[Senate Hearing 110-165]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-165
 
ABUSIVE PRACTICES IN DEPARTMENT OF DEFENSE CONTRACTING FOR SERVICES AND 
                        INTERAGENCY CONTRACTING

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

                                HEARINGS

                               before the

            SUBCOMMITTEE ON READINESS AND MANAGEMENT SUPPORT

                                 of the

                      COMMITTEE ON ARMED SERVICES
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                        JANUARY 17 AND 31, 2007

                               __________

         Printed for the use of the Committee on Armed Services


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                      COMMITTEE ON ARMED SERVICES

                     CARL LEVIN, Michigan, Chairman

EDWARD M. KENNEDY, Massachusetts     JOHN McCAIN, Arizona
ROBERT C. BYRD, West Virginia        JOHN WARNER, Virginia,
JOSEPH I. LIEBERMAN, Connecticut     JAMES M. INHOFE, Oklahoma
JACK REED, Rhode Island              JEFF SESSIONS, Alabama
DANIEL K. AKAKA, Hawaii              SUSAN M. COLLINS, Maine
BILL NELSON, Florida                 JOHN ENSIGN, Nevada
E. BENJAMIN NELSON, Nebraska         SAXBY CHAMBLISS, Georgia
EVAN BAYH, Indiana                   LINDSEY O. GRAHAM, South Carolina
HILLARY RODHAM CLINTON, New York     ELIZABETH DOLE, North Carolina
MARK L. PRYOR, Arkansas              JOHN CORNYN, Texas
JIM WEBB, Virginia                   JOHN THUNE, South Dakota
CLAIRE McCASKILL, Missouri           MEL MARTINEZ, Florida

                   Richard D. DeBobes, Staff Director

             Michael V. Kostiw, Replublican Staff Director

                                 ______

            Subcommittee on Readiness and Management Support

                   DANIEL K. AKAKA, Hawaii, Chairman

ROBERT C. BYRD, West Virginia        JOHN ENSIGN, Nevada
EVAN BAYH, Indiana                   JAMES M. INHOFE, Oklahoma
HILLARY RODHAM CLINTON, New York     JEFF SESSIONS, Alabama
MARK L. PRYOR, Arkansas              SAXBY CHAMBLISS, Georgia
CLAIRE McCASKILL, Missouri           ELIZABETH DOLE, North Carolina

                                  (ii)

  




                            C O N T E N T S

                               __________

                    CHRONOLOGICAL LIST OF WITNESSES

Abusive Practices in Department of Defense Contracting for Services and 
                        Interagency Contracting

                            JANUARY 17, 2007

                                                                   Page

Gimble, Thomas F., Acting Inspector General, Department of 
  Defense........................................................     5
Schinasi, Katherine V., Managing Director, Acquisition and 
  Sourcing Management, Government Accountability Office..........    11

  Continue to Receive Testimony on Abusive Practices in Department of 
      Defense Contracting for Services and Interagency Contracting

                            JANUARY 31, 2007

Madsen, Marcia G., Chair, Acquisition Advisory Panel; Accompanied 
  by Jonathan L. Etherton and James A. Hughes, Members, 
  Acquisition Advisory Panel.....................................    58
Denett, Hon. Paul A., Administrator, Office of Federal 
  Procurement Policy, Office of Management and Budget............    78
Assad, Shay, Director, Defense Procurement and Acquisition 
  Policy, Department of Defense..................................    83

                                 (iii)


ABUSIVE PRACTICES IN DEPARTMENT OF DEFENSE CONTRACTING FOR SERVICES AND 
                        INTERAGENCY CONTRACTING

                              ----------                              


                      WEDNESDAY, JANUARY 17, 2007

                           U.S. Senate,    
                  Subcommittee on Readiness
                            and Management Support,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:30 p.m. in 
room SR-232A, Russell Senate Office Building, Senator Daniel K. 
Akaka (chairman of the subcommittee) presiding.
    Committee members present: Senators Akaka, McCaskill, 
Ensign, and Martinez.
    Majority staff member present: Peter K. Levine, general 
counsel.
    Minority staff members present: Gregory T. Kiley, 
professional staff member; Derek J. Maurer, minority counsel; 
David M. Morriss, minority counsel; Lucian L. Niemeyer, 
professional staff member; and Bryan D. Parker, minority 
investigative counsel.
    Staff assistants present: David G. Collins and Benjamin L. 
Rubin.
    Committee members' assistants present: Darcie Tokioka, 
assistant to Senator Akaka; Nichole M. Distefano, assistant to 
Senator McCaskill; D'Arcy Grisier, assistant to Senator Ensign; 
and Stuart C. Mallory, assistant to Senator Thune.

     OPENING STATEMENT OF SENATOR DANIEL K. AKAKA, CHAIRMAN

    Senator Akaka. The Readiness and Management Support 
Subcommittee meets today to hear testimony about abusive 
practices in Department of Defense (DOD) contracting for 
services and interagency contracting.
    Before we begin, I would like to say how pleased I am to 
continue to work with Senator Ensign. For the last 4 years, 
Senator Ensign has served as chairman of this subcommittee, and 
I have served as ranking member. It has truly been a pleasure 
to work with him.
    Under Senator Ensign's leadership, the Comptroller General 
of the United States, David Walker, noted at our last hearing 
that this subcommittee has been: ``one of the shining stars in 
conducting oversight.'' That has been under Senator Ensign's 
leadership. I look forward to continuing in that oversight 
tradition as I take over the chairmanship of the subcommittee. 
I also hope that I can be as accommodating of Senator Ensign's 
interests and concerns as he has always been to mine when he 
served as chairman.
    This subcommittee has long been concerned about 
shortcomings in DOD's contracting for services and interagency 
contracting. Three years ago, the Inspector General (IG) for 
the General Services Administration (GSA) reported a pervasive 
problem with improper task order and contract awards by GSA's 
client support centers. Because orders from DOD customers 
provided 85 percent of the centers' $5.8 billion of revenues, 
these problems put DOD dollars at risk.
    Senator Ensign and I responded with a legislative provision 
in 2004 requiring a joint review of DOD purchases through the 
GSA centers by the DOD IG and the GSA IG. In 2005 and 2006, 
recognizing that other interagency contracts might suffer from 
similar problems, we required similar joint reviews of DOD 
purchases through other Federal agencies.
    As we will hear today, the results of these reviews reflect 
a deeply troubled procurement system. In four separate reports, 
the DOD IG found case after case of waste and abuse in DOD 
purchases through the GSA, the National Aeronautics and Space 
Administration (NASA), the Department of the Treasury 
(DOTREAS), and the Department of Interior (DOI). Dozens of DOD 
orders were awarded without competition, without required 
reviews for price reasonableness, or for both. Many were 
improperly funded, in possible violation of the Antideficiency 
Act (ADA).
    More importantly, it appears that required contract 
planning and oversight were lacking in almost every case. 
According to the IG, DOD officials failed to perform required 
acquisition planning for 55 of 56 task orders awarded through 
GSA, and 61 of 61 task orders awarded through the DOTREAS. 
Similarly, DOD officials failed to provide for required 
surveillance of contract performance for 54 of 56 task orders 
awarded through GSA, 23 of 24 task orders awarded through the 
DOI, and 58 of 61 task orders awarded through the DOTREAS.
    These problems are not limited to interagency contracts. On 
December 27, 2006, the DOD IG reported on a review of $7.6 
billion in service contracts to support our major range and 
test facilities base. The IG found that 9 of 10 contracts did 
not include proper cost estimates, and 6 of 10 lacked adequate 
plans to monitor contractor performance. With these contracts, 
as with the interagency contracts previously reviewed by the 
IG, the DOD continued to use high-risk contracts without 
following regulations to control costs or monitor performance.
    These deficiencies are symptomatic of a defense acquisition 
workforce that is simply stretched too thin to do this job. 
Over the last 5 years, DOD contracts for services have grown at 
an extraordinary rate. In fiscal year 2000, the DOD spent 
roughly $83 billion on service contracts, in fiscal year 2005 
dollars, and these were performed by an estimated 730,000 
contractor employees. By fiscal year 2005, the DOD was spending 
more than $140 billion--and this is also in fiscal year 2005 
dollars--on an estimated 1,282,000 contractor employees. The 
550,000 increase in our service contractor workforce over this 
5-year period exceeds the size of the entire DOD Federal 
employee workforce.
    At the same time, the number of Federal officials available 
to oversee the activities of these contractors has continued to 
decline. The number of DOD employees in acquisition-related 
organizations dropped from 230,000 in fiscal year 1999 to 
206,000 in fiscal year 2004, a decline of more than 10 percent. 
These reductions were made to an acquisition workforce that had 
already been cut in half over the previous 10 years.
    The problem is even worse with regard to the management of 
contracts for services. Because most of the acquisition 
workforce is focused on the development and purchase of major 
weapons systems, the number of DOD procurement personnel 
responsible for the negotiation and award of contracts, 
including services contracts, is much smaller and has declined 
much faster. In fiscal year 1999, DOD had 31,131 procurement 
personnel. By fiscal year 2004, that number had declined to 
25,918, a decline of almost 27 percent in a 5-year period, when 
the dollars that we spend on service contracts almost doubled.
    In short, we have fewer and fewer procurement officials 
responsible for managing more and more contract dollars. In the 
view of many, these trends long ago passed the point where our 
acquisition workforce lost the capacity needed to perform its 
essential functions. As the Acquisition Advisory Panel 
chartered, pursuant to section 1423 of the National Defense 
Authorization Act (NDAA) for Fiscal Year 2004, recently 
reported, our failure to fund an adequate number of acquisition 
professionals is ``penny wise and pound foolish,'' as that 
seriously undermines the pursuit of good value for the 
expenditure of public resources.
    I believe it is vital for Congress to address this 
structural problem. Senator Ensign and I have been seriously 
thinking and working on this, and we want to make a difference 
here.
    Senator Ensign, do you have an opening statement?

                STATEMENT OF SENATOR JOHN ENSIGN

    Senator Ensign. Thank you, Mr. Chairman.
    We have had an excellent working relationship in the past 4 
years and I share in your enthusiasm in looking towards the 
future. This relationship also extends to our staffs, 
especially Peter Levine and Greg Kiley. I know that we share a 
lot of the same concerns. Mainly, that we provide a lot of the 
money for the military, and we need to hold them accountable 
for how they're using that money. That's what the witnesses are 
here for; to find out whether they are using that money 
properly.
    So, I want to thank the DOD IG's office and the Government 
Accountability Office (GAO) for their tireless efforts in 
helping us with our oversight responsibilities. Yours is not an 
easy job, and it is sometimes a thankless job, but it is 
definitely a very important job. I look forward to discussing 
with you today the results of your most recent efforts in the 
areas of interagency contracting and service acquisition.
    Over the years, I've been encouraged by the steady, though 
sometimes slow, pace of improvements made by the DOD in its 
acquisition policies and processes. Yet, according to the GAO's 
report, ``Tailored Approach Needed to Improve Service 
Acquisition Outcomes,'' the DOD has still, until recently, 
either failed to establish or implement best practices in 
management--in managing service acquisition. This failure is 
especially troubling since the DOD obligated over $141 billion 
on service contracts alone in 2005. As the DOD increases its 
reliance on the private sector in such areas as information 
technology, services, weapons systems, and base operations 
support, it is imperative that we ensure we are buying the 
right service at the right price in the right manner.
    I understand the DOD has already begun to address the 
problem with an October 2006 policy memorandum implementing 
section 812 of the 2006 NDAA. I further understand that DOD is 
attempting to develop a comprehensive plan for the acquisition 
of services. The DOD's efforts are encouraging, and I look 
forward today to discussing ideas on how the DOD can be 
proactive and not just reactive in this area.
    In preparing for today's hearing, I was disturbed by the IG 
and GAO's findings on interagency contracting. It appears that 
good government initiatives, such as GovWorks and others, which 
were designed to increase efficiency and lower cost, have been 
turned on their head. Some have used the programs to circumvent 
fundamental contracting and financial rules, to bank funds that 
are set to expire, or to obtain leases without going through 
normal channels, to cite just a couple of examples.
    The IG has suggested that in some instances these abuses 
may have been deliberate. These are abuses we can ill afford 
these days. As we continue to prosecute the war against Islamic 
jihadists, each defense dollar becomes even more precious.
    It is incumbent upon all of us--contracting officers, 
program officers, Members of Congress--to maximize the buying 
power of each defense dollar. To do otherwise is to do grave 
disservice to our young men and women in military.
    Mr. Chairman, I want to thank you for calling this hearing 
today.
    Welcome, Senator McCaskill, attending the subcommittee 
hearing this morning. As you will see, Senator, the 
subcommittee is probably one of the least partisan committees 
that you will find in Congress, and we are all about doing the 
same thing, and that is, making sure our military works in the 
most efficient manner. We have very capable leadership at the 
helm, in our chairman, Senator Akaka.
    Thank you.
    Senator Akaka. Thank you very much, Senator Ensign.
    Senator McCaskill, if you have an opening statement, this 
is your time.
    Senator McCaskill. I do not have an opening statement, 
except to say that it's strange that GAO reports are fun for 
me. I've come from 8 years as the State Auditor of Missouri, so 
when I start reading recommendations and I start looking at 
responses from agencies, I assume they mean it, I'm old-
fashioned about that. I look forward to a working relationship 
with the members of this committee and with the IG and with GAO 
to see if we can't figure out why this is so hard for DOD to 
get right.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much.
    I want to welcome the witnesses: Inspector General Tom 
Gimble, and Managing Director, Acquisition and Sourcing 
Management, Katherine Schinasi, and ask you for your 
statements.
    Mr. Inspector General?

   STATEMENT OF THOMAS F. GIMBLE, ACTING INSPECTOR GENERAL, 
                     DEPARTMENT OF DEFENSE

    Mr. Gimble. Mr. Chairman, members of the Subcommittee on 
Readiness and Management Support, thank you for the opportunity 
to appear before the committee today to address our ongoing 
oversight work regarding interagency contracting.
    We have issued six final reports on our audits at four 
agencies: GSA, DOI, DOTREAS, and NASA. Collectively, those 
activities awarded 54,022 contract actions, valued at about 
$5.4 billion, for DOD during fiscal year 2005. We reviewed 352 
contract actions valued at about $1 billion.
    Today, I will talk specifically about contracting and 
funding problems relating to DOD use of contracting services at 
GSA and the DOI, the two largest agencies audited.
    We found that DOD continues to use other government 
agencies to make poorly planned purchases with annual 
appropriations about to expire. Also, a large number of the 
purchases were simply ``pass-through'' purchases made using 
either credit cards or from GSA Federal supply schedules, and 
they incurred an additional 2- to 5-percent fee charged by the 
non-DOD agency. For example, DOD used DOI to purchase $592 
million in goods and services that were ordered from Federal 
Supply Schedules, costing DOD $23 million in surcharges for 
that service.
    At this time, I'd like to direct your attention to my 
chart.
    [The information referred to follows:]

    [Copy of chart retained in committee files.]

    The details are too small to read, but the colors are 
important. This chart displays 25 funding documents that were 
sent to DOI by DOD activities. I would like you to focus on the 
yellow and orange colors that are in the same column. These 
represent Federal Supply Schedules and credit card purchases 
made by DOI on DOD's behalf.
    These ``pass-through'' purchases were made for basic items, 
such as furniture, computers, printers, and administration 
services that could have easily been purchased by DOD 
contracting activities. We also found some severe contracting 
problems. For example, DOI awarded a contract valued at $100 
million without competition or the required DOD and 
congressional approvals to lease office space for the 
counterintelligence field activity. Another example was: a DOI 
contracting officer awarded a contract valued at $205,000 to a 
computer software and construction firm to procure armor for 
seven Army Humvees. We also found purchases that didn't make 
much sense. This one, DOD contracting officials used non-DOD 
agencies for purchases, and the non-DOD agencies acquired the 
items off existing DOD contracts.
    GSA and DOI contracting officers did not always take the 
fundamental contracting steps to ensure that they made the best 
value purchases for DOD. We found that the purchases made 
through interagency contracting often skipped the basic 
contracting fundamentals, such as performing market surveys, 
competing acquisitions, determining price reasonableness, 
conducting surveillance on the services received, and obtaining 
the required approvals for construction and leasing contracts.
    Severe problems exist in the proper use of funds through 
interagency orders. We found that DOD used GSA and DOI 
revolving funds as places to park or bank funds that were 
expiring. About $1.5 billion in expired funds remained at GSA 
at the end of our first audit. At DOI, we identified about $400 
million that we believe should have been returned to the 
Treasury as expired funds. We reported 72 potential ADA 
violations at GSA and DOI. We've already identified another 250 
potential violations at the DOI during our ongoing follow-up 
audit.
    Again referring to the chart of the DOI purchases, those 
purchases marked in blue and red are potential ADA violations. 
Those purchases marked in red are purchases made using expired 
funds after March of last year, when we had warned DOI that 
using those funds is in violation of DOD policy. However, to 
our knowledge, DOD organizations have not completed the formal 
investigations of any of the 72 potential ADA violations that 
we reported, and, consequently, no individuals have yet been 
held accountable for the violations.
    We recognize that assigning responsibility is difficult, 
because DOD and the non-DOD agencies each claim the other is at 
fault. However, until DOD begins to enforce the policies in 
existence, the funding problems described in our audits will 
continue.
    The DOI's practice of using ``advance payments'' for 
interagency orders with DOD poses another significant problem 
for the DOD. Using the advance-payments method, DOI collects 
the full amount of the order funding document within 48 hours 
after the acceptance of the document. Consequently, DOD fully 
pays for the goods and services before DOI has awarded the 
contract. This process makes it very difficult for DOD to 
oversee and reconcile its funds at DOI, because DOD considers 
the funds to be expended when DOI collects the full payment. 
Further confusion continues to exist regarding incremental 
funding. DOD activities routinely incrementally fund portions 
of severable services contracts that are performed in the 
fiscal year following the year the funds have expired.
    The contracting and funding problems were primarily caused 
by the desire to secure a particular contractor, to obligate 
expiring funds, or the perceived inability of the DOD 
contracting workforce to timely respond to its customers.
    DOD and non-DOD officials have taken corrective actions to 
address some of the problems. The Director of Defense 
Procurement and Acquisitions recently signed a memorandum of 
agreement with the Chief Acquisition Officer of GSA to work 
together on 22 basic contracting management controls. They 
include ensuring that sole-source justifications were adequate, 
statements of work are complete, and interagency agreements 
describe the work to be performed. Further, GSA has worked with 
DOD to identify unused and expired DOD funds in the GSA 
accounts and to date has turned back over $600 million to DOD.
    DOI has withdrawn all of the contracting officer warrants 
at its Southwest Acquisition Branch and has retrained those 
contracting officers. It continues to revise its interagency 
contracting procedures to include establishing a legal review 
procedure.
    The Under Secretary of Defense Comptroller has issued 
guidance that will reduce the funding problems. On October 16, 
2006, DOD issued financial policy stating that all non-Economy 
Act orders greater than $500,000 are to be reviewed by a DOD 
contracting officer prior to the funds being certified. Also, 
the policy clarified funding for severable service contracts.
    The problems that have been illustrated today are not new 
and have plagued DOD for years. DOD must continue to make it a 
priority to correct these problems by enforcement of policy, 
clarification of policy, and additional oversight requirements. 
Otherwise, the problems I've discussed today will continue.
    That concludes my oral statement. I ask that my written 
statement be inserted in the record, and I'd be happy to answer 
any questions.
    [The prepared statement of Mr. Gimble follows:]

                 Prepared Statement by Thomas F. Gimble

    Mr. Chairman and members of the Subcommittee on Readiness and 
Management Support: Thank you for the opportunity to appear before the 
committee today to address our ongoing oversight work regarding 
interagency contracting.
    Our recent efforts in interagency contracting began in fiscal year 
2004 with a compliance audit of the Department of Defense (DOD) 
purchases made through the General Services Administration (GSA) in 
response to section 802 of the National Defense Authorization Act for 
Fiscal Year 2005. Section 811 of the National Defense Authorization Act 
for Fiscal Year 2006 expanded the scope of the compliance audits to 
include the DOD use of interagency contracting at the Department of the 
Interior, the Department of the Treasury, and the National Aeronautics 
and Space Administration. Section 817 of the National Defense 
Authorization Act for Fiscal Year 2007 further expanded our scope to 
include the National Institutes of Health and the Department of 
Veterans Affairs. Each of these audits has been an effort performed by 
the Inspectors General of DOD and the non-DOD agency being reviewed.
    We have issued final reports of our joint audits at four agencies: 
GSA, the Department of the Interior, the Department of the Treasury, 
and the National Aeronautics and Space Administration. Collectively, 
these agencies awarded 54,022 contract actions valued at about $5.4 
billion for DOD during fiscal year 2005. To conduct the audits, we 
reviewed 352 contract actions valued at about $1.0 billion.

  AUDITS OF INTERAGENCY CONTRACTING AT GSA AND THE DEPARTMENT OF THE 
                                INTERIOR

    Today, I will talk specifically about contracting and funding 
problems found during the audits of interagency contracting at GSA and 
the Department of the Interior, the two largest agencies audited. We 
have completed two audits at GSA as required by the National Defense 
Authorization Act for Fiscal Year 2005. We have also completed our 
first audit at the Department of the Interior and are working on the 
second year follow-up audit.
    Overall, we found significant contracting and funding problems. We 
found a lack of market research by both DOD and non-DOD agencies. When 
a DOD organization initiated its requirement, it did not determine 
whether it was in DOD's best interest to make the purchase through a 
DOD contracting office or pay a 2- to 5-percent fee for assistance from 
a non-DOD agency. On the other hand, GSA and Interior did not always 
make sure the contracting vehicle or contractor used was the best for 
the purchase. Other contracting problems involved a lack of 
competition, determining fair and reasonable pricing, providing 
adequate contract surveillance, and establishing leases and 
construction projects without proper approvals. Regarding funding 
problems, we found that DOD activities used GSA and the Department of 
the Interior revolving funds as places to ``park'' or ``bank'' funds 
that were expiring. Subsequently, both GSA and Interior placed 
contracts for DOD customers using the expired funds, thereby 
circumventing DOD appropriations law. We determined that at GSA, about 
$1 billion to $2 billion in expired funds remained in the ``bank'' at 
the end of our fiscal year 2005 audit. At the Department of the 
Interior, we identified about $400 million that we believed should have 
been returned to the Treasury as expired funds. Most of the contracting 
and funding problems were driven by three factors: the desire to hire a 
particular contractor, the desire to obligate expiring funds, and the 
inability of the DOD contracting workforce to timely respond to its 
customers.

                          CONTRACTING PROBLEMS

    The contracting problems stem from hurried buys with little or no 
planning, mostly due to DOD program managers attempting to quickly 
obligate funds about to expire. We found that DOD and non-DOD officials 
skipped basic planning and contracting fundamentals such as performing 
market surveys, competing acquisitions, determining price 
reasonableness, conducting surveillance on services received, and 
obtaining required approvals for construction and leasing contracts. We 
found some severe contracting problems. For example, the Department of 
the Interior awarded a contract worth $100 million without proper 
approvals or competition to lease office space for the 
Counterintelligence Field Activity. Interior officials also awarded a 
contract to a computer software and construction firm to procure armor 
for Army vehicles going to Kuwait. We also found illogical purchases 
such as DOD program officials using non-DOD agencies who in turn made 
purchases using credit cards, Federal Supply Schedules, and even 
existing DOD contracts.
    Of the 131 GSA purchases and 49 Department of the Interior 
purchases reviewed, we found only one instance where a DOD organization 
documented that using a non-DOD agency to award the contract was in the 
best interest of the Government. Program and contract officials 
conducted almost no market research on the other interagency purchases 
we reviewed. DOD used the Department of the Interior to purchase 
approximately $592 million of goods and services from the Federal 
Supply Schedules. For that service, DOD paid the Department of the 
Interior more than $23 million in surcharges for purchases that could 
have been routinely handled by junior DOD contracting personnel. DOD 
often paid surcharges for GSA and the Department of the Interior to 
purchase low-cost military equipment or commercial items that could 
have been obtained from existing DOD contracts. The Federal Acquisition 
Regulation specifies that it is the responsibility of the requiring 
activity to perform market research. We asked DOD personnel why they 
used a non-DOD agency instead of a DOD contracting office. DOD 
personnel stated that the non-DOD agency processed the purchases faster 
than DOD and they could generally get the contractor they wanted.
    During our review of GSA fiscal year 2005 purchases, we examined 14 
contract actions to evaluate the adequacy of contracts awarded on a 
sole-source basis. We determined that 6 of the 14 actions did not 
comply with the Federal Acquisition Regulation because GSA did not 
adequately justify the use of sole-source contracts. Similarly, at the 
Department of the Interior, there was no competition for 27 of the 49 
purchases reviewed. However, most of the Department of the Interior 
purchases were exempt from Federal Acquisition Regulation competition 
requirements. The contracts were given to either small business 8(a) 
contractors that were owned by Native Americans or to contractors where 
only one bid was received. When competition was obtained, it was 
generally satisfied by obtaining a minimum of three bids by posting the 
solicitation on e-Buy.
    During our joint effort, GSA auditors identified that 64 percent of 
the GSA orders and modifications reviewed lacked required documentation 
showing that the Government received fair and reasonable prices. At the 
Department of the Interior, we determined that contracts for services 
tended to have more problems with price reasonableness than contracts 
for products. Of the 49 purchases reviewed, 24 were for services and 25 
were for products. For 20 of the 24 services purchases reviewed, 
contracting officers did not adequately document and support that 
prices paid were fair and reasonable. Of the 25 product purchases 
reviewed, contracting officers did not adequately document price 
reasonableness for 5 purchases.
    Of the 131 GSA purchases reviewed, 117 did not have adequate 
surveillance plans that met Federal Acquisition Regulation 
requirements. Government surveillance was also not adequate for 23 of 
the 24 Department of the Interior services contracts reviewed. On 
almost all interagency purchases, it was unclear who had responsibility 
for surveillance. Furthermore, when DOD was responsible for 
surveillance, DOD officials were unable to demonstrate how they 
effectively monitored contractor performance. In some cases, we found 
non-DOD contracting officers without security clearances awarding 
contracts with classified statements of work. We found a lack of 
quality assurance surveillance plans, designation letters establishing 
contracting officer representatives, and a general lack of contract 
oversight.
    One of the potentially most serious problems was when DOD and 
Department of the Interior officials leased office space for the 
Counterintelligence Field Activity by using a service contract instead 
of following required procedures through GSA. When leasing costs 
surpass a cost threshold, DOD officials must contact GSA before leasing 
space to accommodate computer and telecommunications operations and 
secure or sensitive activities related to the national defense or 
security. The Administrator of General Services must determine whether 
leasing the space is necessary to meet requirements that cannot be met 
in public buildings. GSA then submits that determination to the Senate 
Committee on Environment and Public Works and the House Committee on 
Transportation and Infrastructure. Public Law also requires the 
Secretary of the applicable Military Department to notify the Senate 
Committee on Armed Services and the House Committee on Armed Services 
when certain cost thresholds are met on leases of real property. The 
10-year, $100 million lease for the Counterintelligence Field Activity 
was disguised as a service contract and exceeded all thresholds that 
require congressional notification and approval. If DOD and Interior 
managers are allowed to purchase lease space via service contracts, 
congressional and senior DOD oversight will be lost, and other DOD 
activities will be making ``end runs'' around GSA and congressional 
approvals. We are currently aware of two other major leases that 
similarly circumvented the process.

                            FUNDING PROBLEMS

    Funding problems revolved around year end spending and attempts by 
DOD managers to obligate funds that are about to expire. We found 
numerous instances of DOD officials using interagency revolving funds 
to ``park'' or ``bank'' funds. We also found instances of officials 
using the wrong appropriation to fund contracts. Overall, we identified 
107 potential Antideficiency Act violations at the four agencies 
reviewed. Of the 107 potential violations, 72 were identified in GSA 
and the Department of the Interior. The follow-on audit at the 
Department of the Interior has already identified at least an 
additional 250 potential violations, 189 of which occurred after 
officials were notified that continued use of expired funds was 
contrary to DOD business practices. Exacerbating these funding problems 
are accounting processes at non-DOD agencies. For example, non-DOD 
agencies sometimes accept expired funds for incremental portions of 
services contracts, or bill for advance payments. These processes make 
it difficult or impossible to maintain oversight and make corrective 
accounting entries.
    Of the 72 potential Antideficiency Act violations at GSA and the 
Department of the Interior, 63 involved the bona fide needs rule, and 
17 involved using the wrong appropriation. There were instances where 
both problems occurred on the same purchase.
    On 41 purchases reviewed at GSA and 22 purchases at the Department 
of the Interior, DOD funding authorities potentially violated the bona 
fide needs rule. That is, they used an annual appropriation to purchase 
goods or services that they needed in the following year rather than in 
the year of the appropriation. In many cases, the DOD funding 
authorities used annual operations and maintenance appropriations to 
fund the purchase of severable services to be received in the year 
following the year of the appropriation. For example, the U.S. Central 
Command Air Force sent $18.5 million of funds that expired on September 
30, 2005, to fund the support of a Network Operations Security Center 
from October 1, 2005, through September 30, 2006.
    At the Department of the Interior, we found goods described as 
``commercial'' in contract documentation that were ordered or delivered 
many months past the expiration date of the appropriation. For example, 
Department of the Interior contracting officials used fiscal year 2002 
operations and maintenance funds to pay for fiscal year 2006 purchase 
orders. Those funds had been expired for 3 years.
    On 16 GSA purchases and 1 Department of the Interior purchase, we 
found that the wrong appropriation was used; in some cases, fiscal 
policy was severely abused. For example, the first GSA audit found that 
the Program Manager, Defense Communications and Army Transmissions 
Systems sent $44 million of operations and maintenance funds to GSA for 
the Army Materiel Command Headquarters Relocation purchase. GSA used 
the funds to contract for the construction of two modular two-story 
office buildings totaling about 230,000 square feet at Fort Belvoir. 
The buildings serve as the headquarters of the Army Materiel Command 
and provide office space for about 1,400 civilian and military 
personnel. Although the Army contended that construction did not occur, 
no buildings existed at the site prior to the contract. Army officials 
stated that using operations and maintenance funds was correct because 
the contractor was providing a service: the use of the buildings. 
However, the procurement of these buildings was clearly a construction 
project. The Army should have used Army Military Construction funds, 
even though the approval of construction projects is a far lengthier 
process in DOD than in GSA.
    Adding to the DOD funding control problems is the Department of the 
Interior use of ``advance payments'' for DOD purchases. Advance 
payments result in a series of internal control problems at DOD because 
this process generally removes the ability of DOD to account for funds 
transferred to the Department of the Interior. When DOD sends a funding 
document to another agency for a purchase of goods or services, DOD 
expects that agency to bill DOD as costs are invoiced and paid. 
However, using the ``advance payments'' method, the Department of the 
Interior collects the full amount of the funding document within 48 
hours after receipt and acceptance of the document. Accordingly, DOD 
has paid for goods and services before they are even contracted for. 
This process makes it extremely hard for DOD to oversee and reconcile 
its funds at the Department of the Interior. DOD generally relies on 
the Department of the Interior to furnish the amounts of unused 
balances of DOD funds.
    Also adding to the funding problems, non-DOD agencies incrementally 
fund portions of severable services contracts. Public Law allows the 
funding of severable services contracts to cross fiscal years as long 
as the funds are obligated and work is started in the year of the 
appropriation and is for a period not to exceed 12 months. However, the 
law is not clear about the 12-month rule when incremental funds are 
used. For instance it is unclear whether it is proper to obligate 
fiscal year 2006 funds in September 2006 for work to be performed in 
June 2007 on a severable services contract that began in April 2006.
    As mentioned earlier, we have reported 72 potential Antideficiency 
Act violations at GSA and the Department of the Interior. We expect to 
report at least another 250 potential violations at the Department of 
the Interior due to the use of expired funds. In July 2005, we also 
reported 38 potential Antideficiency Act violations. DOD conducted 
preliminary reviews in a timely manner in accordance with DOD 
regulations for only 8 of those 38 potential violations. However, the 
preliminary reviews are now complete on the 38 GSA potential 
Antideficiency Act violations reported in July 2005. The reviews 
determined that 11 still require a formal investigation to determine 
whether an Antideficiency Act violation occurred. Ten have had 
corrective actions taken that removes the Antideficiency Act violation 
that had occurred (for example, replacing the initial appropriation 
used with another year's appropriation or another type of 
appropriation). In 17 cases, the preliminary review concluded that an 
Antideficiency Act violation did not occur. However, in our January 2, 
2007, compendium report on potential Antideficiency Act violations, we 
recommended that the Under Secretary of Defense (Comptroller)/Chief 
Financial Officer reassess 12 of those 17 cases because the potential 
Antideficiency Act violations appeared egregious. Further, to our 
knowledge, none of the investigations held individuals responsible for 
the violations. Unless responsible individuals are held accountable, 
the problems will remain.

                                 CAUSES

    In fiscal year 2004, when our interagency contracting audits began, 
DOD guidance on the use and funding of interagency contracting vehicles 
was unclear. We had previously cited the simultaneous growth of 
contracting for services by DOD and the reduction of acquisition 
personnel as a cause of contracting problems within DOD. That factor 
combined with DOD lack of market research and non-DOD agencies 
emphasizing that their funds could be used to legally extend an 
appropriation's period of availability (``banking of funds'') created 
serious financial problems. Additionally, the marketing of procurement 
services by non-DOD agencies put pressure on their own contracting 
offices to offer streamlined acquisition methods that do not include 
such time-consuming requirements as competing acquisitions or 
certifying price reasonableness. This generally resulted in the 
contractor desired by the requiring DOD activity receiving the contract 
award. In short, we believe most of the problems will be resolved if 
the option to ``bank'' funds and the ability to award to a preferred 
vendor are eliminated. Furthermore, if DOD organizations perform 
adequate market research, many of the purchase requests sent to non-DOD 
agencies will remain within DOD.

                           CORRECTIVE ACTIONS

    DOD officials have taken many corrective actions as a result of our 
interagency contracting audits.

         On December 4, 2006, the Director of Defense 
        Procurement and Acquisition signed a memorandum of agreement 
        with the Chief Acquisition Officer of GSA. The memorandum 
        states DOD and GSA share a single objective of providing the 
        best value goods and services, in a timely manner, to support 
        the warfighter. DOD and GSA agreed to work together on 22 basic 
        contracting management controls. These include such controls as 
        ensuring that sole-source justifications are adequate, that 
        statements of work are complete, and that interagency 
        agreements describe the work to be performed.
         GSA has worked with DOD to identify unused and expired 
        DOD funds in GSA accounts. So far, GSA has returned over $600 
        million to DOD, and it continues to review its accounts.
         The Department of the Interior has withdrawn numerous 
        contracting officer warrants due to findings of the joint DOD 
        and Department of the Interior audits. It continues to revise 
        interagency contracting procedures to include establishing a 
        legal review procedure.
         On October 16, 2006, the DOD Acting Deputy Chief 
        Financial Officer revised financial policy by issuing a 
        memorandum, ``Non-Economy Act Orders.'' The memorandum 
        implements many internal controls. For example, for Non-Economy 
        Act orders in excess of the simplified acquisition threshold, 
        the requesting official must provide evidence of market 
        research and acquisition planning, and a statement of work that 
        is specific, definite, and certain. The memorandum states that 
        all Non-Economy Act orders greater than $500,000 must be 
        reviewed by a DOD-warranted contracting officer prior to 
        sending the order to the funds certifier or issuing a funding 
        document to a non-DOD organization. The memorandum also 
        includes much-needed funding guidance. Specifically, it 
        clarifies the DOD position on obligating funds for goods and 
        severable services. However, it does not address incremental 
        funds and how to provide adequate oversight over funds 
        processed by Advance Payment.

                             ACTIONS NEEDED

    The problems reported are not new to the Government. We have 
reported on similar problems for many years, and material internal 
control weaknesses over DOD contracting and funding processes continue 
to exist. We believe DOD must continue to make it a priority to correct 
these problems. Clarification of funding guidance is required. DOD 
should not provide ``advance payments'' when transacting interagency 
financial agreements. Incremental funding of services contracts with 
funds that are expiring needs to be clearly addressed. Further, formal 
investigations of all the potential Antideficiency Act violations we 
have reported need to be completed, accountable individuals need to be 
identified, and appropriate administrative actions need to be taken. 
The deliberate circumvention of Appropriation Law cannot be condoned.

    Senator Akaka. Thank you very much, Mr. Gimble.
    Ms. Schinasi, your statement, please?

    STATEMENT OF KATHERINE V. SCHINASI, MANAGING DIRECTOR, 
ACQUISITION AND SOURCING MANAGEMENT, GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Ms. Schinasi. Thank you, Senator Akaka and Senator Ensign. 
I am very pleased to be here today to have the opportunity to 
discuss GAO's evaluations of how well DOD is acquiring 
services.
    This subcommittee has been in the forefront of tracking 
DOD's increasing reliance on contractors to perform mission-
related functions, and, through many years of authorizing 
legislation, has put in place requirements, guidance, and other 
incentives to improve DOD's management of service contractors 
and contracts. Notwithstanding congressional actions, GAO 
recommendations, and subsequent plans and policies, we continue 
to find problems.
    With your permission, I would like to insert my full 
statement for the record and summarize that statement now.
    Senator Akaka. Without objection, it will be.
    Ms. Schinasi. My statement today will include many examples 
of poor contracting practices that we and others have reported 
on over the years. You've just heard Mr. Gimble; you will hear 
a lot of similar things from me, as well.
    DOD's contract management has been on GAO's high-risk list 
since 1992, and in 2005 we also put interagency contracting on 
as a separate area. We have identified problems in the DOD's 
ability to establish valid needs and requirements, get adequate 
competition, effectively manage and assess contractor 
performance, and appropriately use other agencies' contracts, 
and the vulnerabilities that these create for fraud, waste, and 
abuse that amount to hundreds of millions of dollars a year. I 
will just give you a few examples of reports that we've issued 
recently.
    With respect to poorly defined requirements, in July 2005 
we reported that the files at the DOI's GovWorks and DOTREAS's 
FedSource franchise funds lacked clear descriptions of work the 
contractor was supposed to perform, and sometimes specified 
that the work would be defined after an order was placed.
    In September 2006, we reported on a number of Iraqi-related 
contracts in which contractors were authorized to begin work 
before key terms and conditions and projected costs were 
established.
    In instances where agreements were not reached until the 
work was complete or almost complete, DOD contracting officers 
were less likely to remove millions of dollars of contractors 
costs that had been questioned by auditors as unreasonable, and 
the DOD IG has reported on similar problems.
    With respect to inadequate competition, we have long 
reported on the lack of competition in DOD's acquisition of 
services and continue to find numerous sole-source procurements 
that are not adequately justified. The professed need for speed 
too often wins out over holding competitions with outcomes that 
are not in the best interest of the Government.
    Recently, we reported on the Army's award of a sole-source 
contract for security guard services at domestic bases, despite 
knowing that it was paying 25 percent more than the price it 
had gotten when it had competed that contract earlier.
    In terms of inadequate monitoring of contractor 
performance, in our most recent report on this specific issue 
we reported that approximately one-third of the 90 contracts we 
reviewed did not have appropriate surveillance. If surveillance 
is not conducted, not sufficient, or not well-documented, DOD 
is at risk of being unable to identify and correct deficiencies 
in a timely manner and potentially pays more for the services 
that it receives.
    The ability to conduct appropriate surveillance also ties 
back to well-defined requirements and well-written statements 
of work. If you cannot describe what you want, it is hard to 
assess whether what you are getting is sufficient.
    With respect to the inappropriate use of interagency 
contracts, many of the shortfalls in good contracting practices 
that we have seen in DOD's own contracting processes are also 
found in DOD's use of interagency contract vehicles. GAO's 
recent reports on DOD's acquisition of interrogator services 
and use of interagency franchise funds point to numerous 
problems. In the interagency context, assigning responsibility 
for managing and overseeing the process has been harder. As the 
number of parties in the acquisition process increases, so, 
too, does the need to ensure responsibility and accountability 
for the outcomes.
    It is commonly recognized, as you pointed out in your 
opening statement, Mr. Chairman, that DOD's workforce does not 
have the business acumen needed in today's environment, but it 
is not widely accepted just who makes up the responsible 
workforce. Managing contractors is not just a task for 
contracting officers. Program officers and military officers 
play a large role and also need to be held accountable for the 
results of service acquisition spending.
    As the reliance on contractors expands, historical 
weaknesses in contract management can have a greater impact. 
The reliance also exposes a more basic issue. What services 
should the Government be contracting for, and what expertise 
needs to be maintained in-house? Contractors now provide 
services for which DOD has historically had in-house capacity. 
For example, we have recently reported on the declining status 
of cost estimators in the space acquisition community and have 
heard concerns about losing capability in other key functions, 
such as pricing and systems and software engineering.
    DOD has also turned to service contractors when new 
missions are established, such as the need for security guards 
at U.S. military installations, or when the competition for 
procurement funds closes off the option of buying equipment, 
such as simulators for pilot training, which is now being 
delivered through a service contract using operations and 
maintenance funding.
    The debate on which parts of DOD's mission can best be met 
through buying contractor services has not yet taken place and 
will need to balance the short- and longer-term values and 
objectives.
    In closing, let me be clear that not all service 
acquisitions are problematic and not all need the same level of 
management and oversight attention, but we are in the midst of 
a strategic expansion in service contracting, without strategic 
directions or decisions. In our July 2006 report on 
vulnerabilities, we made the point that DOD's senior leaders 
are a critical factor in translating well-meaning plans into 
results. But the DOD's leadership is rarely in place long 
enough to carry through on plans, and has not yet figured out a 
way to ensure change in front-line practices which is where 
most of the service acquisitions occur, that are in line with 
the Office of the Secretary of Defense-set or congressionally-
directed objectives. Without attention, it appears that a set 
of relationships is developing which inherently work against 
the Government's best interests.
    The relationships that concern us are the ones in which we 
have a set of buyers who don't know what they want or how to 
express it, but have seemingly limitless funds, and a group of 
sellers who want to maximize profits by maximizing revenue and 
minimizing costs. The set of rules in place to manage and even 
mitigate the inherent risks in these relationships is not 
working well enough. Whether that is because the rules are not 
being followed or because they are not sufficient themselves is 
cause for further discussion, but one thing that is clear is 
that the consequences from the seller's actions are 
significant. Businesses cease to exist if they cannot achieve a 
return on their investments, while there are seemingly no 
consequences for the buyer who wastes taxpayers' funds by 
making bad decisions or by just not paying attention. We must 
find ways to allow or force the customer to use his money to 
insist on a good deal or else walk away. That's what I think 
you and I would do.
    Mr. Chairman, that concludes my statement, and I'd be happy 
to take your questions.
    [The prepared statement of Ms. Schinasi follows:]

              Prepared Statement by Katherine V. Schinasi

    Mr. Chairman and members of the subcommittee: I am pleased to be 
here today to discuss challenges the Department of Defense (DOD) faces 
in acquiring services to support its operations. Although many of these 
challenges are longstanding, they have become more apparent in recent 
years as the Department's reliance on contractors has grown in size and 
scope. In fiscal year 2005, DOD obligated more than $141 billion on 
service contracts, a 72-percent increase since fiscal year 1996. 
However, DOD does not always use sound contracting practices when 
acquiring these services and the Department is operating with a deficit 
of people with the right skills to support its acquisitions. 
Consequently, DOD may not have always obtained good value when buying 
billions of dollars of services at a time when serious budget pressures 
face the Nation.
    This subcommittee has explored new approaches and supported 
legislation to improve DOD's acquisition of services. It has emphasized 
the use of sound business practices and competition to obtain services 
at reasonable prices for DOD and ultimately the taxpayer. In addition, 
it has encouraged DOD to establish a structure to better manage its 
acquisition of services. Despite these efforts, many improvements are 
still needed. The recurring nature of DOD's problems is evidenced by 
the fact that DOD contract management has been on the Government 
Accountability Office's (GAO) list of high-risk areas since 1992.\1\ In 
January 2005, we added the management of interagency contracting to the 
list. In July 2006, we reported on DOD's vulnerabilities to contracting 
fraud, waste, and abuse.\2\
---------------------------------------------------------------------------
    \1\ GAO, High-Risk Series: An Update, GAO-05-207 (Washington, DC: 
January 2005).
    \2\ GAO, Contract Management: DOD Vulnerabilities to Contracting 
Fraud, Waste, and Abuse, GAO-06-838R (Washington, DC: July 7, 2006).
---------------------------------------------------------------------------
    Today, I would like to discuss DOD's: (1) increasing reliance on 
contractors, (2) failure to consistently follow sound business 
practices when acquiring services, and (3) opportunities for DOD to 
improve its management of services. My statement is based on work that 
GAO has completed over the past decade, which was conducted in 
accordance with generally accepted government auditing standards. 
Additionally, my statement draws on recent reports issued by the DOD 
Inspector General and General Services Administration Inspector 
General.

                                SUMMARY

    Negative outcomes should be no surprise given the convergence of 
DOD's growing reliance on contractors to provide services and 
longstanding problems with contract management. These problems--ill-
defined requirements, inadequate competition, ineffective management 
and surveillance of contractor performance, and inappropriate uses of 
other agencies' contracts--have resulted in outcomes that have cost the 
Department valuable resources. These problems are not new and, if they 
remain unresolved, will only continue to waste DOD's resources. 
However, DOD is not in a good position to address these longstanding 
problems. DOD does not know where it wants service acquisitions to be 
in the next few years or how to get there. DOD is taking some steps to 
address these problems but much remains to be done.
DOD Increasingly Relies on Contractor-Provided Services
    Over the past decade, DOD has increasingly relied on contractors to 
provide a range of mission-critical services from operating information 
technology systems to providing logistical support on the battlefield. 
The growth in spending on services clearly illustrates this point. 
DOD's obligations on service contracts rose from $82.3 billion in 
fiscal year 1996 to $141.2 billion in fiscal year 2005 (see table 1). 
DOD committed 20 percent of its obligations on services in fiscal year 
2005 for professional, administrative, and management support 
contracts. Overall, according to DOD, the amount obligated on service 
contracts exceeded the amount the Department spent on supplies and 
equipment, including major weapon systems. To a large degree, this 
growth simply happened and was not a managed outcome.

                  TABLE 1: CHANGES IN DOD'S USE OF SERVICE CONTRACTS, FISCAL YEARS 1996 TO 2005
                                     [Fiscal Year 2005 Dollars in Billions]
----------------------------------------------------------------------------------------------------------------
                                                              Service
                                                            obligations       Percentage of        Percentage
                   Service category                         Fiscal year          service         change, fiscal
                                                       --------------------    obligations,      years 1996 to
                                                          1996      2005     fiscal year 2005         2005
----------------------------------------------------------------------------------------------------------------
Professional, administrative, and management support..     $10.8     $28.3               20.0                161
Construction of facilities............................       7.3      11.7                8.3                 62
Maintenance and repair of equipment...................       6.6      11.4                8.1                 74
Information technology................................       4.9      10.3                7.3                110
Medical services......................................       1.6       8.0                5.6                412
Transportation, travel, and relocation................       2.4       6.2                4.4                154
Housekeeping services.................................       2.4       4.8                3.4                 98
All other services, excluding research and development      22.7      23.6               16.7                  4
 a....................................................
Research and development..............................      23.7      37.0               26.2                 56
                                                       ---------------------------------------------------------
  Total, all service contracts........................     $82.3    $141.2              100.0                 72
----------------------------------------------------------------------------------------------------------------
Source: DOD's DD350 database for all actions exceeding $25,000 (data); GAO (analysis).
a Other services include photographic, mapping, and printing; education and training; and social services, among
  others.

    As service acquisition spending has grown, the size of the civilian 
workforce has decreased. More significantly, DOD carried out this 
downsizing without ensuring that it had the specific skills and 
competencies needed to accomplish DOD's mission. For example, the 
amount, nature, and complexity of contracting for services have 
increased, which has challenged DOD's ability to maintain a workforce 
with the requisite knowledge of market conditions and industry trends, 
the ability to prepare clear statements of work, the technical details 
about the services they procure, and the capacity to manage and oversee 
contractors. In addition, new skills have been required to use 
alternative contracting approaches introduced by acquisition reform 
initiatives.
    Participants in an October 2005 GAO forum on Managing the Supplier 
Base for the 21st Century commented that the current Federal 
acquisition workforce significantly lacks the new business skills 
needed to act as contract managers. In June 2006, DOD issued a human 
capital strategy that acknowledged that DOD's civilian workforce is not 
balanced by age or experience. DOD's strategy identified a number of 
steps planned over the next 2 years to more fully develop a long-term 
approach to managing its acquisition workforce. Many personnel, 
however, are involved in acquiring services. In the broadest sense, 
these personnel include not only the contracting officers who award 
contracts, but also those personnel who define the requirements, 
receive or benefit from the services obtained, monitor contractor 
performance, and pay for the services.
    A report we issued in November 2006 on DOD space acquisition 
provides an example of downsizing in a critical area--cost 
estimating.\3\ In this case, there was a belief within the government 
that cost savings could be achieved under acquisition reform 
initiatives by reducing technical staff, including cost estimators, 
since the government would be relying more on commercial-based 
solutions to achieve desired capabilities. According to one Air Force 
cost-estimating official we spoke with, this led to a decline in the 
number of Air Force cost estimators from 680 to 280. According to this 
official, many military and civilian cost-estimating personnel left the 
cost-estimating field, and the Air Force lost some of its best and 
brightest cost estimators. In turn, because of the decline in in-house 
resources, space program offices and Air Force cost-estimating 
organizations are now more dependent on support from contractors. For 
example, at 11 space program offices, contractors accounted for 64 
percent of cost-estimating personnel. The contractor personnel now 
generally prepare cost estimates while government personnel provide 
oversight, guidance, and review of the cost-estimating work. Reliance 
on support contractors raises questions from the cost-estimating 
community about whether numbers and qualifications of government 
personnel are sufficient to provide oversight of and insight into 
contractor cost estimates.
---------------------------------------------------------------------------
    \3\ GAO, Space Acquisitions: DOD Needs to Take More Action to 
Address Unrealistic Initial Cost Estimates of Space Systems, GAO-07-96 
(Washington, DC: Nov. 17, 2006).
---------------------------------------------------------------------------
    DOD also relies extensively on contractors to undertake major 
reconstruction projects and provide logistical support to troops in 
Iraq. DOD is responsible for a significant portion of the more than $30 
billion in appropriated reconstruction funds and has awarded and 
managed many of the large reconstruction contracts, such as the 
contracts to rebuild Iraq's oil, water, and electrical infrastructure, 
and to train and equip Iraqi security forces. Further, U.S. military 
operations in Iraq have used contractors to a far greater extent than 
in prior operations to provide interpreters and intelligence analysts, 
as well as more traditional services such as weapons systems 
maintenance and base operations support. These services are often 
provided under cost-reimbursement type contracts, which allow the 
contractor to be reimbursed for reasonable, allowable, and allocable 
costs to the extent prescribed in the contract. Additionally, after the 
September 2001 terrorist attacks, increased security requirements and 
the deployment of Active-Duty and Reserve personnel resulted in DOD 
having fewer military personnel to protect domestic installations. For 
example, the U.S. Army awarded contracts worth nearly $733 million to 
acquire contract guards at 57 installations.
    Other factors have contributed to the growth in service contracts. 
For example, DOD historically bought space launch vehicles, such as the 
Delta and Titan rockets as products. Now, under the Evolved Expendable 
Launch Vehicle program, the Air Force purchases launch services using 
contractor-owned launch vehicles. Similarly, the Air Force and Army 
turned to service contracts for simulator training primarily because 
efforts to modernize existing simulator hardware and software had lost 
out in the competition for procurement funds. Buying training as a 
service meant that operation and maintenance funds could be used 
instead of procurement funds.\4\
---------------------------------------------------------------------------
    \4\ Various funds can be used to acquire services, depending on the 
nature of service.
---------------------------------------------------------------------------
DOD Does Not Consistently Use Sound Business Practices
    Our work, along with that of the Inspectors General, has repeatedly 
found problems with the practices DOD uses to acquire services. Too 
often, the Department obtains services based on poorly defined 
requirements and inadequate competition. Similarly, it does not always 
oversee and manage contractor performance once a contract is in place. 
All of these problems show up in the Department's use of other 
agencies' contracts. Collectively, these problems expose DOD to 
unnecessary risk and poor outcomes.
    Poorly Defined Requirements
    Poorly defined or broadly described requirements have contributed 
to undesired service acquisition outcomes. To produce desired outcomes 
within available funding and required time frames, DOD and its 
contractors need to clearly understand acquisition objectives and how 
they translate into the contract's terms and conditions. The absence of 
well-defined requirements and clearly understood objectives complicates 
efforts to hold DOD and contractors accountable for poor acquisition 
outcomes. For example,

         In June 2004, we found that during Iraqi 
        reconstruction efforts, when requirements were not clear, DOD 
        often entered into contract arrangements that introduced 
        risks.\5\ We reported that DOD often authorized contractors to 
        begin work before key terms and conditions and the work to be 
        performed and its projected costs were fully defined. In 
        September 2006, we reported that, under this approach, DOD 
        contracting officials were less likely to remove costs 
        questioned by auditors if the contractor had incurred these 
        costs before reaching agreement on the work's scope and 
        price.\6\ In one case, the Defense Contract Audit Agency 
        questioned $84 million in an audit of a task order for an oil 
        mission. In that case, the contractor did not submit a proposal 
        until a year after the work was authorized, and DOD and the 
        contractor did not negotiate the final terms of the contract 
        until more than a year after the contractor had completed the 
        work.
---------------------------------------------------------------------------
    \5\ GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award 
Procedures and Management Challenges, GAO-04-605 (Washington, DC: June 
1, 2004).
    \6\ GAO, Rebuilding Iraq: Continued Progress Requires Overcoming 
Contract Management Challenges, GAO-06-1130T (Washington, DC: Sept. 28, 
2006); see also Iraq Contract Costs: DOD Consideration of Defense 
Contract Audit Agency's Findings, GAO-06-1132 (Washington, DC: Sept. 
25, 2006).
---------------------------------------------------------------------------
         The DOD Inspector General found similar problems with 
        DOD's use of letter contracts. While this type of contract may 
        be necessary to initiate work quickly to meet urgent 
        operational needs, costs on letter contracts are more difficult 
        to control because the requirements and costs are undefined. In 
        August 2004, the Inspector General reported that contracting 
        officials did not adequately definitize the acquisition 
        requirements within the required time frames. Further, the 
        Inspector General noted officials did not document the 
        reasonableness of the profit rates charged by the 
        contractors.\7\ We are continuing to do work in this area.
---------------------------------------------------------------------------
    \7\ Department of Defense, Office of the Inspector General, Audit 
Report: Undefinitized Contractual Actions. Report Number D-2004-112 
(Arlington, VA.: Aug. 30, 2004).
---------------------------------------------------------------------------
         In July 2004, we noted that personnel using the Army's 
        Logistics Civil Augmentation Program (LOGCAP) contract in Iraq, 
        including those that may be called upon to write statements of 
        work and prepare independent government cost estimates, had not 
        always received the training needed to accomplish their 
        missions.\8\ We noted, for example, the statement of work 
        required the contractor to provide water for units within 100 
        kilometers of designated points but did not indicate how much 
        water needed to be delivered to each unit or how many units 
        needed water. Without such information, the contractor may not 
        be able to determine how to meet the needs of the Army and may 
        take unnecessary steps to meet the customer's needs.
---------------------------------------------------------------------------
    \8\ GAO, Military Operations: DOD's Extensive Use of Logistics 
Support Contracts Requires Strengthened Oversight, GAO-04-854 
(Washington, DC: July 19, 2004).
---------------------------------------------------------------------------
         In July 2005, we reported that other agencies that DOD 
        relied on to provide contracting services did not define 
        desired outcomes or requirements.\9\ We found that required 
        outcomes were not well-defined in the cases we reviewed at 
        franchise funds at the Departments of the Interior and the 
        Treasury--GovWorks and FedSource--that acquired a range of 
        services for DOD. The GovWorks and FedSource files we reviewed 
        lacked clear descriptions of requirements the contractor was 
        supposed to meet. Orders generally described work in broad 
        terms and documentation sometimes specifically indicated that 
        work would be defined more fully after an order was placed.
---------------------------------------------------------------------------
    \9\ GAO, Interagency Contracting: Franchise Funds Provide 
Convenience, but Value to DOD Is Not Demonstrated, GAO-05-456 
(Washington, DC: July 29, 2005).
---------------------------------------------------------------------------
    Inadequate Competition
    Competition is a fundamental principle underlying the Federal 
acquisition process. Nevertheless, we have reported on the lack of 
competition in DOD's acquisition of services since 1998. We have 
reported that DOD has, at times, sacrificed the benefits of competition 
for expediency. For example, we noted in April 2006 that DOD awarded 
contracts for security guard services supporting 57 domestic bases, 46 
of which were done on an authorized, sole-source basis.\10\ The sole-
source contracts were awarded by DOD despite recognizing it was paying 
about 25 percent more than previously paid for contracts awarded 
competitively.
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    \10\ GAO, Contract Security Guards: Army's Guard Program Requires 
Greater Oversight and Reassessment of Acquisition Approach, GAO-06-284 
(Washington, DC: Apr. 3, 2006).
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    DOD has also misused the contracts available on the General 
Services Administration's multiple-award schedules. Although DOD is 
required to foster competition and provide all contractors a fair 
opportunity to be considered for each order placed on the schedules, 
unless certain exceptions apply,\11\ DOD officials have on numerous 
occasions avoided the time and effort necessary to compete individual 
orders and instead awarded all the work to be performed to a single 
contractor. GAO work shows that this practice resulted in the 
noncompetitive award of many orders that have not always been 
adequately justified.
---------------------------------------------------------------------------
    \11\ 10 U.S.C. 2304c.
---------------------------------------------------------------------------
    Inadequate Management and Assessment of Contractor Performance
    GAO has reported on numerous occasions that DOD did not adequately 
manage and assess contractor performance to ensure that the business 
arrangement was properly executed. Managing and assessing post-award 
performance entails various activities to ensure that the delivery of 
services meets the terms of contract and requires adequate surveillance 
resources, proper incentives, and a capable workforce for overseeing 
contracting activities. If surveillance is not conducted, not 
sufficient, or not well-documented, DOD is at risk of being unable to 
identify and correct poor contractor performance in a timely manner and 
potentially paying too much for the services it receives.
    Our work has found, however, that DOD is often at risk. In March 
2005, for example, we reported instances of inadequate surveillance on 
26 of 90 DOD service contracts we reviewed.\12\ In each instance, at 
least one of the key factors to ensure adequate surveillance did not 
take place. These factors are: (1) training personnel in how to conduct 
surveillance, (2) assigning personnel at or prior to contract award, 
(3) holding personnel accountable for their surveillance duties, and 
(4) performing and documenting surveillance throughout the period of 
the contract. Officials we met with during our review expressed 
concerns about support for surveillance. The comments included those of 
Navy officials who told us that surveillance remains a part-time duty 
they did not have enough time to undertake and, consequently, was a 
low-priority task.
---------------------------------------------------------------------------
    \12\ GAO, Contract Management: Opportunities to Improve 
Surveillance on Department of Defense Service Contracts, GAO-05-274 
(Washington, DC: Mar. 17, 2005).
---------------------------------------------------------------------------
    More recently, in December 2006 we reported that DOD does not have 
sufficient numbers of contractor oversight personnel at deployed 
locations, which limits its ability to obtain reasonable assurance that 
contractors are meeting contract requirements efficiently and 
effectively.\13\ For example, an Army official acknowledged that the 
Army is struggling to find the capacity and expertise to provide the 
contracting support needed in Iraq. A LOGCAP program official noted 
that, if adequate staffing had been in place, the Army could have 
realized substantial savings on the LOGCAP contract through more 
effective reviews of new requirements. A Defense Contract Management 
Agency official responsible for overseeing the LOGCAP contractor's 
performance at 27 locations noted that he was unable to visit all of 
those locations during his 6-month tour to determine the extent to 
which the contractor was meeting the contract's requirements.
---------------------------------------------------------------------------
    \13\ GAO, Military Operations: High-Level DOD Action Needed to 
Address Longstanding Problems with Management and Oversight of 
Contractors Supporting Deployed Forces, GAO-07-145 (Washington, DC: 
Dec. 18, 2006).
---------------------------------------------------------------------------
    Our review of GovWorks and FedSource also found that both DOD and 
franchise fund officials were not monitoring contracts. Further, these 
organizations lacked criteria against which contractor performance 
could be measured to ensure that contractors provided quality services 
in a timely manner.\14\ Similarly, in 2004, the General Services 
Administration Inspector General reported on problems with surveillance 
when DOD used the General Services Administration's Federal Technology 
Service (FTS). For example, in reviewing task orders DOD placed through 
FTS, the Inspector General found that payments were made for 
substandard work or for work that was incomplete or never delivered, 
for bills that contained incorrect labor rates or did not adhere to 
contract pricing terms, and for bills that included unsubstantiated 
costs.
---------------------------------------------------------------------------
    \14\ GAO-05-456.
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    Inappropriate Use of Interagency Contracts
    In January 2005, we identified management of interagency contracts 
as a high-risk area because of their rapid growth, limited expertise of 
users and administrators, and unclear lines of accountability. Since 
DOD is the largest user of interagency contracts in the government, it 
can ill-afford to expose itself to such risks. Relying on other 
agencies for contracting support requires sound practices. The problems 
in clearly defining requirements, inadequate competition, and 
monitoring contractor performance to ensure that the government is 
getting good value are also evident in interagency contracting, as I 
have previously discussed. However, under an interagency arrangement, 
the number of parties in the contracting process increases and so too 
does the need to ensure accountability. Ensuring the proper use of 
these contracting arrangements must be viewed as a shared 
responsibility that requires agencies to define clearly who does what 
in the contracting process. Additionally, DOD pays a fee to other 
agencies when using their contracts or contracting services, which 
could potentially increase DOD costs.
    In April 2005, we reported that a lack of effective management 
controls--in particular insufficient management oversight and a lack of 
adequate training--led to breakdowns in the issuance and administration 
of task orders for interrogation and other services in Iraq by the 
Department of the Interior on behalf of DOD.\15\ These breakdowns 
included:
---------------------------------------------------------------------------
    \15\ GAO, Interagency Contracting: Problems with DOD's and 
Interior's Orders to Support Military Operations, GAO-05-201 
(Washington, DC: Apr. 29, 2005).

         issuing 10 out of 11 task orders that were beyond the 
        scope of underlying contracts, in violation of competition 
        rules;
         not complying with additional DOD competition 
        requirements when issuing task orders for services on existing 
        contracts;
         not properly justifying the decision to use 
        interagency contracting;
         not complying with ordering procedures meant to ensure 
        best value for the government; and
         not adequately monitoring contractor performance.

    Because officials at Interior and the Army responsible for the 
orders did not fully carry out their responsibilities, the contractor 
was allowed to play a role in the procurement process normally 
performed by government officials. Further, the Army officials 
responsible for overseeing the contractor, for the most part, lacked 
knowledge of contracting issues and were not aware of their basic 
duties and responsibilities.
    Similarly, our work on DOD's use of franchise funds managed by the 
Departments of the Treasury and the Interior found that sound 
management practices for ensuring competition, analyzing contracting 
alternatives, and defining outcomes were not in place. For example, 
GovWorks did not receive competing proposals for work. GovWorks also 
added substantial work to the orders without determining that prices 
were fair and reasonable. FedSource generally did not ensure 
competition for work, did not conduct price analyses, and sometimes 
paid contractors higher prices for services than established in 
contracts with no justification in the contract files. DOD also did not 
analyze contracting alternatives and lacked information about purchases 
made through these arrangements.
    We identified several causes for the lack of sound practices. In 
some cases, there was a lack of clear guidance and contracting 
personnel were insufficiently trained on the use of interagency 
contracting arrangements. In many cases, DOD users chose the speed and 
convenience of an interagency contracting arrangement to respond and 
meet needs quickly. Contracting service providers, under a fee-for-
service arrangement, sometimes inappropriately emphasized customer 
satisfaction and revenue generation over compliance with sound 
contracting policies and procedures requirements. These practices put 
DOD at risk of not getting required services at reasonable prices and 
unnecessarily wasting resources. Further, DOD does not have useful 
information about purchases made through other agencies' contracts, 
making it difficult to assess the costs and benefits and make informed 
choices about the alternatives methods available.
DOD Needs a Management Structure to Oversee Service Acquisition 
        Processes and Outcomes
    Congress and GAO have identified the need to improve DOD's overall 
approach to acquiring services for several years. In 2002, we noted 
that DOD's approach to buying services was largely fragmented and 
uncoordinated, with responsibility for acquiring services spread among 
individual military commands, weapon system program offices, or 
functional units on military bases, with little visibility or control 
at the DOD or military department level. Despite taking action to 
address the deficiencies and implement legislative requirements, DOD's 
actions to date have not equated to progress. DOD's current approach to 
acquiring services suffers from the absence of key elements at the 
strategic and transactional levels and does not position the Department 
to make service acquisitions a managed outcome.
    Considerable congressional effort has been made to improve DOD's 
approach to acquiring services. For example, in 2001, Congress passed 
legislation to ensure that DOD acquires services by means that are in 
the best interest of the government and managed in compliance with 
applicable statutory requirements. In this regard, sections 801 and 802 
of the National Defense Authorization Act for Fiscal Year 2002 required 
DOD to establish a service acquisition management approach, including 
developing a structure for reviewing individual service transactions 
based on dollar thresholds and other criteria.\16\ Last year, Congress 
amended requirements pertaining to DOD's service contracting management 
structure, workforce, and oversight processes, among others.\17\
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    \16\ Pub. L. No. 107-107, Sec. Sec. 801, 802 (2001) (section 801 
added new sections 2330 and 2330a to title 10, U.S. Code).
    \17\ Pub. L. No. 109-163, Sec. 812 (2006) (section 812 amended 10 
U.S.C. Sec. 2330).
---------------------------------------------------------------------------
    We have issued several reports that identified shortcomings in 
DOD's approaches and its implementation of legislative requirements. 
For example, we issued a report in January 2002 that identified how 
leading commercial companies took a strategic approach to buying 
services and recommended that DOD evaluate how a strategic 
reengineering approach, such as that employed by leading companies, 
could be used as a framework to guide DOD's reengineering efforts.\18\ 
In September 2003, we reported that DOD's actions to implement the 
service acquisition management structure required under sections 801 
and 802 did not provide a departmentwide assessment of how spending for 
services could be more effective and recommended that DOD give greater 
attention to promoting a strategic orientation by setting performance 
goals for improvements and ensuring accountability for achieving those 
results.\19\
---------------------------------------------------------------------------
    \18\ GAO, Best Practices: Taking A Strategic Approach Could Improve 
DOD's Acquisition of Services, GAO-02-230 (Washington, DC: Jan. 18, 
2002).
    \19\ GAO, Contract Management: High-Level Attention Needed to 
Transform DOD Services Acquisition, GAO-03-935 (Washington, DC: Sept. 
10, 2003).
---------------------------------------------------------------------------
    Most recently, in November 2006, we issued a report that identified 
a number of actions that DOD could take to improve its acquisition of 
services.\20\ We noted that DOD's overall approach to managing services 
acquisitions suffered from the absence of several key elements at both 
a strategic and transactional level. The strategic level is where the 
enterprise, DOD in this case, sets the direction or vision for what it 
needs, captures the knowledge to enable more informed management 
decisions, ensures departmentwide goals and objectives are achieved, 
determines how to go about meeting those needs, and assesses the 
resources it has to achieve desired outcomes. The strategic level also 
sets the context for the transactional level, where the focus is on 
making sound decisions on individual service acquisitions. Factors for 
good outcomes at the transactional level include valid and well-defined 
requirements, appropriate business arrangements, and adequate 
management of contractor performance.
---------------------------------------------------------------------------
    \20\ GAO, Defense Acquisitions: Tailored Approach Needed to Improve 
Service Acquisition Outcomes, GAO-07-20 (Washington, DC: Nov. 9, 2006).
---------------------------------------------------------------------------
    DOD's current approach to managing services acquisition has tended 
to be reactive and has not fully addressed the key factors for success 
at either the strategic or the transactional level. At the strategic 
level, DOD has not developed a normative position for gauging whether 
ongoing and planned efforts can best achieve intended results. Further, 
good information on the volume and composition of services is still 
wanting, perpetuating the circumstance in which the acquisition of 
services tends to happen to DOD, rather than being proactively managed. 
For example, despite implementing a review structure aimed at 
increasing insight into service transactions, DOD is not able to 
determine which or how many transactions have been reviewed.\21\ The 
military departments have only slightly better visibility, having 
reviewed proposed acquisitions accounting for less than 3 percent of 
dollars obligated for services in fiscal year 2005. Additionally, most 
of the service acquisitions the military services review involved 
indefinite delivery/indefinite quantity contracts. DOD's policy for 
managing service acquisitions had no requirement, however, to review 
individual task orders that were subsequently issued even if the value 
of the task order exceeded the review threshold.
---------------------------------------------------------------------------
    \21\ The management structure has three review levels: (1) review 
by the Under Secretary of Defense (Acquisition, Technology, and 
Logistics) for services acquisitions valued over $2 billion; (2) review 
by the component or designated acquisition executive for service 
acquisitions valued between $500 million and $2 billion; and (3) review 
by a component-designated official for the acquisition of services 
valued at less than $500 million. The Air Force, Army, and Navy each 
developed review processes and authorities to support the DOD review 
requirements.
---------------------------------------------------------------------------
    Further, the reviews tended to focus more on ensuring compliance 
with applicable statutes, regulations, and other requirements, rather 
than on imparting a vision or tailored method for strategically 
managing service acquisitions. Our discussions with officials at buying 
activities that had proposed service acquisitions reviewed under this 
process revealed that, for the most part, they did not believe the 
review significantly improved those acquisitions. These officials 
indicated that the timing of the review process--which generally 
occurred well into the planning cycle--was too late to provide 
opportunities to influence the acquisition strategy. These officials 
told us that the reviews would be more beneficial if they were 
conducted earlier in the process, in conjunction with the program 
office or customer, and in the context of a more strategic approach to 
meeting the requirement, rather than simply from a secondary or 
tertiary review of the contract.
    At the transactional level, DOD tended to focus primarily on those 
elements associated with awarding contracts, with much less attention 
paid to formulation of service acquisition requirements and to 
assessment of the actual delivery of contracted services. Moreover, the 
results of individual acquisitions were generally not used to inform or 
adjust strategic direction. As a result, DOD is not in a position to 
determine whether investments in services are achieving their desired 
outcomes. Further, DOD and military department officials identified 
many of the same problems in defining requirements, establishing sound 
business arrangements, and providing effective oversight that I 
discussed previously. For example,

         DOD and military department officials consistently 
        identified poor communication and the lack of timely 
        interaction between the acquisition and contracting personnel 
        as key challenges to developing good requirements.
         An Army contracting officer issued a task order for a 
        product that the contracting officer knew was outside the scope 
        of the service contract. The contracting officer noted in an e-
        mail to the requestor that this deviation was allowed only 
        because the customer needed the product quickly and cautioned 
        that no such allowances would be granted in the future.
         Few of the commands or activities could provide us 
        reliable or current information on the number of service 
        acquisitions they managed, and others had not developed a means 
        to consistently monitor or assess, at a command level, whether 
        such acquisitions were meeting the performance objectives 
        established in the contracts.

    To address these issues, we made several recommendations to the 
Secretary of Defense. DOD concurred with our recommendations and 
identified actions it has taken, or plans to take to address them. In 
particular, DOD noted that it is reassessing its strategic approach to 
acquiring services, including examining the types and kinds of services 
it acquires and developing an integrated assessment of how best to 
acquire such services. DOD expects this assessment will result in a 
comprehensive, departmentwide architecture for acquiring services that 
will, among other improvements, help refine the process to develop 
requirements, ensure that individual transactions are consistent with 
DOD's strategic goals and initiatives, and provide a capability to 
assess whether service acquisitions are meeting their cost, schedule, 
and performance objectives. DOD expects its assessment will be 
completed in early 2007.
    That assessment, however, will have little meaning unless DOD's 
leadership can translate its vision into changes in front line 
practices. In our July 2006 report on vulnerabilities to fraud, waste, 
and abuse, we noted that leadership positions are sometimes vacant, 
that the culture to streamline acquisitions for purposes of speed may 
have not been in balance with good business practices, and that even in 
newly formed government-industry partnerships, the government needs to 
maintain its oversight responsibility. Understanding the myriad causes 
of the challenges confronting DOD in acquiring services is essential to 
developing effective solutions and translating policies into practices. 
While DOD has generally agreed with our recommendations intended to 
improve contract management, much remains to be done. At this point, 
DOD does not know how well its services acquisition processes are 
working, which part of its mission can best be met through buying 
services, and whether it is obtaining the services it needs while 
protecting DOD's and the taxpayer's interests.
    Mr. Chairman and members of the subcommittee, this concludes my 
testimony. I would be happy to answer any questions you might have.

                         SCOPE AND METHODOLOGY

    In preparing this testimony, we relied principally on previously 
issued GAO and Inspectors General reports. We conducted our work in 
January 2007 in accordance with generally accepted government auditing 
standards.

                   CONTACT AND STAFF ACKNOWLEDGMENTS

    For further information regarding this testimony, please contact 
Katherine V. Schinasi at (202) 512-4841 or [email protected]. Contact 
points for our Offices of Congressional Relations and Public Affairs 
can be found on the last page of this testimony. Key contributors to 
this testimony were Lily Chin, David E. Cooper, Timothy DiNapoli, James 
E. Fuquay, Matthew Lea, Sara Margraf, Kenneth Patton, Sylvia Schatz, 
and Amelia Shachoy.

    Senator Akaka. Thank you very much, Mr. Gimble and Ms. 
Schinasi, for your statements. Your full statements will be 
included in the record.
    Ms. Schinasi, section 802 of the NDAA for Fiscal Year 2002 
required the DOD to improve the management of its services 
contracts through program reviews and spending analysis. 
Section 801 of the same act required the DOD to collect and 
analyze contract data for the same purpose. Unfortunately, it 
is my understanding that DOD still cannot even determine how 
much it is spending on contract services until several months 
after the money has been spent. GAO's November 2006 report on 
DOD service acquisition states that if DOD is going to obtain 
the right services at the right prices in the right manner, it 
must understand the volumes, sources, and trends related to 
what it's buying.
    Ms. Schinasi, has the DOD developed the data, about the 
types of and quantities of services it purchases, that it needs 
to successfully manage its purchases of services at the 
strategic level?
    Ms. Schinasi. Mr. Chairman, they have not been able to do 
that yet. They have made some attempts, and there is some 
bottom-up reporting going on, but even the services themselves 
do not know what they're spending, and so, it's a massive 
effort to try and bring all of that information together, and 
they haven't been able to do it yet.
    Senator Akaka. They have not been able to do that. Is there 
any sight as to when this can be done?
    Ms. Schinasi. I guess my position on that would be that I 
hope we don't wait for all of the data to get in before we 
start making improvements, because it could be a while.
    Senator Akaka. Okay.
    Mr. Gimble and Ms. Schinasi, the GAO report also states 
that sound contract management requires defining a clear scope 
of expected contractor performance, developing an objective 
means to assess the contractor's performance, ensuring 
effective contractor selection based on competition and sound 
pricing, and selecting an appropriate contracting vehicle. 
However, GAO reports that DOD service acquisition management 
activities focus primarily on awarding the contract rather than 
defining requirements. The DOD IG reports that DOD officials 
failed to perform adequate acquisition planning for 55 of 56 
task orders awarded through GSA, and 61 of 61 task orders 
awarded through the DOTREAS.
    Mr. Gimble and Ms. Schinasi, has the DOD taken the steps 
that it needs to take to ensure appropriate planning for the 
acquisition of contract services?
    Mr. Gimble. The DOD is still working that issue. There's a 
series of policy letters that started back in 2004 and continue 
into 2006--clarifying policy, reinforcing policy. I think the 
answer, though, is that we're not there yet. As late as the 
last round of audits that we produced, we found those problems 
still exist. Hopefully, in the next round of audits that we'll 
do as a part of the section 800 series, it'll show some marked 
improvement, but we still have serious problems in that area.
    Ms. Schinasi. Mr. Chairman, I think your question also goes 
to the importance of who is it that we're targeting with 
training? When you talk about establishing requirements, those 
requirements come from outside of the contracting world. Those 
requirements are set by program managers. So, we need to make 
sure, in getting to a place where we have sound requirements 
that are valid and have been justified, that we make sure that 
the program community, as well as the contracting community who 
has responsibility for translating those requirements into a 
statement of work, is captured in our targeting.
    Senator Akaka. As I said in my opening statement, I believe 
that these shortcomings are the result of an acquisition 
workforce that is stretched too thin to do the job.
    Mr. Gimble and Ms. Schinasi, is there any simple and cheap 
way for DOD to improve the performance of its services 
contracts, or is DOD going to have to invest the resources 
needed to provide adequate acquisition planning and oversight?
    Mr. Gimble. In terms of the workforce, Mr. Chairman, I 
believe that the answer is that we went on record as early as 
2000. In February 2000, we issued a report talking about the 50 
percent reduction in the contracting workforce--or the 
acquisition workforce. There has not been significant increase 
in that workforce. As you pointed out in your opening 
statement, there's been significant increase in the volume of 
business that these folks are required to oversee. I think 
there's a huge investment there, because not only do you have 
to attract the people--if we determine that this is inherently 
governmental, meaning this has to be an investment in a 
contract workforce, there's a huge training tail that goes with 
that. So, it'll be a very significant investment, but I think 
that you see the risks that we've continually reported on, and 
maybe it's time that there's a business case made to see what 
the proper level of the acquisition workforce should be.
    Senator Akaka. Ms. Schinasi?
    Ms. Schinasi. I would add to that it's important that we 
start thinking about acquisition differently, that agencies 
realize that being able to accomplish their mission is very 
much hindered or helped by how well they acquire the goods and 
services they need for that mission. Until we can get the 
acquisition function up to a level where we see it as something 
worth investing in, we're not going to make the investments 
that we believe are needed. When you go out and ask private 
successful companies--and we do this quite a bit--``how do you 
approach your sourcing function?''--that is a huge strategic 
area for them, and they invest in the best and brightest 
people, because that's the basis upon which they make profit. 
The Government doesn't see it like that. The Government has 
never seen the acquisition function as requiring and deserving 
commensurate investments as other parts of agency missions.
    Senator Akaka. Senator Ensign.
    Senator Ensign. Thank you.
    Mr. Gimble, is the red area the area where they banked? Am 
I recalling correctly?
    Mr. Gimble. Yes, sir. Actually, the red area is that the 
money was there, it was expired, and they went ahead and put it 
on contract. The banking could be a little bigger than that, 
though.
    Senator Ensign. First of all, is this a question of ``use 
it or lose it''? In other words, ``Well, I have to spend it. 
It's there, I have to make sure I spend it.'' Or is there 
something else involved here? If so, what type of 
administrative action should be taken? Is it criminal? What 
needs to proceed from here to stop this type of situation from 
going on?
    Mr. Gimble. Senator, that's a really good question, and 
it's a very hard question to answer. I think there's a 
multitude of answers that go to that. I think the first thing 
is, the banking--when they push that money across, if you get 1 
year on your money, that's going to expire, you send it over 
into a revolving fund, where it loses its identity. I'm not 
sure that that's criminal; it could be. It would have to be 
examined on a case-by-case basis. But it's a very poor 
practice.
    There's some degree of uncertainty as to where the lines 
are, and we think there needs to be some more clear definition, 
particularly in what you can do. For example, if you buy goods 
and services, those have to be delivered within the year. If we 
buy products, they have to be delivered within this year. What 
that does is, at the end of the year on September 15, which is 
still within the year, the assumption is if you put an order 
in, it'll be delivered before October 1. Maybe that's a little 
unrealistic, maybe there will be things that happen there. On 
the other hand, for severable services contracts, the rule is 
that if you get them on a contract, you have a year to execute. 
In other words, if you issue a contract in September of last 
year, you have until September of this year to execute the 
contract. There is a problem that goes on with that, in our 
view. Once you have the contract there, we wouldn't argue that 
you could carry that on for 12 months; it's when you start 
doing the incremental funding, where you add on to that or take 
from it; then, we think that's outside the scope. So, we think 
there's some definitional clarity that needs to be applied to 
this.
    The other thing, though, is, how do you stop it? Once you 
get the rules down, there has to be some way of stopping it. I 
think that what's happening is, through the legislation, where 
you've had us declare buying activities as red, and you start 
the threat of DOD being their primary customer, not doing 
business with them, that that gets people's attention. We've 
gotten a lot of attention over the past 3 or 4 months. So, some 
of us that have been watching this evolve down over the number 
of years--and it goes back to more than just the Non-Economy 
Act orders that we have today. I'm not saying it should have to 
happen that way, I'm just saying that that is a real deterrent, 
and it makes people look and say, ``If we want your business, 
we're going to spend the money the way you have to have it 
spent.''
    Senator Ensign. I want to get to some of the other contract 
issues and have both of you feel free to take a shot at this.
    DOD has testified many times that the way budgeting is done 
right now is very difficult for DOD annual budgets. By the time 
they actually get their money, it was proposed maybe 4 years 
before that by the time the actual money gets around, and it's 
a very difficult situation for them. In the middle of a war, 
especially, it can be a frustrating situation. You have 
supplementals coming up here, you have all the various things 
going on.
    How much of this is as a result of the situation we find 
ourselves in? Have you put numbers to how much of the money is 
actually being wasted? In other words, they're paying too much 
because of the bad systems that are in place, or is this a 
question, in some cases, of an entrepreneurial bureaucrat 
saying, ``Hey, the system isn't working over there, I have to 
do it a different way, because these people really need these 
services or these materials that I'm going to get them, and I'm 
going to make sure that it happens''? Obviously, you don't want 
to punish people for thinking outside the box, but, at the same 
time, if they're wasting money, if they're doing things not by 
the book that actually cause harm and waste our tax dollars, 
then that is something we need to hold accountable. Have you 
put dollars and your comments on that line of questioning, 
either one of you?
    Mr. Gimble. We haven't put a total dollar figure. I'm not 
sure that anybody knows. If you ask how much money is being 
wasted through poor contracting, I think we'd all say that it's 
significant, but I don't think there's anybody that really has 
a good number for that.
    Insofar as the ``thinking out of the box,'' yes, 
absolutely. I think some of this is from an entrepreneurial 
point of view, but, on the other hand, what you can't do is 
allow that to become the crutch for poor contracting and where 
you give up the basic internal controls that would allow you to 
know that you're getting best value. I think that's where some 
of these things have stepped across the line, that it's an 
expedient way to put money on things; and the truth of it is, 
one would not argue that we might need more Humvees next year, 
but there's a process in place to buy those, I'm talking about 
the armor and the Humvees that we use as an example. The 
expenditure of taxpayers' dollars should be well-planned and 
executed to get the best value. I think what we have here is a 
situation that is not conducive to that.
    Senator Ensign. Ms. Schinasi?
    Ms. Schinasi. I would agree. I think an entrepreneurial 
spirit is fine as long as it's accompanied by good business 
practices. So, there are those lines, and they get crossed for 
different reasons. You raised the issue of funding, and funding 
is difficult. We find that one of the reasons that requirements 
are not established upfront is because they're really budget-
driven. ``We'll buy as many labor hours as we have money for, 
and we don't know how much money we're going to have, because 
we only get our money on a quarterly basis.'' So, there's a lot 
of internal instability in DOD's funding processes that might 
exacerbate some of the things that we're seeing.
    Senator Ensign. I alluded to it a little bit, but it may be 
in other parts of these programs, we hear about this throughout 
Government is: ``You're coming at the end of the fiscal year, I 
have unexpended funds. If I don't spend those funds--and maybe 
sometimes they're on things that we really don't need, but if I 
don't spend those funds''--and I don't know if you've looked at 
any part of that, but if folks aren't spending those funds, 
they know, in next year's budget, ``Oh, they didn't spend it 
last year, so we don't need to give them the same budget level 
for next year,'' even though next year they may need those 
funds, plus.
    Senator Akaka. Thank you, Senator Ensign.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman.
    Mr. Gimble, is there a reason why you're still the Acting 
Inspector General? You've been Acting Inspector General since 
September 10, 2005.
    Mr. Gimble. I'm a senior career guy, and if they put a 
political appointee in there, then I work for the political 
appointee. Short of that, my mission and role is to run the 
organization. I have little or nothing to do with it.
    Senator McCaskill. Okay. When I read all of this, I didn't 
know whether to laugh or to cry. It is startling to see the 
enormity of the problem. I mean that in every sense of the word 
``enormity,'' because there are several definitions that go 
with ``enormity,'' and I think several of them apply to this.
    I was struck by the interagency contracting. Particularly, 
I was struck at the use of GSA and DOI as a roundabout, 
startling that they would actually use other agencies and pay a 
surcharge to circle back and use their contracting list. So, we 
spent millions and millions of dollars paying another agency to 
buy, when all they had to do was go to their own list and 
purchase. Did I misread that?
    Mr. Gimble. The example that you're talking about is of the 
``pass-throughs,'' where DOD could go to the Federal Supply 
Schedules and go directly to that; instead, we went to DOI, as 
an example, and they simply turn and go to the schedule and do 
the same thing we could have done, going straight to that. We 
also have a couple of examples of where we went out to DOI, and 
they've come back around and actually bought off the existing 
DOD contracts, and we've paid a surcharge to have that happen. 
I think that goes back to what Ms. Schinasi was saying. How you 
execute some of these things needs to be well-defined. That's 
just a breakdown in processes.
    Ms. Schinasi. In the report that we issued in July 2005 on 
franchise funds, one of the findings there was, the DOD is 
supposed to analyze alternatives to decide which way to go. It 
is supposed to say, ``Should we do it ourselves? Should we put 
it on this interagency vehicle? That interagency vehicle?'' 
That was not happening. When we looked at whether or not it 
could happen, what we found was that the funds themselves were 
not keeping performance measures to allow anyone to determine 
which is the best way to go. So, the way they measure their 
performance is on the increase in fees and customer 
satisfaction. So, they were interested in reporting that our 
``customers were satisfied,'' not that we have a better deal or 
a better price.
    Senator McCaskill. I noticed, in one of----
    Senator Ensign. Senator, if you would yield, maybe they 
could clarify--it's on your point--just because we've had some 
history on this very issue; this had to do with the number of 
acquisition personnel. Could you just maybe clarify for the 
Senator. The lack of acquisition personnel--in other words, 
we've had our acquisition workforce cut quite a bit at DOD, and 
that's the reason they've gone out and done some of this, 
because they couldn't get the material, they couldn't get some 
of these contracts as quickly as possible using their own 
folks, because of the lack of service personnel. Isn't that 
correct?
    Ms. Schinasi. That is part of it.
    Senator Ensign. Doesn't justify the other things they did, 
but, as far as why they did it.
    Ms. Schinasi. Right. Working properly, that's what you 
would expect to happen. You can get your job done more quickly.
    Senator McCaskill. Would the people not say to their 
superiors, ``We don't have enough people to do this work; 
therefore, we're spending millions and millions of dollars to 
send these contracts circularly through DOI or GSA, and it 
would be a lot less money for the taxpayers if we just hired a 
few more people''?
    Mr. Gimble. Senator, I think that that's a known fact that 
it is, but typically when these come to light, these examples, 
they're coming to light through audit reports. I don't know 
that they're sitting around and that anyone has this visibility 
over it. The point I was making a while ago about the DOD 
contract--the people going out to DOI, coming back to DOD--we 
actually identified 49 contracts, valued about $5 million, 
where we sent the contract over to DOI, and then they came back 
and bought off an existing contract. That's probably not 
visible to the program manager. We're not sure, as--I think the 
other part of this is, if you're the program manager, once you 
put it out to contract, you probably don't worry too much about 
what----
    Senator McCaskill. Out of sight, out of mind.
    Mr. Gimble. ``Out of sight, out of mind,'' ``All I want is 
the product.'' So, that's kind of what builds. A lot of it is 
just the fact that they've cut the workforce so small, that was 
the whole idea, to leverage on some of the buying activities of 
these other operations.
    Now, the other thing that concerns us--and I just need to 
say this--is that one could understand going to certain places 
because they have expertise in buying certain things. For 
example, furniture--you would think GSA has the expertise in 
buying furniture. The example came up that we're all familiar 
with, when they needed to have interrogators or interpreters 
over in Iraq, they went and bought it off an information 
technology contract down at Fort Huachuca. What was the 
expertise being used when an Information Technology (IT) 
Indefinite Delivery Indefinite Quantity (IDIQ) contract that 
buys computers to be going out and buying interpreter services? 
If you're going to direct this out somewhere, you need to go 
somewhere that they have the expertise to make the kind of buys 
that we're dealing with.
    Senator McCaskill. It's hard to imagine, utilizing common 
sense, how you go to an IT supplier to buy interpreters. It's 
really hard for me to understand how--and maybe the longer I'm 
here, the more sense it'll make. But right now, it doesn't make 
much sense.
    I think one of the things that struck me was the example of 
using operational money through GSA to build a building--that 
was in your report, Mr. Gimble. We actually used operational 
money to build a two-story office building, 230,000 square 
feet, and the Army said that they were leasing the use of the 
buildings, but the buildings weren't there before the contract 
was issued.
    Does somebody get fired when that happens, when you 
actually use money that's operational to construct a building, 
and then try to say that you were just leasing a building, and 
you actually built a building? Does somebody lose their job 
when that happens?
    Mr. Gimble. I'm not sure that anyone lost their job over 
that, but it's hard for us to understand, too, because--the 
issue there was 1 year of operations and maintenance money for 
operations versus military construction, which is much more 
constrained. We have an issue and it's still being reviewed in 
the DOD. Our position is that it was military construction, 
because there was not a building there. They did go out and 
pour foundation. We understand that they're--if you will, the 
temporary-type building, or the mobile-home-type building--
that's probably not a good term, but the temporary building. 
But the fact is, they laid all the infrastructure and the 
foundation, and there's a huge building. If you go out and look 
at it, it's a fairly impressive building. It wasn't there the 
year before. It was, the year after. We have a hard time, in 
our organization, understanding how that is not military 
construction, and that was the position we've taken. I think 
the attorneys are still trying to sort that one out.
    Senator McCaskill. I would really be interested in the 
follow-up on that, what happens. If you would--and I'll send a 
letter, specifically.
    Mr. Gimble. Okay.
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    Senator McCaskill. This is a really good example, but if 
there's not accountability when something like that happens, I 
think we might as well throw in the towel.
    Thank you for your service to our country, too.
    Senator Akaka. Thank you.
    I'm happy to welcome Senator Martinez to the committee and 
ask for any statement or questions that you may have.
    Senator Martinez. Thank you, Senator. I appreciate it very 
much, Mr. Chairman. I'm going to insert my statement for the 
record, and go straight to questions.
    [The prepared statement of Senator Martinez follows:]

               Prepared Statement by Senator Mel Martinez

    Mr. Chairman, thank you for calling this important hearing. Many of 
my constituents have contacted me regarding the waste, fraud, and abuse 
that have resulted from some service contracts in Iraq; from a pure 
fiscal responsibility point of view, I think it is important that we 
hold this hearing.
    The shortcomings that have been reported represent a serious drain 
on the ability of U.S. and coalition forces to complete the transition 
to Iraqi control of the country.
    Not only do these contracting problems translate into a tremendous 
loss of money, but because of what is not being done, the success of 
the mission there is being put at risk--and unnecessarily so.
    Recent reports indicated that corruption and waste is widespread 
among the Iraqi Government. Our men and women on the ground need to set 
the example, and work with the elected government and the Iraqi Army to 
stamp out this corruption and help them establish good government.
    In this sense, the widespread problems documented to date threaten 
our most important long-term goals in Iraq. We should be presenting 
ourselves and our operations as a model of good government.
    Through our own example, we are supposed to be showing the Iraqis 
(and the rest of the coalition) how the greatest nation in the world 
conducts business.
    It is important that we take these first steps by being 
introspective and noting deficiencies where they exist. Then we need to 
move forward, and find ways to correct these often overlooked, but very 
serious shortcomings. I look forward to working with my colleagues on 
this committee on this issue that is certain to require our attention 
for the foreseeable future. Thank you again, Mr. Chairman.

    Senator Martinez. I must say that you come in with a spirit 
of criticism, and, as I've sat here, I have been transformed 
back to my days as a Cabinet officer. I'll begin to feel sorry 
for those who attempt to run a Federal bureaucracy.
    The Senator from Missouri will learn that there's no such 
thing as firing a Federal employee. It just doesn't happen. 
[Laughter.]
    I also know that the GAO plays a very useful role, not only 
in identifying problems, but also providing hopeful solutions. 
I wonder in part of what we have been discussing here is an 
issue that I also relate to, because, when I was at the 
Department of Housing and Urban Development, we had the very 
same problem--is that you go on this binge of contracting 
services, which is good, and sounds good, and makes sense, but 
then, at the same time, the corresponding opposite of that is 
you reduce the workforce, because you're not contracting out 
the services. What happens then is that the bureaucracy is left 
shorthanded to oversee and supervise the letting and oversight 
of contracts. So, then these problems arise.
    Are part of your recommendations that you are making as a 
result of your findings, Ms. Schinasi, are they also to 
increase the contracting oversight workforce within the DOD?
    Ms. Schinasi. We haven't gone to the quantity of people. We 
haven't made recommendations on the quantity of people needed. 
But, clearly, getting all of the players who are responsible 
for the decisions involved in the targeted training that we 
need to do is something that we have recommended.
    Senator Martinez. Yes, training is the other part, which is 
not only having the workforce, but having the workforce be 
trained in the oversight of contracts, which is, to them, a new 
thing. They haven't done this before; now, all of a sudden, 
what they used to do in-house, they're doing outside, and 
someone needs to oversee it, and it's a different skill set 
that the workforce needs to have from what it used to be, 
prior.
    Ms. Schinasi. For example, surveillance of contractors is a 
responsibility that is assigned by the contracting officer, but 
it's usually an individual who comes out of the program office, 
presumably because they understand what the contractor is 
supposed to be doing and can assess how well they're doing 
that. But those individuals often are not trained, and they 
just don't pay much attention. So, you need to make sure you 
have all of the pieces in there when you're writing policy or 
developing training.
    Senator Martinez. One of the things, Ms. Schinasi, that 
came to mind was that you may have an infantry colonel 
operating in Iraq, and may be a little uncomfortable with the 
process, but what I was wondering is how much of this 
contracting is done on the ground in theater and how much is 
done in at a strategic level, here in the country?
    Ms. Schinasi. There's very little done at the strategic 
level, and I think that's part of the message that we've been 
trying to get across in our most recent report on how do you 
need to manage service contracting? There is a tactical level, 
and you need to ensure that competition rules are followed and 
surveillance takes place, but there is also a strategic level, 
where you have to decide what is it that you want to achieve 
through hiring contractors to help you carry out your mission? 
That hasn't been done.
    Senator Martinez. At that level, also, additional training 
would be helpful.
    Ms. Schinasi. Yes, and knowledge about what you are doing. 
Do you really know what you're spending it on, who you're 
spending it with? The answer is no.
    Senator Martinez. I saw that in 2005, DOD awarded more than 
52,000 contract actions, with a value of over $5 billion. I 
presume that's all done under a fairly high-stress environment. 
I guess that would also be part of what we're dealing with, and 
I don't know how we do that better under war circumstances. Do 
you have a suggestion there on how to improve?
    Ms. Schinasi. I think what we're trying to get to is a 
strategic and a transactional level, should you be hiring that 
much through service contracting is number one. Then, number 
two, the imbalance we've talked about between the job of each 
individual and how many individuals you have doing that job, is 
another way that you would have to attack that.
    Senator Martinez. That's all part of the same issue and 
part of the same problem?
    Ms. Schinasi. Yes.
    Senator Martinez. Any good news you can share? [Laughter.]
    Ms. Schinasi. Mr. Gimble? [Laughter.]
    Senator Martinez. Mr. Gimble, maybe you'd like to tackle 
that one. I didn't ask you any questions.
    Ms. Schinasi. I will say that I'm encouraged, in our 
discussions with the leadership in the DOD. They are well-
meaning people, they recognize what these problems are, and the 
magnitude that they have to deal with that. The point I made in 
my oral statement, though, is that these are number whatever--
103 in the series of leaders that we have had over there trying 
to correct the problem, and it's very difficult to get 
traction, particularly service contracting, where, as you point 
out, most of the action is at the front-line level, trying to 
get that vision translated down and actually something changed, 
as a result.
    Senator Martinez. I think something that Mr. Gimble also 
alluded to, is the fact that sometimes what becomes so apparent 
at the time of looking at these issues is not apparent on a 
day-to-day basis to those people who have a responsibility for 
oversight. I guess that's part of where I'd identify and feel 
fortunate to no longer be responsible for a government 
department in the Federal bureaucracy.
    But thank you very much, both of you.
    Thank you.
    Senator Akaka. Thank you very much, Senator Martinez.
    I'd like to ask a question about the Acquisition Advisory 
Panel in the second round. The question from which we'll hear 
from the Acquisition Panel later this month. They looked at the 
state of the acquisition workforce and concluded that 
``curtailed investments in human capital have produced an 
acquisition workforce that often lacks the training and 
resources to function effectively.'' I think you mention that, 
too, Ms. Schinasi.
    Ms. Schinasi. Yes.
    Senator Akaka. As a result, the panel concluded, ``The 
Federal Government does not have the capacity in its current 
acquisition workforce necessary to meet the demands that have 
been placed on it.''
    Mr. Gimble and Ms. Schinasi, do you agree with the 
conclusions of the Acquisition Advisory Panel on the state of 
the defense acquisition workforce?
    Mr. Gimble?
    Mr. Gimble. Yes, Mr. Chairman, we do agree with that. Also, 
I think there's something else that hasn't been mentioned. You 
have the baby-boom retirement age that's coming up. There's 
another challenge for the acquisition workforce--and it's not 
just the acquisition workforce, it's the whole Federal 
workforce, as we have a number of folks that are approaching--
and, in some cases, such as myself, past retirement. But that's 
going to be another challenge. Some of the trained people that 
we have, experienced people, are going to be retiring in the 
near-term, so there's a huge issue laying out there for not 
only the hiring of acquisition people, but also the training of 
the people.
    Senator Akaka. Ms. Schinasi?
    Ms. Schinasi. We have ongoing work right now examining all 
of the recommendations of the 1423 panel, so we're still 
working our way through that. But I think one of the things 
that they did raise in that report is this business of thinking 
about your acquisition workforce more strategically, being 
willing to invest in a group of people who help you determine 
how successful or not you are with your mission. Highly 
sophisticated, credentialed, and trained business managers is 
the way that that panel talked about the private sector 
approach to a kind of workforce, and I would agree that that's 
the way we need to start thinking about the capability that the 
Government has to have.
    Senator Akaka. To both of you, would you agree with the 
conclusion of the Acquisition Advisory Panel that our failure 
to fund an adequate number of acquisition professionals is 
penny wise and pound foolish, as it seriously undermines the 
pursuit of good value for the expenditure of public resources?
    Mr. Gimble?
    Mr. Gimble. Mr. Chairman, I would agree with that.
    Ms. Schinasi. We need to make greater investments.
    Senator Akaka. On criminal violations of fiscal statutes, 
Mr. Gimble, I understand that in the course of your reviews of 
interagency contracts awarded through GSA, DOI, DOTREAS, and 
NASA, you have identified several hundred potential violations 
of the ADA, more than 100 of which occurred even after 
officials were warned that continued expenditures would violate 
funding requirements. The ADA is a critical statute which 
ensures that money is spent in accordance with congressional 
appropriations. It is also a criminal statute.
    My question is, what has happened to these ADA cases? Have 
any Federal officials been--instead of saying ``fired''--
disciplined for these violations?
    Mr. Gimble. Mr. Chairman, let me put a little perspective 
on that. We initially identified 72 potential ADA violations in 
our initial round of audits. The way that works is, when we 
have a potential violation, where there hasn't been a 
conclusive determination that there is, in fact, a violation, 
that becomes a comptroller/general counsel issue which--we're 
on record saying that we think they should have moved those 
along quicker than what they've done. They haven't finished any 
of the 72 that we initially reported. We believe that those 
have to be done. That would be the baseline from which, if it's 
determined that there are, in fact, violations, you'd make a 
determination that, at that point, as to whether they're 
criminal or not.
    The other part of that is the 100 that occurred after--I 
think we're talking about my red chart up here--we have 
identified those as ``potential.'' We will be referring those 
back into the normal ADA violation process for a determination 
of whether, in fact, they were a violation, and also, that same 
determination as to whether, if there was a violation, in fact, 
was it criminal or administrative? So, I think the jury's out 
on that.
    The answer to the question, nobody's been held accountable 
on the potential violations that we've identified and reported. 
So, our position is that the DOD needs to take action to speed 
those reviews up. We're on record with them, internally in the 
DOD, telling them that they need to move those forward. We 
think this is a huge part of the enforcement issue. If we're 
going to correct these problems and solve them in the future, 
if they need to be held accountable, they should be held 
accountable. That process is still working.
    Senator Akaka. Is it true, Mr. Gimble, that one of the 
major DOI contracting officers advertised on its Web site that 
DOD officials could avoid congressional limitations on the 
availability of funds by sending money to them?
    Mr. Gimble. That is correct. There was an advertisement on 
the Web site that says that--put your money here--basically, 
park your money, and it will still be useful in years to come.
    Senator Akaka. Mr. Gimble and Ms. Schinasi, do statements 
of this kind give you confidence that we are on our way to 
fixing the systematic problems that you have identified with 
interagency contracting? What I'm referring to is, the 
administrator of GSA recently complained about the joint 
reviews that you have conducted with the GSA IG. The 
administrator is quoted as saying that there are two kinds of 
terrorism in the United States: the external kind, and, 
internally, the IGs have terrorized the GSA regional 
administrations. Again, I'll come back to the question. Do 
statements of this kind give you confidence that we are on our 
way toward fixing the systemic problems that you have 
identified with interagency contracting? [Laughter.]
    Mr. Gimble. Mr. Chairman, let me take that, because--
actually, it's our joint review. It's not GAO--it was DOD IG 
and GSA IG. I read that in the paper. Frankly, if that's true 
that the administrator said that, I think that's a very 
unfortunate label to be applied to a very respected member of 
the Federal IG community. You only have to go back and read in 
the Inspector General Act of 1978, as amended. We have a very 
clear role in the forefront of the war against fraud, waste, 
and abuse. Running these joint reviews that we're doing is--we 
view that as doing value-added work for the taxpayer, in 
overseeing the expenditure and stewardship of the taxpayers' 
dollars.
    Senator Akaka. This is my last question, Mr. Gimble. Under 
these interagency contracts, DOD pays a fee to the contracting 
agency to conduct contracting actions on its behalf. For 
example, DOD paid fees to the DOI in the range of 3 to 4 
percent of the value of each transaction. Mr. Gimble, do you 
have a view as to whether the DOD was getting its money's worth 
for these fees?
    Mr. Gimble. Mr. Chairman, I think we have some examples 
where we thought they weren't getting their money's worth. I 
also would tell you, though, the fee-for-service, in itself, if 
properly managed, I think you do get value that way. The theory 
being, if I have a true contracting requirement that I cannot 
fulfill--I can downsize my acquisition workforce and rely 
reliably on some other Government activity to do that, then 
they can't do it for free, so, I think it's not a bad concept. 
I think what we have here are examples of just poor planning 
and poor use of what would otherwise be a very valuable 
resource to the DOD.
    Ms. Schinasi. I would just add to that. The way they manage 
their own performance set--puts in place a set of incentives 
that works against, perhaps, the best interests of the 
Government at large, because they're measuring on the fees that 
they get and customer satisfaction. So, if that's all you're 
looking at doing, then you want to make customers happy by 
bringing more business, and you're willing to do a lot of 
things that otherwise, in other circumstances, would not 
constitute good business practice.
    Senator Akaka. Thank you for your responses.
    Senator McCaskill.
    Senator McCaskill. I certainly think if the head of GSA 
made those comments, especially in light of your record in the 
military, I would think, Mr. Gimble, that you are owed an 
apology. I think the IGs and GAO are incredibly important to 
the expenditure of public money, and I hope that you all feel 
as valued as you are, especially by those of us who have spent 
time wading through audit reports; and, second, that if ever 
your independence is compromised, that the way this wonderful, 
elegant democracy was designed, the congressional branch is 
here to try to make sure that your independence is maintained.
    I wanted to focus, during this round, just on a couple of 
practices that are ongoing and are mentioned in both of your 
reports. One is ``costs incurred before scope in work'' has, in 
fact, been laid out. In fact, I believe you cite in your work, 
Ms. Schinasi, that there's actually an instance where all of 
the costs had been incurred and paid for before the scope in 
work had been decided upon.
    Ms. Schinasi. That's correct. There were several instances, 
but one, the contract was finally agreed to a year after the 
work had been completed.
    Senator McCaskill. Can you explain how that phenomena has 
become something that is accepted and that isn't immediately 
something that is, with an internal control, basic rudimentary 
best business practices? It would seem that that would get 
caught pretty quickly. If money is going out before there is 
any contractual agreement, how does that happen?
    Ms. Schinasi. ``Urgent and compelling need'' is the 
technical term for it, and there is a provision to give a 
contractor permission to start work as long as you get the 
terms and conditions set within 180 days. So, the regulations 
allow for urgent and compelling needs--and these cases were in 
Iraq--that you can let the contractor proceed without agreeing. 
But that 180 days is in there for a reason, and that is, the 
longer it takes, the less chance the Government has of having 
any influence over the contractor or influence over the 
contractor's costs. That was what we found in the review that 
we did, that contracting officers did not feel they had the 
ability to go back and recover costs that had been incurred, 
even though the Defense Contract Audit Agency had questioned 
those as unreasonable.
    Senator McCaskill. Did they try and were somehow rebuffed 
in the legal process? Or they just said, ``If we've already 
given them the money, no harm, no foul, they get to keep it''?
    Ms. Schinasi. It would be too hard.
    Senator McCaskill. What about cost-plus? What is going on 
with this incredible commonplace practice? At least reading 
about it from the outside, it appears that cost-plus--where I 
come from in government contracting, that is something that 
makes the foundation shake, because it's an absolute ticket to 
spending as much money as you possibly want to spend, because 
there is absolutely no bottom-line pressure. How common are 
these cost-plus contracts? Is this just something that's being 
taken out of context and it's unusual, or is this truly 
something that we need to be concerned about, in terms of 
watching taxpayer money?
    Ms. Schinasi. I'll take a shot at that first. It is a 
problem that we're seeing so many cost-plus contracts. I think 
what that is is a reflection of the point that Mr. Gimble and I 
have both made: that the Government doesn't really know what it 
wants. It cannot articulate a set of requirements against which 
a contractor can propose and get the risk under control so that 
we know what we're going to get when we enter into a contract. 
Cost-plus is meant to be used in an environment where a 
contractor is not willing to take on risk. That usually happens 
when the Government can't say what it is that it wants.
    So, it's a very risky place for the Government to be, and 
also indicative of this growing trend that we see, ``We know we 
need something''--maybe tied back to the capacity we have in 
our own workforce--``We know we need something, but we don't 
really know what it is, so can you help us develop the 
solution?''
    Senator McCaskill. Is this something that--if we did a 
graph, would we see that this is something that's growing, the 
cost-plus phenomena in DOD?
    Mr. Gimble. We've not done any detail work lately on the 
volume of cost-plus. Let me get back to you with an answer, if 
we could do that.
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    Senator McCaskill. Sure, that would be great. I'd like to 
know.
    On the costs incurred before scope in work, have you done 
any work following up in terms of if, in fact, it was urgent 
and compelling? Have you done that audit work to check to see 
what, in fact, the underlying rationale was for cost incurred 
before scope in work agreed to?
    Ms. Schinasi. We have a job underway right now to look at a 
portion of those contracts to get more in-depth insight into 
what really did happen.
    Senator McCaskill. I'm worried that urgent and compelling 
is a phrase that people realize they can use, and just go ahead 
and start. Certainly, I think, all of us understand that if 
it's men and women's lives that are at risk, our soldiers, 
then, certainly I would be the first to say there might be some 
instances. But what I worry about is, if this is a practice 
that has started occurring, it may be like going through the 
agencies for parking or banking money, once it becomes 
accepted, then they quit looking, and that just becomes a 
phrase they use instead of something that's actually urgent and 
compelling.
    Mr. Gimble. Senator, I think that urgent and compelling 
probably has a history of valid uses, and it also probably has 
a history in the DOD of being abused from time to time. There's 
a process that you go through to justify urgent and compelling 
need, and it needs to be documented and defended. We've all 
looked at--from the audit side of the house, we've all looked 
and seen instances where the documentation really wasn't 
sufficient and it would be questionable whether urgent and 
compelling was really a valid requirement. On the other hand, 
it is a valid technique if you do have on urgent and compelling 
need. Sometimes you have to justify it and move forward.
    Senator McCaskill. Okay.
    Thank you all.
    Senator Akaka. Thank you very much, Senator McCaskill.
    This has been a meeting to discuss the abusive practices of 
the DOD in contracting for services and interagency 
contracting. Some of the responses we've heard today are very 
troubling. We'll have a second hearing later this month on this 
subject.
    But, at this time, I'd like to thank you, Mr. Gimble and 
Ms. Schinasi, for your responses and your statements.
    If there's no further business, this hearing is adjourned.
    [Questions for the record with answers supplied follow:]

               Questions Submitted by Senator John Ensign

         USE OF SERVICE CONTRACTS TO ENTER INTO PROPERTY LEASES

    1. Senator Ensign. Mr. Gimble, a significant finding in your report 
that has been covered by the press concerns the award of a service 
contract by the Department of the Interior (DOI) on behalf of the 
Department of Defense's (DOD) Counterintelligence Field Activity to 
provide leased office space and the installation of communication and 
other equipment. You state in your written testimony that ``the 10 
year, $100 million lease was disguised as a service contract and 
exceeded all thresholds that require congressional notification and 
approval.'' From your research and in your opinion, is it standard DOD 
practice to use service contracts to procure property leases and 
equipment?
    Mr. Gimble. We are not aware of widespread use of service contracts 
to obtain real property leases. The Counterintelligcnce Field Activity 
lease described in our report and testimony is not standard practice in 
DOD and it should not be permitted to become the rule rather than the 
exception. Our concern is that, if the practice of leasing space for 
use by Government employees via service contracts is not stopped 
quickly, other DOD activities will circumvent required GSA and 
congressional approvals to obtain office space.
    It is not uncommon to see equipment being purchased in conjunction 
with services on a service contract. However, the equipment should be 
needed in order to perform the required service.

    2. Senator Ensign. Mr. Gimble, in your opinion, in this case, what 
differentiated a service contract from a property lease?
    Mr. Gimble. A real property lease would be any agreement which 
gives rise to a landlord tenant relationship or a contract by which one 
owning real property grants the right to use and enjoy that property 
for a specified period of time in exchange for periodic payment of a 
stipulated price. A service contract would normally be a contract for 
the performance of intangible services by individuals for a specified 
period of time in exchange for periodic payment of a stipulated price. 
A Federal real property lease to provide office space for Government 
employees and a service contract are controlled by separate regulations 
applicable to each. Service contracts are made subject to the Federal 
Acquisition Regulations while real property leases are subject to the 
guidance in the Federal Management Regulation. The cost of the 
Counterintelligence Field Activity contract was primarily for the right 
to use real property to provide office space for Government employees--
$80.5 million (80 percent of contract value) and tenant improvement 
costs--$14.7 million (about 15 percent of contract value) plus 
associated interest charges on the tenant improvement costs. Although 
the contractor was responsible for providing services such as 
facilities management, this made up only a small portion of the 
contract cost.

    3. Senator Ensign. Mr. Gimble, you further state in your testimony 
that ``We are aware of two other major leases that similarly 
circumvented the process.'' Can you elaborate on these two leases?
    Mr. Gimble. The Acting Director of the Counterintelligence Agency, 
in his management response to our draft audit report, identified 
another lease for the Counterintelligence Field Activity through the 
Defense Information Technology Contracting Organization. A similar 
contract was also awarded by the Missile Defense Agency for the lease 
of office space.

 ASSESSMENT OF DEPARTMENT OF DEFENSE'S REMEDIAL EFFORTS ON INTERAGENCY 
                              CONTRACTING

    4. Senator Ensign. Mr. Gimble, you mention in your testimony that 
there are two corrective actions DOD has recently taken to improve 
oversight of interagency contracting--a December 2006 memorandum from 
the Director of Defense Procurement and an October 2006 memorandum from 
the Defense Comptroller's office. Do you think these memoranda go far 
enough in effecting positive change within DOD?
    Mr. Gimble. The December 2006 Memorandum of Agreement between 
General Services Administration (GSA) and DOD goes a long way in 
effecting positive change in the working relationship between GSA and 
DOD. However, similar agreements are also needed with the other 
activities contracting on behalf of DOD (e.g. the DOI and Department of 
Treasury (DOTREAS)). The Agreement laid the framework for what is 
expected from each agency. Specifically, it lets GSA know how DOD wants 
to do business and what GSA can expect from DOD. The October 16, 2006, 
memorandum from the Comptroller clarified funding rules for severable 
services contracts and established a $500,000 threshold for contracting 
officer review of interagency purchases, among other requirements. 
However, it stopped short of providing clear guidance regarding advance 
payments and the handling of incremental funding of services contracts.

    5. Senator Ensign. Mr. Gimble, should Congress additionally 
consider statutory language this coming year?
    Mr. Gimble. I do not believe additional statutory language is 
necessary. The DOD Comptroller understands the problems and can fix 
them by providing additional guidance to DOD organizations. I also 
believe that the guidance already published needs to be enforced and 
actions taken against those who ignore the guidance. Following the 
interagency audits now being conducted, I recommend that my office and 
the Inspectors General of GSA and DOI conduct joint audits in about 3 
years to ensure that interagency contracting procedures are working as 
intended.

    6. Senator Ensign. Ms. Schinasi, what are your thoughts on the 
potential effectiveness of these efforts?
    Ms. Schinasi. The October 2006 memorandum from the Comptroller, 
which was sent to DOD components, established policies and procedures 
for ordering goods and services that are not subject to the Economy Act 
that are purchased from non-DOD agencies. For example, it requires 
officials to provide evidence of market research and acquisition 
planning, and a statement of work that is specific, definite, and 
certain for non-Economy Act orders above the simplified acquisition 
threshold. The memorandum also included a checklist and 
responsibilities for DOD officials to use as guidance when placing 
orders through interagency contracts. These actions should help to 
address prior Government Accountability Office (GAO) recommendations 
for better defining contract requirements and outcomes, and the need 
for guidance on the use of interagency contracts.
    The December 2006 Memorandum of Agreement between DOD and the GSA 
serves to establish expectations for the parties involved in an 
interagency contracting transaction. For example, the memorandum 
proscribes that statements of work are complete, interagency agreements 
describe the work to be performed, and surveillance and oversight 
requirements are defined and implemented. The planned quarterly 
meetings for DOD and GSA to evaluate the effectiveness of the 
Memorandum of Agreement are a positive step.
    However, as the acting Inspector General, DOD, pointed out during 
the January 2007 hearing, the risks associated with interagency 
contracting are not new and require sustained attention. The use of 
these types of contracts continues to increase government-wide, and our 
work and the work of the Inspector General have found that users and 
administrators lack expertise about how to use these contracts. In 
addition, adequate oversight is lacking. For example, DOD issued 
guidance that was signed in October 2004 (effective January 1, 2005) 
that outlines procedures to be developed and general factors to 
consider in making the decision to use another agency's contract. 
However, recent Inspector General audits have found that the guidance 
is not always followed. In March 2006, the DOD Comptroller issued a 
memorandum to the military departments, defense agencies, and other 
components stating that DOD purchases made through non-DOD entities 
continue to violate policies, existing regulations, and practices 
regarding the use and control of DOD funds under interagency 
agreements; the memorandum also stated that this situation needed 
improvement. Therefore, although recent DOD actions are welcome, DOD 
will need to continue to monitor its use of interagency contracts and 
do more to define who is responsible for what in the contracting 
process.

     ASSESSMENT OF DEPARTMENT OF DEFENSE'S REMEDIAL EFFORTS ON THE 
                        ACQUISITION OF SERVICES

    7. Senator Ensign. Ms. Schinasi, how do recent steps taken by DOD, 
such as the Under Secretary of Defense's October 2006 memorandum 
concerning the reform of services acquisition, compare to your 
recommendations regarding strategic and tactical level management?
    Ms. Schinasi. DOD has taken a number of steps to improve its 
acquisition of services, but these steps do not fully address our 
recommendations regarding strategic and tactical management, For 
example, DOD's October 2006 memorandum identified a number of 
improvements in its current management structure, including providing 
lower dollar thresholds for reviewing proposed services acquisitions 
and requiring senior DOD officials to annually review whether service 
contracts were meeting established cost, schedule, and performance 
objectives. Further, in its comments to our November 2006 report \1\ on 
DOD services acquisitions, DOD noted that it had made organizational 
changes to improve its strategic sourcing efforts; it was assessing the 
skills and competencies needed by its workforce to acquire services; 
and the military departments and defense agencies were conducting self-
assessments intended to address contract management issues we 
identified in our high-risk report. Each of these efforts are steps in 
the right direction, but in our view, appeared to be primarily 
incremental improvements to DOD's current approach to acquiring 
services.
---------------------------------------------------------------------------
    \1\ GAO, Defense Acquisitions: Tailored Approach Needed to Improve 
Service Acquisition Outcomes, GAO-07-20 (Washington, DC: Nov. 9, 2006).

    8. Senator Ensign. Mr. Gimble and Ms. Schinasi, what more do you 
think the DOD needs to do to further address the problems in the 
acquisition of services?
    Mr. Gimble. DOD needs to assess its acquisition workforce and 
identify its capabilities to award and administer service contracts. 
For example, is DOD using contractors to perform routine duties that 
should be done by Government workers? DOD needs to establish centers of 
excellence and leverage its buying power. DOD also needs to look at 
Performance Based Acquisitions and determine if DOD has the contracting 
talent to implement it on a department-wide basis. Other areas needing 
attention are the oversight of service contracts, preparing Quality 
Assurance Surveillance Plans, and evaluating performance against the 
plans.
    Ms. Schinasi. At a fundamental level, we believe DOD needs to begin 
to proactively manage services acquisitions outcomes, an action that 
will involve making changes at both the strategic and transactional 
levels. In contrast, DOD's approach to managing the acquisition of 
services has tended to be reactive, and, as noted above, DOD's reform 
efforts appear to be primarily incremental improvements to existing 
processes. In our view, such incremental improvements will not place 
DOD in a position to proactively manage services.
    As we noted in our November 2006 report, DOD stated that it was 
examining the types and kinds of services it acquired and developing an 
integrated assessment of how best to acquire such services. DOD 
expected that this assessment would result in a comprehensive, 
department wide architecture for acquiring services that would, among 
other improvements, help refine the processes to develop requirements, 
ensure that individual transactions are consistent with DOD's strategic 
goals and initiatives, and provide a capability to assess whether 
services acquisitions were meeting their cost, schedule, and 
performance objectives. DOD expected this assessment would be completed 
in early 2007. Our discussions with DOD officials indicated that this 
architecture may hold potential for making the more fundamental change 
at the strategic and transactions levels that we have recommended. We 
cautioned, however, that the extent to which DOD successfully 
integrated the elements we identified would be key to fostering the 
appropriate attention and action needed to make services acquisitions a 
managed outcome.

    9. Senator Ensign. Mr. Gimble and Ms. Schinasi, do you have any 
recommendations that Congress should consider to ensure that the 
progress made endures?
    Mr. Gimble. Although I do not see the need for specific action by 
Congress, I recommend that in about 3 years, audits of interagency 
purchases made through GSA and the DOI be jointly conducted by my 
office and the Inspectors General of the applicable agencies. Other 
areas of concern include provisions of the Federal Acquisition 
Regulations pertaining to the definition of a ``commercial item,'' use 
of service contracts for personal services, and exemptions for certain 
section 8(a) contractors from the competition requirements.
    Ms. Schinasi. Congressional oversight, including hearings such as 
this, plays a significant and important role in helping to assess 
progress, identify challenges, focus senior management attention, and 
hold DOD accountable for its actions.

                       BROADER ACQUISITION REFORM

    10. Senator Ensign. Ms. Schinasi, over the years, this committee 
has enacted a number of measures aimed at reforming the DOD's 
acquisition processes and practices. How do, or should, reforms in the 
acquisition of services fit within this committee's broader acquisition 
reform efforts?
    Ms. Schinasi. We believe that three elements transcend the type of 
goods or services DOD buys: recognizing that mission success depends 
heavily on a successful acquisition function and elevating senior 
leadership attention and accountability accordingly; ensuring that the 
government negotiates the best deal possible, a precursor of which is 
the market-based discipline of competition; and monitoring the outcome 
of acquisition decisions to ensure that the government gets what it 
pays for. Although improvements should be targeted according to facts 
and circumstances, the line between acquiring goods and acquiring 
services is blurring as DOD contracts out the management of its major 
systems acquisitions. The subcommittee's efforts to promote good 
practices are relevant for both the acquisition of goods and the 
acquisition of services.

    11. Senator Ensign. Mr. Gimble and Ms. Schinasi, are there common 
lessons learned or processes to be applied between major weapon systems 
acquisition--which has been on the government's high risk list for 
quite some time--and service acquisition reform?
    Mr. Gimble. All Government officials have a responsibility to 
ensure funds are used efficiently and effectively to meet the 
requirements of DOD and the Federal Government. The common lesson that 
can be applied is that program office officials need to be just as 
aware of funding and contracting controls as financial management and 
contracting office officials. A second lesson learned is that 
activities must provide clear and concise statements of work to 
contracting organizations. The contracts most often abused are those 
with vague requirements. Services contracts contain a much higher level 
of cost and performance risk when the quality of a contractor's 
performance cannot be objectively quantified using objective metrics.
    Ms. Schinasi. Services acquisitions parallel major weapon system 
acquisitions in that both should start with well-defined requirements, 
conduct sufficient market research, maximize competition, use qualified 
contractors, appropriately incentivize contractor performance, provide 
oversight or surveillance of the contractor's performance, and accept 
and pay for only quality outcomes. Our work has repeatedly found 
weaknesses in these processes. As we noted in our January 2007 
testimony before the subcommittee, DOD does not know how well its 
services acquisition processes are working and whether it is obtaining 
the services it needs while protecting DOD's and the taxpayers' 
interests. Key to achieving better outcomes will be DOD's ability to 
translate well-meaning guidance and policy into actual practice. In 
trying to improve the acquisition of both goods and services, the 
underlying incentives that drive behavior--particularly funding--are 
most often ignored.

                         ACQUISITION WORKFORCE

    12. Senator Ensign. Mr. Gimble and Ms. Schinasi, there are a number 
of concerns regarding the acquisition workforce. It is an aging 
workforce and is losing much talent through retirement. The talent that 
does remain may not match up well with the skills needed to buy 
software-intensive, net-centric weapons. What are your views on the 
health and composition of the acquisition workforce?
    Mr. Gimble. The simultaneous growth of contracting for services by 
DOD and the reduction of acquisition personnel is a principal cause of 
contracting problems within DOD. I agree with the Director of Defense 
Procurement and Policy, who on January 31, 2007, testified to your 
subcommittee that because of the downsizing of the acquisition 
workforce in the 1990s, the DOD acquisition workforce now requires 
improvement.
    Ms. Schinasi. Although defining the acquisition workforce as the 
focus of attention is appropriate in some respects, the problems facing 
DOD today are broader as the increased demands on the acquisition 
workforce also stem, in part, from declines in the capacity of the 
overall DOD workforce and, in part, from the demands emanating from the 
requirements process. That said, we have raised concerns about the 
health and composition of DOD's acquisition workforce for several 
years. DOD's acquisition workforce must have the right skills and 
capabilities if it is to effectively implement best practices and 
properly manage the goods and services it buys. We noted in reports 
issued in 2003 and July 2006, however, that procurement reforms, 
changes in staffing levels, workload, and the need for new skill sets 
have placed unprecedented demands on the acquisition workforce.
    Further, DOD's current civilian acquisition workforce level 
reflects the considerable downsizing that occurred in the 1990s. DOD 
carried out this downsizing without ensuring that it had the specific 
skills and competencies needed to accomplish DOD's mission. As a 
result, these factors have challenged DOD's ability to maintain a 
workforce with the requisite knowledge of market conditions and 
industry trends, the ability to prepare clear statements of work, an 
understanding of the technical details about the services they buy, and 
the capacity to manage and oversee contractors. In the case of the 
$160-billion Future Combat Systems (FCS) program, for example, the Army 
chose to use a lead systems integrator because it did not believe it 
had the in-house resources or flexibility to field such a complex 
system in the time required.\2\
---------------------------------------------------------------------------
    \2\ The FCSs program is a family of weapons, including 14 manned 
and unmanned ground vehicles, air vehicles, sensors, and munitions that 
will be linked by an information network.
---------------------------------------------------------------------------
    DOD has acknowledged that it faces significant workforce challenges 
that if not effectively addressed could impair the responsiveness and 
quality of acquisition outcomes. In June 2006, DOD issued a human 
capital strategy that identified a number of steps planned over the 
next 2 years to more fully develop a long-term approach to managing its 
acquisition workforce, including developing a comprehensive competency 
model for each functional career field including the technical tasks, 
knowledge, skills, abilities, and personal characteristics required of 
the acquisition workforce.

    13. Senator Ensign. Mr. Gimble and Ms. Schinasi, what are the 
immediate priorities that must be addressed to ensure that the 
workforce can meet the demands of today's acquisitions?
    Mr. Gimble. The Director of Defense Procurement and Policy, Mr. 
Shay Assad, testified that his office, in concert with the Defense 
Acquisition University, the military departments, and the defense 
agencies, has been developing a model that will address the skills and 
competencies required. Mr. Assad testified that the contracting 
competency model will be complete in March 2007, and that after the 
results are tested, his office will implement actions to address 
overall acquisition workforce deficiencies. Although my office has not 
done a thorough review of the acquisition workforce since 2000, we do 
see shortages of personnel and skills in the contract offices we are 
visiting.
    Ms. Schinasi. First, we have reported that senior DOD leaders need 
to set the appropriate tone at the top and ensure that its personnel 
adhere to sound contracting practices.\3\ Senior leadership is a 
critical factor in providing direction and vision as well as in 
maintaining the culture of the organization. As such, senior leaders 
have the responsibility to communicate and demonstrate a commitment to 
sound practices deemed acceptable for the acquisition function. Without 
sustained and prominent senior leadership, DOD increases its 
vulnerability to contracting fraud, waste, and abuse if it does not 
ensure that its decisionmakers, personnel, and contractors act in the 
best interests of DOD and taxpayers. DOD has emphasized making contract 
awards quickly; sometimes, however, the focus on speed has come at the 
expense of sound contracting techniques.
---------------------------------------------------------------------------
    \3\ GAO, Contract Management: DOD Vulnerabilities to Contracting 
Fraud, Waste, and Abuse, GAO-06-838R (Washington, DC: July 7, 2006).
---------------------------------------------------------------------------
    Second, DOD needs to determine what skill sets its current 
workforce has, and what skill sets the workforce needs, to carry out 
DOD's mission. As I previously noted, DOD's June 2006 strategic human 
capital plan identified a number of steps planned over the next 2 years 
to more fully develop a long-term approach to managing its acquisition 
workforce, including developing a comprehensive competency model for 
each functional career field. The model should identify the technical 
tasks, knowledge, skills, abilities, and personal characteristics 
required of the acquisition workforce. As part of this effort, DOD also 
needs to assess whether it has sufficient numbers of adequately trained 
personnel to plan, negotiate, and award contracts, and to manage and 
assess contractor performance.

    14. Senator Ensign. Mr. Gimble and Ms. Schinasi, are you concerned 
that we are relying too much on service contractors to augment DOD 
program offices?
    Mr. Gimble. My office has not done an analysis or study of this 
subject, however, clarification of the term ``inherently governmental'' 
would help DOD program offices to draw the line on what types of 
services should be contracted. This is particularly true in contracting 
offices when you have contractors performing much of the work where 
many of the duties performed appear to be inherently governmental and 
may involve potential conflicts of interest.
    Ms. Schinasi. We have expressed concern about DOD's growing 
reliance on contractors. This reliance is a government-wide phenomenon 
and is occurring across a wide variety of activities and functions, 
including support for program offices. In recent years, for example, 
DOD has been using a lead systems integrator approach that allows one 
or more contractors to define weapon system's architecture and then 
manage both the acquisition and integration of subsystems into the 
architecture. This approach relies on contractors to fill roles and 
handle responsibilities that differ from the more traditional prime 
contractor relationship the contractors had with the program offices 
and can blur the oversight responsibilities between the lead systems 
integrator and DOD program management representatives. To illustrate 
this point, the Army's FCSs program is managed by a lead systems 
integrator that assumes the responsibilities of developing 
requirements, selecting major system and subsystem contractors, and 
making trade-off decisions among costs, schedules, and capabilities. 
While this management approach has some advantages for DOD, we found 
that the extent of contractor responsibility in many aspects of program 
management is a potential risk. Given the growing role of contractors, 
we believe it is important for DOD to identify the functions and tasks 
contractors are performing, the reasons or justifications for choosing 
a contractor instead of using a government employee, and the costs and 
risks inherent in such choices. In addition, we believe it is important 
for DOD to identify and mitigate the risks that can accompany increased 
reliance on contractors--risks such as organizational or personal 
conflicts of interest and insufficient in-house capacity to ensure that 
contractors meet cost, schedule, and performance requirements. We are 
conducting work to explore these issues.

    15. Senator Ensign. Mr. Gimble and Ms. Schinasi, Congress has 
provided many different tools to DOD to improve the hiring and training 
of acquisition personnel. Have the tools for rapid hiring authority 
been given to the acquisition workforce?
    Mr. Gimble. The Director of Defense Procurement and Policy, Mr. 
Assad, has testified that his model will allow DOD to assess the 
acquisition workforce in terms of size, capability, and skill mix and 
to develop a comprehensive recruiting, training, and deployment plan to 
meet the identified capability gaps. Once the model is completed his 
office will be better equipped lo answer this question.
    Ms. Schinasi. We have not evaluated the use of the tools that have 
been provided to DOD for rapid hiring authority.

    16. Senator Ensign. Mr. Gimble, your testimony includes an 
observation that resonates with all of us: ``Unless responsible 
individuals are held accountable, the problems will remain (page 12).'' 
What can be done to increase accountability for individuals in DOD who 
execute contracts without regard to the requirements of law, as you 
have described in your testimony?
    Mr. Gimble. The DOD Financial Management Regulation procedures used 
to determine whether an Antideficiency Act violation has occurred 
stipulate that if a violation has occurred, a culpable individual will 
be identified. Right now, the completion of the formal investigations 
and resultant identification of responsible individuals will be the 
most efficient method of increasing the perceived accountability of 
other individuals currently executing contracts. Current law states 
that an officer or employee of the U.S. Government that knowingly 
violates Antideficiency laws can be fined up to $5,000, imprisoned for 
up to 2 years, or both. Enforcement of current law is the key to fixing 
this problem.

    17. Senator Ensign. Mr. Gimble and Ms. Schinasi, in your opinion, 
do the new authorities under the National Security Personnel System 
(NSPS) for performance management offer an opportunity for improved 
accountability? If so, have you made such a recommendation to the DOD 
leadership?
    Mr. Gimble. I do not believe the NSPS changes DOD opportunity for 
accountability.
    Ms. Schinasi. Our past testimonies and work indicate that 
evaluating the effect of NSPS will be an ongoing challenge. However, we 
believe NSPS does offer an opportunity for improved accountability. In 
our July 2005 report on DOD's efforts to design NSPS, we recommended 
that DOD develop procedures for evaluating NSPS that contain results-
oriented performance measures and reporting requirements.\4\ Our prior 
work also indicates that involving employees and other stakeholders 
helps to improve overall confidence and belief in the fairness of the 
system, enhance their understanding of how the system works, and 
increases their understanding and ownership of organizational goals and 
objectives. Organizations have found that the inclusion of employees 
and their representatives needs to be meaningful, not just pro forma. 
Results-oriented performance measures and reporting requirements along 
with employee involvement can improve accountability.
---------------------------------------------------------------------------
    \4\ GAO, Human Capital: DOD's National Security Personnel System 
Faces Implementation Challenges, GAO-05-730 (Washington, DC: July 14, 
2005).

         CONTINUED GENERAL SERVICES ADMINISTRATION INTERACTION

    18. Senator Ensign. Mr. Gimble, this past year, the Senate Armed 
Services Committee, working with the House Armed Services Committee, 
reviewed and rejected an unprecedented proposal by the DOD to use the 
GSA to obtain a long-term lease that would lead to the construction of 
a headquarters facility for United States Southern Command in Miami, 
Florida. During the review, we asked why the DOD was willing to pay GSA 
a 3 percent service fee for the transaction as opposed to carrying out 
the lease with their own existing statutory authorities. DOD 
representatives responded that GSA would have ``a more favorable and 
flexible'' contracting climate to enter in a long-term lease with 
specific terms and conditions meeting the requirements of DOD, as well 
as satisfying an offer by the State of Florida. In your opinion, is DOD 
still to this date actively seeking opportunities to contract through 
other Federal entities with the deliberate intent of seeking more lax 
rules and processes for the procurement of goods and services?
    Mr. Gimble. Some program offices in seeking to address the needs of 
the program will always see the faster procurement of goods and 
services that result from lax rules and processes as a benefit to the 
program. Program offices must be educated to understand proper 
contracting and funding controls ensure good prices and performance. 
Most of the problems we have identified do not involve corrupt 
officials but rather officials who do not understand the 
responsibilities inherent in Government service and are individuals 
that only want to satisfy their customers' desires. I believe the 
interagency audits completed by my office over the last 3 years will 
greatly lessen the amount of DOD offices contracting through other 
agencies with the intent of seeking more lax rules and processes.
                                 ______
                                 
             Questions Submitted by Senator Saxby Chambliss

                       RECRUITMENT AND RETENTION

    19. Senator Chambliss. Mr. Gimble and Ms. Schinasi, the vast number 
of retirement eligible Federal employees presents a manpower challenge 
across the Federal Government, and specifically in adequately replacing 
members of the acquisition workforce. What innovative recruitment, 
retention, hiring, and/or training methods have been employed to 
address this inevitable force reduction?
    Mr. Gimble. We have not conducted any reviews in this area. We have 
seen contracting activities employ hiring methods that may not be in 
the best interest of DOD or the Government. Specifically, some 
activities have started contracting for contract specialist services. 
For example, the Naval Sea Systems Command used a contractor which it 
had obtained through a GSA information technology contract to solicit 
bids and evaluate quotes for impending contracts. Although a warranted 
Government official signed the final contract, all analysis and 
preparation of the contract was handled by contracted employees. We do 
not feel this is an appropriate response to the shortfall in the 
acquisition workforce.
    Ms. Schinasi. Our prior work has shown that DOD needs to conduct 
comprehensive acquisition workforce planning to address recruitment, 
hiring, retention, and training issues. We reported in April 2002 that 
DOD recognized the need as well as the substantial challenges involved 
in implementing a strategic approach to shaping the acquisition 
workforce.\5\ In June 2004, we reported that DOD had taken steps to 
develop and implement civilian strategic workforce plans to address 
future civilian workforce needs, but these plans generally lacked some 
key elements essential to successful workforce planning.\6\ None of the 
plans included analyses of the gaps between critical skills and 
competencies currently needed by the workforce and those that will be 
needed in the future. Without including analyses of gaps in critical 
skills and competencies, DOD and its components may not be able to 
design and fund the best strategies to fill its talent needs through 
recruiting and hiring or to make appropriate investments to develop and 
retain the best possible workforce. Such gap analyses need to be 
completed to address acquisition workforce shortcomings and to identify 
methods that might prove successful for recruiting and retention. While 
we made several recommendations to improve DOD's strategic workforce 
planning efforts, the work we have completed has not identified the 
need for legislative changes or authorities to enhance DOD's efforts in 
the areas of recruitment and retention. However, we continue to be 
concerned about strategic human capital issues at DOD, as well as 
across the Federal Government, as we point out in our recently issued 
high-risk report.\7\
---------------------------------------------------------------------------
    \5\ GAO, Acquisition Workforce: Department of Defense's Plans to 
Address Workforce Size and Structure Challenges, GAO-02-630 
(Washington, DC: April 30, 2002).
    \6\ GAO, DOD Civilian Personnel: Comprehensive Strategic Workforce 
Plans Needed, GAO-04-753 (Washington, DC: June 30, 2004).
    \7\ GAO, High Risk Series: An Update, GAO-07-310 (Washington, DC: 
January 2007).

    20. Senator Chambliss. Mr. Gimble and Ms. Schinasi, what methods 
have proven successful thus far?
    Mr. Gimble. DOD has successfully implemented the Defense Career 
Intern Program, which works well for recruiting college students into 
professional government positions such as DOD auditors and contracting 
officers.
    Ms. Schinasi. See response to question for the record number 19.

    21. Senator Chambliss. Mr. Gimble and Ms. Schinasi, what 
limitations stymie more robust recruiting and retention results, and 
are there legislative changes or authorities that would enhance DOD's 
efforts in this area?
    Mr. Gimble. Lengthy security clearance processes and low starting 
pay are the main limitations that stymie the DOD OIG's recruiting 
practices. All Government activities are recruiting new personnel to 
reduce the effect of the coming force reduction due to retirements. DOD 
acquisition personnel are often targeted by other agencies and 
commercial contractors due to the extensive training and experience 
with large contracts that they have. However, I believe these are local 
management issues and do not require legislative changes beyond those 
already planned for the DOD workforce.
    Ms. Schinasi. See response to question for the record number 19.

                         ACQUISITION PRACTICES

    22. Senator Chambliss. Mr. Gimble and Ms. Schinasi, the 
administration has made clear the priority of success in the global war 
on terrorism, and the DOD has an enormous role in this fight. Given 
your finding that DOD needs significant improvement in both contract 
oversight and interagency contracting practices, DOD clearly faces 
multiple challenges on the contracting front as part of its role in 
global war on terrorism support. What are your recommendations for how 
DOD might simultaneously develop and implement strategic acquisition 
processes and improve contract management practices in its Iraq 
reconstruction mission?
    Mr. Gimble. We have not addressed these types of issues in our 
audits. However, the lack of security in Iraq is obviously the foremost 
problem for contractors attempting to perform on construction type 
contracts. From a contracting perspective, contingency contracting 
practices that streamline contracting procedures in theater should only 
be used to support forward deployed combat forces and should not be 
used for contracting civil construction or service contracts under 
other conditions as the streamlined techniques used will often not 
result in best value contracting. In March 2004, we reported numerous 
contracting problems that were primarily attributed to the need to 
react quickly to the rapidly changing situation in Iraq and that 
acquisition support was an afterthought to the Office of Reconstruction 
and Humanitarian Assistance. At that time, we recommended that the 
Deputy Secretary of Defense designate an office to study existing 
strategy and establish responsibilities, policies, and procedures for 
the acquisition of goods and services in support of future post-war 
occupation and relief operations. The Deputy Secretary of Defense 
concurred with the recommendation and designated the Under Secretary of 
Defense for Acquisition, Technology, and Logistics to conduct the 
study. Since then, the office of Defense Procurement and Acquisition 
Policy established a Joint Contingency Contracting Working Group that 
will develop a Joint Contingency Contracting Guide. This guide will be 
in the Defense Federal Acquisition Regulations Supplement Part 18 and 
incorporated into specific Procedures, Guidance, and Information. A 
committee including representatives from the military Services, the 
Defense Contract Management Agency, and Defense Logistics Agency is 
currently reviewing and identifying differences between service 
contingency contracting supplements and will recommend standardized 
procedures.
    Ms. Schinasi. As the Comptroller General noted during testimony in 
February 2007, the challenges faced by DOD on its reconstruction and 
support contracts in Iraq often reflected systemic and longstanding 
shortcomings in DOD's capacity to manage contractor efforts.\8\ Such 
shortcomings result from various factors, including poorly defined or 
changing requirements; the use of poor business arrangements; the 
absence of senior leadership and guidance; and an insufficient number 
of trained contracting, acquisition, and other personnel to manage, 
assess, and oversee contractor performance. In turn, these shortcomings 
manifest themselves in higher costs to taxpayers, schedule delays, 
unmet objectives, and other undesirable outcomes.
---------------------------------------------------------------------------
    \8\ GAO, Rebuilding Iraq: Reconstruction Progress Hindered by 
Contracting, Security, and Capacity Challenges, GAO-07-426T 
(Washington, DC: Feb. 15, 2007).
---------------------------------------------------------------------------
    Through the years, we have made recommendations to help DOD address 
these shortcomings, including recommendations intended to assure that 
adequate acquisition staff and other resources are available to support 
future operations, to emphasize the need to clearly define contract 
requirements in a timely manner, to improve the management of 
interagency contracting, and to resolve longstanding issues with regard 
to the management and use of support contractors. DOD has generally 
agreed with our recommendations and has some actions underway to 
address them. However, senior DOD leadership is needed to address these 
issues on a systemic level and ensure that subsequent changes in DOD's 
policies and practices are implemented, as appropriate, in Iraq.

    [Whereupon, at 3:51 p.m., the subcommittee adjourned.]


  CONTINUE TO RECEIVE TESTIMONY ON ABUSIVE PRACTICES IN DEPARTMENT OF 
      DEFENSE CONTRACTING FOR SERVICES AND INTERAGENCY CONTRACTING

                              ----------                              


                      WEDNESDAY, JANUARY 31, 2007

                           U.S. Senate,    
                  Subcommittee on Readiness
                            and Management Support,
                               Committee on Armed Services,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:40 p.m. in 
room SR-222, Russell Senate Office Building, Senator Daniel K. 
Akaka (chairman) presiding.
    Committee members present: Senators Akaka, McCaskill, and 
Ensign.
    Majority staff member present: Peter K. Levine, general 
counsel.
    Minority staff members present: Gregory T. Kiley, 
professional staff member; Derek J. Maurer, minority counsel; 
Lucian L. Niemeyer, professional staff member; Bryan D. Parker, 
minority investigative counsel; and Diana G. Tabler, 
professional staff member.
    Staff assistants present: David G. Collins and Benjamin L. 
Rubin.
    Committee members' assistants present: Darcie Tokioka, 
assistant to Senator Akaka; Lauren Henry, assistant to Senator 
Pryor; Nichole M. Distefano, assistant to Senator McCaskill; 
Arch Galloway II, assistant to Senator Sessions; and D'Arcy 
Grisier, assistant to Senator Ensign.

     OPENING STATEMENT OF SENATOR DANIEL K. AKAKA, CHAIRMAN

    Senator Akaka. The Readiness and Management Support 
Subcommittee meets today to continue its review of abusive 
practices in the Department of Defense (DOD) contracting for 
services and interagency contracting. At our first hearing the 
DOD Inspector General (IG) and the Government Accountability 
Office (GAO) told us that poor DOD business practices, such as 
poorly defined requirements, inadequate competition, inadequate 
monitoring of contractor performance, and inappropriate uses of 
other agencies' contracts, expose the DOD to fraud, waste, and 
abuse.
    The Readiness and Management Support Subcommittee has long 
been concerned about these problems. More than 5 years ago, in 
our committee report on the National Defense Authorization Act 
(NDAA) for Fiscal Year 2002 we stated, ``Last year the DOD IG 
reviewed the Department's $10 billion of annual expenditures 
for professional, administrative, and management support 
services and found an almost complete failure to comply with 
basic contracting requirements. Other reviews by the IG and the 
General Accounting Office have revealed the Department has 
failed to complete requirements for the delivery of services as 
required by law and regulation and has barely begun to 
implement requirements for performance-based contracting. The 
GAO and the DOD IG have found that DOD managers failed to 
compete services work in up to three-quarters of the cases they 
examined.
    ``At a more fundamental level, DOD has no centralized 
management structure for services contracts. Rather, the award 
of these contracts is dispersed throughout the Department, with 
little management oversight. As a result, the Department has 
never conducted a comprehensive spending analysis of its 
services contracts and has made little effort to leverage its 
buying power, improve the performance of its services 
contractors, rationalize its supplier base, or otherwise ensure 
that its dollars are well spent.
    Moreover, the Department has failed to provide its 
acquisition professionals with the training and guidance needed 
to manage the Department's service contracts in a cost 
effective manner.''
    The persistence of these problems leads me to believe that 
there is a real need for strong action by this committee. Today 
we will hear from the Acquisition Advisory Panel chartered 
pursuant to section 1423 of the NDAA for Fiscal Year 2004, 
followed by a panel of witnesses from the administration. I 
hope that these witnesses will be able to propose some 
constructive solutions to the problems we have identified.
    In my view, the key is the acquisition workforce. According 
to the Acquisition Advisory Panel, ``Curtailed investments in 
human capital have produced an acquisition workforce that often 
lacks the training and resources to function effectively.'' The 
report states: ``The drought in hiring, the inadequacy of 
training in some agencies, and the increased demand for 
contracting have together created a situation in which there is 
not in the pipeline a sufficient cadre of mature acquisition 
professionals who have the skills and the training to assume 
responsibility for procurement in today's demanding 
environment. As a result, the Federal Government does not have 
the capacity in its current acquisition workforce necessary to 
meet the demands that have been placed on it.''
    As I pointed out at our last hearing, the DOD has almost 
doubled its spending on service contracts over the last 5 years 
while the number of procurement personnel available to oversee 
these contracts has dropped by more than 25 percent. As a 
result, we have fewer and fewer procurement officials 
responsible for managing more and more contract dollars. I 
believe it is vital for Congress to address this structural 
problem at this time.
    [The prepared statement of Senator Akaka follows:]

             Prepared Statement by Senator Daniel K. Akaka

    The Readiness and Management Support Subcommittee meets today to 
continue its review of abusive practices in Department of Defense 
contracting for services and interagency contracting. At our first 
hearing, the DOD Inspector General and the Government Accountability 
Office told us that poor DOD business practices, such as poorly defined 
requirements, inadequate competition, inadequate monitoring of 
contractor performance, and inappropriate uses of other agencies' 
contracts--expose the Department to fraud, waste and abuse.
    The Readiness and Management Support Subcommittee has long been 
concerned about these problems. More than 5 years ago, in our committee 
report on the National Defense Authorization Act for Fiscal Year 2002, 
we stated:

          ``Last year, the DOD Inspector General reviewed the 
        Department's $10 billion of annual expenditures for 
        professional, administrative, and management support services, 
        and found an almost complete failure to comply with basic 
        contracting requirements. Other reviews by the Inspector 
        General and the General Accounting Office (GAO) have revealed 
        that the Department has failed to compete requirements for the 
        delivery of services, as required by law and regulation, and 
        has barely begun to implement requirements for performance-
        based services contracting. The GAO and the DOD Inspector 
        General have found that DOD managers failed to compete services 
        work in up to three-quarters of the cases they examined.
          ``At a more fundamental level, DOD has no centralized 
        management structure for services contracts. Rather, the award 
        of these contracts is dispersed throughout the Department with 
        little management oversight. As a result, the Department has 
        never conducted a comprehensive spending analysis of its 
        services contracts and has made little effort to leverage its 
        buying power, improve the performance of its services 
        contractors, rationalize its supplier base, or otherwise ensure 
        that its dollars are well spent. Moreover, the Department has 
        failed to provide its acquisition professionals with the 
        training and guidance needed to manage the Department's service 
        contracts in a cost-effective manner.''

    The persistence of these problems leads me to believe that there is 
a real need for strong action by this committee.
    Today, we will hear from the Acquisition Advisory Panel chartered 
pursuant to section 1423 of the National Defense Authorization Act for 
Fiscal Year 2004, followed by a panel of administration witnesses. I 
hope that these witnesses will be able to propose some constructive 
solutions to the problems we have identified.
    In my view, the key is the acquisition workforce. According to the 
Acquisition Advisory Panel, ``curtailed investments in human capital 
have produced an acquisition workforce that often lacks the training 
and resources to function effectively.'' The report states: ``The 
drought in hiring, the inadequacy of training in some agencies, and the 
increased demand for contracting have together created a situation in 
which there is not, in the pipeline, a sufficient cadres of mature 
acquisition professionals who have the skills and the training to 
assume responsibility for procurement in today's demanding 
environment.'' As a result, ``The Federal Government does not have the 
capacity in its current acquisition workforce necessary to meet the 
demands that have been placed on it.''
    As I pointed out at our last hearing, the Department of Defense has 
almost doubled its spending on service contracts over the last 5 years, 
while the number of procurement personnel available to oversee these 
contracts has dropped by more than 25 percent. As a result, we have 
fewer and fewer procurement officials responsible for managing more and 
more contract dollars. I believe it is vital for Congress to address 
this structural problem.

    Senator Akaka. Senator Ensign, you may present your opening 
statement.

                STATEMENT OF SENATOR JOHN ENSIGN

    Senator Ensign. Thank you, Senator Akaka.
    I want to welcome our panelists and before we begin today I 
want to thank all of you and the 13 members of the Acquisition 
Advisory Panel. We gave you very little staff and very little 
money, but you completed your mission in the last 18 months and 
we are very grateful.
    Today we begin to reap the benefits of your labor. I look 
forward to this hearing and its findings, more importantly 
recommendations on improving DOD's acquisition practices. I 
also look forward to a robust discussion with Mr. Denett from 
the Office of Federal Procurement Policy and Mr. Assad from the 
DOD. I hope they bear messages of good news on how they are 
improving their stewardship of the taxpayers' dollars.
    Let me provide some historical context for today's 
discussion. In the early 1990s, Congress passed laws aimed at 
fundamentally changing the way the DOD and other Federal 
agencies acquire goods and services. We intended to make it 
easier for Federal agencies to purchase commercial items, to 
streamline the purchase of small orders, and to open the door 
to more flexible contracting vehicles.
    In the 1990s, we also saw a downturn, what some call a 
halt, in defense procurement activity. Faced with less work and 
more efficient contracting methods, the DOD began to reduce its 
acquisition workforce and in just 10 years they cut their 
acquisition workforce by almost half. Unfortunately, we are now 
seeing the unintended consequences of that grant of flexibility 
and we are grappling with the problems caused by the large 
reductions in acquisition personnel.
    This committee has noted on more than one occasion that DOD 
made such cuts haphazardly, without any strategic vision on 
maintaining a well-trained, professional acquisition workforce. 
Of course, the tragic events of September 11 forced us to 
increase our defense procurement activity exponentially in the 
past 5 years, stretching an already thin workforce even 
thinner.
    Two weeks ago, we received testimony from the DOD IG and 
the GAO on problems and interagency contracting and the 
acquisition of services at the DOD. In the area of interagency 
contracting, the problems ranged from failures to use best 
practices to knowingly disregarding the rules. In the 
acquisition of services, we see the stark impact of deep cuts 
to the acquisition workforce. Many of the recommendations we 
have heard and which we will hear focus on such things as 
contracting personnel performing better market research and 
better contract surveillance. Yet, when the workforce is 
already strained and not adequately trained, best practices 
give way and the order of the day becomes getting the job done 
in the shortest time possible. That does not excuse some of the 
bad practices described to us, but it does put them in proper 
context.
    With that stage set, I hope we can focus today less on the 
problems and more on the solutions and preventative measures. I 
am especially interested in what best commercial practices from 
the private sector DOD can effectively adopt.
    In closing, I know that these issues may at times seem 
esoteric or arcane. In some ways they are. But their nature 
does not undermine their importance. Every dollar we save 
through improved acquisition practices and policies is another 
dollar for Humvee armor, another dollar for body armor, another 
dollar for ammunition, or another dollar for medical supplies. 
Let us not forget that.
    Thank you, Mr. Chairman.
    [The prepared statement of Senator Ensign follows:]

               Prepared Statement by Senator John Ensign

    Thank you, Senator Akaka. Welcome to our panelists. Before we 
begin, I want to thank the members of the Acquisition Advisory Panel 
for their hard work and dedication. I know all 13 members are employed 
full-time, and had little staff or money to complete the mission 
Congress set before them. Nevertheless, they labored for 18 months to 
fulfill their congressional mandate. Today, we begin to reap the 
benefits of their labor. I look forward to hearing their findings and, 
more importantly, their recommendations on improving the Department of 
Defense's acquisition practices.
    I also look forward to a robust discussion with Mr. Denett from the 
Office of Federal Procurement Policy and Mr. Assad from the Department 
of Defense. I hope they bear messages of good news on how they are 
improving their stewardship of the taxpayer's dollar.
    Let me provide some historical context for today's discussion. In 
the early 1990s, Congress passed laws aimed at fundamentally changing 
the way the Department of Defense and other Federal agencies acquired 
goods and services. We intended to make it easier for Federal agencies 
to purchase commercials items, to streamline the purchase of small 
orders, and to open the door to more flexible contracting vehicles. In 
the 1990s, we also saw a downturn--what some call a ``holiday''--in 
defense procurement activity. Faced with less work and more efficient 
contracting methods, the Department of Defense began to reduce its 
acquisition workforce. In just 10 years, the Department cut its 
acquisition workforce by almost half.
    Unfortunately, we are now seeing the unintended consequences of 
that grant of flexibility, and we are grappling with the problems 
caused by the large reductions in acquisition personnel. This committee 
has noted on more than one occasion that the Department made such cuts 
haphazardly, without any strategic vision on maintaining a well-
trained, professional acquisition workforce. Of course, the tragic 
events of September 11 forced us to increase our defense procurement 
activity exponentially in the past 5 years, stretching an already thin 
workforce even thinner.
    Two weeks ago, we received testimony from the Department of Defense 
Inspector General and the Government Accountability Office on problems 
in interagency contracting and the acquisition of services at the 
Department of Defense. In the area of interagency contracting, the 
problems ranged from failures to use best practices to knowingly 
disregarding the rules. In the acquisition of services, we see the 
stark impact of the deep cuts to the acquisition workforce.
    Many of the recommendations we have heard, and which we will hear, 
focus on such things as contracting personnel performing better market 
research and better contract surveillance. Yet, when the workforce is 
already strained and not adequately trained, best practices give way, 
and the order of the day becomes getting the job done in the shortest 
time possible. That does not excuse some of the bad practices described 
to us, but it does put them in proper context.
    With that stage set, I hope we can focus today less on the 
problems, and more on solutions and preventative measures. I am 
especially interested in what best commercial practices from the 
private sector the Department of Defense can effectively adopt.
    In closing, I know that these issues may, at times, seem esoteric 
or arcane. In some ways, they are. But their nature does not undermine 
their importance. Every dollar we save through improved acquisition 
practices and policies Is another dollar for Humvee armor, another 
dollar for body armor, another dollar for ammunition, another dollar 
for medical supplies. Let us not forget that.

    Senator Akaka. Thank you very much.
    At this time I would like to welcome our first panel of 
witnesses. The Acquisition Advisory Panel was chartered by 
Congress in section 1423 of the NDAA for Fiscal Year 2004 to 
review laws and regulations regarding the use of commercial 
practices, performance-based contracting, the performance of 
acquisition functions across agency lines of responsibility, 
and the use of government-wide contracts. The panel's 500-page 
report is a product of more than 2 years of hard work by some 
of our leading experts on acquisition policy in the public and 
private sectors.
    I thank our witnesses for their public service. It is 
particularly gratifying to see Mr. Etherton here today as Jon 
served for more than a decade on the Senate Armed Services 
Committee staff, working on some of the same issues that we 
will be discussing today.
    Ms. Madsen, do you have a statement and would you like to 
give the statement on behalf of the panel?

  STATEMENT OF MARCIA G. MADSEN, CHAIR, ACQUISITION ADVISORY 
PANEL; ACCOMPANIED BY JONATHAN L. ETHERTON AND JAMES A. HUGHES, 
              MEMBERS, ACQUISITION ADVISORY PANEL

    Ms. Madsen. Thank you, Mr. Chairman and Senator Ensign. I 
do have a brief oral statement and then I would like to ask 
that my more fulsome statement which I submitted be included as 
part of the record.
    Thank you very much for inviting us here today. As members 
of the Section 1423 Acquisition Advisory Panel we are very 
pleased to be here to talk about our work and our findings and 
our recommendations. Accompanying me are: to my left, Ty 
Hughes, who is Deputy General Counsel for Acquisition of the 
Air Force; and as you have already noted, Jonathan Etherton, 
who today is self-employed as Etherton and Associates. Both of 
these gentlemen chaired working groups for the panel, Mr. 
Etherton on interagency contracts and Mr. Hughes on commercial 
practices.
    Also with us is Laura Auletta, who has been the panel's 
Executive Director. Senator Ensign, you were nice enough to 
note our staffing shortages. Laura has really been the backbone 
of the panel's efforts and we could not have completed our work 
without her.
    I would also like to recognize two other people who are in 
the room who supported the panel's efforts: Denise Benjamin 
from the Small Business Administration and Diane Newburg from 
ATT, who worked for one of the panel members. Both of these 
individuals helped tremendously with preparation of the panel's 
report and we are very grateful to them.
    We on the panel have recognized the work of the 
subcommittee over many years in monitoring and providing 
guidance regarding the use of service contracts. We have been 
looking at it very carefully.
    Mr. Chairman, as you mentioned, section 1423 identified the 
key topics for the panel as commercial practices, performance-
based contracting, and the use of government-wide contracts or, 
as we have been calling them, interagency contracts. The panel 
was sworn in in February 2005 and consisted of 13 members, 
balanced between government and the private sector. All of us--
I hate to say volunteers because people might wonder, why would 
you volunteer for something like this. But we did.
    We heard testimony from more than 100 witnesses 
representing industry, government, and public interest 
organizations in more than 30 public meetings. We adopted over 
100 findings and 80 recommendations. The volume of those can 
only be touched on here. Our process has been very public and 
transparent and our in-process efforts posted on our web page 
so that everyone could look at them, including our draft final 
report.
    I am pleased to say today that our final report is at the 
Government Printing Office (GPO). I might also say that I am 
relieved to say that it is at GPO.
    The panel was well aware that with Federal procurement 
spending approaching $400 billion annually and with serious and 
competing demands that have already been identified on taxpayer 
dollars, that an accountable and transparent acquisition system 
that delivers innovative high-quality goods and services is 
critical to our national interest.
    Let me talk for a moment about commercial practices. 
Because of the emphasis in the legislation regarding 
appropriate use of commercial practices and because 
performance-based acquisition is a commercial practice, the 
panel reached out to large commercial buyers of services, who 
testified about current commercial services acquisition. We 
also took testimony from government buyers and from users of 
services, both at DOD and the civilian agencies.
    As detailed at length in our report, there is a large and 
robust private sector market for services, particularly 
information technology (IT) and IT-related services. Commercial 
companies are acquiring billions of dollars in services and 
they have well-developed acquisition and contracting 
procedures. The large commercial buyers who testified before 
the panel identified requirements development and competition 
as the keys to successful service contracting. These companies 
make large upfront investments in defining requirements, 
typically on an outcome basis. This investment makes vigorous 
competition possible and it facilitates the use of performance-
based contracts as well as fixed-price contracts. As one 
witness told us, if you do not know what you are going to buy 
perhaps it would be better to buy nothing until you do.
    Government practice, on the other hand, is clearly driven 
by the need to get to award quickly, to meet mission needs, and 
to obligate funds. We recognize that inadequate requirements 
definition is not a new problem. Every group that has looked at 
acquisition issues for the last 30-plus years has identified it 
as an issue. However, the problem in the services context is 
that poor requirements definition results in reduced 
competition, the inability to effectively use performance-based 
contracts, the inability to make use of fixed-price contracts, 
and ultimately it results in increased costs to the Government.
    The panel's commercial practices recommendations for this 
reason focus on improving competition. The panel's 
recommendations recognize that competition fuels innovation, 
drives fair prices, disciplines the responsible use of 
streamlined acquisition vehicles, and improves opportunities 
for small business.
    The panel worked very hard to develop data on the extent to 
which government acquisition is competitive. First we noted 
that spending on services as, Mr. Chairman, you noted has 
increased dramatically and accounted for 60 percent of 
procurement dollars in 2004 and 2005, including at the DOD. The 
details are in our report, but in fiscal year 2004 one-third of 
the government's procurement dollars were awarded 
noncompetitively. Even when competed, the percent of dollars 
awarded when only one offer was received has more than doubled 
from about 9 percent in 2000 to about 20 percent in 2005.
    We fear that the amount of noncompetitive awards actually 
may be understated. Although we tried for months, we could not 
obtain reliable data on competition for orders under multiple 
award contracts available for interagency use. We do know that 
in 2004 $142 billion, or 40 percent of procurement spending, 
went through these interagency contracts. But again, we could 
not develop reliable data on the extent of competition.
    Our commercial practices recommendations include: improving 
requirements development and doing that through the use of 
centers of excellence and by mandating that the program manager 
and the contracting officer be responsible for the 
requirements, regardless of the acquisition vehicle they have 
selected.
    With respect to competition under interagency contracts, 
our recommendations try to achieve a balance between 
recognizing that these vehicles are necessary to allow for 
streamlined acquisition of bite-sized requirements for 
repetitive needs on the one hand with the fact that a 
significant proportion of large orders--and by that I mean 
significant transactions in excess of $5 million, single 
transactions in excess of $5 million--is flowing through these 
vehicles.
    For interagency contracts, we recommended making the 
requirements of section 803 be applicable government-wide for 
orders over $100,000 placed against multiple award contracts or 
against General Services Administration (GSA) schedules, and 
applicable to supplies as well as services. We also recommended 
requiring a synopsis post-award for sole source orders to 
increase transparency, and for orders over $5 million we 
recommended three things: first, a more formalized competitive 
procedure that requires agencies to clearly state their 
requirements, allow adequate time for response, disclose their 
evaluation factors, and document their award decisions.
    We recommended post-award debriefings as currently set 
forth in the Federal Acquisition Regulation (FAR) for 
circumstances where statements of work are used. We also 
recommended allowing protests for orders over $5 million.
    Separately, we recommended a new competitive IT schedule at 
the GSA that will require all orders to be competed.
    With regard to interagency contracting, in addition to the 
competition requirements we also recommended a number of steps 
that should lead to better management and accountability for 
interagency contracts. The panel's findings recognize very 
clearly the importance of interagency contracts in helping 
agencies meet their missions and in allowing the government to 
take advantage of its purchasing power. But there are 
significant issues that we addressed in our report regarding 
the proliferation of these contracts and with the exercise of 
proper management responsibilities between the agency holding 
the contract and the agencies ordering from them. These issues 
include just simply identifying how many of these contracts 
there are and where they are, which was our very first 
recommendation.
    With regard to the workforce, an issue that both of you 
mentioned, the panel determined that there is a significant 
mismatch between the demands placed on the acquisition 
workforce and the personnel and skills available within that 
workforce to meet those demands. The problem the panel 
encountered was that there was not reliable information about 
the size, composition, and competencies of the acquisition 
workforce.
    To assist in our analysis, the panel commissioned a 
significant study, which we can provide to the subcommittee, 
analyzing available data regarding the acquisition workforce.
    We actually went back and looked at workforce studies and 
reports from the 1960s all the way forward to today. Because of 
the volume of the data involved, this report is contained in 
nine large volumes. I brought the executive summary with me. It 
is not insubstantial.
    We also noted that the Commission on Government Procurement 
actually experienced similar frustrations 30 years ago plus in 
1972 and had to commission its own study on the workforce. So 
it is not a new problem.
    With respect to workforce recommendations, we start with 
the basic proposition that prompt and aggressive action is 
necessary to improve the workforce. In our view, this must 
begin with the establishment of a consistent definition and 
method for measuring the workforce and that effort must be 
completed by the Office of Federal Procurement Policy (OFPP) 
within a year. I know Mr. Denett will be attuned to this.
    Second, agencies in our view should undertake human capital 
planning for acquisition workforce needs immediately if they 
have not already done so.
    The panel did not recommend that agencies rush out and hire 
scores of new acquisition professionals. This is because we do 
not have current evidence that allows definition of the issues 
to tell the relationship between the numbers of acquisition 
professionals, the competencies of those people, gaps in the 
competencies, and where the use of contractors figures into the 
workforce. But instead we stated that a flexible planning 
process should be used and it should begin immediately so that 
changes can be made quickly as information becomes available.
    The panel also looked at the challenges of the blended 
workforce and in that regard we were very focused on the 
question of determining when the government's reliance on 
contractor support actually affects the government's 
decisionmaking process to the point that the integrity of that 
process may be questioned. We recognize that our findings and 
recommendations in this particular area of blended workforce 
are a beginning point, but we believe that we have identified 
the issues and the relationships between the issues correctly. 
Among other things, we recommended: one, that OFPP update the 
principles for agencies to apply in determining which functions 
must be performed by Federal employees, so that agencies 
understand that these principles apply even outside the A-76 
context.
    Second, we recommended removing the prohibition on personal 
services contracts. We heard a lot of testimony in our panel 
hearings about how this prohibition is ignored or results in 
inefficient work-arounds. Because contractors are a reality in 
the government workplace today, we believe the policies in this 
area need to be updated to reflect that reality.
    Third, with respect to conflicts of interest, the panel did 
not see a need for new statutes. Rather, it recognized that 
these issues likely are contract-specific. We recommended that 
the FAR Council develop government-wide policy and new clauses 
if necessary to address these issues, but especially update the 
rules regarding organizational conflicts of interest to deal 
with cases of impaired objectivity.
    Finally, although time does not permit me to discuss all of 
these here, I would be remiss not to note that the panel 
devoted significant time and attention and made findings and 
recommendations in the areas of performance-based acquisition, 
small business, and procurement data.
    That concludes my statement. Mr. Hughes, Mr. Etherton, and 
I would be happy to answer your questions.
    [The prepared statement of Ms. Madsen follows:]

                 Prepared Statement by Marcia G. Madsen

    Mr. Chairman, Senator Ensign, and members of the subcommittee, 
thank you for the opportunity to appear before you to address the 
Acquisition Advisory Panel's findings and recommendations. Two of the 
panel members have joined me today, Jonathan Etherton of Etherton and 
Associates, and James ``Ty'' Hughes, Deputy General Counsel 
(Acquisition), Department of the Air Force. In addition to chairing 
this panel, I am a partner in the law firm of Mayer, Brown, Rowe & Maw 
LLP and I have 20 years of experience in government procurement law.
    You have asked specifically for the panel's views with respect to: 
enhancing competition and adopting more commercial practices; 
implementing performance-based acquisition; the management and use of 
interagency contracting; acquisition workforce deficiencies; and the 
appropriate role of contractors supporting the government.
    The panel was established pursuant to section 1423 of the National 
Defense Authorization Act For Fiscal Year 2004. Since the appointment 
of its members in February 2005, the panel has held 31 public meetings 
and heard the testimony of 108 witnesses representing 86 entities or 
groups from industry, government, and public interest organizations. 
The panel's public deliberations produced approximately 7,500 pages of 
transcript. In addition, we received written public statements from 
over 50 sources, including associations, individual companies, and 
members of the public.
    My comments here do not cover the panel's 100 findings and 80 
recommendations in their entirety, but provide a good overview. I would 
like to personally thank the 13 panel members for their dedication over 
the course of our deliberations. Each of them has a full-time and 
highly responsible ``day job.'' With very little panel staff or money, 
the level of participation by the members was substantial.
    The panel is grateful to the many witnesses and members of the 
public who helped shape the panel's report through their active 
participation and interaction with the panel. The insight gained from 
this exchange has been invaluable. In many instances, approaches under 
consideration by the panel were revised or adjusted based on input from 
the witnesses who helped the panel see many different perspectives. I 
would like to especially thank those commercial companies that 
addressed the panel. We invited large commercial buyers of services to 
address the panel in an effort to determine their current best 
practices for services acquisition. These companies generously shared 
their expertise with the panel even though many of them do little or no 
business with the government. We are grateful for this rare opportunity 
to learn how they buy services and where they invest in the services 
acquisition process.
    My testimony covers the following topics:

    Enhance Competition by Investing in Planning

         Commercial buyers invest heavily in planning and requirements 
        analysis to obtain meaningful competition
         Government practice focuses on rapid awards at the expense of 
        planning
         Recommendations to enhance the government's ability to 
        develop/maintain market expertise and define requirements

    Encourage Competition to Produce Fair and Reasonable Prices

         Commercial practice relies on competition for innovation and 
        pricing
         Government practice

                 Interagency Contracting

                         Incentives to compete lacking
                         Recommendations to insert incentives

    Removing Other Obstacles to Achieving Fair and Reasonable Prices

         Current regulatory definition of ``commercial services'' does 
        not require an efficient market as statutorily intended
         Regulatory guidance unclear about obtaining contractor 
        information to support government determination of fair and 
        reasonable prices
         Recommendations to restore statutory definition of commercial 
        services and clarify regulations on obtaining price information 
        and ``other than cost or pricing data''

    Accountability and Transparency Inadequate for Interagency 
Contracting

         No consistent, government-wide policy for agencies who manage 
        or use interagency contracts
         Accountability and transparency lacking in interagency 
        contracting
         Recommendations to require formal business cases to support 
        interagency contracts, greater accountability in their 
        management, and more transparent use

    The Acquisition Workforce Requires Immediate Attention

         Demands on the acquisition workforce have outstripped its 
        capacity, but assessment not possible
         Recommendations to move toward an expedited assessment of the 
        workforce in order to improve capacity

    Appropriate Role of Contractors Supporting the Workforce

         Management challenges of a ``blended'' workforce

                 Blurring the distinctions between

                         Inherently governmental and commercial 
                        functions
                         Personal and Non-Personal Services

                 Rising concerns about

                         Organizational and personal conflicts of 
                        interest
                         Protection of contractor proprietary/
                        confidential data

                 Recommendations to promote ethical/efficient use of 
                ``blended'' workforce

              ENHANCE COMPETITION BY INVESTING IN PLANNING

Commercial Practice
    The commercial buyers described a vigorous requirements definition 
and acquisition planning process. They consider requirements definition 
of equal importance to the selection of the right contractor. These 
companies invest the time and resources necessary to clearly define 
requirements upfront in order to achieve the benefits of competition. 
They perform ongoing rigorous market research and are thus able to 
provide well-defined, performance-based requirements conducive to 
innovative fixed-price solutions. They obtain buy-in on their 
requirements from all appropriate levels in the corporation.
Government Practice
    The panel's work shows that the government fails to invest in this 
phase of procurement, focusing instead on rapid awards. While there 
appears to be a conceptual understanding of the importance of 
requirements definition to successful, cost-effective contracts, 
culture and the metrics focus on ``getting to award'' rather than 
contract results. Public sector officials and representatives of 
government contractors testified that the government is frequently 
unable to define its requirements sufficiently to allow for fixed-price 
solutions, head-to-head competition, or performance-based contracts.
    Ill-defined requirements fail to produce meaningful competition for 
services solutions. Instead, agencies often rely on time-and-materials 
contracts with fixed hourly rates that lack incentives for innovative 
solutions. The testimony was consistent that the major contributors to 
this problem are the cultural and budgetary pressures to quickly award 
contracts or orders, combined with a lack of market expertise in an 
already-strained acquisition workforce. The government's lack of 
investment in acquisition planning is well-documented beyond the 
testimony heard by the panel. For instance, two recent audits from the 
Department of Defense Inspector General (DOD IG) found that of the $217 
million spent under 117 awards reviewed, 116 lacked acquisition 
planning or market research.\1\
---------------------------------------------------------------------------
    \1\ DOD IG Report No. D-2007-007, ``Fiscal Year 2005 Purchases Made 
Through the General Services Administration,'' Oct. 30, 2006, at 1-4 
(general discussion of the issue); DOD IG Report No. D-2007-032, 
``Report on Fiscal Year 2005 DOD Purchases Made Through the Department 
of Treasury,'' Dec. 8, 2006, at 32 (specific statistics cited).
---------------------------------------------------------------------------
Recommendations
    The panel recommendations are based on current commercial sector 
practices. For instance, to develop and maintain market expertise, the 
panel recommended that agencies establish ``centers of expertise'' to 
protect their high-dollar investments in recurring or strategic 
requirements. The panel also saw a need for a central source of market 
research information comparable to that maintained by private 
companies. We recommended that the General Services Administration 
(GSA) establish such a capability to monitor services acquisitions by 
government and commercial buyers, collect information on private sector 
transactions that is publicly available, as well obtain information on 
government transactions, and make this information available 
government-wide. Under our recommendations for improving Performance-
Based Acquisition (PBA), the panel recommended that the Office of 
Federal Procurement Policy (OFPP) be more guidance to agencies 
regarding how to define requirements in terms of desired outcomes, how 
to measure those outcomes, and how to develop appropriate incentives 
for contractors to achieve those outcomes. Because defining needs/
requirements upfront is one of the most critical aspects of a PBA, the 
panel recommended that the FAR require the government to develop and 
provide to contractors a ``baseline performance case.'' The panel's 
report contains details about what this baseline performance case would 
entail, but it is essentially a framework to provide discipline in the 
government's requirements definition process. We also recommended an 
educational certification program for contracting officer 
representatives to help them become effective planners and monitors of 
PBAs. With respect to the concerns expressed by the GAO and Inspectors 
General (IGs) regarding ill-defined requirements for orders under 
interagency contracts, the panel recommended criteria for requirements 
planning by ordering agencies before access to an interagency contract 
is granted.

      ENCOURAGE COMPETITION TO PRODUCE FAIR AND REASONABLE PRICES

Commercial Practice
    In addition to learning that basic commercial practice involves 
substantial investment in requirements analysis, the panel also was 
advised that commercial buyers rely extensively on competition to 
produce innovation and fair and reasonable prices. In fact, competition 
is their ``gold standard'' for driving innovation and for determining 
fair and reasonable prices. Because there is no substitute for 
competition, commercial companies rarely buy on a sole-source basis. In 
those rare cases where they do not seek or cannot achieve competition, 
commercial buyers rely on their own market research, benchmarking, and 
often seek data on similar commercial sales to establish fair and 
reasonable pricing. In some cases, they may even obtain certain cost-
related data, such as wages or subcontract costs, from the seller to 
determine a price range. But they generally find these methods far 
inferior to competition for arriving at the best price. As a result, 
they monitor non-competitive contracts closely, and eliminate such 
arrangements as soon as the requirement can be moved to a competitive 
solution.

Government Practice
    It is instructive to compare the strong commercial preference for 
competition to the government's competition statistics. In fiscal year 
2004, the government awarded $107 billion, or over one-third of its 
total procurement dollars, non-competitively. Over one-fourth, or $100 
billion, was awarded non-competitively in 2005.\2\ The number of 
competitions that result in the government only receiving one offer 
doubled between 2000 and 2005. Spending on services in both 2004 and 
2005 accounted for 60 percent of procurement dollars with 20 percent 
and 24 percent awarded without competition, respectively.\3\
---------------------------------------------------------------------------
    \2\ Standard Competition Report from FPDS-NG, available on-line at 
https://www.fpds.gov under Standard Reports (last visited Jan. 29, 
2007). The competitive/non-competitive base (against which the 
percentage is derived) is $338 billion for fiscal year 2004 and $371.7 
billion for fiscal year 2005.
    \3\ FPDS-NG special reports for the panel.
---------------------------------------------------------------------------
Interagency Contracting
    The panel believes the amount of non-competitive awards may, in 
fact, be underreported for orders under multiple award contracts 
available for interagency use, generally known as ``interagency 
contracts.'' The panel's repeated attempts over several months to 
obtain information about the extent of competition for orders under 
these types of contracts were frustrated. The government's database on 
Federal procurement spending, the Federal Procurement Data System-Next 
Generation (FPDS-NG) only began to collect data on interagency 
contracts in 2004. Due to a number of factors, including poor reporting 
instructions, faulty validations, and even DOD policy, the ``extent 
competed'' field in FPDS-NG for these orders overwhelmingly reflects 
the competitive nature of the master contract, rather than the actual 
level of competition for orders. This reporting problem skews the data 
such that it is unreliable. The lack of transparency into the nature of 
these orders is a significant weakness. FPDS-NG reports spending under 
contracts available for multi-agency use at as much as $142 billion, or 
40 percent of procurement spending, in fiscal year 2004.\4\
---------------------------------------------------------------------------
    \4\ Id.
---------------------------------------------------------------------------
    Despite the panel's overarching concern with data reliability and 
transparency, there certainly appears to be sufficient cause for 
concern in addition to these statistics. You already have heard from 
both the DOD IG and the GAO regarding orders placed against interagency 
contracts. The panel was well aware that GAO put management of 
interagency contracting on its High Risk Series in 2005. Since the GAO 
high risk designation in 2005, more data regarding orders under these 
contracts has become available. In fact, in a recent audit, the DOD IG 
found that 62 percent of reviewed orders, totaling nearly $50 million, 
failed to provide a fair opportunity to compete as required by law. In 
addition, 98 of 111 orders valued at $85.9 million were either 
improperly executed, improperly funded, or both.\5\
---------------------------------------------------------------------------
    \5\ DOD IG Report No. D-2007-023, ``fiscal year 2005 Purchases Made 
Through the National Aeronautics and Space Administration,'' Nov. 13, 
2006, at ii.
---------------------------------------------------------------------------
    The panel's report sets forth the history and efforts by Congress 
to improve competition. The intent of interagency contracts, most of 
which are assumed to be multiple award contracts, was to lower 
administrative costs, leverage buying power and provide a streamlined 
acquisition process--all well-meaning goals. Such contract vehicles 
were never intended to be used to avoid competition.
    Interagency contracts generally are indefinite-delivery/indefinite-
quantity type contracts with very broad scopes of work, most of which 
provide for multiple awardees that will compete with one another for 
specific orders at a later point when an agency identifies a 
requirement. Therefore, where services are concerned, the initial 
competition is based on loosely defined statements of the functional 
requirements resulting in proposals for hourly rates for various labor 
categories. The expectation is that once an agency identifies a 
specific need, a more clearly defined requirement will be provided at 
the order level allowing the multiple awardees to submit task-specific 
solutions and pricing. Because this process narrows the number of 
eligible contractors at the order level, Congress has insisted that 
these multiple awardees be given a ``fair opportunity'' to compete for 
the task orders.
    So why do interagency contracts seem to be drawing so much non-
competitive activity? There appear to be a number of checks and 
balances missing that would otherwise contribute to healthier 
incentives for competition.
Incentives to Compete Lacking
    There is no government-wide requirement that all interagency 
contracts provide notification that a task order is available for 
competition. There is no visibility into sole-source orders, as there 
is no requirement for a synopsis or public notification for orders 
under multiple award contracts, regardless of the size of the order. 
Even where a best value selection is made at the order level, there is 
no requirement for a detailed debriefing, regardless of the amount of 
the order or the amount of bid and proposal costs expended by the 
eligible contractor, thus denying the contractor information that might 
enable it to be more competitive on future orders/contracts. Further, 
without regard to size of the order, there is no option for contractors 
to protest the selection process under multiple award contracts, 
reducing the pressure on the government to clearly define requirements, 
specify its evaluation criteria, and make reasonable trade-off 
decisions among those criteria. For example, even issues that affect 
the integrity of the competitive process such as organizational or 
personal conflicts of interest cannot be protested.
    However, the panel also took testimony from agency officials who 
told us they could not meet their missions without the use of 
interagency contracts. Therefore, the panel has sought to achieve a 
balance in its recommendations that will introduce incentives to 
encourage more competition while not unduly burdening these tools for 
streamlined buying. For instance, some of our recommendations only 
apply to orders over $5 million. Why this threshold? We found that of 
the $142 billion spent on orders under these interagency contracts in 
fiscal year 2004, $66.7 billion, nearly half, was awarded in single 
transactions (at the order level) exceeding $5 million. The fiscal year 
2005 statistics show total spending on these contracts at $132 billion 
with $63.7 billion in single transactions over $5 million.\6\
---------------------------------------------------------------------------
    \6\ FPDS-NG special reports for the panel.
---------------------------------------------------------------------------
    Nearly half of the dollars are spent on single transactions over 
this threshold, but the majority of transactions are actually below it. 
By using this threshold, we were able to impact a significant dollar 
volume, but not the majority of transactions. ``Bite-sized'' orders for 
repetitive needs can be placed using the current methods under this 
threshold, while large transactions involving the need for requirements 
in a Statement of Work, evaluation criteria, and best value selection 
procedures would be subject to a higher level of competitive rigor.

Recommendations
    The panel recommended expanding government-wide the current DOD 
Section 803 requirements that include notifying all eligible 
contractors under multiple award contracts of order opportunities. We 
also recommended that the 803 procedures apply to supplies and 
services. While we agreed that a pre-award notification of sole-source 
orders might unduly burden the ordering process, the panel recommended 
post-award public notification of sole-source orders finding that it 
would improve transparency. For single orders exceeding $5 million, the 
panel recommended that agencies adhere to a higher competitive standard 
by: (1) providing a clear statement of requirements; (2) disclosing the 
significant evaluation factors and subfactors and their relative 
importance; (3) providing a reasonable response time for proposal 
submissions; and (4) documenting the award decision and the trade-off 
of price/cost to quality in best value awards. We also recommended 
post-award debriefings for disappointed offerors for orders over $5 
million when statements of work and evaluation criteria are used. 
Concerned that the government is buying complex, high-dollar services 
without a commensurate level of competitive rigor, transparency, or 
review, we recommended limiting the statutory restriction on protests 
of orders under multiple award contracts to orders valued at $5 million 
or less.
    Specific to the GSA Federal Supply Schedules program, the panel 
recommended a new services schedule for information technology that 
would require competition at the task order level and reduce the burden 
on contractors to negotiate upfront hourly labor rates with GSA. The 
panel sees the exercise of negotiating (and auditing) labor rates as 
producing little in the way of meaningful competition given that 
solutions are project-specific and the price depends on the actual 
labor mix applied. In such cases, analyzing labor rates contributes 
little to understanding the price that the government will pay for the 
project.

    REMOVING OTHER OBSTACLES TO ACHIEVING FAIR AND REASONABLE PRICES

Definition of Commercial Services
    The Federal Acquisition Streamlining Act (FASA) defined commercial 
services as those offered and sold competitively in substantial 
quantities in the commercial marketplace. When commercial services are 
sold competitively in substantial quantities, commercial market forces 
determine both the price and the nature of the services offered. The 
statutory definition was designed to allow such services to be 
purchased using the more streamlined commercial buying procedures of 
FAR Part 12. Unfortunately, the regulatory implementation of the 
statutory definition allowed services not offered and sold in 
substantial quantities in the commercial marketplace, or those ``of a 
type,'' to nonetheless be classified as commercial and, therefore, 
eligible for the streamlined procedures of FAR Part 12. These 
streamlined buying procedures, while effective in an efficient market, 
become problematic in circumstances where the services are not offered 
and sold in substantial quantities. In that situation, the government 
is placed at a significant disadvantage with respect to pricing when 
there is limited or no competition, leaving it with too few tools to 
determine fair and reasonable prices.
Recommendations
    The panel recommended revising the FAR to be consistent with the 
statutory definition of commercial services. This recommendation has 
been inaccurately portrayed by some who claim it will prevent the 
purchase of cutting-edge technology. However, restoring the statutory 
definition in the FAR would not preclude the government from purchasing 
services that are not offered and sold in substantial quantities in the 
commercial marketplace. Rather, it would require that such services be 
purchased using FAR Part 15 procedures, giving the government tools for 
determining fair and reasonable prices absent an efficient market.
    The panel also recommended specific regulatory revisions that would 
clarify and provide a more commercial-like approach to determining 
price reasonableness for commercial items in cases where a competitive 
acquisition is not used. These revisions, which apply to commercial 
items generally, clarify the contracting officer's right to ask for 
information ``other than cost or pricing data,'' and provide an order 
of precedence for the type of information a contracting officer should 
seek. This recommendation is based on testimony received by the panel 
from government and contractor representatives. Both groups complained 
that the current regulatory treatment of ``other than cost or pricing 
data'' was confusing. On the one hand, government representatives 
complained that they cannot obtain necessary information because 
contractors argue that it is not required. On the other hand, 
contractor representatives complained that the government presses for 
inappropriate information. The panel's proposed regulatory change is 
consistent with the testimony we received from commercial buyers 
regarding the types of pricing information that they receive and the 
circumstances under which they ask for limited types of cost data such 
as wages and subcontractor costs.

 ACCOUNTABILITY AND TRANSPARENCY INADEQUATE FOR INTERAGENCY CONTRACTING

    While I have already discussed interagency contracting with respect 
to requirements analysis and competition, the panel also separately 
addressed the issues of management of, accountability for, and 
transparency of interagency contracts. We included in our review the 
practice of using assisting entities that buy from interagency 
contracts. The panel found that while some competition among 
interagency contracts is desirable, there is no coordination regarding 
the creation or continuation of these contract vehicles to determine 
whether their use is effective in leveraging the government's buying 
power or whether they have proliferated to the point of burdening the 
acquisition system. The panel also was concerned that recent focus on 
the problems of interagency contracting would result in an increase of 
so-called ``enterprise-wide contracts.'' Such contracts are 
operationally the same as interagency contracts, except they are 
restricted for use by one agency. The panel found the trend toward such 
contracts to result in costly duplication if the existing problems with 
interagency contracts can be addressed through better management 
discipline and a more transparent competitive process.

Recommendations
    Specifically, the panel found that the lack of government-wide 
policy regarding the management of interagency contracts is a key 
weakness that can be addressed by OFPP. In fact, you will soon hear 
from Administrator Paul Denett of OFPP's initiative to develop just 
such a policy. (As the panel was developing its findings and 
recommendations in this area, panel members met with OFPP to provide 
input regarding the panel's work). The panel also recommended that 
agencies, under policy guidance issued by OFPP, formally approve the 
creation, continuation, or expansion of interagency contracts using a 
formal business case. Agencies managing these contracts would, among 
other things, be required to identify and apply the appropriate 
resources to manage the contract, clearly identify the roles and 
responsibilities of the participants, and measure sound contracting 
procedures. As discussed above, there is little visibility into the 
numbers and use of interagency contracts. The data must be derived from 
FPDS-NG and is not, as discussed earlier, completely reliable. 
Therefore, the panel made a number of recommendations to improve the 
transparency and reliability of data on interagency contracts.

         THE ACQUISITION WORKFORCE REQUIRES IMMEDIATE ATTENTION

    The panel determined that a quantitatively and qualitatively 
adequate workforce is essential to the successful operation of the 
acquisition system. But the demands on the acquisition workforce have 
outstripped its capacity. Just since September 11, the dollar volume of 
procurement has increased by 63 percent. While the current workforce 
has remained stable since 2000, there were substantial reductions in 
the 1990s accompanied by relatively little new hiring. Compounding the 
problem, while a variety of simplified acquisition techniques were 
introduced by the 1990's acquisition reforms for low dollar value 
procurements, higher dollar procurements require greater sophistication 
by the government buyer due to the growth in best value procurement, 
the emphasis on past performance, and the use of commercial 
contracting. Accompanying these trends is the structural change in what 
the government is purchasing, with an emphasis on high-dollar, complex 
technology related solutions. However, due to the lack of a consistent 
definition of the workforce and lack of ability to measure the 
workforce, as well as the lack of competency assessments and systematic 
human capital strategic planning, determining the needs of this 
workforce is difficult. The panel was struck by the difference from 
commercial practice. Private sector buyers of services use extremely 
well-qualified employees and consultants in designing and carrying out 
their acquisition of services. Larger acquisitions--$10 million and 
up--are subject to a tightly controlled and carefully structured 
process overseen by highly credentialed and experienced buyers. The 
committee need only look at the presentations to the panel by the 
private sector buyers and the consulting firms that support them for 
comparison.

Recommendations
    An accurate understanding of the key trends about the size and 
composition of the Federal acquisition workforce cannot be obtained 
without using a consistent benchmark, and none is currently available 
for such an assessment. The panel recommended that OFPP prescribe a 
consistent definition and methodology for measuring the workforce. The 
urgency of this task is reflected in another recommendation that OFPP 
collect data using this definition and measuring methodology within 1 
year of the panel's final report. Consistent with this, OFPP should be 
responsible for creating and maintaining a mandatory government-wide 
database for members of this workforce. The panel noted that the 
Commission on Government Procurement recommended just such a system 
over 30 years ago--in 1972. While there are a great many 
recommendations for workforce improvement in the panel's report, one of 
the key recommendations is that each agency must engage in systematic 
assessment and human capital strategic planning for its acquisition 
workforce. Without such plans, it is impossible to know how and to what 
extent a given agency's workforce is deficient. It is also difficult to 
know to what extent and how efficiently agencies are using contractors 
to support the acquisition function. In support of this recommendation, 
the panel has also suggested that these plans be reviewed by OFPP for 
trends, best practices, and shortcomings as part of an agency's overall 
human capital planning requirements. Finally, the panel recommended a 
government-wide intern program, as well as the reauthorization of the 
Services Acquisition Reform Act training fund.

        APPROPRIATE ROLE OF CONTRACTORS SUPPORTING THE WORKFORCE

Management challenges of a ``blended'' workforce
    The panel heard testimony regarding the use of and management of 
the ``blended'' workforce, where contractors work side-by-side with 
government employees, often performing the same or similar functions.

Blurring the Distinctions
    In the mid-1990s, the Federal acquisition workforce was reduced by 
50 percent and hiring virtually ceased during that time. The structural 
changes in what and how much the government is buying since September 
11 have left agencies with no alternative to using contractors to deal 
with the pressures of meeting mission needs and staying within hiring 
ceilings. Agencies have contracted for this capability and contractors 
are increasingly performing the functions previously performed by 
Federal employees. To a significant degree, this has occurred outside 
of the discipline of OMB Circular A-76, with the result that there is 
no clear and consistent government-wide information about the number of 
people and the functions performed by this growing cadre of service 
providers.
    While the A-76 outsourcing process provides a certain discipline in 
distinguishing between ``inherently governmental'' and commercial 
functions, it is less clear if and how agencies apply these concepts to 
the blended or multi-sector workforce that has arisen outside of the A-
76 process. The challenge is determining when the government's reliance 
on contractor support impacts the decisionmaking process such that the 
integrity of that process may be questionable. A second challenge that 
arises is how the government effectively manages a blended workforce 
given the prohibition on personal services.

Rising Concerns
    The panel identified the increased potential for conflicts of 
interest, both organizational and personal, as a significant challenge 
that arises from the blended workforce and from the consolidation in 
many sectors of the contractor community. Alongside this issue is the 
need to protect contractor proprietary and confidential data in such an 
environment when a contractor supporting one agency in a procurement 
function may be competing against other contractors for work that is in 
the subject area of its support contract at another agency.

Recommendations
    The panel recommended that OFPP update the principles for agencies 
to apply in determining which functions must be performed by Federal 
employees, so that agencies understand that such principles apply even 
outside the A-76 process.
    The panel also recommended lifting the prohibition on personal 
services contracts. The panel heard a great deal of testimony about how 
this prohibition is either effectively ignored or how agencies use 
awkward and inefficient work-arounds to ensure they do not direct the 
work of contractor employees. The GAO has acknowledged the need to rely 
on contractors to meet government missions. Panel witnesses have 
confirmed the necessity of contractors in the workplace. Therefore, the 
panel finds the prohibition to be akin to a ``myth.'' OFPP should 
develop new policy guidance on the appropriate and ethical use of 
service contractors that would allow appropriate government employees 
to direct the substance of their work, but not perform supervisory 
functions such as hiring, firing, disciplinary actions, etc.
    With respect to the growing potential for conflicts of interest, 
the panel did not see a need for new statutes. Instead, it viewed the 
issues as contract-specific and suggested that the better approach 
would be policy guidance and new solicitation and contract clauses. 
Therefore, the panel recommended that in its unique role as developer 
of government-wide acquisition regulations, the FAR Council review 
existing conflict of interest rules and regulations, and to the extent 
necessary, create new, uniform, government-wide policy and clauses 
regarding conflicts of interest, as well as clauses protecting 
contractor proprietary and confidential data. In particular, the rules 
regarding organizational conflicts of interest need to be updated to 
address situations involving impaired objectivity. The panel also 
recommended that the FAR Council work with the Defense Acquisition 
University and the Federal Acquisition Institute to devise improved 
training for contracting officers to assist in identifying and 
addressing potential conflicts and to develop better tools for the 
protection of contractor proprietary and confidential data.
    Finally, a general comment about the panel's recommendations: while 
most of them can be implemented through policy or regulation, a few 
require legislation.

                               CONCLUSION

    Mr. Chairman and members of the subcommittee, thank you for your 
interest in the panel's efforts. We are available to provide any 
additional information or assistance that the committee may need.
    This concludes my prepared remarks. My colleagues and I are happy 
to answer any questions you might have.

    Senator Akaka. Thank you very much for your statement. Your 
full statement will be included in the record.
    Before I begin with my questions, I would like to ask 
Senator McCaskill if she has an opening statement?
    Senator McCaskill. Believe it or not, I am anxious to have 
a look at the executive summary. I was particularly startled by 
how long this effort was and how voluminous the testimony was. 
So I am anxious to be as knowledgeable as possible, because if 
I am going to really focus on trying to do something about 
this. I want the benefit of everything that you learned.
    So if I could get a copy of the full executive summary I 
would appreciate it. Then I would just reserve anything further 
until questioning.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you.
    Ms. Madsen, the Acquisition Advisory Panel recommended 
enhanced competition for task orders in excess of $5 million.
    This process would make large task orders more like 
contracts by requiring that the agency provide a clear 
statement of requirements, disclose significant evaluation 
factors and subfactors, provide a reasonable response time for 
proposal submissions, document the selection decision, and 
provide post-award debriefings for disappointed offerors.
    Ms. Madsen, can you explain why you think this 
recommendation is important?
    Ms. Madsen. Certainly, Mr. Chairman. I think, as detailed 
in our report, as we looked at the data on orders under 
multiple award interagency contracts, we realized that there 
was a very substantial quantity of those orders being placed 
that exceeded $5 million in value. Some of them exceeded $5 
million in value by a very substantial amount, orders in the 
neighborhood of $100 million or more in value.
    Our review of the legislative history in this area 
indicates that the purpose for these ordering vehicles was to 
allow repetitive needs to be satisfied in a streamlined manner, 
not to allow very large orders to be placed that really looked 
more like contracts. Because of the fact that the process is 
set up so orders are placed under multiple award contracts, of 
course there is limited visibility into the ordering process 
that would not exist if those orders were placed as contracts 
under FAR Part 15.
    We just could not get good data on the extent of 
competition for orders. But we have data indicating that in 
2004 $66.7 billion was expended in single transactions over $5 
million, with services accounting for 64 percent or about $42.6 
billion of that amount. So there are a number of large 
transactions passing through that system without oversight.
    I think the other observation that we made was that once 
you get above about $5 million, these look like other kinds of 
procurements that people would recognize. They have a statement 
of work, they have a solicitation, they have evaluation 
criteria. Agencies are using best value techniques for larger 
orders. It looked like to us if an agency is going to go to all 
that work anyway it might as well do it in a more formal form 
and give the contractors a better opportunity to have a more 
reasonable competitive process.
    I do not know if Mr. Hughes has anything he wants to add to 
that.
    Mr. Hughes. I think that covers it. The thought here was 
that the government benefits because this approach enhances 
competition. It creates an opportunity for competitive bidding 
on these large task orders. At the same time, the panel was 
careful not to make this a full Part 15 process, so they were 
preserving some--a more informal but structured process.
    Looking at the contractor's side, I think a contractor that 
invests in putting together a complex proposal is entitled to 
know the basis on which the government is going to evaluate the 
proposal and document the decision, and if the contractor wants 
a debriefing we felt on these large task orders they are 
entitled to that.
    So the objective here was really to help sharpen the 
government's requirements and promote competition, which 
ultimately benefits the government.
    Senator Akaka. One of the advantages that Federal agencies 
see in task order contracts is that they can award task orders 
with minimal effort. Would not the process that you recommend 
require more personnel and attention to manage? If so, do you 
believe that it would be worth the investment?
    Ms. Madsen. I am happy to respond to that and then if Mr. 
Hughes wants to say something. I think that our conclusion was 
definitely yes. Again, as we looked at this, once you get above 
about $5 million the process is more formal anyway, but it does 
not meet in many instances the kinds of requirements for due 
process and fairness that we thought were important.
    So it is not that there is not more work being done for 
those larger orders. It is just that it is not as perhaps fair 
and transparent as it should be.
    So will it have an impact on staffing? It may, but we think 
it is probably well worth it because the government is going to 
get a much better competitive process. As I think I said in my 
statement, we traded this off. We recognized that the majority 
of transactions are under $5 million. But, the majority of 
dollars is over $5 million. So we do not think that we are 
unduly burdening the transactions that are really, as we refer 
to them, bite-size as they are for repetitive needs. Those 
transactions would go forward just as they do today.
    Mr. Hughes. There was also a recommendation on the section 
803, the fair opportunity. What that is essentially is a 
requirement that is imposed on DOD to give all of the people in 
the contract, who are on the contract, an opportunity to 
compete for the items that are being ordered. It has worked 
well within DOD. We thought it would be an appropriate model to 
extend across the Federal Government.
    You are correct in your question. It is some additional 
work to evaluate the additional offers, but with respect to the 
benefits we thought that would be significant. The notion of 
having competition at the task order level and being a little 
more rigorous about that would avoid, we thought, a large 
number of the sole source task orders that we see. So clearly 
there is a cost, a small cost, because the contract vehicles 
are already in place. The large ordering vehicle is already 
awarded. This is simply a communication to the people who might 
be able to propose against particular task orders the 
opportunity to make that proposal.
    So correct, a little more work, but the panel thought very 
strongly that the government would benefit with reduced pricing 
and greater competition.
    Senator Akaka. The Acquisition Panel, Ms. Madsen, found 
that commercial organizations invest the time and resources 
necessary to understand and define their requirements, 
facilitate competition by defining their requirements in a 
manner that allows services to be acquired on a fixed-price 
basis in most instances, and ensure continuous evaluation and 
ongoing monitoring of supplier performance.
    Is it your view, Ms. Madsen, that the Federal Government 
needs to adopt these best commercial practices if it is going 
to achieve better results in its contracting for services?
    Ms. Madsen. Mr. Chairman, we certainly tried to take a 
lesson from the commercial buyers that we heard. Somebody who 
recently commented on the panel's work said that our 
recommendations in that regard sounded like Procurement 101. 
That is really what our commercial buyers told us, if you do 
these things you get better competition, you get contracts that 
because they are well scoped can be in many cases fixed price, 
so they are easier to administer, and you get better prices.
    We thought all of those were things that actually the 
Federal Government not only could and should do, but in many 
cases these are already required by law and regulation.
    Mr. Hughes. Just one other point I think is important to 
make. The current commercial buying of items and services is 
working fairly well. We are talking at the margins here where 
we have seen noncompetitive procurements. So the 
recommendations are not to suggest that the commercial buying 
practices are somehow inadequate themselves. They are not. They 
are good and they work well. At the margin, we propose these 
changes to where we found that, for a number of different 
reasons, some categories of procurements wind up being sole 
source or limited competition or not enough definition of 
requirements.
    So the criticisms are to improve the process, but I did not 
want to suggest that the panel thought that the system was just 
fundamentally flawed. It is not. This is more in the line of an 
incremental or an evolutionary improvement of what Congress 
started with FASA a number of years ago.
    Senator Akaka. Let me defer to questions from Senator 
Ensign.
    Senator Ensign. Thank you, Mr. Chairman.
    I want to explore this idea of the whole idea of 
competitive contracts. You are comparing some of these things 
to contracts because of the size of them. When we get into 
competitive contracting sometimes in the government purchasing, 
we have seen where folks underbid knowing that they are 
underbidding and then later come back and say, well, we are 
halfway through this and we do not have the money to be able to 
finish this, and then the government ends up spending a lot 
more money in the long run because of that.
    Is there any danger in that happening with the 
recommendations that you are talking about? Did you see any 
evidence that people were trying to avoid that? If anybody on 
the panel wants to take a shot at that, that is fine.
    Ms. Madsen. Well, I guess I will take the first shot. I 
think, with respect to the practice of probably what you are 
calling buying in, I think that is not something we looked at 
specifically, but good requirements definition definitely 
helps, because when people know what it is that they are 
proposing on it is easier to price it properly, it is easier to 
price it accurately.
    Something else that we also recommended, it is kind of a 
common sense recommendation, is that the government be given 
better tools to just do market research so that the government 
can make better judgments about those kinds of issues. For 
instance, we learned from the commercial companies that they 
maintain very extensive collections of data on transactions. 
There is a lot of information that is available in the public 
sector about services transactions. Commercial companies 
collect it, they pay attention to it, they analyze it. We did 
not see any reason that the government could not do that also.
    So we actually made a recommendation that a market research 
operation be set up. We suggested GSA. It made sense to us.
    Senator Ensign. When you are looking at the acquisition 
personnel issue, do you have just two or three specific 
recommendations for us on improving the type of people? 
Obviously we have a lot of senior people that are getting ready 
to leave. We all see that coming. What were the panel's 
recommendations on making sure that we, one, replace some of 
the people, but also in making sure that we are hiring really 
good, talented people? Does outsourcing play a role in that? I 
know there has been some problems, but there has been successes 
in outsourcing, some of these issues of advising how to do 
acquisition.
    So do you have any thoughts on any of that?
    Ms. Madsen. Well, a couple of thoughts. With respect to 
workforce, we were very struck by the commercial organizations 
that talked to us about the credentials and the experience of 
the people that are handling particularly their larger 
transactions, transactions $10 million and above. Very highly 
credentialed, very experienced people who view acquisition of 
services very much in a strategic mode.
    You will see this in our findings and our recommendations, 
that one of our questions really is how does the government 
sort of stack up and how does the government get access to 
those kinds of people and those kinds of resources. Our very 
first question was do we know what we have?
    One of the reasons we did this study is to try and 
ascertain how do you define the acquisition workforce? Where 
are the people who build requirements? Where are the people who 
are doing analysis of the government needs? Do we have the 
right people in the right places?
    Those are very difficult questions to get the answers to, 
which is why our recommendations really begin with, let us find 
out what we have and make some decisions there. Then we made a 
series of recommendations about attracting, since obviously the 
government cannot pay at the private sector scale, about 
attracting people, starting with intern programs, easier 
hiring, better opportunities to identify talent, bring people 
into the government.
    Now, I will tell you one thing that we did not tackle, we 
did not have the time, was the whole personnel system. So we 
really looked at it from an acquisition standpoint.
    Mr. Etherton. Senator Ensign, I think if you look at 
chapter 5 of the report and follow the recommendations, what 
you will see is a very logical sequence of how to address some 
of the issues that have been raised both in our report--I know 
that they were discussed at the hearing 2 weeks ago, addressing 
some of the shortfalls in the acquisition workforce. I think 
that the recommendations follow a pattern that basically talks 
about data collection and trying to really get a clear 
understanding of what the current makeup of the acquisition 
workforce is and who would be included and try to identify 
where the shortfalls might be occurring; then to shift from 
that mode into a more aggressive human capital planning effort 
specifically focused on the acquisition workforce throughout 
the Federal Government; and then going from there to look at 
some of the tools that you have for both recruiting people and 
also to try to do some things on the retention side; and then 
finally, as you are doing all that and I guess more or less 
concurrently with it, trying to get a clearer sense of what 
your resources and needs are with respect to training and 
education. There are a number of very specific recommendations 
along those lines in chapter 5 of the report.
    I guess I would say from my perspective, having worked up 
here for a time, this is a very complex area that will require 
a lot of sustained long-term focus and long-term oversight if 
you are likely to have any success in playing a role in 
bringing about those improvements.
    Senator Ensign. Jon, most of the issues this subcommittee 
deals with fit into how you just described this issue: long 
term, a lot of oversight, staying the course with it. We have 
noticed that over the last few years.
    According to the report the panel believes that a best 
practice measures guide is critical to providing instruction 
and illustration in the use of measures as part of performance-
based service acquisition. Have you seen any such guides either 
in the private sector or the public sector that would serve as 
a good model for the guide that you suggested?
    Ms. Madsen. Senator, we did not look at guides 
specifically. We looked at practices, however. We had a lot of, 
a lot of testimony, both from the public sector and the private 
sector, about how to do performance-based acquisition. We have 
collected that information. Some of our private sector 
witnesses actually provided us with proprietary information and 
explanations as to how they go about this process.
    So we have that information and we have tried to reflect 
the conclusions we drew from it in our report, but we do not 
really have in our hand a tidy best practices guide that we 
could hand out. We do recommend that one be created.
    Senator Ensign. Thank you, Mr. Chairman.
    Senator Akaka. Thank you, Senator Ensign.
    Senator McCaskill.
    Senator McCaskill. Thank you, Mr. Chairman.
    At the risk of sounding sarcastic, and I do not mean to be 
sarcastic, but as somebody who is new and who comes from an 
auditing background this is incredibly complex when you realize 
what we are trying to do is get stuff as cheaply as possible 
that we need.
    That is really what this all boils down to, is for the 
government to be able to buy things for the best bargain that 
they need. I have some questions that I have asked--let me ask 
you all first, have you read the IG's report that we talked 
about in this hearing? [Witnesses nod affirmatively.]
    If I can just stay on that report for the entire time of 
this term and fix some of those things, I will consider my term 
to be incredibly successful, because it was eye-opening for me. 
Understand if that report had been issued by my State auditing 
agency it would have been front page news for weeks. Building a 
building with operational funds that is 230,000 square feet? 
Paying for services before there has been scope of a contract? 
Having the contract signed years after they finished paying for 
the work that had been done?
    This is really, a lot of this is over the top for somebody 
who is taking a fresh look at it. I want the first ask you 
about what seems to me to be really kind of down the rabbit 
hole, and that is the part of your testimony and the part of 
your work on the committee where you talked about the reduced 
workforce. I am assuming the workforce was reduced because 
people were trying to save money, correct?
    Ms. Madsen. Senator, certainly in the mid-1990s, 
particularly with I think what was probably then viewed as the 
benefit of the end of the Cold War, there was a perception that 
we did not need as many Federal employees. There were 
certainly--and our study that we did on the workforce, the 
nine-volume study, certainly documents the reductions in the 
workforce. But the Federal acquisition workforce was reduced 
about 50 percent between like 1993 and 2000. It is a 
significant number.
    Senator McCaskill. Well, the interesting thing to me is in 
reading all this material last night, is that we reduced the 
workforce to save money and as a result we are now contracting 
out with this huge workforce to do this work, and because we 
are contracting out we have no idea what is going on. Is that 
fair?
    Mr. Hughes. I think one of the chapters in our report, 
chapter 6, deals with appropriate role of contractors. I think 
it is an interesting issue because you have this question of 
how you buy services. We testified about that and talked about 
that, requirements development and how we do it. The other part 
of the question is what is the appropriate role for contractors 
in this process, decisionmaking. One of our recommendations is 
that agencies review, make sure they are maintaining core 
capabilities in house, in other words sufficient core 
capabilities to do things that are an inherent part of the 
government decisionmaking process. There is a lot of related 
issues that go with this too: What is an inherently 
governmental function? Who should be performing it?
    But you raise a question, but your question raises an issue 
that the panel looked at and the numbers are there. Sixty 
percent of the procurement spend is on services and those 
services move closer to the decisionmaking side, the inner 
circle of the government. One of the things we did worry about 
as a panel is what is the appropriate role as you move closer 
to the circle.
    The complexity of this can be overwhelming. If you just 
take DOD's spend, it is about $250 billion. If you were to 
convert that to Fortune 500 and convert that spend to revenue, 
DOD would be right up there maybe after two or three of the oil 
companies in terms of complexity. There are a lot of different 
issues here. We focused on services in a number of areas, but 
it is a very complex process.
    Senator McCaskill. Honestly, Mr. Hughes, I think that the 
more complex it is the harder it is for us to figure out how to 
get a handle on it. I have a feeling that if somebody does not 
try to do something bold and dramatic--I mean, talk about the 
cow being out of the barn. Anybody coming with a fresh look on 
this can do one of two things. I think people have thrown up 
their hands and said, this is to complicated. There is this 
policy and that policy.
    I tried to get through your testimony and there are so many 
acronyms and so many numbers, but it can be boiled down. I 
mean, if you look at the issue of competitiveness, how in the 
world do we get to the point that one-third of the procurement 
is noncompetitive in government?
    Mr. Hughes. We had a lot of internal debate about this 
issue and I think one of the things that we discovered, and it 
is written in the report, is--by and large, let me just say we 
heard a lot of great testimony. There is a lot of folks out 
there in the government trying really hard to do the right 
thing. In every case, they look at their agency's mission and 
they have a mission, and then they have a very narrow period of 
time in which to obligate money. We have a fiscal rule system, 
and if you have an auditing background from the State you 
understand that. In other words, there is a rule set by which 
we obligate government money.
    So what we have seen in the testimony is I think people 
trying very hard to do their agency's mission, whatever their 
mission was. We talked to civilian agencies, defense agencies. 
Then we have this rule set by which we have to run procurements 
because we have to be transparent, we have to be accountable, 
we have to obey the fiscal rules. Then you have heard evidence 
that the workforce has been relatively flat or maybe decreasing 
and the number of procurements have gone up.
    So there are lots of stories like the ones that you are 
citing to in the IG report. I am not refuting that. I think we 
have to fix those things when we find them. But I also think 
that the sense of the panel was that the system is not 
fundamentally broken, that there is a lot of professionals 
working hard to do the right thing, and what our view was was 
to look at the areas that we did look at and recommend specific 
improvements.
    So it is complex, it is tough. We have tried to lay it out 
sequentially in the different chapters. But I did want to say 
that there were some good news stories out there too that we 
heard in the course of taking the testimony, and it is a 
tribute sometimes that things get done, given the constraints 
that we put in front of the acquisition workforce.
    Senator McCaskill. At this point I am trying to get a 
handle on how much we are buying without competition. That is 
what I am trying to focus on right now. Reading what I have 
read, a third in 2004, which was $107 billion, and $100 billion 
in 2005. Then you look at how much is interagency and then you 
say further that we cannot really tell with the interagency 
purchases whether they are even competitive or not.
    So what we know is at least a third are noncompetitive, but 
40 percent of 2004 was all interagency and what you have said 
is you cannot tell me how much of that interagency was 
competitive.
    Ms. Madsen. That is correct, Senator. We actually invested 
a lot of--I am going to speak specifically to Ms. Auletta 
because she had more of those midnight hours than I did, 
looking at the data from the Federal Procurement Data System-
Next Generation. In 2004 really was the first time that that 
system started to capture data on the interagency contracts.
    So we just did not have a good view of the ordering 
process. We could tell how much was going through it, but we 
just could not tell how competitive it was. Really, our source 
of information about competitiveness on those contracts are the 
IG and GAO reports going back to 1997, 1998 and coming forward, 
which consistently indicate with orders under those multiple 
award contracts that somewhere around 40 to 50 percent of the 
orders that they sample--and they always do relatively small 
samples--you will see 17 contracts, 20 contracts. The samples 
show about 40 to 50 percent are not competitive.
    But that is information that was not available to us. Now, 
if you get to sort of the back of our report you will see we 
have made a number of recommendations with respect to 
collecting data and particularly data on competition so that 
folks, especially you, can get a better handle on the questions 
you are asking.
    Senator McCaskill. Well, it seems to me that it is pretty 
basic that we should at least know whether something is 
competitive or not. I mean, that to me is fundamental to 
government acquisition, and if we cannot tell whether or not 
what we are buying is being done competitively I do not know 
how we think we are ever going to get our hands around the fact 
that we have government waste. I think it is impossible. 
Correct? Am I wrong in that?
    Mr. Etherton. No, Senator McCaskill, you are correct. I 
think that one of the major themes that you see going 
throughout the recommendations is the sense that we need to get 
a better understanding of what is actually happening. There are 
a number of--for example, in the interagency contracts section 
we endorse the current effort underway at the Office of 
Management and Budget to figure out how many of these vehicles 
we have out there, what the activity that we have going through 
them, as a baseline then to make further improvements on the 
system and better manage that entire contracting universe.
    Ms. Madsen also pointed out that there is a section in the 
back of the report which talks about improvements to the 
database so we have a better understanding about that. On the 
other side of that, we made some recommendations with respect 
to competition, one in particular being the extension and 
expansion of the section 803 requirements on a much greater 
basis, so that everyone----
    Senator McCaskill. You have to tell me what section 803 is.
    Mr. Etherton. I am sorry. Section 803 basically says that 
when you have a multiple award task or delivery order contract, 
in most circumstances you are supposed to let all the people 
who are under that contract or are eligible to get a task or 
delivery order, to give them information about any pending 
awards that they may be eligible to try to compete for, in 
other words to get the information out there so that everybody 
can see it. There are a number of other recommendations along 
those lines. So as we are gathering the information and trying 
to get a better understanding of what the current state of play 
is, we also have the ability to disseminate these opportunities 
to a much broader universe of folks in a more formal way so 
that people are aware of the opportunities and we can increase 
competition in that fashion.
    Senator McCaskill. Thank you, Mr. Chairman.
    Senator Akaka. Thank you very much, Senator McCaskill.
    I want the thank the panel. We do have questions which we 
will include for the record for you to respond to and I want to 
thank you for your responses today.
    I would like to now call the second panel to the dais.
    Ms. Madsen. You are very welcome, Senator, and if there is 
any other information we can provide we would be happy to do 
so.
    Senator McCaskill. Thank you all.
    Senator Akaka. Our second panel includes: Paul Denett, the 
Administrator for Federal Procurement Policy; and also Shay 
Assad, the Director of Defense Procurement and Acquisition 
Policy. Mr. Denett and Mr. Assad are the two senior officials 
responsible for developing and implementing Federal policy on 
contracting for services and interagency contracting.
    I want to welcome both of you to the committee. I want to 
emphasize that Mr. Denett and Mr. Assad are not personally 
responsible for the extensive problems that we have experienced 
with contracting for services and interagency contracting. Both 
took office fairly recently and have been working to address 
the problems that we have identified. The record of these 
hearings makes it clear that much more remains to be done.
    Mr. Denett and Mr. Assad, we look forward to your 
statements. Mr. Denett, you may begin.

  STATEMENT OF HON. PAUL A. DENETT, ADMINISTRATOR, OFFICE OF 
  FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET

    Mr. Denett. Thank you. Chairman Akaka, Senator Ensign, and 
members of the subcommittee: I appreciate the opportunity to 
appear before you this afternoon to discuss contracting for 
services, interagency contracting, and related issues. My 
remarks will focus on acquisition from a government-wide 
perspective. I prepared a full statement for the record and 
with your permission would like to insert it into the record 
and highlight a few key points.
    Senator Akaka. Your full statements will be included in the 
record.
    Mr. Denett. First, we must do a better job ensuring that 
our acquisition workforce has the proper skills and 
competencies to deliver the best results possible for the 
American taxpayer. Assessment of acquisition skills is an 
essential step in agencies determining the necessary 
acquisition staffing levels.
    We acquired over $400 billion in goods and services in 
fiscal year 2006. Many of the shortcomings that have been 
identified by the GAO, the agency IGs, and the Services 
Acquisition Reform Act (SARA) panel lie not in the acquisition 
tools themselves, but rather in the management, practice, and 
training surrounding their use. Adequate, proper, and timely 
acquisition and project management training is essential.
    As Administrator of OFPP, I am focusing policy development, 
management attention, and training on the tools that our 
workforce is relying on most to meet the unprecedented 
challenges of the 21st century. For example, OFPP is developing 
guidance to strengthen the interagency contracting with the 
assistance of an interagency team that includes DOD and other 
large customer and servicing agencies. The guidance will be 
designed to ensure requesting and servicing agencies understand 
and carry out their respective responsibilities for each step 
in the acquisition process.
    In addition to guidance, we will work with the Federal 
Acquisition Institute and the Defense Acquisition University 
and private training companies to increase training offered in 
this area.
    OFPP and the interagency team will also be exploring ways 
we might improve strategic use of interagency contracts.
    Second, I share the SARA panel's overarching conclusion 
that competition, transparency, and accountability for results 
are the underpinnings of a solid Federal acquisition system. As 
a general matter, the current statutory acquisition authorities 
will produce good results for taxpayers when they are followed 
and coupled with sound planning, competition, and effective 
management and oversight.
    I work closely with the Chief Acquisition Officers Council 
and the Federal Acquisition Regulatory Council, industry 
associations, and scholars to carefully analyze the panel's 
many recommendations. We will implement those that make sense. 
We will track and have agencies review to ensure compliance and 
results.
    I intend to pay particular attention to panel proposals 
that strengthen the management and transparency of task and 
delivery orders, especially for complex services. Services now 
account for over 60 percent of all our acquisition dollars. I 
will also focus on the panel proposal that can improve the 
quality of acquisition planning, such as through the 
establishment of agency centers of expertise to assist with the 
analysis related to common recurring needs. I am glad that many 
of the panel's proposals can be addressed through regulatory or 
policy action.
    Third and last, I am a strong supporter of giving credit 
and recognition. Too often we fail to recognize when 
acquisitions are conducted well and miss opportunities for 
employees to learn through the success of their peers. I have 
launched the SHINE initiative to increase the visibility of 
acquisition excellence within our workforce.
    For example, the following individuals from the DOD have 
received well-deserved recognition for achieving great results 
through their hard work: Nancy Gunderson as the acquisition and 
contracting team leader of the Pentagon renovation program, for 
being instrumental in renovating and repairing the Pentagon on 
time and in an efficient manner following the September 11 
attack;
    Lieutenant Commander Jeffrey Davies of the Naval Supply 
Systems Command, for his outstanding leadership in combining 
contracting and logistics for superior regional patrol boat 
maintenance and crew swaps at significantly lower cost and 
reduced times in support of the warfighter;
    Lieutenant Commander Kristen Aquavella of the Naval Sea 
Systems Command, for her contracting accomplishments on the 
repair and overhaul of submarines, which played an integral 
role in saving the Navy $75 million. She also volunteered and 
served as the chief of a Baghdad contracting office where she 
led direct acquisition support of Operation Iraqi Freedom.
    The last person I would like to recognize: Mark Strawn of 
the Department of the Air Force, for increasing the efficiency 
of the acquisition process undertaken by the Landing Gear 
Commodity Council. He reduced the processing time of 
acquisitions for landing gear from 75 days to an average of 3 
days with advanced contracting.
    I will use this SHINE initiative to help ensure that the 
best practices are shared and that the value of our Federal 
acquisition employees is appropriately recognized.
    Today our agencies are more reliant on contracting to 
support their missions than ever before. I am proud to work 
with the acquisition contracting personnel to produce good 
results for our taxpayers. The OFPP is committed to addressing 
shortcomings and reinforcing successful practices.
    I welcome the opportunity to work with the subcommittee and 
other Members of Congress in a bipartisan effort to ensure a 
contracting system that is competitive, transparent, and 
accountable.
    This concludes my prepared remarks. I would be happy to 
answer any questions that you might have.
    [The prepared statement of Mr. Denett follows:]

               Prepared Statement by Hon. Paul A. Denett

    Chairman Akaka, Senator Ensign, and members of the subcommittee, I 
appreciate the opportunity to appear before you today to discuss 
contracting for services, interagency contracting, and related issues. 
You have asked for my views on the report of the Acquisition Advisory 
Panel established under the Services Acquisition Reform Act (the ``SARA 
Panel'') as well as my thoughts on recent assessments by the Inspectors 
General (IGs) for the Department of Defense (DOD) and other Federal 
agencies.
    My remarks will focus on acquisition from a government-wide 
perspective, consistent with my responsibilities as Administrator for 
the Office of Federal Procurement Policy (OFPP). Mr. Shay Assad will 
provide a departmental perspective on issues before us today.
    The beginning of the 21st century has presented our acquisition 
workforce with unprecedented challenges. We are more reliant on 
contracting to support the numerous agency missions. While I have great 
confidence in the dedication of our workforce, I am concerned that we 
have not adequately trained them and strengthened their competencies so 
that they can deliver the best results possible. Over the past decade, 
spending on services has outpaced spending on products, as agencies 
shift from buying items to buying solutions. Today, service contracting 
represents just over 60 percent of the almost $400 billion in total 
acquisition dollars. Similarly, interagency contracting has also grown 
significantly as agencies look to reduce administrative expenses and 
leverage resources. While neither of these trends should, by 
themselves, be cause for alarm, the level of management attention given 
to service contracting and interagency contracting must be increased 
accordingly to ensure these tools are used properly and effectively.
    The SARA Panel's report on Federal acquisition practices is 
especially timely. I welcome the anticipated arrival of the final 
report. Through a highly transparent process and input from members and 
witnesses representing diverse perspectives and backgrounds, the Panel 
has produced a comprehensive report with a number of findings and 
recommendations that are deserving of our careful consideration to 
improve contracting for the American taxpayer.
    I share the Panel's overarching conclusion that competition, 
transparency, and accountability for results are the underpinnings of a 
solid Federal acquisition system. Many of the shortcomings identified 
by the Panel, the IGs, and the Government Accountability Office (GAO) 
lie not in the acquisition tools themselves, but rather in the 
management, practices, and training surrounding their use. As a general 
matter, the current statutory acquisition authorities will produce good 
results for the taxpayer when they are coupled with sound planning, 
competition, and effective management and oversight. Oversight should 
contribute to improvement and results. Hold the contracting personnel, 
including myself, accountable.

                   IMPROVING INTERAGENCY CONTRACTING

    With respect to interagency contracting, in particular, OFPP is 
taking a number of steps to address weaknesses identified by the GAO, 
agency IGs, the SARA Panel, and others. Our goal is to ensure these 
contracts are used properly and in a strategic manner.
Clarifying roles and responsibilities
    The GAO, IGs, and others have found that breakdowns in interagency 
contracting are often associated with unclear lines of responsibilities 
and a failure to carry out key responsibilities. OFPP is leading an 
interagency working group to establish guidance clarifying 
responsibilities between the requesting (customer) agency and the 
servicing agency for each key step in the acquisition process--from the 
determination of needs and development of the statement of work, to the 
determination of price reasonableness, and the performance of contract 
surveillance. Participants include DOD and other major requesting and 
servicing agencies, including the General Services Administration 
(GSA), the Department of the Interior, the National Aeronautics and 
Space Administration, the Department of Energy, and the Department of 
the Treasury, among others. We anticipate completing the guidance in 
the spring.
    This exercise is especially important in an assisted acquisition, 
where a contract action is placed by the servicing agency on the 
requesting agency's behalf. Absent a clear understanding between the 
parties, there is increased risk that responsibilities will not be 
accomplished. We are working to develop a model interagency agreement 
to facilitate greater consistency and clarity in the identification and 
documentation of roles by the respective parties.
    I commend DOD for taking actions to improve its interagency 
contracting. As the DOD IG noted before this subcommittee, the recent 
memorandum of understanding between DOD and GSA includes a number of 
basic contracting management controls, such as ensuring that sole-
source justifications are adequate and interagency agreements describe 
the work to be performed.
Strategic use
    We wish to ensure strategic use of interagency contracting 
vehicles. Many in the contracting community, including the SARA Panel, 
have raised concerns that there may be unnecessary duplication of 
interagency vehicles. We are exploring whether we may need a governance 
structure for multiagency contracts (MACs). MACs operate separate and 
apart from the Federal Supply Schedules, which are governed by rules 
established by GSA, and government-wide acquisition contracts (GWACs), 
which are subject to review by OMB. As a first step, OFPP conducted a 
data collection to gain a better understanding of the number of MACs. 
According to the latest count, agencies have identified at least 55 
MACs. These contracts are predominantly for professional and technical 
services and information technology, which appear to overlap the scope 
of GWACs and some schedule contracts. We are currently working to 
identify the dollars obligated through these MACs. We are also 
reviewing acquisition activity on franchise funds. The SARA Panel 
recognized and endorsed these efforts, concluding that increased 
visibility is a prerequisite to improving the strategic use of 
interagency contract vehicles.

                         OTHER OFPP PRIORITIES

    In addition to our work on interagency contracting, other 
priorities that I have laid out for OFPP also address the types of 
concerns identified by the SARA Panel, the IGs and the GAO. They 
include: (1) increasing attention on acquisition planning and contract 
management, (2) strengthening the acquisition workforce, and (3) 
improving the Federal Procurement Data System (FPDS).
    (1) Increasing attention on acquisition planning and contract 
management. We must ensure that agencies do a better job of planning 
and articulating contract requirements. We must also pay greater 
attention to overseeing our contractors to ensure they meet their 
contractual obligations efficiently and effectively.
    This past June, OMB revised its Capital Programming Guide, which 
discusses the policy for planning, budgeting, acquisition, and 
management of Federal capital assets. The development of business cases 
remains a central feature of the process. Agencies must conduct 
comprehensive planning to support the business case, including a needs 
assessment and an alternatives analysis. The Guide emphasizes the 
importance of cross-functional participation in the planning process to 
ensure the ultimate success of the acquisition.
    In addition, OFPP plans to:

         Enhance the quality and consistency of agency internal 
        control reviews by issuing guidance to agencies on assessing 
        their acquisition function, taking into consideration the GAO's 
        2005 framework for assessing risk in acquisition activities.
         Issue guidance to ensure the proper use of contract 
        incentives.

    (2) Strengthening the acquisition workforce. Getting good results 
from our acquisitions ultimately depends on the capabilities of the 
workforce. Our workforce must be equipped with the skills and 
competencies required to meet the needs of our end-users. Adequate 
training is a must. To achieve these results, OFPP plans to:

         Place greater emphasis on the recruitment and retention of 
        top talent through improved acquisition intern programs, cross-
        agency rotational assignments, and special training for interns 
        and new members of the workforce.
          The Federal Acquisition Institute (FAI) has developed the 
        blueprints for a Federal Acquisition Intern and Career 
        Development Coalition that will promote acquisition intern and 
        career development programs for entry and mid-level 
        professionals.
         Seek legislation to make the acquisition workforce training 
        fund (AWTF) permanent.
          By using the AWTF, FAI was able to leverage its demand for 
        course work, save an average of 45 percent per student over the 
        commercial price for these classes, and increase the amount of 
        training available to the acquisition community.
         Ask agencies to conduct a competency assessment on the 
        acquisition workforce to help agencies identify skills gaps.
         Support efforts by the Chief Acquisition Officers (CAOs) to 
        identify hiring, training, and developmental needs for their 
        respective agencies for incorporation into the agency's human 
        capital strategic plan.
         Establish program/project manager and contracting officer's 
        representative certification programs to support common 
        competencies and training standards for this important 
        acquisition function.
          FAI and the Defense Acquisition University (DAU) now offer 
        classroom and online training on performance-based service 
        contracting to contracting officers, program managers, and 
        other members of the acquisition team who play a critical role 
        in service contracting. These courses will better enable all 
        members of the acquisition team to contribute to the creation 
        of performance work statements and support management of the 
        resulting contracts.
         Work with DOD to study the feasibility of a Federal 
        Acquisition University.
          Over the last 2 years, FAI and DAU have developed a close 
        partnership to leverage resources for training and other 
        professional development efforts. In fiscal year 2006, FAI 
        delivered classroom training to over 2,800 contracting 
        professionals and provided on-line training to over 20,000 
        students--a substantial increase over any previous year.
         Work with DAU and FAI to develop additional emergency 
        contracting training and expand reference materials available 
        through the DAU/FAI online community of practice Web site to 
        meet the needs of the Department of Homeland Security and other 
        agencies with emergency responsibilities.

    In addition, I launched the ``Shine'' initiative to increase the 
visibility of acquisition excellence within our workforce. Too often, 
we fail to recognize when acquisitions are conducted well and miss 
opportunities for employees to learn through the successes of their 
peers. The Shine initiative will help ensure best practices are shared 
and the value of our Federal employees are appropriately recognized.
    (3) Improving FPDS. FPDS must be an authoritative source for 
acquisition information that allows the government and industry to make 
decisions and measure results with accurate data. We will implement a 
data verification process to achieve this outcome.

               REVIEWING THE SARA PANEL'S RECOMMENDATIONS

    I will work closely with the Chief Acquisition Officers Council 
(CAOC) and the Federal Acquisition Regulatory Council (FAR Council) to 
analyze the Panel's recommendations, identify those that deserve 
priority attention, and take timely action. In this regard, I am glad 
that many of the Panel's proposals can be addressed through regulatory 
or policy actions.
    I intend to pay particular attention to proposals that would 
strengthen the management and transparency of task and delivery orders, 
especially for complex services. The Panel, IGs, and GAO each have 
raised concerns about high-dollar value orders for services being 
placed with inadequate planning, competition, and post-award 
surveillance.
    I also intend to pay close attention to proposals that can improve 
the quality of acquisition planning. The Panel offers several common-
sense ideas to help agencies better define their requirements. For 
instance, they recommend the establishment of agency centers of 
expertise to assist with analysis related to common recurring needs, 
and the centralization of market research information at GSA to 
organize and make this information available for government-wide use.
    I am pleased to tell you that OFPP, through its ongoing initiative 
to improve interagency contracting, has already taken actions to 
address some of the recommendations made by the Panel in this area. The 
Panel acknowledged our data collection as an important first step to 
ensuring these vehicles are being used strategically.
    While not specifically addressed in the Panel's report, other 
ongoing OFPP initiatives are also serving to help agencies improve 
their operations through the synergies of marketplace competition, 
including:

         Greater use of strategic sourcing, where agencies collaborate 
        to leverage the government's buying power and reduce costs for 
        commonly used products.
          GSA recently awarded a blanket purchase agreement (BPA) with 
        a nationwide domestic delivery service company to leverage the 
        government's volume, reduce prices, and improve commodity 
        management. By February, agencies will have placed over $55 
        million in orders against this BPA to take advantage of 
        significant price reductions--which could be as high as 40 
        percent, depending on the services ordered.
         The reasoned and responsible use of competitive sourcing to 
        reduce costs and improve the performance of commercial support 
        activities.
          Improvements set in motion by competitions completed in 
        fiscal year 2006 are expected to generate net savings or cost 
        avoidances totaling about $750 million over the next 5-10 
        years. Expected annualized savings from competitions completed 
        between fiscal years 2003-2006 is approximately $1 billion.

                               CONCLUSION

    Mr. Chairman and members of the subcommittee, OFPP is committed to 
addressing shortcomings and reinforcing successful practices. I look 
forward to working with DOD and the other agencies, the members of this 
subcommittee, and other members of Congress in a bipartisan effort to 
ensure our acquisition system produces the good results our taxpayers 
deserve.
    This concludes my prepared remarks. I am happy to answer any 
questions you might have.

    Senator Akaka. Thank you.
    Mr. Assad.

  STATEMENT OF SHAY ASSAD, DIRECTOR, DEFENSE PROCUREMENT AND 
           ACQUISITION POLICY, DEPARTMENT OF DEFENSE

    Mr. Assad. Chairman Akaka, Senator Ensign, members of the 
subcommittee, my name is Shay Assad. I serve as the Director of 
Defense Procurement and Acquisition Policy. Before assuming 
this position in April 2006, I served as the Senior Contracting 
Official within the Marine Corps. Prior to entering government 
service in 2004, I spent 25 years in industry serving as a 
member--serving in a number of operational and contract 
management capacities, primarily with Raytheon Company. My 
experience includes serving as a Senior Vice President of 
Contracts, and President and Chief Operating Officer of one of 
Raytheon's major subsidiaries, and lastly as an Executive Vice 
President and Chairman and Chief Executive Officer of one of 
Raytheon's major subsidiaries.
    Thank you for the opportunity to participate in today's 
discussion on contracting for services and interagency 
contracting practices. I would like to take a moment to thank 
the committee for its support of our troops and all you have 
done to help with their mission.
    In your invitation to appear before this subcommittee, you 
stated that you were interested in hearing my views on several 
matters related to DOD contracting. With regard to the findings 
and recommendations of the advisory panel, I have read the 
draft advisory report. It is comprehensive and covers matters 
ranging from the workforce, small business participation, 
ethics, contracting for services, interagency contracting, and 
commercial practices, to name a few. The report certainly 
provides a framework for improvement in a number of areas and 
we will be busy addressing them. In general, I agree with most 
of the panel's recommendations.
    With regard to the joint interagency contracting reviews of 
the Inspectors General, as was noted in our written response to 
the DOD IG's reports, we have concurred with their findings and 
we are taking several steps to respond to those findings. I 
recently met with both the DOD IG and the Department of 
Interior (DOI) IG in order to review each and every finding 
that were the result of their initial second year audit of the 
DOI contracting activities.
    We will continue to work diligently with our sister 
agencies to further improve business practices and to more 
effectively conduct business in a manner that is compliant with 
fiscal law requirements. We believe the progress being made is 
responsive to the findings of the DOD IG and will help ensure 
that in an overall sense DOD funds are spent wisely and in 
accordance with all Federal law and fiscal policy.
    I would also like to comment on the GAO and DOD IG 
oversight functions. In my view both of these organizations 
play key and important roles. My experience with both 
organizations is that they are extremely competent, they are 
independent, and they are necessary. They either reaffirm that 
we are doing the job right or they highlight areas that require 
improvement. In either case, in general, I find their views to 
be constructive and meaningful.
    Concerning the implementation of legislative provisions 
regarding the management of services contracts, most recently 
the DOD issued a policy memorandum implementing the legislation 
provisions of section 812 by requiring all DOD components to 
establish and implement a management structure for the 
acquisition of services based on dollar values and review 
thresholds.
    With regard to the adequacy of the DOD acquisition 
workforce to carry out its responsibilities, in my role I serve 
as the functional leader of the contracting professionals of 
the DOD, both military and civilian. Over the past 10 years our 
workload has increased significantly. The number of actions in 
excess of $100,000 has increased by well over 60 percent. The 
total value of our procurement actions has increased by well 
over 130 percent. I believe that our workload will continue to 
increase.
    During that timeframe, our acquisition workforce has 
decreased by approximately 5 to 10 percent. We have useful 
information regarding the numbers of our contracting 
professionals and we have a very good sense of how they have 
been trained. We also believe that because of the downsizing of 
the workforce that took place in the late 1990s the overall 
capability of our workforce requires improvement. However, 
while we can surmise, we cannot determine with specificity 
where those shortfalls in capabilities exist.
    For the past 5 months my office, in concert with the 
Defense Acquisition University, the military departments, and 
the defense agencies, has been developing a workforce 
assessment model that will address the skills and competencies 
necessary for our contracting workforce. We will complete the 
development of that contracting model in March 2007. Beginning 
in the second quarter of this year, we will begin deployment of 
the competency model across the entire DOD contracting 
workforce. This is a major undertaking and will be the first 
time the DOD has attempted to assess its contracting capability 
across the entire enterprise.
    The assessment will allow the DOD to evaluate the workforce 
in terms of its size, its capability, its skill mix, and to 
develop a comprehensive recruiting, training, and deployment 
plan to meet the identified contracting capability gaps.
    Concerning DOD contracting for services and interagency 
contracting, the DOD is taking action to improve the way it 
acquires and manages services. This integrated action involves 
changes and improvements in our organization, our strategic 
approach, and the tactical methods we will use to acquire and 
manage services.
    We have made organizational changes and are taking steps to 
improve workforce skills to more efficiently and effectively 
acquire services. In addition to my duties as the Director of 
the Defense Procurement and Acquisition Policy Organization, I 
am now charged with the responsibility for oversight of 
strategic sourcing activities across the DOD. In this new role, 
I am responsible for working with the military departments and 
the defense agencies to craft a coordinated and integrated 
strategic approach to the acquisition and management of 
services.
    We concurred with the GAO when they said that a more 
coordinated and integrated strategic approach to acquiring 
services was necessary. DOD is developing that approach. The 
basic tenets of our architecture are straightforward and 
simple: maximum use of competition, use of acknowledged best 
practices, appropriate application of performance-based 
approaches, enhanced contract surveillance by early on 
identification of appropriate contract performance metrics, 
quality assurance surveillance plans included in our contracts, 
appointment of properly trained contracting officer 
representatives, enhanced application of past performance 
information, and finally, maximum small business participation 
in socioeconomic goal achievement.
    In conclusion, I believe that there is not another 
organization that rivals the procurement and contracting 
expertise residing within the DOD. The range and depth of the 
approximately $300 billion of items and services that we buy on 
an annual basis are unparalleled in any other procurement 
organization in the world. Our training programs are the envy 
of industry. The contracting functions that we perform are not 
trivial. Whether contracting for base operating support, 
contingency contracting, or the procurement of an aircraft 
carrier, our contracting professionals require unique and 
significant skill and expertise.
    We recognize that there is much improvement needed in order 
to ensure that we provide the most effective and efficient 
means of contracting for the goods and services necessary to 
support our warfighters. We must always remember, however, that 
while we strive to provide our warfighters the very best, we 
must also ensure that we do so while being good stewards of 
taxpayer funds. Our warfighters deserve nothing less and our 
taxpayers rightfully should insist on nothing less.
    Mr. Chairman, I thank you and the members of the committee 
for your interest in our efforts and would be happy to address 
any questions that you may have for me. Thank you very much, 
sir.
    [The prepared statement of Mr. Assad follows:]

                    Prepared Statement by Shay Assad

    Chairman Akaka, Senator Ensign, and members of the subcommittee: I 
am Shay Assad and I serve as the Director, Defense Procurement and 
Acquisition Policy in the Office of the Under Secretary of Defense for 
Acquisition, Technology, and Logistics. Before assuming this position 
in April 2006, I was the Assistant Deputy Commandant, Installations and 
Logistics (Contracts) for the Marine Corps and, as such, served as the 
senior civilian contracting official within the Marine Corps.
    Prior to Government service, I spent 25 years in industry serving 
in a number of operational and contract management capacities, 
primarily with Raytheon Company. My experience includes serving as a 
Senior Vice President of Contracts, a President and Chief Operating 
Officer of one of Raytheon's major subsidiaries and lastly, as an 
Executive Vice President of the company and the Chairman and Chief 
Executive Officer of one of its major subsidiaries. I am a graduate of 
the United States Naval Academy and I started my career as an officer 
in the United States Navy serving two tours on U.S. Navy destroyers and 
lastly as a Navy Procurement Officer at the Naval Sea Systems Command.
    Thank you for the opportunity to appear before you today to 
participate in today's discussion on contracting for services and 
interagency contracting practices. I would like to take a moment to 
thank the committee for its support of our troops and all you have done 
to help with their mission. I would also like to thank the men and 
women who serve our great country. When I say men and women, I mean our 
military service men and women, our Government civilian employees and 
those in industry who support our mission. None of us could get the job 
done without the other.
    The Department of Defense (DOD) acquisition team strives to provide 
our warfighters the support they need, consistent with responsible 
management and stewardship to our taxpayers. We strive to effect timely 
acquisition planning, contract execution and responsible contract 
management oversight in order to provide our warfighters the contractor 
support they need to accomplish the mission. We are doing everything it 
takes to make sure our soldiers, marines, airmen, and sailors are 
provided with the safest, most dependable, and highest performing 
equipment available within fiscal constraints, together with the 
logistics and material support necessary to ensure performance 
whenever, and wherever they are needed. We will continue to work 
everyday to improve the service that we provide our men and women in 
the Armed Forces.
    In your invitation to appear before this subcommittee you stated 
that you were interested in hearing my views on several matters related 
to DOD contracting. Among them were: (1) the findings and 
recommendations of the Acquisition Advisory Panel; (2) the results of 
the joint reviews conducted by the Department of Defense Inspector 
General (DOD IG) and the Inspectors General of the other Federal 
agencies; (3) the implementation of legislative provisions regarding 
the management of services contracts; (4) the adequacy of the DOD 
acquisition workforce to carry out its responsibilities; and (5) DOD 
contracting for services and interagency contracting. For the record, I 
will provide a brief summary of my views.

        ACQUISITION ADVISORY PANEL FINDINGS AND RECOMMENDATIONS

    With regard to the findings and recommendations of the Acquisition 
Advisory Panel, I have read the draft Acquisition Advisory Panel 
Report. It is comprehensive and includes a number of recommendations 
and findings on matters ranging from the workforce, small business 
participation, ethics, contracting for services, interagency 
contracting and commercial practices, to name a few. The report 
certainly provides a framework for improvement in a number of areas and 
we will be busy addressing them. While I agree with most of the panel's 
recommendations, I would like to note that with regard to the 
recommendations concerning the assessment of the acquisition workforce, 
the Department has already done a significant amount of work in this 
area. We already have an AT&L Human Capital Strategic Plan and we are 
moving forward with our workforce assessment initiatives.

                       INSPECTOR GENERAL REVIEWS

    With regard to the joint interagency contracting reviews of the 
Inspectors General, as was noted in our written response to the DOD 
IG's reports, we have concurred with their findings and we are taking 
several steps to respond to those findings. I recently met with both 
the DOD IG and the Department of the Interior (DOI) IG in order to 
review each of the recent findings that were the result of their 
initial second year audit of DOI contracting activities.
    The Department takes seriously its fiduciary responsibilities and 
we are working closely to effect both programmatic and financial 
corrective actions that will ensure mission accomplishment and protect 
the integrity of our fiscal requirements. Our efforts to effect sound 
financial management of our complex business area are an object of 
continuous improvement. We believe that actions being taken are 
resolving the issues identified in the audit reports. As we make 
progress to resolve the issues surrounding Interagency Agreements, we 
are working concurrently with our providers of goods and services as 
well as the DOD IG to seek optimum solutions.
    At the very heart of the issue is an understanding that 
departmental funds have a common and consistent statutory basis, 
regardless of the agency that we charge with executing those funds. It 
is both our philosophy and practice that ``the (fiscal) rules follow 
the funds.'' Much improvement has been made over time and some of the 
significant financial actions taken include the following:

         Established and reinforced standard fiscal policy and 
        correction of common misinterpretations that exist both within 
        and outside the Department. Our new policy provides a standard 
        business model for conducting business with other Federal 
        agencies, regardless of their statutory authority. In essence, 
        the policy establishes the requirements for initiating an 
        agreement, the timing of the obligation, and the period of 
        performance.
         Ensure that the use of an Interagency agreement is consistent 
        with its statutory authority.
         Tightened internal controls to more effectively manage 
        agreements with other Federal agencies. For example, DOD 
        Components are now required to conduct tri-annual reviews to 
        validate open obligations on Interagency Agreements.
         Reviewed all Interagency Agreements and the financial records 
        from the providers to determine the status, reconcile 
        transactions, return outstanding balances, and take corrective 
        actions to ensure compliance with fiscal policy requirements. 
        As a result, approximately $550 million has been deobligated.

    In addition to these measures, we are clarifying our advance 
payment policy. The Department will also evaluate internal fund 
certification policy and related training requirements to improve 
accountability, understanding of fiscal requirements, and further 
strengthen internal controls.
    We will continue to work diligently with our Interagency partners 
to further improve business practices and to more effectively conduct 
business in a manner that is compliant with fiscal law requirements. 
The Department's new financial policy has taken the proper approach to 
business being conducted with our interagency providers.
    We believe the progress being made is responsive to the findings of 
our DOD IG and will help ensure that, in an overall sense, DOD funds 
are spent wisely and in accordance with all Federal law and fiscal 
policy.
    I would also like to comment on the Government Accountability 
Office (GAO) and the DOD IG oversight functions. In my view, both of 
these organizations play key and important roles. My experience with 
both organizations is that they are extremely competent, independent, 
and necessary. They either reaffirm that we are doing our jobs or they 
highlight areas that require improvement. In either case, in general, I 
find their views to be constructive and meaningful.

    IMPLEMENTATION OF MANAGEMENT OF SERVICES CONTRACTS LEGISLATIVE 
                               PROVISIONS

    Concerning the implementation of legislative provisions regarding 
the management of Services' contracts, over the past years there have 
been numerous legislative provisions that have addressed the 
Department's management of services contracts. We have responded with 
incremental policy and regulation revisions. While we are in process of 
developing policy associated with the National Defense Authorization 
Act (NDAA) for Fiscal Year 2007, most recently, the Under Secretary of 
Acquisition, Technology, and Logistics (USD(AT&L)) issued policy on 
October 2, 2006 implementing the legislative provisions of section 812 
of the NDAA for Fiscal Year 2006 by requiring all DOD components to 
establish and implement a management structure for the acquisition of 
services, based on dollar values and review thresholds. The DOD 
components have largely completed their implementations. However, in 
addition, the Department is now taking a strategic approach to the 
acquisition of services, and is developing a comprehensive DOD-wide 
architecture for the acquisition of services. Basic tenets of this 
architecture will include:

         Maximum use of competition to ensure pricing based on 
        competition.
         Use of acknowledged best practices.
         Appropriate application of performance-based approaches.
         Enhanced contract performance management supported by:

                 Early-on identification of appropriate contract 
                performance metrics.
                 Quality Assurance Surveillance Plans included in the 
                contract.
                 Appointment of properly trained contracting officer 
                representatives.

         Enhanced application of past performance information.
         Maximum small business participation and socio-economic goal 
        achievement.

                         ACQUISITION WORKFORCE

    With regard to the adequacy of the DOD acquisition workforce to 
carry out its responsibilities, in my role I serve as the functional 
leader of the contracting professionals of the DOD, both civilian and 
military. I am also a member of the Acquisition, Technology, and 
Logistics Steering Group established by the USD(AT&L) to address the 
implementation of our AT&L Human Capital Strategic Plan.
    Frequently, I am asked two questions regarding our workforce: (1) 
whether or not we have enough people in the Department to perform our 
mission effectively, efficiently, and in a manner that assures the 
lawful operation of the Federal acquisition system; and (2) whether or 
not our contracting workforce is sufficiently qualified to do the same.
    Over the past 10 years our workload has increased significantly. 
The number of actions in excess of $100,000 has increased by over 60 
percent, the total value of our procurement actions has increased by 
well over 100 percent and I believe that our workload will continue to 
increase. During that timeframe, our acquisition workforce has 
decreased by approximately 5-10 percent.
    We have useful information regarding the numbers of our 
professional contracting employees and we have a very good sense of how 
they have been trained. We also believe that because of the downsizing 
of the workforce that took place in the late 1990s the overall 
capability of our workforce requires improvement. However, while we can 
surmise, we can not determine with specificity, where those shortfalls 
in capability exist.
    Earlier in my comments, I mentioned that we have done a significant 
amount of work associated with the assessment of our workforce. For the 
past 5 months, my office, in concert with the Defense Acquisition 
University, the military departments and the defense agencies, has been 
developing a model that will address the skills and competencies 
necessary for our contracting workforce. We will complete development 
of the contracting competency model in March 2007. Beginning in the 
second quarter of calendar year 2007, we will begin deployment of that 
competency modeling across the entire DOD contracting workforce. This 
is a major undertaking and it will be the first time the Department has 
attempted to assess its contracting capability across the entire 
enterprise. The modeling will enable us to assess workload demands for 
and the degree to which members of the workforce possess these 
competencies. The competency assessment will also allow the Department 
to assess the workforce in terms of size, capability, and skill mix and 
to develop a comprehensive recruiting, training, and deployment plan to 
meet the identified capability gaps.

        DOD CONTRACTING FOR SERVICES AND INTERAGENCY CONTRACTING

    Concerning DOD contracting for services and interagency 
contracting, the Department is taking action to improve the way it 
manages and acquires services. This integrated action involves changes 
and improvements in: (1) our organization, (2) our strategic approach, 
and (3) the tactical methods we will use to manage and acquire 
services. We have made organizational changes and are taking steps to 
improve workforce skills to more efficiently and effectively acquire 
services. In a recent organizational realignment within the Department, 
responsibility for Strategic Sourcing has been moved to the Acquisition 
and Technology organization. In addition to my duties as the Director 
of Defense Procurement and Acquisition Policy, I am now charged with 
the responsibility for oversight of the strategic sourcing activities 
across the Department. In this new role, I am responsible for working 
with the military departments and the defense agencies to craft a 
coordinated and integrated strategic approach to the management and 
acquisition of services.
    We believe the consolidation of the development of acquisition and 
procurement policy with the oversight of strategic sourcing of services 
will result in a more cohesive and integrated approach. It will ensure 
that the tactical approaches utilized within the Department are 
consistent and aligned with the strategic objectives for the 
acquisition of services.
    In addition, the Department has set a course to completely reassess 
its strategic approach to services. This involves the examination of 
the types and kinds of services that we acquire and an integrated 
assessment of how to meet the needs of our warfighters while ensuring 
that the expenditure of taxpayer funds is wise and effective. We 
concurred with the GAO when they said that a more coordinated and 
integrated strategic approach to acquiring services is necessary. The 
ongoing reassessment also includes examination of how those services 
are acquired by the Department or how they are acquired on its behalf 
by other Federal agencies, such as General Services Administration 
(GSA) and the DOI. We expect to have the reassessment completed in the 
second quarter of calendar year 2007.
    Upon completion of that reassessment, we will develop an effective 
strategic sourcing deployment plan. We expect the plan to be completed 
in calendar year 2007. The fundamental tenets of our strategy will be 
straightforward: Ensure that we effectively and efficiently, in terms 
of both timeliness and cost effectiveness, acquire the services 
necessary to meet the needs of our warfighters. Underpinning our 
strategy will be the utilization of contracting tools that ensure 
competition whenever possible.
    While we look for areas where combined buying power will result in 
savings, we are ever mindful of our responsibilities to fulfill the 
socioeconomic goals of the Department. It is our belief that the use of 
competition, at all levels, is the most effective tool we have in the 
acquisition of services.
    Finally, we must implement our strategy with straightforward and 
simple tactical methods: (1) ensure that we clearly identify our 
requirement; (2) select the most efficient and effective tool to 
acquire particular services; (3) drive consistency and discipline 
across the Department; and (4) ensure that we have metrics and 
accountable individuals who will oversee performance.
    We would like to point out some specific actions we have taken with 
regard to interagency contracting and contract surveillance. With 
regard to interagency contracting, the Department is proactively and 
aggressively working to improve policies, procedures and oversight of 
interagency acquisitions. DOD is an active participant in the Office of 
Federal Procurement Policy (OFPP) working group to improve the 
management and use of interagency contracts. We are working with the 
GSA and DOI to reconcile and return unused funds to DOD. For example, 
by working together, GSA has already been able to return virtually all 
unused DOD funds from prior years. We continue to update policies and 
procedures to ensure DOD properly uses ``Assisting Agencies'' (e.g. 
GSA, National Aeronautics and Space Administration, Interior, and 
Treasury) acquisition services. For example, we have issued revised 
guidance specific to interagency acquisition and now require DOD 
components to review interagency acquisitions as part of our tri-annual 
review process. We are coordinating with the Under Secretary of Defense 
(Comptroller) (USD(C)) and the Office of General Counsel on issuing 
additional legal guidance governing the proper use of funds under 
interagency agreements.
    The Department has issued a series of policy memos on Interagency 
Acquisition dating back to October 2004. The policies established 
standards for using assisting agencies providing acquisition support to 
the Department. The policies were issued both jointly by USD(AT&L) and 
USD(C) and separately by each organization. In addition, we developed 
and revised training materials to address the deficiencies identified 
in the Interagency Acquisition process.
    Since April 2006, the Department has collaborated with the senior 
leadership at GSA, National Aeronautics and Space Administration, 
Interior, and Treasury to identify solutions to the issues identified 
in the audits. We have hosted a number of meetings with the military 
department Senior Procurement Executives to collaboratively strategize 
on long-term goals and objectives related to interagency acquisition.
    We recently signed a memorandum of agreement with the GSA that 
includes an action plan that addresses 24 specific actions the 
Department and GSA will undertake to ensure acquisition excellence when 
GSA acts on behalf of DOD. The Administrator of General Services has 
also issued guidance that brings her agency's fiscal policies into 
harmony with DOD's. We expect to have similar agreements with all 
executive agencies that support the Department. Additionally, the 
Department has been very active in working with the OFPP on their study 
of the proliferation of multiple award contracts and the Government's 
response to GAO's High Risk Report of January 2005, which added the 
``Management of Interagency Contracting'' as an issue area.
    In October 2006, the Department issued a policy memorandum that 
requires a DOD contracting officer review any action greater than 
$500,000 that is going to an assisting agency for contract placement. 
This review should assist in alleviating many of the concerns raised in 
recent audit reports.
    When utilizing interagency acquisitions our goals and objectives 
are the same as if we were doing the acquisition ourselves: acquiring 
the right product or service, at the right price, at the right time, 
consistent with statute, regulation and policy. When done properly 
interagency acquisitions can be an efficient and effective means to 
meet critical DOD requirements. It maximizes the buying power of the 
Department and is a good business decision. When done improperly 
interagency acquisitions can be inefficient, ineffective, and result in 
poor business decisions.
    With regard to contract surveillance for contracts for services, we 
have made numerous adjustments to our policies and guidance. We issued 
a policy memorandum, ``Interagency Acquisition: A Shared 
Responsibility,'' dated September 20, 2005, which addresses proper 
contract administration functions. We also updated and clarified the 
Defense Federal Acquisition Regulation Supplement (DFARS) and DFARS 
Procedures, Guidance, and Instructions with a requirement for 
designating a properly trained Contracting Officer's Representative 
(COR) before contract performance begins and issued a policy memorandum 
in December 2006, reinforcing this requirement. The Defense Acquisition 
University deployed an updated, web-based COR training module ``COR 
with a Mission Focus'' in December 2005.
    In conclusion, I believe that the there is not another organization 
that rivals the procurement and contracting expertise residing within 
the DOD. The range and depth of the approximately $300 billion of items 
and services that we buy on an annual basis are unparalleled in any 
other procurement organization in the world. Our training programs are 
the envy of industry. The contracting functions that we perform are not 
trivial. Whether contracting for base operating support, contingency 
contracting or the procurement of an aircraft carrier, our contracting 
professionals require unique and significant skill and expertise. We 
recognize that there is much improvement needed in order to ensure that 
we provide the most effective and efficient means of contracting for 
the goods and services necessary to support our warfighters. We must 
always remember, however, that while we strive to provide our 
warfighters the very best, we must also ensure that we do so while 
being good stewards of taxpayer funds. Our warfighters deserve nothing 
less and our taxpayers, rightfully, should insist on nothing less.
    Mr. Chairman, I thank you and the members of the committee for your 
interest in our efforts, and would be happy to address any questions 
that you may have for me. Thank you.

    Senator Akaka. Thank you very much for your testimony.
    I am going to defer to Senator Ensign and ask that we 
maintain a 5-minute time limitation for each. I will do the 
last questioning.
    Senator Ensign. Thank you, Mr. Chairman.
    Mr. Assad, Congress required in the NDAA for Fiscal Year 
2006 the DOD to study the feasibility of establishing the 
position of chief management officer within the DOD. The GAO 
has long advocated and the Comptroller General, Mr. Walker, has 
often testified on the need of such senior leadership positions 
to help oversee and manage defense business transformation 
efforts.
    The report was due to Congress by December 1, 2006. I 
understand that you have been told to expect this question. I 
will ask the question and make one quick comment. What is the 
status of the report on having a chief management officer 
oversee business transformation at the DOD, and to what extent 
do you know what is DOD's position?
    One caveat to that. I just want you to know that we have 
understood that we are not going to receive the report and we 
are going to receive the recommendations based on the report, 
but not the report itself. I just want you to know that if we 
do not receive the report that I will be recommending to 
Senator Akaka that the bill that he and I have introduced to 
form this position, that we will recommend that it goes into 
this year's defense authorization bill.
    So what is your response to the question?
    Mr. Assad. Senator, I was not aware that the report was not 
going to be delivered and that just recommendations were going 
to be delivered in March. My understanding is that the report 
is complete and it is in coordination and it is being reviewed, 
and that our senior leadership will be reviewing that report 
shortly with the Secretary. Beyond that, I do not know much 
more about the status of the report other than that it is in 
coordination and it is expected to be completed in March.
    I will take for the record and back to my senior 
leadership, I understand very clearly what you are saying, sir.
    Senator Ensign. Thank you.
    [The information referred to follows:]

    The report by a Federally Funded Research and Development Center 
required by section 907 of the National Defense Authorization Act for 
Fiscal Year 2006 was provided to the chairman and ranking member of the 
Senate Armed Services Committee and the House Committee on Armed 
Services by Deputy Secretary England by letter on January 31, 2007. As 
stated in these letters. Deputy Secretary England intends to reserve 
comment on the report by the Institute for Defense Analysis and S.179, 
which would establish a Deputy Secretary for Management until he is 
able to fully discuss these management issues with Secretary Gates. 
These discussions are expected to be completed in March 2007.

    Senator Ensign. Go ahead.
    Senator Akaka. I just want to tell Senator Ensign--and he 
knows this--that I share his views on the issue he just 
mentioned. If we do not get the report in a timely manner, we 
will certainly have to give strong consideration to including a 
chief management officer provision in the committee mark.
    Senator Ensign. Thank you, Mr. Chairman.
    Mr. Assad. Thank you, Mr. Chairman. I know that we have 
both been trying not to force this on the military. Secretary 
England had asked us to wait and do this report and we did the 
in lieu of that. So we are anxiously awaiting that so that we 
can make the decision whether or not to include that this year. 
So we look forward to that report.
    In both his report and his testimony, the DOD IG labeled 
problematic the practice of DOD using advanced payments on 
orders made through the DOI. As I understand it, the DOD fully 
pays for goods and services before the DOI has even awarded the 
contract. For both of you: Do you agree that using advance 
payments is a bad practice? Why or why not? Mr. Assad, what 
specific steps, if any, has the DOD taken to mitigate the 
problem?
    Mr. Denett. It should not be done, and I will yield to 
them, because I know DOD has worked aggressively with GSA and 
DOI and others so that they can get fiscal responsibility on 
record. I will let him address what they have done.
    Mr. Assad. Yes, sir. In the past it is true that we have in 
fact advanced paid DOI for purchases through GOVWORKS and other 
organizations, and the Comptroller, DOD Comptroller, right now 
is assessing that particular policy and is considering changing 
that policy. That should come out very shortly.
    I do not concur, I do not agree with making advance 
payments. I do not think it is necessary and I think that the 
Comptroller is taking that under serious consideration.
    Senator Ensign. Thank you.
    Mr. Chairman, we have a couple votes coming up, so to make 
sure that both of you get to ask your questions I will yield 
and submit the rest of my questions in writing.
    Senator Akaka. Thank you very much, Senator Ensign.
    Senator McCaskill.
    Senator McCaskill. Just a couple of things. I noticed in 
the testimony of one of the panel members they were talking 
about interagency contracting and part of it they were saying 
is we cannot figure out to what extent some of the interagency 
work is competitive. They said there were many factors that 
made it difficult for them to figure out whether or not these 
interagency contracts were in fact competitive. She 
specifically mentioned DOD policy.
    I would appreciate it, Mr. Assad, and you do not need to do 
this today, but if in writing you would explain the DOD policy 
that makes it more difficult for us to keep a very strong 
handle on whether or not the interagency contracting is in fact 
competitive.
    Mr. Assad. Yes, ma'am, I will be happy to do that. I am not 
aware of any policy that we have that would cause that to 
happen. But I will absolutely research it and get back to you.
    [The information referred to follows:]

    In my original response to your question, I indicated that I am 
unaware of any policy of the Department of Defense that makes it 
difficult to know whether interagency contracting is, in fact, 
competitive. Subsequently, I have reviewed the Federal Acquisition 
Regulation (FAR) at Subpart 8.4 regarding the ordering procedures for 
Federal Supply Schedules, also known as multiple award schedules. The 
FAR outlines certain procedures, depending upon the applicable monetary 
threshold, for placing orders or establishing blanket purchase 
agreements for supplies and services. If these procedures are followed, 
the FAR stipulates the order is considered to be issued using full and 
open competition. However, the FAR procedures recognize limited 
circumstances when consideration of schedule vendors may be restricted 
and orders placed on a sole source basis. The Department is working 
with the Office of Federal Procurement Policy and GSA to review 
practices for reporting orders against Federal Supply Schedules in the 
Federal Procurement Data System to ensure consistent practices are used 
for reporting such orders and that differentiation is made between 
orders that have been competed and those that have not been competed.

    Senator McCaskill. I will take the extra step of visiting 
with the panel members and making sure that I can specify the 
policy they are referencing that is making it more difficult 
for us to figure out of it is competitive.
    Mr. Assad. Okay.
    Senator McCaskill. The other thing I would like from you in 
writing is how many times that you are aware of--and I will ask 
others in the DOD this when the time is appropriate--how many 
times you are aware of the there has ever been a criminal or 
administrative action taken under the Anti-Deficiency Act (ADA) 
within the DOD?
    [The information referred to follows:]

    The Department has made measurable progress on Ant-deficiency Act 
(ADA) violations. The attachment shows ADA violations status and 
progress on actions since 2003.
      
    
    
      
    
    
      

    Mr. Assad. Well, let me just give you a little bit of a 
framework for the ADAs. We have had about 150 investigations in 
fiscal years 2005, 2006, and 2007. Of that 150, ADA 
investigations that we have done, we have determined that about 
30 of them, approximately 20 percent, have in fact been ADA 
violations. Of those 30, I think about 10 or 11 resulted in 
adverse personnel actions.
    What the exact action was, I do not have that. But I can 
tell you it is about a third of those things that we find are 
in fact ADA violations, about a third of them result in adverse 
action. Whether it is criminal or not, I could not answer that.
    Senator McCaskill. That is something I would like to know, 
and I would like to know if anyone has lost their job because 
of an Anti-Deficiency violation, the ADA.
    Mr. Assad. Yes, ma'am.
    Senator McCaskill. It was also interesting to me, in the 
letter I got from the IG after a specific inquiry I made in the 
last hearing he said that many of them can be corrected with an 
accounting entry. They can go back and make an accounting 
entry. I am curious if there is any discipline action taken 
towards that employee or if everybody can go back and just make 
the correcting accounting entry and it is no harm, no foul?
    Mr. Assad. Well, I think that if there has been a 
deliberate intent to do something that is not proper, then I do 
not think there is--I think no harm, no foul is not the case. 
But oftentimes what we do is we do discover that there has been 
an inadvertent error, whatever it might be, that would have 
caused it, and so you can go back and correct the funding in 
the fiscal year while it is happening.
    Senator McCaskill. My concern is it seemed to be a 
wholesale activity in terms of spending expired funds, and if 
this was a matter of being able to go back and correct the 
fiscal year that it was attributable to, if it has been done 
literally hundreds of times that the IG report indicated, it is 
hard for me to believe that this is isolated error.
    Mr. Assad. We would be happy to brief the committee or to 
brief your staff with some further details on the ADA.
    Senator McCaskill. That would be great.
    Thank you both very much.
    Thank you, Mr. Chairman.
    Senator Akaka. Thank you.
    Mr. Assad, last October DOD issued a new policy setting 
forth the following objectives, and I have five here: one, 
acquisition of services should be based on clear performance-
based requirements; two, expected cost, schedule, and 
performance outcomes should be identifiable and measurable; 
three, acquisitions of services should be properly planned and 
administered; four, services should be acquired by sound 
business arrangements that are in compliance with applicable 
statutes, regulations, and policies; and five, services should 
be acquired using a strategic enterprise-wide approach which is 
applied to both the planning and the execution of the 
acquisition.
    Unfortunately, DOD remains far short of these objectives. 
My question to you, Mr. Assad, is would you agree that some of 
the objectives of your new policy, such as the development of 
clear performance-based requirements and measurable performance 
outcomes, are likely to be resource- intensive?
    Mr. Assad. I do agree, Senator, that it will require 
additional resources or capability to make sure that the 
happens. I am not sure we need more people to do it, but we 
certainly need to refocus the capability that we have to ensure 
that that gets done. Part of our strategic approach to the 
acquisition of services--I provided the committee a slide on 
that. Part of that approach is to look at that capability and 
to see how we in fact need to realign some capability to get 
that done.
    There is no doubt about it, there is a great payoff. If we 
do this right, defining requirements properly, writing good 
statements of work, ensuring that we have proper metrics, 
ensuring that we have quality control assurance surveillance 
plans, there is no doubt that we can save some money here.
    Senator Akaka. Mr. Assad, I understand that you have 
proposed the development of a multifunctional support cadre to 
assist in the acquisition of services by the DOD. These 
functional experts would help DOD apply best practices, state 
requirements early, develop acquisition objectives, draft 
quality assurance and contractor surveillance plans, identify 
appropriate performance measures, and develop incentive fee 
structures tied to expected outcomes.
    Do you currently have trained acquisition experts in the 
DOD who are available to perform these functions, or would new 
resources be required?
    Mr. Assad. Senator, we do not have overall enterprise- wide 
the capability to do this. We have pockets of this capability 
that exists now and they do it very well. I will tell you that 
my perception is that one of the things that we are doing is we 
have asked all four Services--Army, Navy, Marine Corps, Air 
Force--to take a look at how they are organized and how they 
would respond to that multifunctional support capability.
    We expect to get our first inputs from the Services 
probably by the end of March. We then intend in the second 
quarter to sit down with the service acquisition executives to 
examine the resources that are necessary to get this job done, 
because there is no doubt about it, if we focus on this 
multifunctional support cadre concept we can save money.
    Senator Akaka. To both you, Mr. Denett, and Mr. Assad. At 
our earlier hearing our GAO witness testified that the Federal 
Government has failed to make needed investments in its 
acquisition workforce. One of the results, according to GAO, is 
that we have become more and more reliant upon contractors, 
even when it comes to performing acquisition functions.
    According to GAO, ``Contractors now provide services for 
which DOD has historically had in-house capacity. For example, 
we have recently reported on the declining status of cost 
estimators in the space acquisition community and have heard 
concerns about losing capability in other key functions, such 
as pricing and systems and software engineering.''
    To both of you: Do you agree or disagree with GAO's 
assessment? Does it concern you that we may have lost the 
capability to perform some basic acquisition functions in 
house, including cost estimating and system and software 
engineering? Also, what steps do you think we need to take to 
address this problem?
    Mr. Denett. We have had a decrease in the availability of 
cost estimators. I think that is a mistake. The procurement 
shops that I have run over the last 3 decades, I always had a 
cost estimator. They are worth their weight in gold. They 
always find things and assist negotiators in identifying things 
that you could negotiate and get better deals.
    I think we need to make sure that we increase our 
capabilities in that area, that we have our contracting people 
also get trained in cost-price analysis. They do get some 
training. They need more. We are offering courses through the 
Defense Acquisition University and Federal Acquisition 
Institute. We have to make sure we have adequate funds and 
people actually get that training so they can apply it.
    I believe this is an extremely important area, and I think 
Mr. Assad can tell you about some good initiatives that he is 
taking in this area.
    Mr. Assad. Senator, I also agree with Mr. Denett with 
regard to cost and pricing skills. That capability in general 
needs in my opinion significant improvement across the board. 
What are we doing about it? Well, the first thing we need to do 
is understand where we are at. So that is what this competency 
modeling is all about. We have been working for the past 5 
months to develop a competency model. It is complete. We have 
the preliminary model right now. We are going through a final 
review of that model within our own organization. We have had 
400 of our best folks look at it, give us their views of what 
they think.
    Starting in the second quarter of this year, we intend to 
apply that model across the entire workforce. It is going to 
take us about a year to get that done. It is 26,000 people. At 
the end of that, we will have a much better feel for what our 
capability shortfalls are.
    The situation that we have right now is that if Mr. Krieg 
or the Under Secretary was to come to me or Mr. Finley and say, 
here is an additional X number of people, we could not tell 
them where we want them, what skill sets they should have, 
where exactly, which location do we want to place them in. When 
we get this work done, we will be in a much better position to 
do that.
    Senator Akaka. There is a vote on now, so we are going to 
have to answer that call. But I want to thank you so much for 
your responses. I have additional questions that we will put 
into the record for your response. I would like to thank you 
very much for your responses here today. Of course, we look 
forward to dealing with this problem and to make important 
progress to help save our country money that is being really 
wasted. We have objectives, but we have not met them, and we 
will continue to look at this as a committee and hope that we 
can make better progress than we have made already.
    So I thank you very much. This concludes the hearing.
    [Questions for the record with answers supplied follow:]

               Questions Submitted by Senator John Ensign

                 PERFORMANCE-BASED SERVICE ACQUISITION

    1. Senator Ensign. Ms. Madsen, for quite some time, there has been 
much talk about using a performance-based service acquisition approach, 
an approach that focuses on describing results and measuring contractor 
performance, rather than dictating the manner in which the contractor 
performs the work. In its draft report, the panel suggests that our 
acquisition workforce currently has problems understanding and, 
consequently, implementing such an approach. With respect to the 
acquisition of services, what are the advantages in using a 
performance-based acquisition (PBA) approach?
    Ms. Madsen. As discussed in the panel's report and in testimony 
before the panel from numerous private sector witnesses, there are many 
direct advantages of using PBA. Achieving any of those benefits, 
however, is predicated on the acquiring organization determining its 
requirements for the acquisition of services. If an organization is 
capable of determining and stating its needs and doing so in the form 
of performance objectives, PBA can be an extremely valuable tool that 
allows entities to transform their business practices and to reduce 
their costs. At the heart of PBA, however, is the necessity for the 
acquiring organization to make critical decisions about what it wants 
to achieve and state those decisions as performance objectives. This 
approach allows suppliers to apply their knowledge and experience and 
innovate to provide the best solution. Also, both providing incentives 
that encourage innovation by the suppliers and monitoring performance 
to make sure the incentives are working are critical to PBA.
    The panel heard considerable testimony from major commercial buyers 
about their use of PBA. All of them emphasized the need for a rigorous 
and disciplined requirements definition process that occurs at a high 
level in the organization where management is focused on driving the 
business forward. It eschews allowing parochial interests to determine 
outcomes. The presenters told the panel that these are hard decisions 
and some companies actually may exclude parts of the organization that 
may be too change resistant. The approach is to stale outcomes and let 
the experts, who are the suppliers, create innovative solutions. The 
advantages that were presented to the panel included:

          (i) a focus on the organization's key mission needs and the 
        results that are required to meet those needs;
          (ii) harnessing supplier expertise and creativity to provide 
        solutions (rather than performing to a specification), and to 
        continue to improve the solution;
          (iii) improved competition;
          (iv) with appropriate incentives, enhanced performance;
          (v) less performance risk; and
          (vi) lower costs.

    2. Senator Ensign. Ms. Madsen, what are the risks inherent in using 
this approach?
    Ms. Madsen. The panel heard testimony from buyers and sellers 
alike, including government buyers and government contractors about how 
failure to define requirements, failure to create proper incentives, 
and failure to monitor performance all can lead to unsuccessful 
contracts, not to mention disputes and investigations. There is also a 
risk of misapplying PBA to efforts that should be strictly prescribed, 
such as in the case where failure to perform to specific guidelines 
risks public health and safety. The Government Accountability Office 
(GAO) has recognized that in these circumstances, PBA is not 
appropriate. Therefore, the panel recommends developing a PBA 
assessment tool.

    3. Senator Ensign. Ms. Madsen, how are these risks exacerbated by 
an acquisition workforce that has not been properly trained to 
understand and implement PBA initiatives?
    Ms. Madsen. Certainly training and qualifications are important. 
The difficult issues arise in complex, high value and technology-heavy 
acquisitions. As we heard from the private sector, the individuals 
involved in structuring large transactions are very highly-credentialed 
and experienced. Corporations treat these large services deals as 
significant to their bottom line. For most companies, we heard that the 
key group involved in such transactions is small, experienced, familiar 
with the marketplace and likely supplemented by experienced outside 
advisors. Part of the message is that not every government acquisition 
professional should be handling large and complex services 
transactions. Nor is every acquisition suitable for use of performance-
based techniques.
    In addition, the panel learned that there are aspects of PBA that 
can be applied in many contexts to services procurements, even when the 
entire acquisition is not suitable for performance-based techniques.
    Significantly, the panel's recommendations emphasize the need for 
improved training, including specialized training for individuals 
tasked as Contracting Officer Performance Representatives. The panel 
also recommended that, under the Office of Management and Budget's 
(OMB) guidance, agencies be given better tools to determine when PBA is 
appropriate, as well as guidance on structuring incentives.
    The key to successful PBA, however, remains requirements definition 
and high level management involvement and commitment to the use of a 
performance-based approach. There are management issues here that 
transcend training of acquisition personnel.

    4. Senator Ensign. Ms. Madsen, I think we all agree that there is a 
difference between common, routine, or relatively simple service 
acquisitions and long-term or complex service acquisitions. A ``one-
size-fits-all'' approach is therefore not appropriate. The panel's 
report recognizes as much. What criteria should be used in deciding 
whether a service acquisition should be performance-based?
    Ms. Madsen. The panel's findings and recommendations recognize that 
the government-wide quota of requiring 40 percent of acquisitions be 
performance-based is not consistent with analysis of individual agency 
missions and procurement portfolios. The panel agrees that goals are 
important, but believes the each agency's mission should be taken into 
account. The panel believes that OMB guidance would be helpful and it 
should allow each agency to assess its own ability to make use of PBA.
    In this regard, the panel recommended that the Office of Federal 
Procurement Policy (OFPP) should provide much more explicit guidance 
about the use of PBA and actually recommended creation of a self-
assessment tool to assist agencies in analyzing when to use PBA. This 
tool would guide a user through an analytical process that would, 
hopefully, produce better decisions about the use of PBA in particular 
circumstances. Some of the analytical points are: (i) identifying if 
there is a baseline issue that is performance-related, such as cost or 
quality; (ii) examining the level of risk to the agency and its mission 
of not having the services provided at the highest levels (i.e., can 
the agency tolerate less than optimal performance?); (iii) whether the 
agency has an adequate work statement to address the baseline problem, 
or whether that work statement requires refinement; (iv) whether the 
agency is in a position to shift risk for management of the performance 
to the vendor, or for policy reasons the agency must have direct 
management responsibility; (vi) whether agency/program management is 
ready to accept having the service quality measured on a performance 
basis; and (vii) whether the staff (acquisition and program staff) are 
trained and prepared to use PBA. This list of issues illustrates what 
the panel heard from the private sector--that PBA involves a careful 
internal analysis of the organization's objectives and senior 
management commitment.

    5. Senator Ensign. Ms. Madsen, can you give us specific examples of 
successful uses of PBAs at the Department of Defense (DOD)? Other 
departments or agencies? Why were they successful?
    Ms. Madsen. While the panel did not focus solely on DOD, it did 
conduct a random survey of acquisitions that were coded as PBA in the 
Federal Procurement Data System-Next Generation (FPDS-NG) for the top 
10 contracting agencies, including all the services within DOD. What we 
found was that out of the actions reviewed, 36 percent contained all of 
the elements of a PBA, while 22 percent required significant 
improvement and 42 percent were clearly not PBA. Of those that were 
PBA, the use of service level agreements seemed to be effective with 
information technology requirements. The panel also heard testimony 
from agencies that one of the major impediments to achieving successful 
PBAs is insufficient investment of time and resources in developing the 
requirements and appropriate outcomes. Frequently, this lack of 
investment results in little or no market research and hastily or ill-
defined needs. Some agencies, however, have invested in centers of 
expertise that analyze and write performance requirements. The Coast 
Guard, for instance, has set up a permanent group, that focuses solely 
on writing performance-based requirements for the agency. They are 
experienced at asking users the right questions to get to a performance 
work statement. They maintain and build on their experience and market 
expertise. They are multi-functional with experience in quality 
assurance, Six Sigma, etc. This is not unlike what commercial buyers 
build within their own organizations to ensure that they maintain 
expertise in the marketplace and that their description of their 
requirements can form the basis for a meaningful competition and 
successful performance. The panel suggests adopting this practice with 
its recommendation for agencies to establish centers of expertise in 
requirements analysis and a government-wide center for market research.

                       broader acquisition reform
    6. Senator Ensign. Ms. Madsen, over the years, this committee has 
enacted a number of measures aimed at reforming the DOD's acquisition 
processes and practices. How do, or should, reforms in the acquisition 
of services fit within this committee's broader acquisition reform 
efforts?
    Ms. Madsen. As discussed in my testimony, DOD actually spends more 
on services than on major weapons systems. That fact has significant 
implications for acquisition. As reflected in the panel's findings and 
recommendations, there are aspects in which acquisition of services is 
different--or requires different skills and emphasis. Some of these 
aspects include the fact that technology related services are sold in 
the private sector involving a wide variety of skills. Private sector 
buyers focus on bringing the right mix of skills together for a project 
and on the price for that project. The government tends to buy services 
on an hourly basis without adequate emphasis on the objective. In 
addition, because the private sector sees services acquisition as a 
major transaction that can improve an organization's performance and 
reduce its costs, services acquisition in the private sector is treated 
accordingly--such transactions are carefully planned, subject to 
competition, and managed tightly. These efforts take a different skill 
set and emphasis than arc used in weapons system procurement. The 
private sector has realized that the requirements for services 
acquisition can be defined to permit use of fixed-price contracts, 
performance-based contracts, and healthy competition.

    7. Senator Ensign. Ms. Madsen, are there common lessons learned or 
processes to be applied between major weapon systems acquisition--which 
has been on the government's high risk list for quite some time--and 
service acquisition reform?
    Ms. Madsen. Key issues in common with services acquisition are:

          1. the necessity for requirements development and management 
        buy-in on requirements prior to undertaking an acquisition;
          2. competition; and
          3. effective management of contract incentives.

                              PATH FORWARD

    8. Senator Ensign. Ms. Madsen, in the broader context of 
acquisition reform, do you have any suggestions for this committee on 
areas to focus on?
    Ms. Madsen. Congress should seek a ``good government'' balance 
between ensuring efficiency and responsible stewardship of taxpayer 
money. Maintaining balance is critical. The Federal Government should 
monitor commercial buying practices on an ongoing basis, not just each 
time a panel is authorized. Commercial buyers told the panel that their 
processes and techniques are constantly adapting to ensure continuous 
improvement. Continuous monitoring of these practices to determine what 
can be applied to the government should be the goal. In this way, we 
could ensure that acquisition reform is not seen as some set of 
immutable ``reforms'' developed in the mid-1990s, but rather a fluid 
and ongoing process that welcomes dialogue and is always ready to adapt 
and improve on the ideas of the past.

    9. Senator Ensign. Ms. Madsen, do you have suggestions of possible 
legislative remedies that this committee should consider?
    Ms. Madsen. Of course, it would be no surprise that I would 
recommend the panel's legislative recommendations. But in a more 
general context, as you see from the panel's recommendations, the panel 
addresses areas for improvement from the earliest stages of 
acquisition. For instance, the panel found that the first step toward 
improving competition is improving the requirements definition process 
and making government officials responsible for those requirements. By 
doing so, the government can create an environment conducive to 
meaningful competition. Then the panel makes recommendations to improve 
the evaluation process, ensure reasonable award decisions, and provide 
debriefings and redress to contractors who invest in high dollar 
procurements. The panel's interagency contracting recommendations focus 
on how interagency contracts are created, approved, and managed as the 
means to address misuse of them at the ordering level. Therefore, it is 
important that proposed legislation not only seek to identify problems 
after-the-fact, but to also create an environment with appropriate 
internal controls and incentives in which the likelihood of such 
problems occurring is reduced. When oversight mechanisms are proposed, 
thoughtfully applying these, perhaps based on dollar thresholds or some 
other characteristic is preferable to a one-size-fits-all approach. The 
panel was careful when it imposed oversight or ``self-policing'' 
measures favoring applying them, for instance, at higher dollar 
thresholds where the majority of dollars are spent rather than lower 
thresholds where we found the majority of transactions. Again, 
maintaining a ``good government'' balance between efficiency and 
responsible stewardship is critical.

              DOD'S TRACK RECORD OF WORKFORCE IMPROVEMENTS

    10. Senator Ensign. Ms. Madsen, I was struck with the urgent tone 
of the panel's findings concerning acquisition workforce improvements, 
and the need for ``immediate'' action. While there has been some short-
term progress, in terms of long-term human capital planning, it seems 
that the DOD is just scratching the surface in gaining an understanding 
of the needed size, qualifications, and mix of the acquisition 
workforce of the future. Do you agree with that assessment?
    Ms. Madsen. The panel's emphasis on prompt attention begins with 
immediate acquisition workforce human capital planning. As can be 
readily seen from the panel Report and findings, the data regarding the 
workforce and the skills necessary to meet current demands in 
acquisition are not available. The panel's recommendations start with 
establishing a consistent definition of the workforce and method for 
measurement, as well as a government-wide database, But, a key set of 
findings and recommendations go to determining the competencies of the 
workforce and the gaps, especially given the growth in acquisition of 
services. The panel found that resources are inadequate; however, it is 
not clear that the needs are in traditional procurement specialties. 
Thus, the panel's recommendation was that human capital planning must 
take place before additional personnel are hired.
    DOD, of course has its own workforce count. Our understanding is 
that DOD has underway an assessment of competencies and gaps in the 
workforce. DOD advised the panel that it intended to complete this 
assessment within 12 months and then to make decisions about areas to 
add personnel, including whether people with additional substantive 
skills are needed.

    11. Senator Ensign. Ms. Madsen, how has the DOD distinguished 
itself by moving ahead with many of the workforce recommendations that 
the panel has formulated for the government as a whole?
    Ms. Madsen. Certainly, DOD has demonstrated a seriousness of 
purpose in analyzing its workforce needs. It has set out a disciplined 
approach, very similar to the one also outlined by the panel, designed 
to answer the questions of whether there are enough people with the 
right skills to meet mission needs. Such discipline (i.e., human 
capital planning that includes needs and workforce assessments) is 
necessary for a responsible approach to improving the workforce and 
planning for the future. OFPP just announced that an Internet-based 
tool to assess skills will be available for voluntary use in April 2007 
through the Federal Acquisition Institute. Clearly, some civilian 
agencies are farther along than others in their own efforts and 
sustained emphasis by Congress on workforce improvement will be 
necessary to ensure results.

    12. Senator Ensign. Ms. Madsen, when do you think we can expect to 
see results?
    Ms. Madsen. The timing of results depends entirely on when OFPP and 
Congress implement the recommendations. For instance, some Panel 
recommendations, once implemented will demonstrate immediate results 
(for example, producing greater transparency by giving public notice of 
all sole-source orders over $100,000). Other recommendations, such as 
improving acquisition workforce capability are longer term requiring a 
disciplined approach and a number of incremental steps in order to 
effectively conduct human capital planning and needs and capability 
assessments. But while the results are longer term, the sense of 
urgency with respect to workforce issues compelled the panel to 
recommend a 12-month deadline for the initial incremental steps (i.e., 
defining and measuring the acquisition workforce). Congress can assist 
by conveying to the agencies that they must be actively engaged in 
human capital planning for the acquisition workforce.


            RELIANCE ON CONTRACTORS FOR ACQUISITION SUPPORT

    13. Senator Ensign. Ms. Madsen, the panel's draft report 
acknowledges that agencies have been compelled to rely on contractors 
for acquisition tasks due to several factors: a decrease in government 
personnel, increasing complexity of value-based performance contracts, 
and an increase in the volume of such contracts. I share your concern 
that the so-called ``blended workforce,'' in which contractor and 
government personnel work side-by-side, can impact the integrity of 
acquisition decisionmaking processes. A contractor working on 
performance evaluation criteria today, could become part of an 
organizational entity of a potential bidder the next. Proprietary 
information--both of a contractor and of the government--can be easily 
compromised. Wouldn't the cleanest solution to the problem of 
organizational conflict of interest be to identify certain functions 
within government acquisition processes that are `reserved' for 
government personnel only?
    Ms. Madsen. As discussed in the panel's report, an area in which 
data was not available was the number of contractors supporting 
acquisition functions and the types of tasks that they are performing. 
The panel's sense was that increasingly contractors are involved in 
supporting the acquisition process in various capacities--in many 
instances providing technical expertise that is not available within 
the government. A portion of the panel's recommendation regarding data, 
also is directed at obtaining a better sense of where contractors are 
being used and in what capacities. The panel also recommended that OFPP 
update the principles for agencies to apply in determining what core 
agency functions must be performed by Federal employees and then ensure 
that those functions arc, in fact, staffed by Federal employees. That 
said, however, the panel recognized that the government will always 
need the ability to obtain technical expertise in certain areas--the 
government simply does not have all of the experts it may need at a 
given point to meet mission needs. The panel thus recommended that the 
Federal Acquisition Regulation (FAR) Council consider regulatory 
amendments to take into account current circumstances and the GAO 
rulings in several cases over the past 10 years regarding impaired 
objectivity and unfair competitive advantage. GAO has set forth 
principles to be used by agencies in analyzing organizational conflicts 
of interest (OCIs); however, these principles are not reflected in the 
regulations. The panel also recommended consideration of additional FAR 
clauses that would allow an agency to obtain information sufficient to 
analyze possible OCIs. Some of the most sensitive areas, such as 
requirements development are areas where it is likely the government 
often may need outside technical expertise. Given that fact, better 
rules, training, and guidance should be available for agencies to help 
avoid or mitigate OCIs.

                        USE OF ADVANCED PAYMENTS

    14. Senator Ensign. Mr. Assad, you indicated that the DOD was 
revising its policy on the use of advanced payments to acquire goods 
and services through interagency contracting, and that the new policy 
was presently in coordination. When will the DOD complete its revised 
policy on the use of advanced payments?
    Mr. Assad. The Under Secretary of Defense (Comptroller) issued a 
policy memorandum titled ``Advance Payments to Non-DOD Federal Agencies 
for Interagency Acquisitions,'' on March 1, 2007.

    15. Senator Ensign. Mr. Assad, as soon as the new policy on 
advanced payments is finalized, will you provide a copy to the 
Readiness and Management Support Subcommittee?
    Mr. Assad. Yes. The Under Secretary of Defense (Comptroller) issued 
a policy memorandum titled ``Advance Payments to Non-DOD Federal 
Agencies for Interagency Acquisitions,'' on March 1, 2007. (The 
requested policy memorandum is attached.)
      
    
    
      
    
    

               strategic approach to purchasing services
    16. Senator Ensign. Mr. Denett, at our last hearing, the GAO 
testified that ``[t]he debate on which parts of DOD's mission can best 
be met through buying contractor services has not yet taken place . . . 
we are in the midst of a strategic expansion in service contracting 
without strategic direction or decisions.'' Based on your government-
wide perspective, what more can the DOD do to address, on a strategic 
level, its policies and practices in acquiring services?
    Mr. Denett. The steps Mr. Assad described in his testimony, 
including the development of a comprehensive DOD-wide architecture for 
the acquisition of services, should help the Department award better 
structured contracts and manage risks more effectively. In terms of 
additional steps, I have encouraged all agencies, including DOD, to 
complete a skills assessment of their contracting professionals. 
Through this process, agencies will identify skills gaps and related 
training to ensure their workforce can obtain the skills it needs. 
There are many options available if an agency's workforce needs 
training in services contracting. Through the partnership between the 
Defense Acquisition University (DAU) and the Federal Acquisition 
Institute, the acquisition workforce has access to classroom courses, 
continuous learning modules, and other training opportunities to 
develop service contracting skills. Additionally, team-based training 
for performance-based services acquisition is offered to all agencies, 
and the Acquisition Center of Excellence for Service Contracting 
provides an online resource for service contracting information policy, 
guidance, samples, and best practices.

                 ADEQUACY OF DOD ACQUISITION WORKFORCE

    17. Senator Ensign. Mr. Assad, do you agree that the Acquisition 
Advisory Panel's assertion that there is an ``acute shortage'' of 
experienced acquisition professionals applies to the DOD acquisition 
workforce today?
    Mr. Assad. The DOD acquisition workforce has been impacted by 
downsizing and, since September 11, the need for updated skills and new 
mission challenges. With the growth in contracting for services, we are 
re-assessing all of our acquisition oversight processes to improve 
acquisition outcomes. For example, the Under Secretary of Defense for 
Acquisition, Technology, and Logistics has established a management 
structure, to include defined roles and responsibilities, for the 
review and approval of services acquisitions. The Under Secretary took 
this action to ensure that the services acquisition is improved in 
compliance with statutes, policy and other requirements. In addition to 
contract oversight, we continue to expand our training infrastructure 
and available training resources to provide the acquisition workforce 
with better knowledge sharing tools and web based performance support 
resources. Although we are very successful today with hiring and high 
retention, we will face significant challenges as the highly 
experienced Baby Boomer generation departs the workforce. Approximately 
78 percent of our current acquisition workforce is in the Baby Boomer 
generation. We are working hard on many fronts to ensure we have the 
right acquisition capability now and into the future. In June 2006, we 
published both the DOD Civilian Human Capital Strategic Plan (HCSP) and 
the Acquisition, Technology, and Logistics (AT&L) HCSP. Meanwhile, the 
AT&L Workforce Senior Steering Board has been working aggressively to 
position the DOD to be successful in the future. The Board has met 
three times since May 2006, and it is now planning to meet quarterly to 
develop and implement strategies for identifying capability gaps and 
for improving the effectiveness of the acquisition workforce. The Under 
Secretary for AT&L deployed a joint competency management initiative in 
October 2006 in alignment with the Quadrennial Defense Review, the DOD 
Human Capital Strategy, the AT&L Human Capital Strategic Plan, and the 
AT&L Implementation Plan. This initiative is expected to update and 
assess acquisition competencies for twelve functional communities 
within the DOD acquisition workforce. Each update will identify 
behaviors and underlying knowledge, skills, and abilities for 
successful performance. We have made significant progress in the 
development of competency models for program management, life cycle 
logistics and contracting. Between now and June 2008, the Department 
will begin pilot workforce assessments for program management and life 
cycle logistics. In the fourth quarter of fiscal year 2008 it will 
commence a DOD-wide assessment of the contracting workforce. These 
competency assessments will help our senior leaders to reallocate 
resources, target recruitment, improve retention strategies, and expand 
education and training resources. The combination of our competency 
assessment initiative and other leadership actions to address workforce 
quality and capability will allow us to more accurately assess and 
address staffing sufficiency. We have the right sense of urgency, and 
we are confident that we will shape the acquisition workforce in an 
intelligent manner.

    18. Senator Ensign. Mr. Assad, in your opinion, will that 
characterization apply to the DOD workforce in 2010? 2012?
    Mr. Assad. As provided in my written testimony, frequently, I am 
asked two questions regarding our workforce: (1) whether or not we have 
enough people in the Department to perform our mission effectively, 
efficiently, and in a manner that assures the lawful operation of the 
Federal acquisition system and (2) whether or not our contracting 
workforce is sufficiently qualified to do the same. Over the past 10 
years our workload has increased significantly. The number of actions 
in excess of $100,000 has increased by over 60 percent, the total value 
of our procurement actions has increased by well over 100 percent and I 
believe that our workload will continue to increase. During that 
timeframe, our acquisition workforce has decreased by approximately 5 
to 10 percent. We have useful information regarding the numbers of our 
professional contracting employees and we have a very good sense of how 
they have been trained. We also believe that because of the downsizing 
of the workforce that took place in the late 1990s the overall 
capability of our workforce requires improvement. However, while we can 
surmise, we can not determine with specificity, where those shortfalls 
in capability exist. In response to other questions for the record, I 
mentioned that we have done a significant amount of work associated 
with the assessment of our workforce. For the past 5 months, my office, 
in concert with the DAU, the military departments, and the defense 
agencies, has been developing a model that will address the skills and 
competencies necessary for our contracting workforce. We will complete 
development of the contracting competency model in the second quarter 
of 2007. Beginning in the third quarter of calendar year 2007, we will 
begin deployment of that competency modeling across the entire DOD 
contracting workforce. This is a major undertaking and it will be the 
first time the Department has attempted to assess its contracting 
capability across the entire enterprise. The modeling will enable us to 
assess workload demands for and the degree to which members of the 
workforce possess these competencies. The competency assessment will 
also allow the Department to assess the workforce in terms of size, 
capability and skill mix; and to develop a comprehensive recruiting, 
training, and deployment plan to meet the identified capability gaps. 
With regard to 2010, 2012 we will have to assure that we are able to 
track the improvements and changes made in response to our competency 
modeling on a continuing basis. In addition, we will also have to 
periodically reassess the workforce competency in order to ensure that 
the capability gaps as identified are addressed.

    19. Senator Ensign. Mr. Assad, what are the key bottom-line 
elements that you would look for to solve the Department's workforce 
shortages?
    Mr. Assad. In order to ensure we have the right people, doing the 
right jobs, at the right place and time, and at the best value to 
achieve mission success, we are moving forward aggressively on many 
fronts to implement the AT&L Human Capital Strategic Plan and continue 
to improve our contracting workforce capability. First and foremost we 
will continue to work with the DAU, military departments, and defense 
agencies to assess our workforce, identify capability gaps, and address 
those gaps. The key bottom line elements we will use to target the 
capability gaps are education, training, professional development, 
improved contracting tools, and the addition of resources--where 
needed, through recruitment and retention. The specificity provided by 
our Contracting Competency Model will enable us to identify and focus 
our efforts to fill the aforementioned gaps. I will continue to work 
closely with DAU and the DOD senior procurement executives to increase 
emphasis in areas such as major systems contacting, pricing, contract 
incentive and award fees, services acquisition, small business and 
contingency contracting. Our available training resources are extensive 
and will continue to improve. We have modernized training for the 
contracting workforce in all aspects: certification training, 
continuous learning, performance support, and knowledge management. We 
are expanding the use of knowledge management and web-based performance 
support resources so the workforce can always be engaged in learning 
and quickly apply best practices as they perform in the workplace. We 
also have the ability to support new or updated policy implementation 
and to address skill gaps by quickly creating and providing targeted 
training to the workforce.

    20. Senator Ensign. Mr. Assad, do you believe that there is an 
imbalance of government and contractor personnel in the acquisition 
workforce? If so, what is needed to correct that imbalance?
    Mr. Assad. My answer is limited in scope to the Contracting Career 
Field 1102, the civilian career series for government contracting 
professionals. I am not able to answer the question as to whether there 
is an imbalance at this time as we are presently assessing the make-up 
of contracting workforce. While initial indications are that we do not 
have an imbalance in terms of the number of contractors working in the 
contracting field, I believe that we should focus on exactly what 
functions those contractors are performing. It is my view that the 
functions performed by 1102s in the areas of contract formation should 
be accomplished solely by Government employees, whenever possible. 
There are certainly times when contractor personnel may be used in pre-
award functions to provide expert professional support in specific 
areas, but it is my view that the day-in, day-out performance of 
contract formation should be accomplished by government employees. Once 
our contracting workforce assessment is complete I will encourage the 
military departments and other defense agencies to reduce and 
preferably eliminate, whenever possible, the nongovernment 1102 
personnel performing contract formation functions in our contracting 
offices. We are conducting a broader review of acquisition structures 
and capability in response to section 814 of the National Defense 
Authorization Act for Fiscal Year 2006. This review will address 
contractor support of the acquisition mission. Results of this study 
are scheduled to be provided to Congress this summer.

         USE OF SERVICE CONTRACTS TO ENTER INTO PROPERTY LEASES

    21. Senator Ensign. Mr. Assad, a significant finding by the DOD 
Inspector General (IG), that has been covered by the press, concerns 
the award of a service contract by the Department of the Interior on 
behalf of the DOD's Counter Intelligence Field Activity to provide 
leased office space and the installation of communication and other 
equipment. The IG testified that ``the 10 year, $100 million lease was 
disguised as a service contract and exceeded all thresholds that 
require congressional notification and approval.'' Is it standard DOD 
practice to use service contracts to procure property leases and 
equipment?
    Mr. Assad. No. It is not the policy of the Department to utilize 
services contracts to procure property leases. We recently issued a 
policy memorandum titled ``Contracts for Services'' reminding the 
acquisition workforce of both the Department's policy and the proper 
procedures regarding the use of services contracts.

    22. Senator Ensign. Mr. Assad, in your opinion, in this case what 
differentiated a service contract from a property lease?
    Mr. Assad. It was inappropriate to utilize a ``services'' contract 
to contract for a lease for office space. The only time it might be 
appropriate is in the circumstance in which services are being 
performed by a contractor and the lease of office space is for those 
contractor employees performing the services work under that particular 
contract.

    23. Senator Ensign. Mr. Denett, are you aware of any other agencies 
that have arranged for leases under a similar mechanism and called them 
service contracts? Does this practice give you cause for concern?
    Mr. Denett. The OFPP does not track this information, though I 
understand the acting DOD IG advised this committee of two other 
instances. I agree that lease transactions must be conducted in 
accordance with applicable laws and regulations, including 
congressional notification when required.

             REMEDIAL MEASURES IN RESPONSE TO DOD IG AUDITS

    24. Senator Ensign. Mr. Assad, in separate audit reports, the DOD 
IG has identified serious problems the Department has encountered when 
using interagency contracts with the Department of Interior (DOI), the 
Department of Treasury, the General Services Administration (GSA), and 
the National Aeronautics and Space Administration (NASA). I know that 
the Department has undertaken some remedial measures with the DOI and 
the GSA. Is the Department satisfied with the assistance and responses 
from those two entities?
    Mr. Assad. The actions taken by both the DOI and the GSA have been 
satisfactory to date. Only time and demonstrated performance will 
affirm whether the improvements made have taken hold. The cooperation 
at the senior leadership level and the action officer level has been 
excellent. We recently signed a Memorandum of Agreement (MOA) with GSA 
(December 2006) and with DOI (February 2007) that outline the roles and 
responsibilities of each organization in the Interagency Acquisition 
process. We expect to sign an MOA with NASA in April 2007. Ultimately, 
we expect to have an MOA with every agency that supports the 
Department.

    25. Senator Ensign. Mr. Assad, what has the DOD done with respect 
to the problems identified with the Department of Treasury and NASA 
interagency contracts?
    Mr. Assad. We have taken specific action with NASA to collaborate 
on the Department's proper use of NASA's Scientific and Engineering 
Workstation Procurement Government-Wide Acquisition Contract (SEWP 
GWAC). For example, in keeping with one of the DOD IG's 
recommendations, we have made it mandatory that any DOD user of NASA's 
SEWP GWAC must have training before being allowed to utilize that 
contract vehicle. In addition, we plan to sign an MOA with NASA in 
April 2007 that will define the roles and responsibilities of each 
Agency when utilizing NASA's SEWP GWAC. We will also be signing an MOA 
with the Department of Treasury that will address each of the IG's 
findings and the collaborative corrective actions that are required to 
ensure compliance with statute, regulation, and policy when the 
Department utilizes its assisting services.

    [Whereupon, at 4:10 p.m., the subcommittee adjourned.]

                                 
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