other review. So if there is an Investment Review Board around 
an activity, it is at that point that the decision should be 
made to code that it is performance-based or not.
    So just changing the level, not to suggest that every 
procurement needs to come up to the Investment Review Board, 
but if the IRB is in fact reviewing a procurement and 
validating that the three or four key components are being met, 
that is the right time to code it or not, as the case may be.
    The question of competition is a different one. It really 
goes to, again, coming back to the quality of the original 
requirements and the degree of clarity around the agency's 
needs, both from a contractual standpoint and from an end-user 
requirement. That is not a coding issue. That is a transparency 
issue, if you will. That is a communications issue on the 
department's part, and any department, not just the Department 
of Homeland Security.
    That is a more difficult challenge to make, but I think 
here again there are opportunities through industry days, 
through broad communications, through draft solicitations that 
can help enormously in getting that information out to the 
bidding community.
    Chairman Thompson. Thank you.
    Ms. Reed, would you like to respond?
    Ms. Reed. I think I would very much agree with Mr. Chvotkin 
on this. There is a need for the acquisition community to 
understand how they can best reach out to industry and engage 
in that communication. One of the things that we have become 
concerned about is that there seems to be more focus around the 
notion of inappropriate communication. There are forums, and 
this is again one of the reasons why we like the performance-
based process, that it emphasizes--and I talked earlier about 
communication within the government. It is equally important to 
be able to communicate openly with transparency to industry.
    I would submit that this is important whether or not it is 
a performance-based acquisition. It is what is necessary for 
good acquisition no matter what type you are using. It is my 
belief that the process that is in place to support 
performance-based acquisition gives you a better shot at the 
kind of open communication that is necessary for industry to be 
able to understand what the requirement is and then bid 
competitively and appropriately on it.
    Mr. Essig. Mr. Chairman. If I could add something on 
performance-based?
    Chairman Thompson. Yes, sir.
    Mr. Essig. Specifically on coding? The first point I would 
like to make is that problems with the Federal procurement data 
system is a Federal-wide issue that is currently being worked 
by the Office of Federal Procurement Policy. DHS has been an 
active participant in trying to improve the quality of the data 
in that system, but this is a Federal-wide issue.
    Second, regarding the numbers that you mentioned in the 
opening comment which said 50 percent were inaccurate, that was 
for one single element of the Federal procurement data system 
report. That is whether or not the contract was coded as 
performance-based or not.
    I would argue first-off, when the requirement to identify 
as performance-based first came out, we had a contracting 
workforce that was striving to implement the new initiative to 
get the full advantage of performance-based. A couple of other 
things in that data tells me that the other 50 percent of those 
people were fully successful in implementing performance-based 
acquisitions--acquisitions that met all of the requirements to 
deliver some of the benefits that were identified in the GAO 
report.
    It is not to say that the remaining 50 percent included 
none of the aspects of performance-based. In some cases, I 
would say they included some of the requirements. They may have 
had a performance statement of work, but may not have had 
measurable data to assess how well they did. In other cases, we 
had simply a case of a coding error.
    But the key is that I think we have made very significant 
improvements in our use of performance-based acquisitions over 
the past several years. We are doing it better today and we are 
doing more of it than we ever have in the past. I think that is 
some good news in the data. Not to say that we don't have some 
inaccuracies.
    The third point I want to make is what we are doing about 
those inaccuracies. If you looked at the data for Immigration 
and Customs Enforcement between 2006 and 2007, you could be led 
to believe that we are doing less of it. That is not correct. 
The difference is between 2006 and 2007, ICE, Immigrations and 
Customs Enforcement, trained its people on how to code 
properly. So what you see in 2007 is a much more accurate 
database than it was just the year before.
    So we are identifying where we are not doing things 
perfectly today, and we are providing training, we are 
providing guidance to our workforce to ensure that we do it 
better in the future. I am not saying that we are perfect 
today. I am saying we are making significant progress and I 
think we are headed in the right direction.
    Chairman Thompson. Well, if you remember, I asked whether 
or not you had the resources to do the job necessary. Ms. 
Pascrell asked whether or not you agreed with the findings of 
GAO. You said you did. Our effort is to, if it is a resource 
issue, to get you the money. But if it is a management and 
training issue, that is something you are going to have to do.
    I just want to assure you that our concern is that too many 
procurements have historically gone out of the department with 
many things lacking. It is lack of training that caused some of 
it; being short-handed at the beginning of the creation of the 
department created it--all those things.
    I would like for you to provide us with the new matrix for 
how you now manage the other procurement people in the other 
departments. You referenced a term ``dual-something.''
    Mr. Essig. Dual accountability.
    Chairman Thompson. Yes. I am amazed at a lot of our 
definitions, but dual accountability will be unique for me. 
Some of us function based on line authority, and when you give 
that authority to more than one person, you really have to be 
clear as to lines of authority with that, otherwise there is 
some confusion.
    Our private sector people, let me thank you very much for 
your addition to it. Our goal, on one hand, is to utilize the 
different procurement opportunities we have. We want small 
business, medium-size businesses to be able to compete. We want 
the private sector intricately involved in the department, but 
we want it where they understand clearly what is to be expected 
with that involvement. To that extent, that is where we are.
    Mr. Hutton, very rarely do we get somebody from the 
department who agrees with the GAO findings, so we might have 
set a record here today.
    Mr. Hutton. Well, as GAO always does, we have great staff 
and I think we do good work. I think it is very positive that 
our findings were embraced that way.
    Chairman Thompson. Mr. Essig, let me again say that our 
probing is merely to give you what we think from a tools 
standpoint what you need to get the job done. One of the 
reasons we are looking at this area and some other areas is to 
actually perform the oversight responsibility that as a 
committee we should be doing.
    It is in that spirit that we will be doing hearings like 
this. We have done hearings on transition, hearings on 
resiliency and some other things within the department. So it 
is not singling your operation out. It is part of the oversight 
jurisdiction that we have.
    Let me just thank all the witnesses again for your valuable 
testimony and your patience for this hearing. The members of 
the committee may have additional questions for you, and we ask 
you to respond expeditiously in writing to those questions.
    Hearing no further business, the committee stands 
adjourned.
    [Whereupon, at 2:01 p.m., the committee was adjourned.]


                            A P P E N D I X

                              ----------                              

 Questions From Chairman Bennie G. Thompson for Thomas W. Essig, Chief 
          Procurement Officer, Department of Homeland Security

    Question 1. The findings of the report GAO is releasing today are 
consistent with prior GAO and DHS Inspector General reviews, showing 
that many DHS performance-based acquisitions continue to lack clearly-
defined requirements and measurable performance standards. What are you 
currently doing to address these shortcomings at a Department-wide 
level and at the DHS-component level?
    Answer. A key factor required for successful Performance-Based 
Acquisitions (PBAs) is a thorough understanding of the requirement by 
all parties, including the program office, the procurement office, and 
the contractor. The term ``requirement,'' however, is used throughout 
the acquisition process and can mean different things to different 
people. From the perspective of the user--which includes our first 
responders and law enforcement personnel--the requirement is a user-
defined need. From the perspective of the contracting officer and 
contractor, conversely, the requirement is what the contract states--no 
more and no less. That can be the source of problems downstream when 
the product or service that is delivered meets the contract's 
requirement, but not the user's. A key aspect in successful 
performance-based acquisitions, therefore, is the ability to translate 
the user need into measurable, outcome-based requirements that all 
parties--including the user--understand and agree to. That is not just 
a contracting function and consequently requires a team effort from a 
wide range of functional specialists. It is also a labor intensive 
process that must be completed prior to award of the contract.
    Furthermore, PBAs are not right for every requirement. In complex 
service acquisitions, where user requirements may change during the 
course of the contract, the approach could be disadvantageous. In such 
a situation, the contract would ``require'' services that are not what 
the user actually needs.
    While the benefits of PBA are many, the sophistication of both 
program, procurement and other offices involved in the process plays a 
key role in the ability of any agency to successfully initiate and 
manage a portfolio of PBAs. PBA usage requires considerable effort on 
the front-end of the process by a highly skilled requirements and 
acquisition work force. Likewise, during contract administration, PBA 
requires a labor-intensive effort of contractor surveillance that 
places further demands on the respective program management offices.
    Given the nature of our mission, the organizational maturity of our 
relatively new Department, and the continuing staffing shortages in the 
full range of acquisition functions, it is essential that we pursue 
PBAs in a judicious manner. Our goal is to increase both the quantity 
and quality of our PBAs, while continuing to meet our essential mission 
requirements.
    In many cases, contracts were incorrectly coded as PBA in the 
contracts database. The Office of the Chief Procurement Officer (OCPO) 
is working with the components to ensure correct coding of future 
actions. OCPO is also currently working to strengthen acquisition and 
procurement Department-wide, which includes all components, by 
institutionalizing solid processes that will support our ability to 
appropriately and judiciously utilize PBA, including the following 
actions:
    A. Strengthening the requirements and investment review processes. 
        We are currently developing a new Department-wide requirements 
        process and re-engineering our investment and acquisition 
        review process;
    B. Reviewing the major programs and investments to ensure that the 
        requirements are clear, cost estimates are valid, technology 
        risks are properly assessed, schedules are realistic, contract 
        vehicles are proper, and the efforts are well managed. DHS is 
        also beginning the process of conducting Investment Review 
        Boards at the Deputy Secretary level and Program Reviews are 
        being conducted by the Deputy Under Secretary for Management, 
        as well as the establishment of Acquisition Program Baselines 
        (APBs) and authorizing execution to the APBs for all Level 1 
        and 2 programs;
    C. Building the capability to manage complex efforts by ensuring 
        that program offices are properly structured and staffed with 
        the right people and skills to ensure efficient and effective 
        program management and oversight; and to aggressively hire 
        where we have known shortages; and
    D. Examining best practice metrics in use by other departments with 
        the intent to start implementation this year.
    Further, as part of regularly conducted OCPO procurement management 
reviews of DHS components, PBA is addressed to ascertain whether such 
contracts include the fundamental PBA elements such as performance-
based statements of work and corresponding outcome-based performance 
metrics, and to ensure that a quality assurance surveillance plan is in 
place and used post-award to validate contractor compliance with 
contract-mandated outcomes. Additionally, on a quarterly basis, 
component PBA data is reviewed to compare PBA goals to outcomes, and 
feedback capability is being added to this process this fiscal year.
    Question 2. GAO's report states that DHS continues to lack 
sufficient contracting and program staff with the expertise needed to 
properly plan and monitor contractor execution of requirements. Can you 
update us on your progress in addressing acquisition workforce needs 
and the impediments to obtaining and retaining sufficient staff?
    Answer. Obtaining qualified acquisition specialists in a timely 
manner continues to be a challenge. Competition for seasoned 
acquisition and procurement professionals is intense within the 
Washington, DC area in both the public and private sectors. To resolve 
these personnel shortages, we are intensifying our human capital 
planning efforts to determine what the appropriate number of 
acquisition and procurement professionals is and the level of requisite 
skills. We are currently conducting staffing studies that will help the 
Department better define its work force needs. We have also centralized 
a number of recruiting activities such as the issuance of Department-
wide vacancy announcements for mid-level procurement professionals, as 
well as for re-employed annuitants.
    This year, DHS received funding for the Acquisition Professional 
Career Program (APCP), a developmental program modeled after the highly 
successful DoD programs aiming to attract new talent to fill entry 
level acquisition positions and develop our future acquisition leaders. 
We began this program in fiscal year 2008 with a goal of 300 
participants by fiscal year 2011 to fill critical acquisition 
positions. To support and enrich the APCP program, the component 
organizations will bring in re-employed annuitants. These individuals 
will use their knowledge and background to mentor and lead the APCP 
participants during their time in the program.
    DHS is implementing an aggressive set of Acquisition Workforce 
Certification programs for Contracting and Program/Project Management. 
The DHS Program/Project Management Certification Program incorporates 
both the education, training, and experience requirements outlined in 
the Federal Acquisition Institute's Federal Acquisition Certification 
for Program/Project Management, as well as the additional requirements 
in the Defense Acquisition Workforce Improvement Act for Program 
Management. DHS is continuing to expand the identification of 
additional career fields such as Test and Evaluation and Cost 
Estimating. These efforts include establishing the education, training, 
and experience requirements for each field in order to ensure the DHS 
Acquisition Workforce is world-class.
    This year, we also received funding to centralize our acquisition 
training program. We have adopted a three-tiered approach to 
acquisition training. We receive contracting certification training 
from the Federal Acquisition Institute, have formed a partnership with 
the Defense Acquisition University (DAU), and continue to purchase 
commercial off-the-shelf training. DHS, in partnership with DAU, is 
tailoring and modifying the courses used by the Department of Defense 
for Program Management in order to make the training relevant and 
applicable to DHS and its acquisition programs. DHS has already 
implemented and made available to the DHS acquisition work force the 
first of these new program management courses.
    Question 3. DHS generally concurred with GAO's report 
recommendations but did not specify how it plans to address how the 
CPO's process and organizational changes will impact component-level 
management and assessment of complex acquisitions. Can you elaborate on 
how you plan to implement the recommendations?
    Answer. The Department provides policy, oversight, and support for 
programs managed at the component level. Clear acquisition policies and 
processes are essential to achieving efficient, economic and reliable 
capability delivery to the Department's operational user base. 
Oversight must be complemented by execution support that includes 
mentoring by experienced acquisition professionals. Finally, there must 
be accountability for critical decisions and execution performance.
    Acquisition is not just the award of a contract, but an entire 
process that begins with identifying a mission need and developing a 
strategy to fulfill that need through a thoughtful, balanced approach, 
and very importantly, effectively managing the requirement through 
completion of the program's lifecycle. I am among many who feel that 
the root cause of many of reported problems with our contracts stem 
from failings in the broader acquisition process, such as requirements 
development and definition, program management, logistics, performance 
standards development, quality assurance planning, and test and 
evaluation. Therefore, the solution to identified problems in 
acquisition lies in applying the necessary energy and resources, 
particularly to program management. We are doing that DHS.
    The Department established the Acquisition Program Management 
Division (APMD) of the Office of the Chief Procurement Officer (OCPO) 
in August 2007. The Division was established to improve oversight and 
execution support for DHS acquisition programs. The division was 
established to improve oversight and execution support for DHS 
acquisition programs. To date, APMD has performed Quick Look 
assessments of 37 level 1 programs and has overseen Deep Dive reviews 
of the SBInet and ASP programs. Currently, the APMD team is focused on 
an aggressive Investment and Acquisition process re-engineering effort 
to replace Management Directive 1400. APMD has restarted the Investment 
Review process and is establishing revised investment and acquisition 
decision procedures that include Acquisition Decision Memoranda. APMD 
is collaboratively assisting programs in strengthening their 
Acquisition Program Baselines. Additionally, APMD is establishing a new 
periodic reporting system to monitor acquisition execution at the 
project level.
    To strengthen and support the Department's programs, OCPO is 
developing standards for all acquisition career fields. To date, DHS 
has three acquisition career fields for which DHS has certification 
standards (Contracting, Contracting Officer's Technical Representative, 
and Program Management). DHS will add certification standards for other 
acquisition career fields including logistics, systems engineering, 
cost estimating, and test and evaluation, as soon as practicable.
    Question 4. How does DHS evaluate whether a performance-based 
approach should be used for a particular type of service or investment?
    Answer. Performance-Based Acquisitions (PBAs) are not right for 
every requirement. In complex service acquisitions where user 
requirements may change during the course of the contract, the approach 
could be disadvantageous. In such a situation, the contract would 
``require'' services that are not what the user actually needs.
    While the benefits of PBA are many, the sophistication of program, 
procurement and other offices involved in the process plays a key role 
in the ability of any agency to successfully initiate and manage a 
portfolio of PBAs. PBA usage requires considerable effort on the front-
end of the process by a highly skilled requirements and acquisition 
work force. Likewise, during contract administration, PBA requires a 
labor-intensive effort of contractor surveillance that places further 
demands on the respective program management offices.
    Moving forward, it is imperative that DHS ensures that its business 
deals enable the Department to both accomplish our mission and provide 
for good stewardship of taxpayer dollars. PBAs can be an effective tool 
in accomplishing that; however, given the nature of our mission, the 
organizational maturity of our relatively new Department, and the 
continuing staffing shortages in the full range of acquisition 
functions, it is essential that we pursue this contract type in a 
judicious manner. Our goal remains to increase both the quantity and 
quality of our performance-based acquisitions, in every case where 
their use is both practicable and appropriate, while continuing to meet 
our essential mission requirements.
    Question 5. GAO's report notes that a performance-based approach 
requires the collective talents of several groups within an 
organization, including the program and contracting offices, legal, and 
budget. What steps has DHS taken to assist its program managers in 
successfully collaborating with contracting officers to fulfill their 
role in the PBSA process?
    Answer. A key aspect in successful performance-based acquisitions 
is the ability to translate user needs into measurable, outcome-based 
requirements that all parties--including the user--understand and agree 
to. Requirements inform the acquisition process, regardless of the 
acquisition approach chosen. The system or service requirements for an 
acquisition program are flowed down from an operational need defined by 
a user into contractual/technical requirements which are used to 
procure system or service.
    In any acquisition it is the government's responsibility to 
establish the contract requirements, whether through a statement of 
work, specifications, or a statement of objectives. The contractor's 
responsibility is to propose the method by which they will deliver the 
product or service sought by the government. The type of contract used 
will flow from the requirement and the way it is presented to the 
contractor will determine the level of flexibility that the contractor 
has in proposing a solution.
    The Department is strengthening the requirements and investment 
review processes by improving the Joint Requirements Council and 
Investment Review Board process. We are preparing to pilot a new 
Department-wide requirements process and we have just restarted a new 
investment review process. We are working on revising DHS Directive 
1405 and replacing DHS Directive 1400. The current plan for replacing 
DHS Directive 1400 includes establishing acquisition oversight/
execution policies and processes for enterprise services, as well as 
the other acquisition mechanisms used by DHS, and closely couples the 
requirements and acquisition processes. Providing clear acquisition 
policies and processes for enterprise services to the program 
management community will facilitate the collaboration required for 
successful performance-based acquisitions.
    Question 6. According to GAO, DHS's CPO has several efforts 
underway to address oversight challenges in acquisition planning. One 
initiative is an acquisition oversight program. However, this 
acquisition oversight program does not include an evaluation of the 
outcomes of contracting methods such as performance-based service 
acquisitions. Given the hundreds of millions of dollars spent and 
sometimes even wasted on performance-based service acquisitions, why 
doesn't the Department have a structured evaluation process in place to 
determine the success or failures of these acquisition methods?
    Answer. Presently, the Chief Procurement Officer's oversight 
program includes verifying that performance-based contracts include an 
adequate performance-based statement of work, including outcome-based 
performance metrics, a quality assurance surveillance plan, and post-
award evidence of surveillance. In addition, as part of the oversight 
program, the Office of the Chief Procurement Officer (OCPO) plans to 
interview contracting officers that have used performance-based service 
acquisitions to obtain information on how effective they believe these 
acquisitions are when compared to their use of non-performance-based 
acquisitions. OCPO will then utilize the information obtained from 
these interviews to assess the success and failure of the various 
aspects of DHS performance-based acquisitions, considering such factors 
as the overall quality of our performance-based acquisitions and the 
availability of adequate acquisition staffing levels, both pre-award 
and post-award, as needed to ensure their success. When considering the 
future of performance-based acquisitions at DHS, given the nature of 
our mission, the organizational maturity of our relatively new 
Department, and the continuing staffing shortages in the full range of 
acquisition functions, it is essential that we pursue this contract 
type in a judicious manner. Our goal remains to increase both the 
quantity and quality of our performance-based acquisitions in every 
case where their use is both practicable and appropriate, while 
continuing to meet our essential mission requirements.
    Question 7. The findings of GAO's report (08-263) are consistent 
with prior GAO and DHS Inspector General reviews, showing that many DHS 
performance-based acquisitions continue to lack clearly defined 
requirements and measurable performance standards. What action is the 
Chief Procurement Officer (CPO) taking to address these shortcomings at 
a Department-wide level and at the DHS component level?
    Answer. A key factor required for successful Performance-Based 
Acquisitions (PBAs) is a thorough understanding of the requirement by 
all parties, including the program office, the procurement office, and 
the contractor. The term ``requirement,'' however, is used throughout 
the acquisition process and can mean different things to different 
people. From the perspective of the user--which includes our first 
responders and law enforcement personnel--the requirement is a user-
defined need. From the perspective of the contracting officer and 
contractor, conversely, the requirement is what the contract states--no 
more and no less. That can be the source of problems downstream when 
the product or service that is delivered meets the contract's 
requirement, but not the user's. A key aspect in successful 
performance-based acquisitions, therefore, is the ability to translate 
the user need into measurable, outcome-based requirements that all 
parties--including the user--understand and agree to. That is not just 
a contracting function and consequently requires a team effort from a 
wide range of functional specialists. It is also a labor intensive 
process that must be completed prior to award of the contract.
    Furthermore, PBAs are not right for every requirement. In complex 
service acquisitions, where user requirements may change during the 
course of the contract, the approach could be disadvantageous. In such 
a situation, the contract would ``require'' services that are not what 
the user actually needs.
    While the benefits of PBA are many, the sophistication of both 
program, procurement and other offices involved in the process plays a 
key role in the ability of any agency to successfully initiate and 
manage a portfolio of PBAs. PBA usage requires considerable effort on 
the front-end of the process by a highly skilled requirements and 
acquisition work force. Likewise, during contract administration, PBA 
requires a labor intensive effort of contractor surveillance that 
places further demands on the respective program management offices.
    Given the nature of our mission, the organizational maturity of our 
relatively new Department, and the continuing staffing shortages in the 
full range of acquisition functions, it is essential that we pursue 
PBAs in a judicious manner. Our goal is to increase both the quantity 
and quality of our PBAs, while continuing to meet our essential mission 
requirements.
    In many cases, contracts were incorrectly coded as PBA in the 
contracts database. The Office of the Chief Procurement Officer (OCPO) 
is working with the components to ensure correct coding of future 
actions. OCPO is also currently working to strengthen acquisition and 
procurement Department-wide, which includes all components, by 
institutionalizing solid processes that will support our ability to 
appropriately and judiciously utilize PBA, including the following 
actions:
    A. Strengthening the requirements and investment review processes. 
        We are currently developing a new Department-wide requirements 
        process and re-engineering our investment and acquisition 
        review process;
    B. Reviewing the major programs and investments to ensure that the 
        requirements are clear, cost estimates are valid, technology 
        risks are properly assessed, schedules are realistic, contract 
        vehicles are proper, and the efforts are well-managed. DHS is 
        also beginning the process of conducting Investment Review 
        Boards at the Deputy Secretary level and Program Reviews are 
        being conducted by the Deputy Under Secretary for Management, 
        as well as the establishment of Acquisition Program Baselines 
        (APBs) and authorizing execution to the APB for all Level 1 and 
        2 programs;
    C. Building the capability to manage complex efforts by ensuring 
        that program offices are properly structured and staffed with 
        the right people and skills to ensure efficient and effective 
        program management and oversight; and to aggressively hire 
        where we have known shortages; and
    D. Examining best practice metrics in use by other departments with 
        the intent to start implementation this year.
    Further, as part of regularly conducted OCPO procurement management 
reviews of DHS components, PBA is addressed to ascertain whether such 
contracts include the fundamental PBA elements such as performance-
based statements of work and corresponding outcome-based performance 
metrics, and to ensure that a quality assurance surveillance plan is in 
place and used post-award to validate contractor compliance with 
contract-mandated outcomes. Additionally, on a quarterly basis, 
component PBA data is reviewed to compare PBA goals to outcomes, and 
feedback capability is being added to this process this fiscal year.
    Question 8. GAO's report (08-263) states that DHS continues to lack 
sufficient contracting and program staff with the expertise needed to 
properly plan and monitor contractor execution of requirements. Please 
provide an update us on your progress in addressing acquisition 
workforce needs and the impediments to obtaining and retaining 
sufficient staff.
    Answer. Response was not received at the time of publication.
    Question 9. DHS generally concurred with the recommendations in 
GAO-08-263 but did not specify how it plans to address how the CPO's 
process and organizational changes will impact component-level 
management and assessment of complex acquisitions. Please elaborate on 
how you plan to implement the recommendations.
    Answer. Response was not received at the time of publication.
    Question 10. How does DHS evaluate whether a performance-based 
approach should be used for a particular type of service or investment?
    Answer. Response was not received at the time of publication.
    Question 11. GAO-08-263 states that a performance-based approach 
requires the collective talents of several groups within an 
organization, including the program, contracting, legal, and budget 
offices. What steps has DHS taken to assist its program managers in 
successfully collaborating with contracting officers to fulfill their 
role in the PBSA process?
    Answer. A key aspect in successful performance-based acquisitions 
is the ability to translate user needs into measurable, outcome-based 
requirements that all parties--including the user--understand and agree 
to. Requirements inform the acquisition process, regardless of the 
acquisition approach chosen. The system or service requirements for an 
acquisition program are flowed down from an operational need defined by 
a user into contractual/technical requirements which are used to 
procure system or service.
    In any acquisition, it is the government's responsibility to 
establish the contract requirements, whether through a statement of 
work, specifications, or a statement of objectives. The contractor's 
responsibility is to propose the method by which they will deliver the 
product or service sought by the government. The type of contract used 
will flow from the requirement, and the way it is presented to the 
contractor will determine the level of flexibility that the contractor 
has in proposing a solution.
    The Department is strengthening the requirements and investment 
review processes by improving the Joint Requirements Council and 
Investment Review Board process. We are preparing to pilot a new 
Department-wide requirements process and we have just restarted a new 
investment review process. We are working on revising DHS Directive 
1405 and replacing DHS Directive 1400. The current plan for replacing 
DHS Directive 1400 includes establishing acquisition oversight/
execution policies and processes for enterprise services as well as the 
other acquisition mechanisms used by DHS and closely couples the 
requirements and acquisition processes. Providing clear acquisition 
policies and processes for enterprise services to the program 
management community will facilitate the collaboration required for 
successful performance-based acquisitions.
    Question 12. Does DHS have a transition plan for how to 
successfully continue its on-going initiatives to improve acquisition 
workforce and oversight of complex investments when a new 
administration is in place?
    Answer. We are undertaking a multi-pronged approach to our 
transition planning to ensure operational continuity of homeland 
security responsibilities during the Presidential Administration 
transition. Part of this approach includes continued focus on our on-
going initiatives of improving the acquisition work force and oversight 
of complex investments. The Department has in place an experienced and 
capable team of senior-level acquisition officers to lead the 
acquisition work force improvement effort through the transition and 
well into the future. While the Under Secretary for Management, who 
also serves as the Chief Acquisition Officer for DHS, is a Senate-
confirmed Presidential appointee, he is legally authorized to stay in 
his position through the transition until the incoming Under Secretary 
for Management is confirmed. In addition, the Under Secretary for 
Management is supported in his acquisition role by the Deputy Under 
Secretary for Management, Chief Procurement Officer, and Deputy Chief 
Procurement Officer, all of which are career positions and all of which 
are currently filled by individuals who have been integrally involved 
in the DHS acquisition work force development process. The continuing 
efforts mentioned below are a key element of the Management 
Directorate's future goals and will be included in the Transition 
Briefing Book for the new administration's incoming Secretary for 
Homeland Security.
    To address our acquisition personnel shortages and improve our 
acquisition work force, we have been intensifying our human capital 
planning efforts to minimize skill and competency gaps as well as 
minimize our critical vacancies and reliance on contractors. For 
example, in response to the Office of Management and Budget 1102 
Contracting Workforce Competency Gap Survey, we developed a training 
plan that spans the next 3 years, well through the 2009 transition. 
This training plan targets the contracting functional area within the 
DHS acquisition work force, but it will also benefit other acquisition 
career fields including program management and Contracting Officer's 
Technical Representatives. We are also currently conducting staffing 
studies to better define our acquisition work force needs. Currently, 
our work force includes program managers and contract specialists. As 
part of our human capital planning efforts, we will be identifying 
other required acquisition career fields such as test and evaluation, 
systems engineering, logistics, and cost estimating. We are 
aggressively working to ensure that each acquisition position, upon 
definition, is encumbered by an acquisition professional trained and 
certified at the appropriate level. To this end, we are continuously 
reviewing and updating our Acquisition Training Program, the 
underpinning of a good certification program. We are utilizing the 
Defense Acquisition Workforce Improvement Act framework to develop DHS 
certification standards. We have also centralized a number of 
recruiting activities including issuing Department-wide vacancy 
announcements. Our centralized recruitment efforts to date have focused 
primarily on contracting professionals. Expansion to other acquisition 
career fields will occur as each series is defined and Department-wide 
needs are identified. This initiative supplements our components' on-
going recruitment efforts with a goal of recruiting the best candidates 
available.
    Our most substantial recruitment activity began in 2005 with the 
establishment of a DHS Acquisition Fellows Program. The goal of the 
Fellows Program was to attract new talent at the entry level into our 
acquisition positions, and retain and train them through a professional 
career development program. The Office of Procurement Operations (OPO) 
and the Transportation Security Administration (TSA) participated in 
this program and this June, a diverse class of 13 Fellows from TSA and 
seven Fellows from OPO will be graduating.
    Building on the success of the Acquisition Fellows Program, we 
expanded it into the Acquisition Professional Career Program and 
modeled it to further resemble the highly successful Department of 
Defense program. This year, we plan to expand the program to support 33 
additional intern positions. In fiscal year 2009 we are planning for a 
total of 100 intern positions to be funded. Our inaugural Acquisition 
Professional Career Program class began in January 2008 and a second 
class begins in June 2008. Our goal is to grow this program to 300 
positions by fiscal year 2011 in order to fill critical acquisition 
positions.
    For the past 2 years, we have made considerable efforts to ensure 
our major programs are properly structured and resourced to be 
successful. Our goal is to make certain the programs we are 
implementing are on track for the next administration. In August 2007, 
we formalized our oversight efforts and support for acquisition 
programs by establishing the Acquisition Program Management Division 
(APMD) within the Office of the Chief Procurement Officer. To date, 
APMD has performed Quick Look assessments of 37 Level 1 programs and 
has overseen Deep Dive reviews of the SBInet and ASP programs. APMD has 
provided advice and guidance to a number of programs, particularly in 
the area of cost-benefit analysis. We are ensuring that the 
requirements are clear, cost estimates are valid, technology risks are 
properly assessed, schedules are realistic, contract vehicles are 
proper, and the efforts are well-managed.
 Questions From Chairman Bennie G. Thompson for John Hutton, Director, 
 Acquisition and Sourcing Management, Government Accountability Office
    Question 1. DHS generally concurred with GAO's recommendations, and 
provided information on the CPO's initiatives to strengthen the 
department's acquisition and procurement. What are your views on the 
CPO's initiatives, and what more needs to be done to address GAO's 
recommendations?
    Answer. Improving acquisition management has been an ongoing 
challenge since DHS was established and requires the Department's 
sustained management attention. DHS generally concurred with our 
recommendations that it: (1) routinely assess requirements for major, 
complex investments to ensure they are well-defined, and develop 
consistently measurable standards linked to those requirements; and, 
(2) systematically evaluate the outcomes of major investments and 
relevant contracting methods. DHS responded to these recommendations by 
noting that the Chief Procurement Officer (CPO) is revising the 
investment review process; reviewing major programs and investments; 
and is building the capability to manage complex efforts by ensuring 
program offices are properly structured and staffed with the right 
people and skills. However, the Department's response did not address 
how these initiatives will impact component-level management and 
improve the assessment of complex acquisitions to improve outcomes.
    With regard to GAO's third recommendation, that DHS continuously 
improve the quality of the Federal Procurement Data System--Next 
Generation (FPDS-NG) data to facilitate the ability to accurately 
identify and assess the use and outcomes of various contracting 
methods, DHS stated that the CPO validates the accuracy of the FPDS-NG 
data that is part of the CPO's oversight review sample. This includes 
an evaluation of whether the contracts have been properly coded as 
performance-based. DHS also added that the CPO is an active member of 
the Office of Federal Procurement Policy (OFPP) group working to 
improve FPDS-NG data and is reaching out to DHS components to improve 
data collection. However, while these CPO initiatives may be steps in 
the right direction, DHS's response did not present the results of the 
oversight reviews, or state how these coordination efforts address the 
causes of the miscoding of contracts or how they will improve the 
quality of FPDS-NG data in the future.
    Question 2. Your report notes the fact that DHS is likely farther 
away from meeting the targets for numbers of eligible acquisitions 
using a performance-based approach. Do you think the emphasis on 
performance targets is achieving the intended outcomes, or should the 
focus shift from targets to performance on individual acquisitions?
    Answer. DHS is likely farther away than previously reported from 
meeting the governmentwide performance-based targets for eligible 
service obligations established by the Office of Management and Budget 
(OMB). GAO's analysis of DHS reported data on contracts coded as 
performance-based indicated that FPDS-NG data were not reliable for 
reporting on the performance target. This analysis is consistent with 
the Acquisition Advisory Panel's report which noted that 42 percent of 
the performance-based contracts it reviewed at 10 Federal agencies had 
been incorrectly coded. Consistent with Federal procurement policy, DHS 
has emphasized a performance-based approach to improve service 
acquisition outcomes. We noted in our report, however, that in keeping 
with our prior findings, DHS's designation of a service acquisition as 
performance-based is not as relevant as the underlying contract 
conditions. Beyond focusing on performance targets for numbers of 
service acquisitions, sound acquisition practices, such as clearly 
defining requirements; establishing complementary measurable 
performance standards; and planning and conducting surveillance in 
order to take corrective actions are all hallmarks of successful 
service acquisitions. Continued emphasis on these areas is required to 
prevent less than expected acquisition outcomes.
    Question 3. Your report notes issues with procurement staffing at 
the Department. Can you explain how these staffing issues affect the 
Department's ability to manage and oversee complex contracts?
    Answer. Insufficient work force has presented challenges for DHS in 
implementing its service acquisitions, including those that use a 
performance-based approach. DHS continues to lack contracting and 
program staff with the expertise needed to adequately plan or monitor 
contractor execution of requirements. In addition, some component 
acquisition representatives indicated a lack of collaboration between 
the program and contracting offices. Prior GAO work has highlighted the 
importance of having the right people with the right skills to achieve 
successful acquisition outcomes. However, DHS has not fully defined the 
types of positions or numbers of staff for each position in its 
acquisition work force. CPO representatives have identified staff 
shortages as one of the primary obstacles to successful acquisitions. 
Specifically, insufficient contracting and program office staff was a 
challenge for two of the investments we reviewed--CBP's SBInet and ACE 
programs. In these two cases, contracts were not on schedule or 
contractor performance was otherwise less than expected. The need for 
improved collaboration among acquisition work force is also a recurrent 
theme in our work on acquisition management. Senior acquisition staff 
at TSA and CBP indicated that collaboration between contracting and 
program offices in general has been a challenge. GAO has ongoing work 
at DHS on the acquisition work force for this committee, and we plan to 
report on these initiatives in the final product for that engagement.
    Question 4. Your report identifies 138 contracts that may have been 
miscoded as performance-based contracts. Can you discuss this 
misidentification problem? Specifically, what does the Department need 
to do to assure that contracts are appropriately identified?
    Answer. Inaccurate Federal procurement data is a long-standing 
governmentwide concern. Our prior work and the work of the General 
Services Administration's Inspector General have noted issues with the 
accuracy and completeness of FPDS and FPDS-NG data. In 2007, the 
Acquisition Advisory Panel reported from its review at 10 Federal 
agencies that 42 percent of the performance-based contracts it reviewed 
had been incorrectly coded. Of 138 contracts at the Coast Guard, CBP, 
ICE, and TSA coded in FPDS-NG as performance-based, DHS contracting 
representatives confirmed that only 42, about 30 percent, contained all 
of the required performance-based elements--a performance work 
statement, measurable performance standards, and a method of assessing 
contractor performance against performance standards. About 18 percent 
had some, but not all, of the required performance-based acquisition 
elements, and about 51 percent--totaling about $347.3 million--had none 
of the required elements. Our report noted that, according to DHS 
contracting representatives, contracts were miscoded as performance-
based for the following reasons: (1) contracting staff may have coded 
contracts as performance-based without the presence of the required 
elements; (2) contracting staff may not have followed data validation 
procedures; and (3) technical knowledge of FPDS-NG. Accurate FPDS-NG 
data could facilitate the CPO's departmentwide oversight of 
acquisitions, including an evaluation of the outcomes of the 
performance-based acquisition method. To improve data reliability, we 
recommended that the department continuously improve data quality to 
facilitate the ability to accurately identify and assess the use and 
outcomes of various contracting methods.
    Question 5. Can you explain how properly managed performance-based 
contracts shift the risk away from the government and onto the private 
sector?
    Answer. A performance-based approach includes: a performance work 
statement that describes outcome-oriented requirements in terms of 
results rather than the methods of performing the work; measurable 
performance standards describing how to measure contractor performance 
in terms of quality, timeliness, and quantity; and the method of 
assessing contractor performance against performance standards, 
commonly accomplished through the use of a quality assurance 
surveillance plan. These characteristics, if properly implemented, can 
help ensure that services meet cost, schedule and performance 
requirements, thereby reducing risk to the government and improving 
service acquisition outcomes. To further minimize the government's 
risk, Federal procurement law establishes a preference for using firm 
fixed-price contracts or task orders--where a specific price is paid 
regardless of a contractor's incurred costs--when using a performance-
based approach. A performance-based approach also calls for greater 
collaboration among procurement and program representatives throughout 
the contract period. Including stakeholders with varied knowledge and 
skills at the earliest point possible enables acquisition teams to 
determine that all aspects of the acquisition are necessary, 
executable, and tailored to the transaction's risk level. While these 
attributes have been accepted as sound management practices, prior GAO 
work has found that performance-based acquisitions must be 
appropriately planned and structured to minimize the risk of the 
government receiving services that are over cost estimates, delivered 
late, and of unacceptable quality.
    Question 6. Can you explain how the Office of Management and 
Budget's mandate regarding performance-based awards may affect an 
agency's actions?
    Answer. Since fiscal year 2002, the Office of Management and Budget 
(OMB) has established governmentwide performance targets to encourage 
agencies to apply a performance-based approach to service acquisitions. 
In 2007, the congressionally mandated Acquisition Advisory Panel 
reported on the implementation of a performance-based approach and 
recommended that OMB adjust the governmentwide target to reflect 
individual agency assessments and plans. Subsequently, in May 2007, OMB 
issued a memo allowing agencies to establish their own targets and 
report on them in management plans. OMB has also stressed the 
importance of submitting timely and accurate procurement data to FPDS-
NG. However, because a large proportion of contracts are miscoded in 
the Federal Procurement Data System (FPDS-NG) as performance-based, 
targets set based on these data may be overestimated. Additionally, 
performance targets may create an incentive to code contracts as 
performance-based although they do not have the three required elements 
intended to foster good contract outcomes: a performance work 
statement, measurable performance standards; and quality assurance 
surveillance. While performance targets can provide focus to obtain 
desired goals, emphasis on sound acquisition practices to achieve 
desired outcomes should be agencies' primary focus.

Questions From Chairman Bennie G. Thompson for Anne F. Reed, President 
           and Chief Executive Officer, Acquisition Solutions
    Question 1. The Federal procurement work force is undergoing 
massive change. There is a concern that much of the Federal work force 
is nearing retirement. The Federal Acquisition Institute found that 60 
percent of DHS procurement personnel will be eligible for retirement by 
2015. Can you discuss how the changing nature of the Federal 
procurement work force will impact Federal acquisition practices and 
policies?
    Answer. In the past decade, Federal agencies have increasingly 
relied on contracting to achieve their missions. That reliance and 
legislative reforms have moved the definition of acquisition 
``success'' far beyond mere process-oriented compliance to 
accountability for delivering program outcomes. Federal acquisition is 
in the midst of a full-scale transformation from a tactical focus on 
meeting individual program requirements at a transactional level to a 
mission critical strategic function that optimally addresses mission 
needs at the enterprise level in partnership with other agencies, 
contractors and other stakeholders.
    Acquisition reforms in the last 15 years have emphasized results-
driven approaches that can accelerate and improve acquisition 
dramatically, but do not necessarily make the acquisition process 
``easier'' or simpler. Statutory, regulatory, and management mandates 
still require Federal agencies to execute well-conceived, thoroughly 
documented acquisitions that maximize competition while taking 
advantage of marketplace diversity to leverage the strengths of firms 
of all sizes across the entire socioeconomic spectrum. Agencies still 
must maintain strong internal controls to safeguard the fiduciary 
integrity of appropriated funds as money well-spent to deliver on their 
missions. Moreover, the current environment demands business acumen and 
sophisticated reasoning in addition to compliance with rules and 
detailed procedures.
    Ironically, as the number, complexity, and dollar value of 
transactions steadily increased in the last decade, the Federal 
Government consistently under-invested in recruiting, hiring, and 
training the acquisition work force. The longstanding investment 
constraints have left DHS and the rest of the government with too few 
contracting and program management professionals to accomplish a 
mission that continues to grow exponentially in scope and complexity.
    While recent hiring has brought an influx of talented, but 
inexperienced newcomers to Federal service at the entry level, the 
virtual hiring freeze also has resulted in a Federal acquisition work 
force disproportionately concentrated at senior levels with very thin 
ranks of mid-level professionals and managers. Retirements in the next 
5 years will exacerbate staffing challenges as the government does not 
have sufficient mid-level professionals to move up and replace the 
retirees. Moreover, in the interest of retention, some of the ``mid-
levels'' have moved into senior level positions (i.e., SES, GS-14 and 
GS-15) much earlier with less experience and expertise than in the 
past--struggling in some cases to keep up with the demands of their 
positions much less mentoring and developing newcomers.
    The work force deficit creates challenges in dimensions other than 
mere numbers. Transforming Federal acquisition demands critical 
competencies not prevalent in the current work force; many of whom 
started and progressed through their careers when contracting focused 
on compliance and process far more than performance and outcomes. To 
meet the demands of the dynamic Federal environment today and in the 
future, Federal acquisition professionals must think strategically and 
reconcile competing interests to deliver business acumen and innovation 
with an in-depth understanding of the programs they support, the 
markets in which they operate, and the contractors with whom their 
agency must partner to accomplish the mission. Understaffed, 
overworked, and lacking training, the current Federal work force has 
neither the time nor the ``know-how'' to transform Federal 
acquisition--much less to mentor a new generation of professionals to 
function as the strategic business advisors needed to deliver 
innovative, outcome-oriented acquisition approaches.
    The characteristics of the new generation of recruits, members of 
the ``millennial'' or ``Gen Y'' cohort, differ greatly from the 
generation that precedes them in ways that signal that the manner in 
which the government conducts acquisition may change in the future. 
According to a Spring 2008 article in The Public Manager, ``The Future 
Workforce: Here They Come,'' by William Broddie, Jeanne Contardo, and 
Robert Childs, this new generation of workers and future policymakers 
are characterized as `` . . . unconstrained by time, space, and 
organizational boundaries and will leverage innovative technologies to 
communicate and interact effectively, collaborating with colleagues 
around the world and with new partners through virtual networks to 
achieve individual and organizational goals.'' While the cohort of 
American workers in their 50's held an average of 10.5 jobs during the 
prime of their careers, we can expect the 21st century workers to hold 
as many as 20 or 30 jobs during their careers. Ibid. We are already 
experiencing the increased mobility of Federal workers resulting not 
only from the characteristics of the new generation but also induced by 
the shift from the static Civil Service Retirement System to the 
portable Federal Employees Retirement System. This mobility contributes 
to the severe shortage of government acquisition professionals as 
Federal employees move more easily to the private sector.
                                 impact
    These work force characteristics will have an impact on Federal 
policies and practices most likely in the following ways:
   Hiring Flexibility and Funding: Federal agencies need 
        increased funding, additional billets and expedited hiring 
        authorities to fill big gaps in acquisition work force 
        competencies and capacities to meet the demands of continued 
        heavy reliance on contracting for the foreseeable future.
   Competency Development and Enhancement: Developing needed 
        competencies for the acquisition community on an accelerated 
        track will require significant increases in funding for 
        training, internships and other innovative career development 
        programs.
   Civil Service Rules Review: Agencies need changes to the 
        Federal civil service rules that make it much easier to hire. 
        Further, rather than basing grade mostly on the number of 
        Federal employees reporting to the manager, the rules should 
        shift to account for the demands of managing in a multi-sector 
        work force environment that contemplates accomplishing 
        government missions with a mix of Federal, contractor, non-
        profit, State and local employees.
   Personal Services Contracts Clarification: As recommended by 
        the Acquisition Advisory Panel, the rules regarding personal 
        services contracting require re-examination and clarification. 
        Currently, some agencies have authority to issue personal 
        services contracts; others do not. Even within some agencies, 
        certain components have the authority and others do not. Policy 
        makers should consider that personal services (which some argue 
        really are not ``personal'' services, but necessary staff 
        augmentation), are a critical resource for many agencies' 
        operations. The need for these services is brought on, at least 
        in part, by current personnel rules that make Federal hiring a 
        cumbersome, time-consuming process.
   Human Capital Planning: Federal human capital planning 
        policy also must account for staffing, operating and planning 
        succession in a multi-sector work force, holistically and 
        realistically addressing resource needs for contract support, 
        volunteer staff, intergovernmental exchanges and Federal 
        annuitant as well as full-time Federal civil service staff. 
        Staffing plans for major acquisition need to provide for a 
        multi-disciplinary mix of skills and experience, continuity and 
        succession planning.
   Knowledge Capture, Transfer and Use: The increased mobility 
        and attrition within the Federal acquisition work force puts a 
        premium on the adoption of effective processes for capture, 
        transfer and reuse knowledge. The Federal acquisition community 
        is an experienced-based profession in which the skills and 
        insight necessary for success are learned primarily through 
        hands-on effort and through mentoring. As all ranks and levels 
        of the work force move because of promotion, transfer and 
        retirement, there is a critical need to flatten the learning 
        curve associated with the loss of knowledge and experience that 
        those who remain or replacements need to fulfill agency 
        missions. New employees must have a means to quickly learn the 
        current policies and most effective practices. Practitioners 
        must capture their experience and learnings in consistent and 
        disciplined ways that others in the organization can share. 
        Developers of policies and procedures need to access and 
        leverage the knowledge of expert practitioners to improve the 
        practice of acquisition and enhance the abilities of those in 
        the profession.
   Chief Acquisition Officers Role: Appoint full-time Chief 
        Acquisition Officers with broad understanding and competence in 
        the field of Federal acquisition and emphasize their 
        responsibility to rebuild the acquisition work force and the 
        policy infrastructure needed to guide them.
   Balanced, Outcome-Focused Oversight: Executive and 
        congressional oversight functions must support, encourage and 
        facilitate the transformation of acquisition from a 
        transaction-based, process-oriented administrative function to 
        a performance-based, outcome-oriented mission critical function 
        that it has and must become. Balance the number of overseers in 
        proportion to the number of workers to do the job, and consider 
        the impact of multiple, overlapping, or duplicative reviews by 
        various oversight organizations on the ability of agencies to 
        get the job done. Indeed, policy that promotes insight into 
        operations will prove far more effective in promoting a focus 
        on getting positive outcomes and overcoming barriers to 
        achieving them than will countless after the fact oversight 
        investigations.
    The collective impact of the deficits and changing demographics of 
the current acquisition work force demands policy support from Congress 
and the Executive branch to the replenish acquisition work force and 
recapitalize the infrastructure that supports it, with an eye toward 
the characteristics of the next generation--a generation that values 
focus on mission, collaboration, mobility, and innovation.
    Question 2. Many experts have said that performance-based contracts 
require adequate market research before the solicitation is issued. Can 
you explain the importance of market research and the nexus between 
market research and the determination of the contract requirements?
    Answer. Federal procurement statutes (see, 41 U.S.C. 253a(a)(1), 41 
U.S.C. 264b, and 10 U.S.C. 2377) and regulations (FAR 10.001) have long 
required agencies to conduct market research prior to defining 
requirements for an acquisition. The requirement for market research 
primarily focuses on ensuring that agencies have an understanding of 
the context and possibilities in crafting the optimal approach to 
acquisition as well as to identify the characteristics of an ideal 
solution--not to define requirements or identify solutions for the 
government to specify for delivery. Ideally, market research takes 
place before the agency has translated an identified need into specific 
requirements for an acquisition. Because these inquiries precede 
articulation of specific requirements, candid and in-depth discussions 
can take place with industry experts without concerns about release of 
``procurement sensitive'' information.
    Market research typically falls into two types. The first type 
focuses on general ongoing research to keep up with trends, 
developments and competitive dynamics in the market place. This 
research may take the form of attending trade shows and/or conferences, 
reviewing trade journals, surveying websites, participating in 
association functions and other activities to identify new 
capabilities, technologies and providers. The second type of research 
relates to specific acquisition and typically involves a ``deeper 
dive'' into benchmarking successful executions and identifying critical 
success factors to understand the range of possibilities to meet an 
identified need. These efforts build on the general research with 
``one-on-one'' discussions with solutions providers and similarly 
situated organizations which confront the same challenges. It also 
includes more formal processes such as requests for information, pre-
solicitation notices and conferences, pre-proposal conferences and site 
visits.
    Market research enables the agency to understand the capabilities 
and capacity of the marketplace to deliver solutions. It offers an 
opportunity to meet with the experts in crafting and implementing 
solutions to acquisition planning challenges like those facing the 
agency. Market research sessions will include discussions with 
similarly situated organizations to gain insight on how others have 
dealt with the same challenges in other contexts. This analytical 
effort focuses on determining how a particular market segment actually 
conducts business and identifying leading practices before the 
government formulates acquisition strategies. Market research therefore 
not only helps identify leading providers, but also provides invaluable 
insights on what has worked well and how to avoid others' mistakes. 
These sessions also provide a chance to collect information from 
similarly situated organizations and solutions providers on metrics, 
measurement practices and incentive structures used to deliver 
successful outcomes.
    What should the government do with the information gained? Analyze 
the results of all the meetings; identify ``lessons learned,'' trends, 
and promising metrics and incentive approaches; and prepare a market 
research report that captures the knowledge and learnings developed in 
the sessions. To ensure integrity in the acquisition process and 
promote candor in response to future market research inquiries, 
agencies must respect the proprietary rights of participants, label all 
documents containing ``confidential business information'' and limit 
their distribution.
    The market research report then provides information in identifying 
the optimal acquisition strategy and defining specific requirements for 
articulation in a statement of objectives, a performance work statement 
or a statement of work that will form the basis of a solicitation.
    We offer a couple examples to illustrate how market research 
provides critical knowledge for shaping sound acquisition strategies 
and defining requirements with clarity that directly link to achieving 
strategic agency objectives.
    In one case an agency began market research with a very small 
solution set for addressing information technology infrastructure and 
services needs. The approach was altogether too typical: Take the last 
RFP, update it, and buy basically the same thing again. This approach 
would have resulted in the agency expressing its need in terms of the 
state of the marketplace that had existed in the original competition 
many years previously. The agency would have issued a ``facilities 
management'' work specification instead of using an approach more 
typical of the marketplace today: true outsourcing in a managed 
services environment with performance-based partnering. After 
conducting meaningful market research, the range of possible approaches 
and solutions increased dramatically, and the agency adopted an 
approach that involved the IT solutions provider capitalizing the 
infrastructure and assuming responsibility for keeping technology 
current, appropriately scaled with features, functionality and 
necessary services tailored for the users in the operational context of 
the agency's law enforcement mission.
    In another case, market research led to radical change in the whole 
approach to the acquisition--from an IT system support services 
contract to a performance-based, loan-servicing contract. The agency 
ended up reaching out to a completely different segment of the 
marketplace to address its needs with a completely different approach 
to performance and contract pricing.
    The agency was trying to develop incentive provisions to reduce 
defaults and improve performance of its loan portfolio. Under the IT 
systems support model with a pricing arrangement based on the 
activities performed, the agency actually paid the contractor more for 
non-performing loans because poorly performing loans require so many 
more actions (letters, etc.) During market research, the agency learned 
that standard practice in the loan-servicing industry is to structure 
agreements so that contractors only get paid if the loans remain 
performing. The standard commercial practice represented a marked 
contrast from the activity-based pricing with the incumbent contractor 
which provided no incentive to achieve the agency's intended outcome--
minimized loan defaults. The agency learned that commercial loan-
servicing outfits have a powerful contractual incentive to do what it 
takes to keep the loans performing. The agency adopted the commercial 
loan-servicing model to establish a win-win arrangement that aligned 
the contract with the agency efforts to keep loans performing and 
minimize defaults.
    Question 3. The culture of the procurement work force may involve 
viewing the award as a final step in the process. However, in 
performance-based contracts, the award is an intermediate step. What 
are your thoughts on how to change this culture?
    Answer. Regardless of whether an acquisition employs performance-
based approaches or not, contract award is just an intermediate step. 
Indeed, while a significant milestone, contract award represents only 
the end of the beginning of the acquisition life cycle. The product of 
the acquisition process is an outcome, not a contract. The contract 
simply documents the parties' agreement to work together to achieve 
that outcome. Execution of the contract delivers the outcome. However, 
fostering a life cycle view of the acquisition process within the 
procurement work force will require a significant shift in mindset that 
will not happen spontaneously or overnight. This cultural 
transformation will require committed leadership, clarity in direction, 
consistency in application and continual reinforcement in messaging and 
managing to get procurement professionals to internalize the change and 
adopt an outcome-orientation in practice.
    ``An organization's culture encompasses the values and behaviors 
that characterize its work environment, and in particular, how people 
work with each other, how they are held accountable, how they are 
rewarded, as well as how communication flows through the 
organization.'' Jeffrey A. Schmidt, ed., Making Mergers Work: The 
Strategic Importance of People (Alexandria, Va.: Towers, Perrin, Foster 
and Crosby/Society for Human Resource Management, 2002), as reported by 
GAO in GAO-03-669. Changing culture to alter behavior must address both 
the work environment and the people. No amount of communication or 
training will change the preoccupation on contract formation and award 
unless the environment that fosters that mindset changes to promote a 
more outcome-focused perspective. Processes, policies and incentive 
structures also must align to promote changes in norm, mores and values 
of procurement professionals within the work environment. Agencies must 
take deliberate, consistent actions to emphasize the importance of 
post-award performance in delivering superior acquisition outcomes.
    First, the transition from a performance-based contract award to 
performance-based management requires special care. Otherwise, there is 
a tendency to slip back into specifications-based behaviors that can be 
highly detrimental to ensuring continued focus on delivering 
performance results in partnership. Preparation for performance-based 
project management (PBPM) should begin well in advance of contract 
award to ensure a smooth transition from award to successful 
implementation. Indeed, from the early stages in acquisition planning, 
the agency should consider post-award execution in forming the 
acquisition team, formulating acquisition strategy and defining 
requirements.
    Second, the agency must make sure that the acquisition team has 
enough people and resources to manage execution of the contract to 
deliver program results. For several years now, the acquisition work 
force has operated under overwhelming pressures--for both contracting 
officials and program/project managers. The growth of the procurement 
budget and complexity of contracts have added exponentially to the 
workload relative to the size and skills of the acquisition work force. 
Most acquisition professionals simply don't have time to do anything 
other than move on to the next contract award. Agencies need to devote 
more people and resources to avoid or minimize the suboptimal operating 
practices and approaches that the crushing workload compels.
    Third, acquisitions should be undertaken by a multi-disciplinary 
team working together from identification of the need to award through 
performance and delivery. Continuity on the team promotes focus on 
delivering the ultimate outcomes rather than work simply focused on 
achieving intermediate milestones along the way. That team should 
include members from the program, contracting and user/beneficiary 
communities working in an integrated manner with regular input from 
legal, finance and oversight functions as well as key stakeholder 
groups. The team should begin to shape the acquisition with the end in 
mind from the outset. That means they need to envision what success 
will look like and establish critical performance measures and metrics 
that will signal progress toward that goal.
    Fourth, the acquisition team should train together with a 
curriculum that focuses on delivering more than just compliance-based 
``check the box'' training. They should be steeped in performance-based 
management practices through a curriculum that builds organizational 
capacity and aligns teams to succeed with PBA. The role of the 
government manager shifts from checking compliance with contract terms 
to ensuring that contractor performance actually delivers the desired 
outcome for the agency and the public. Agency leadership should 
reinforce those lessons with support and encouragement for the team to 
use what they have learned. Too often, Federal employees have taken PBA 
courses only to return to an environment that insists on adherence to 
conventional compliance-based contracting and thwarts the efforts to 
put newfound PBA lessons into practice. This may happen either because 
their management doesn't truly support PBA or because other team 
members were not trained with them and are not operating from the same 
PBA principles.
    Fifth, at least some of the same team members ideally should remain 
on the effort through the entire life cycle from award through 
performance. The long duration of most major acquisition efforts and 
the increasing mobility of the Federal acquisition work force make 
staff turnover inevitable. To counter or mitigate negative impacts of 
that turnover, agencies will benefit from combining an aggressive 
approach to retaining key talent with active succession planning and 
effective programs to capture, transfer and use program knowledge.
    In short, changing acquisition work force culture to recognize the 
importance of managing contracts for success after award starts with 
leaders who communicate, inspire, and motivate people to rally around 
performance-based acquisition management as an organizational goal. 
That leadership also must extend to allocating staff, resources and 
management attention to delivering successful acquisition outcomes in 
partnership with contractors. Achieving that partnership requires 
attracting, rewarding and retaining teams that can and will be held 
accountable for executing contracts for superior results.
Questions From Chairman Bennie G. Thompson for Alan Chvotkin, Executive 
       Vice President and Counsel, Professional Services Council
    Question 1. The Federal procurement world is undergoing massive 
change. There is a concern that much of the Federal work force is 
nearing retirement. The Federal Acquisition Institute found that 60 
percent of DHS procurement personnel will be eligible for retirement by 
2015. Can you discuss how the changing nature of the Federal 
procurement work force will impact Federal acquisition practices and 
policies?
    Answer. The Department of Homeland Security spent more than $15 
billion in fiscal year 2006 on the purchase of goods and services, with 
a major portion of that spent on the purchase of services. There is a 
critical need for the Department of Homeland Security to have a well-
trained and well-compensated Federal acquisition work force in 
sufficient numbers to meet the department's need for contracting 
officers, technical officials, contract administration and appropriate 
oversight. A first step for determining the right numbers and skills is 
to understand what resources exist in the department today and this was 
initiated through the voluntary skills assessment of the contracting 
work force undertaken by the civilian agencies. The second step is for 
the department to determine where it needs to be in the next 5 to 10 
years; a key to answering the question of ``where are we going'' is the 
department's strategic planning process and the linkage to the 
strategic human capital plan for the department--and that human capital 
plan must include a specific focus on the acquisition work force. 
Finally, if the department knows where its work force is today and 
where its work will likely be performed in the next decade, the 
department can put an action plan in place to bridge those known 
pillars.
    In addition, while simultaneously assessing the qualifications and 
capabilities of the current work force, the department should be 
assessing the tools that are available to meet those substantive 
requirements. One of those tools to fulfill the department's mission 
requirements is the acquisition system. The Federal acquisition system 
generally, and the department's acquisition policies and procedures, 
must be evaluated to ensure that they support the mission goals of the 
department. For example, if the department anticipates that in the next 
decade it will spend a greater share of its procurement dollars on the 
purchase of services, the department must ensure that it has the 
internal and external procurement procedures and the work force skills 
to be able to procure services in addition to commodities.
    Finally, the Federal Government generally, and the department 
specifically, must reverse the current hiring trends and become an 
employer of choice for the next generation of workers. It is not enough 
to swap employees from one department or agency to another without 
taking aggressive steps to fill the retirement gaps. Some short-term 
steps the Professional Services Council supports include permitting 
retiring employees with critical skills to be temporarily reemployed 
and creating a contingency contracting corps that permits agencies to 
call upon the existing work force with critical skills to be 
temporarily redeployed to meet emergency agency needs--such as to 
respond to a natural disaster. Some mid-range steps the Professional 
Services Council supports include expanding student loan forgiveness 
programs for those who commit to a minimum period of Federal service in 
critical skills shortage areas and providing alternative pay and 
performance systems for critical skills. Some long-term steps the 
Professional Services Council supports include providing robust 
internship and mentoring programs for younger workers, rotational 
assignments for the work force to expand opportunities, and 
accelerating the access to training and leadership opportunities.
    Oversight is an appropriate and essential element of the 
acquisition system; the organizations that provide independent reviews 
and advice to the contracting officer would also benefit from 
rotational assignments ``in the trenches'' and they should be required 
to take the same training as the acquisition work force.
    Finally, Congress has a critical role to play. It should fully fund 
the salaries and expenses for the acquisition work force identified in 
that strategic human capital plan; it should also carefully assess 
whether mistakes that are made are the result of individual actions or 
systemic issues. Congress should also proceed cautiously before 
imposing additional process requirements or restricting the 
department's ability to assess and deploy the most effective 
acquisition approaches to meet their defined needs.
    Question 2. Many experts have said that performance-based contracts 
require adequate market research before the solicitation is issued. Can 
you explain the importance of market research and the nexus between 
market research and the determination of contract requirements?
    Answer. Market research is an essential element of every Federal 
agency acquisition--and one of the reasons why it is discussed in Part 
7 of the Federal Acquisition Regulation (FAR) as part of the 
acquisition planning phase before the FAR discusses using any of the 
techniques to conduct the specific acquisition. In the context of 
performance-based contracting, the first characteristic of a successful 
performance-based acquisition is having a clear statement of objectives 
or performance work statement (depending on which is used) since it 
becomes the key document for setting the agency's needs. At this phase, 
market research can provide significant assistance to the agency in 
identifying examples of clear requirement statements and where there 
have been successful prior awards for the same or similar requirements.
    The second characteristic is having measurable performance 
standards (i.e. in terms of quality, timeliness, quantity, etc.). The 
standards must be measurable and structured to permit a fair and 
accurate assessment of the contractor's performance. These measures 
must also be directly tied to the outcomes to be achieved, should be 
limited in number and scope, and must take into account the cost to the 
government and the contractor of developing and reporting on any 
specific measure. Again, market research is an excellent planning tool 
to help the agency identify appropriate performance measures that are 
specifically targeted at the performance work statement; the research 
may also identify favorable and unfavorable lessons learned from 
metrics used on prior performance-based acquisitions.
    The third characteristic is the method of assessing contractor 
performance against the performance standards. The most common method 
for assessing contractor performance is the requirement for the 
government to have a quality assurance surveillance plan (QASP). The 
government may either prepare the QASP or require the contractor to 
submit a proposed plan for the government's use with its proposal. In 
the preparation of the acquisition strategy, market research can assist 
the agency in identifying appropriate measures of ``quality assurance'' 
and of contractor performance. Even if the government's solicitation 
asks offerors to submit a proposed QASP, market research conducted by 
the agency in advance of the release of the solicitation will provide 
the agency with valuable information to assess the scope, depth and 
reasonableness of the offerors' proposed plans.
    Question 3. The culture of the procurement work force may involve 
viewing the award as the final step in the process. However, in 
performance-based contracts, the award is an intermediate step. What 
are your thoughts on how to change this culture?
    Answer. There is a clear line of demarcation between the steps 
leading to contract award and the steps relating to contract 
administration. Often, these responsibilities are split between 
different elements of the Federal work force. While in itself this 
demarcation is not a ``culture'' issue, greater attention is often 
placed on the award phase of a contract rather than on the 
administration phase. The three key elements required to change the 
culture are strong leadership, full involvement by all stakeholders and 
continuous learning.
    As to leadership around performance-based contracting, it is a 
``different'' kind of procurement that starts with the agency defining 
its requirements and permitting the competing offerors to propose their 
specific solutions and approaches to execution. This type of contract 
puts a premium on the requirements identification phase and the 
leadership of the entire organization must be involved in and support 
the use of this alternative acquisition method. As I noted in my 
written statement, it is not just a contracting exercise.
    The second element is the full involvement of all stakeholders in 
the organization throughout the design and implementation of the 
performance-based action; the agency's senior leaders, the end-users, 
program management and even the oversight community must be involved in 
the formulation of the statement of objectives or performance work 
statement and the decision to use the performance-based approach. 
Again, it is not just a contracting exercise. When there is full 
involvement of all of the key stakeholders in these crucial, up-front 
decisions, there is an organizational investment in its contents and 
its success--and there is greater likelihood that the procurement will 
be successful.
    Finally, there must be continuous learning about the status of the 
procurement and the tools and techniques available to measure success. 
Without this activity, stakeholders aren't kept informed of market 
research findings, lessons learned from prior contracts, or new 
techniques for achieving the agency's mission needs. Merely repeating 
past actions does not ensure future success.

                                 
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