[Federal Register Volume 59, Number 99 (Tuesday, May 24, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-12593]


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[Federal Register: May 24, 1994]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

 

Policy Letter on Management Oversight of Service Contracting

AGENCY: Executive Office of the President, Office of Management and 
Budget (OMB), Office of Federal Procurement Policy.

ACTION: The Office of Federal Procurement Policy (OFPP) is reissuing 
Policy Letter 93-1 on the ``Management Oversight of Service 
Contracting.'' The Policy Letter includes appropriate changes from 
proposed Supplement No. 1 which was issued on January 26, 1994 and 
published in the Federal Register on February 2, 1994 (59 FR 4955).

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SUMMARY: OFPP Policy Letter 93-1, ``Management Oversight of Service 
Contracting,'' was signed by the former OFPP Administrator on November 
19, 1993 and published in the Federal Register on December 2, 1993 (58 
Fed. Reg. 63593). The Policy Letter is being reissued in its entirety 
to replace the November 19, 1993 version.
    The Policy Letter is being reissued to provide agencies with a more 
``results-oriented'' approach to managing and administering service 
contracts through the ``best practices'' concept. One way to achieve 
excellence in contractor performance is to improve the acquisition, 
management, and administration of service contracts. OFPP has several 
initiatives underway that should help to achieve excellence in 
contractor performance, e.g., emphasizing past performance in source 
selection, stressing the need for more performance-based service 
contracts, and developing best practices in contract administration. 
This Policy Letter provides guiding principles through the ``best 
practices'' concept that should help agencies develop, analyze, and 
perfect requirements for service contracts which, in turn, should 
improve contract management and administration. Other ``best 
practices'' models in contract management and administration will be 
issued as separate guidance.

SUPPLEMENTARY INFORMATION: A proposed Supplement No. 1 and requests for 
comments was published in the February 2, 1994 Federal Register (59 FR 
4955). Twenty-one comment letters were received in response to the 
Federal Register notice, of which, one was from the private sector. A 
summary of the more significant comments received and OFPP response to 
them follows:

1. Best practices in Lieu of Mandated Written Management Control 
Procedures and a Single Management Official

    Several Inspectors General (IGs) commented that changing to the 
``best practices'' concept will not promote the improvements that are 
needed in managing and administering service contracts. The commenters 
suggested that eliminating the requirement for management control 
procedures and the single management official will increase the 
vulnerability of the procurement system to waste, fraud, and abuse.
    Traditionally, OFPP has taken an ``input-oriented'' approach to 
managing and administering service contracts to respond to concerns 
raised in Congressional hearings and reports that better controls are 
needed to prevent abuses from occurring in the acquisition and use of 
service contracts. We believe that this input-oriented approach, i.e., 
developing procedures, designating a single official, and adding 
reporting requirements, has not added significant value to management 
practices being used in the federal government. Hence, we believe that 
a more ``results-oriented'' approach that suggests best practices that 
add value in contract management and administration should help to 
streamline the procurement process and achieve excellence in contractor 
performance.
    Therefore, the proposed revisions in Supplement No. 1 to section 8 
(Responsibilities) has been incorporated in this reissued Policy 
Letter. We have included a definition of ``best practices'' to clarify 
our intent of this concept.

2. Use of Best Practices as Mandatory Guidance for Audit Purposes

    Several IGs expressed concern that they are unable to use ``best 
practices'' as mandatory regulatory guidance for audit purposes. OFPP 
believes that the guidelines in section 7 and the questions in appendix 
A should be viewed as warning signals to help agencies analyze and 
perfect requirements for service contracts to prevent abuses from 
occurring. As we continue to work with the agencies and industry to 
develop ``best practices'' in contract management and administration 
agencies should be able to use these guiding principles to make 
improvements that add value to the procurement system. In keeping with 
the principles of the National Performance Review, we believe that the 
IGs should work with the procurement community to help achieve needed 
improvements in service contracting.
    Therefore, the proposed changes to section 8(d) in Supplement No. 1 
will be incorporated in this reissued Policy Letter.

3. Exclusion of Interagency Acquisitions Under the Economy Act

    Several commenters raised concern about excluding interagency 
agreements from coverage of the Policy Letter in view of the problems 
identified in the recent hearings on contract offloading. Other 
commenters suggested that the exclusion should be clarified since an 
interagency agreement under the Economy Act can be used to obtain 
either in-house support from another agency or to obtain support from a 
contract sponsored by another government organization.
    OFPP's intent was to exclude interagency agreements where the 
support service is being provided by in-house government employees. 
Interagency acquisitions under the Economy Act where the servicing 
agency contracts out for the support are covered by the Policy Letter. 
In developing the requirement for the interagency agreement, the 
requesting and servicing agencies should ensure that the principles 
outlined in the Policy Letter are being followed.
    Section 5 (Exclusions) has been revised to make clear that only 
interagency acquisitions/agreements where support is provided by in-
house government employees are excluded from coverage of the Policy 
Letter.

4. Other Exclusions

    One agency suggested that the coverage of the Policy Letter was too 
broad which creates an enormous administrative burden without a 
demonstrated need. The agency suggested that such services as ADP and 
telecommunications, training, medical services, or those that do not 
affect government decisionmaking, support or influence agency policy 
development, or affect program design and implementation should be 
excluded. In addition it was suggested that research and development 
(R&D) should be excluded since contracts for R&D are inherently 
different from service contracts. The concern is that many of the 
questions may be misapplied to R&D contracts since the very nature of 
the work is very broad and imprecise.
    OFPP disagrees with excluding the other suggested services since 
they may be susceptible to abuse in those problem areas identified in 
the Policy Letter. Prior GAO reports, the SWAT Report on Civilian 
Agency Contracting, and the Director's recent services contract review 
revealed that services contracting practices are uneven across the 
Executive Branch and that various contract management problems should 
be addressed.
    We understand that a distinction can be made between R&D and 
service contracts. Moreover, some of the questions may not be 
appropriate for R&D because of the technical and scientific nature of 
the work. We believe, however, that R&D contracts may be susceptible to 
the problem areas identified in the Policy Letter and should not be 
excluded. We have included a statement in the second introductory 
paragraph in section 7 to recognize that R&D, as well as architect and 
engineering services, are specialized categories of contracting. 
Agencies should also ensure that they are in compliance with applicable 
FAR guidance pertaining to those categories when using the guiding 
principles in the Policy Letter.
    As part of the National Performance Review, the procurement reform 
legislation includes a provision to increase the small purchase 
threshold to $100,000. This would significantly reduce the number of 
service contracts subject to the Policy Letter because the Letter does 
not apply to contracts below the small purchase threshold. Moreover, we 
believe that the questions in appendix A are good guiding principles 
that should help agencies better structure their requirements for all 
services so that excellence in contractor performance is achieved.

DATES: The Policy Letter is June 23, 1994. It directs that 
governmentwide regulations be promulgated to implement the policies 
contained therein within December 20, 1994.

FOR FURTHER INFORMATION CONTACT: Linda G. Williams, Deputy Associate 
Administrator, Office of Federal Procurement Policy, 725 17th Street 
NW., New Executive Office Building, room 9013, Washington, DC 20503, 
telephone (202) 395-3302. To obtain a copy of this reissued Policy 
Letter, please call the Executive Office of the President's 
Publications Office at (202) 395-7332.
Steven Kelman,
Administrator.
Policy Letter No. 93-1 [Reissued]
To the Heads of Executive Departments and Establishments
Subject: Management Oversight of Service Contracting
May 18, 1994.

1. Purpose

    This Policy Letter establishes Government-wide policy, assigns 
responsibilities, and provides guiding principles for Executive 
Departments and agencies in managing the acquisition and use of 
services.

2. Authority

    This Policy Letter is issued pursuant to section 6(a) of the 
Office of Federal Procurement Policy (OFPP) Act, as amended, 
codified at 41 U.S.C. Section 405.

3. Background

    On March 15, 1993, the Office of Management and Budget (OMB) 
Director Leon Panetta requested that 17 major Executive Departments 
and agencies review their service contracting programs. The purpose 
of the review was to determine (1) if the service contracts were 
accomplishing what was intended; (2) whether the contracts were cost 
effective; and (3) whether inherently governmental functions were 
being performed by contractors. The results of the reviews indicated 
that service contracting practices and capabilities are uneven 
across the Executive branch and that various common management 
problems need to be addressed.
    In addition to the Director's review, the National Performance 
Review has found that improved support for customers of the 
procurement system is needed. To do this it is important that 
procurement officials work closely with program and other officials 
to develop clear and precise statements of work for the products and 
services being acquired. Contracting for services is especially 
complex and demands close collaboration between procurement 
personnel and the users of the service to ensure that contractor 
performance meets contract requirements and performance standards.
    This Policy Letter--which includes appropriate changes from 
Supplement No. 1 [59 FR 4955 (1994)]--has been revised to provide 
agencies with a more results-oriented approach to managing and 
administering service contracts through the ``best practices'' 
concept. One way to achieve excellence in contractor performance is 
to improve the acquisition, management, and administration of 
service contracts. This Policy Letter provides guiding principles 
through the ``best practices'' concept that should help agencies 
develop, analyze, and perfect requirements for service contracts 
which, in turn, should help to improve contract management and 
administration. Other ``best practices'' models in contract 
management and administration will be issued as separate guidance.
    The guidance contained in the Office of Management and Budget 
(OMB) Circular No. A-120, ``Guidelines for the Use of Advisory and 
Assistance Services,'' has been rescinded by Transmittal Memorandum 
No. 1, [58 FR 63593 (1993) and 59 FR 789 (1994)].

4. Definition

    The following definitions are applicable to the Policy Letter:
    a. Services are identifiable tasks to be performed, rather than 
the delivery of an end item of supply. For purposes of this Policy 
Letter, only services obtained under nonpersonal services contracts 
are covered.
    b. Best Practices. For purposes of this Policy Letter, best 
practices are techniques that agencies may use to help detect 
problems in the acquisition, management, and administration of 
service contracts. Best practices are practical techniques gained 
from experience that agencies may use to improve the procurement 
process.

5. Exclusions

    Excluded from coverage of this Policy Letter are services that 
are (1) obtained through personnel appointments and advisory 
committees, (2) obtained through personal services contracts 
authorized by statute, (3) for construction, as defined in 
Sec. 36.102 of the Federal Acquisition Regulation (FAR), or (4) 
obtained through interagency agreements where the work is being 
performed by in-house federal employees.
    Also excluded from coverage of this Policy Letter are services 
obtained under contracts below the small purchase threshold, and 
services incidental to supply contracts. However, agencies should 
ensure that they are in compliance with appropriate OFPP Policy 
Letters applicable to service contracting and use good management 
practices and contract administration techniques when using these 
contracting methods to obtain services.

6. Policy

    When contracting for services, it is the policy of the Federal 
Government that:
    a. Program officials are responsible for accurately describing 
the need to be filled or problem to be resolved through service 
contracting to assure full understanding and responsive performance 
by contractors, and should obtain assistance from contracting 
officials, as needed.
    b. Services are to be obtained and used in ways that ensure that 
the Government retains inherently governmental decision-making 
authority.
    c. Services are to be obtained in the most cost-effective 
manner, without barriers to full and open competition, and free of 
any potential conflicts of interest.
    d. Sufficient trained and experienced officials are available 
within the agency to manage and oversee the contract administration 
function.
    e. Effective management practices are used to implement the 
guiding principles contained herein to prevent waste, fraud, and 
abuse in services contracting.

7. Good Management Practices

    While effective management oversight is required for all types 
of service contracts, some require less oversight than others, as, 
for example, such routine services as lawn mowing and food 
preparation. Conversely, services that tend to affect Government 
decision-making, support or influence policy development, or affect 
program management are more susceptible to abuse. These, therefore, 
require a greater level of scrutiny.
    The following sections offer guidance to ensure that good 
management practices are being followed. Agencies should involve 
procurement and program officials when developing requirements for 
service contracts. Appendix A contains a series of questions to help 
analyze and perfect service contract requirements within these 
guidelines. If the below guidelines apply, and if the response to 
any of the questions listed in the appendix is affirmative, agencies 
should ensure that they are in compliance with appropriate OFPP 
Policy Letters applicable to service contracting, and use good 
management practices and contract administration techniques. 
Agencies should also continue to comply with the FAR guidance for 
specialized categories of contracting such as research and 
development (part 35) and architect and engineering (part 36) as 
they use the guidance in this Policy Letter.

a. Inherently Governmental Functions

    When contracting for services, agencies must ensure that any 
final agency action reflects the informed, independent judgment of 
agency officials. Contractors thus must not be allowed to perform 
inherently Governmental functions as defined in OFPP Policy Letter 
92-1, Inherently Governmental Functions (57 FR 45096 (1992)).

b. Cost Effectiveness

    When a valid requirement exists, agency officials must ensure 
that the requirement is obtained in the most cost-effective manner. 
If contractor support is deemed appropriate, agencies should ensure 
that their acquisition strategy will result in the acquisition of 
services from a quality vendor that constitute the best value 
considering costs and other relevant factors, and yield the greatest 
benefit to the Government.

c. Control

    When contracting for services, in particular for highly 
specialized or technical services, agencies should ensure that a 
sufficient number of trained and experienced officials is available 
within the agency to manage and oversee the contract administration 
function. This especially applies to such services as management and 
professional support, studies, analyses, and evaluations, and 
engineering and technical support. Agency officials need to be able 
to make sound judgements on what the requirements should be, the 
estimated costs, and whether the contractor is performing according 
to the contract terms and conditions. Agency officials must retain 
control over, and remain accountable for, policy decisions that may 
be based, in part, on a contractor's performance and work products. 
Agency officials must also provide an enhanced degree of management 
controls and oversight when contracting for functions that closely 
support the performance of inherently Governmental functions.

d. Conflicts of Interest

    Agency officials must ensure that any actual or potential 
conflicts of interest are identified and that appropriate steps are 
taken to avoid, neutralized, or mitigate them. Service contracts are 
not to be awarded to any individual or organization that is unable, 
or potentially unable, to render impartial advice or assistance to 
the Government, or that has an unfair competitive advantage over 
competing contractors unless every effort is first taken to mitigate 
such conflict or advantage. OFPP Policy Letter 89-1, Conflicts of 
Interest Policies Applicable to Consultants, 54 FR 51805 (1989) and 
FAR subpart 9.5 provide detailed guidance on conflicts of interest.

e. Competition

    Full and open competition will assure cost effectiveness and 
reduce the potential for favoritism and conflict of interest. To 
maximize competition, the Competition in Contracting Act requires 
thorough acquisition planning and limits exceptions. The Act 
provides that lack of advance planning is not adequate justification 
for sole source contracting. Any justification for a noncompetitive 
contract should provide a detailed explanation as to why competition 
cannot be achieved. Plans should be made to minimize the number of 
subsequent noncompetitive awards.

8. Responsibilities

a. Heads of Agencies

    Agency head (or their designees should ensure that:
    (1) Requirements for servicers are clearly defined and 
appropriate performance standards are developed so that contractor 
performance meets contract terms and conditions.
    (2) Service contracts are awarded and administered in such a 
manner that will provide the customer is goods and services of 
significant quality, on time and within budget.
    (3) Specific procedures are in place when contracting for 
services to assure compliance with OFPP Policy Letters 92-1, 
Inherently Governmental Functions (57 FR 45096 (1992), 91-2, Service 
Contracting (56 FR 15110 (1991), and 89-1, Conflicts of Interest 
Policies Applicable to Consultants, 54 FR 51805 (1989).
    (4) Implementation strategies are developed and necessary staff 
training is initiated to assure effective implementation of these 
policies.

b. Contracting Officials

    Contracting officials should ensure that ``best practice'' 
techniques, such as those set forth below, are used when contracting 
for services:
    (1) The corporate experience section of an offeror's proposal 
should be reviewed to detect conflicts of interest. Usually, the 
corporate experience section contains the contractor's prior 
business clients.
    (2) Monthly progress reports should be reviewed to detect 
whether the contractor may be performing inherently governmental 
functions.
    Contracting officials should also seek other best practices 
techniques in contract management and administration that may be 
used within their own contracting activities or other agencies that 
will help to achieve excellence in contractor performance.
    OFPP will also be working to develop governmentwide ``best 
practices'' models in contract administration which will be issued 
as separate guidance.

c. Federal Acquisition Regulatory Council

    Pursuant to sections 6(a) and 25(f) of the OFPP Act, as amended, 
41 U.S.C. 401 et seq., the Federal Acquisition Regulatory Council 
shall ensure that the policies established herein are incorporated 
in the FAR within 210 days from the date this Policy Letter is 
published in the Federal Register. The 210 day period is considered 
a ``timely manner'' as prescribed in 41 U.S.C. 405(b).

d. Inspectors General

    The Inspectors General are encouraged to conduct vulnerability 
assessments of service contracting and, where warranted, include in 
their annual plans a review of service contracts to ensure 
compliance with this Policy Letter.
    The guidance in section 7 which refers to the questions in 
appendix A, or any resulting ``best practices'' models developed by 
OFPP should not be viewed as mandatory regulatory guidance for audit 
purposes.

9. Judicial Review

    This Policy letter is not intended to provide a constitutional 
or statutory interpretation of any kind and it is not intended, and 
should be construed, to create any right or benefit, substantive or 
procedural, enforceable at law by a party against the United States, 
its agencies, its officers, or any person. It is intended only to 
provide policy guidance to agencies in the exercise of their 
discretion concerning Federal contracting. Thus, this Policy Letter 
is not intended, and should not be construed, to create any 
substantive or procedural basis on which to challenge any agency 
action or inaction on the ground that such action or inaction was 
not in accordance with this Policy Letter.

10. Information Contract

    For information regarding this Policy Letter contact Linda G. 
Williams, Deputy Associate Administrator, Office of Federal 
Procurement Policy, 725 17th Street, NW., Washington, DC, 20503. 
Telephone (202) 395-3302.

11. Effective Date

    This Policy Letter is effective 30 days after the date of 
issuance. While these policies must be implemented in the FAR, it is 
expected that agencies will take all appropriate actions in the 
interim to develop implementation strategies and initiate staff 
training, consistent with section 8a(4), to ensure effective 
implementation of these policies.
Steven Kelman,
Administrator.

Appendix A

    The following is a series of questions to help agencies analyze 
and review requirements for service contracts.

A. Inherently Governmental Functions

    If the response to the first question is affirmative, the 
contract requirement is for an inherently Governmental function that 
must be performed by Government officials; if the response to the 
second question is affirmative, the contract requirement may be for 
an inherently governmental function:
    (1) Is the requirement for a function that is listed in appendix 
A of OFPP Policy Letter 92-1, Inherently Governmental Functions?
    (2) If the function is not listed in appendix A, do any of the 
factors in the ``totality of the circumstances'' analysis discussed 
in section 7(b) of Policy Letter 92-1 indicate that the function may 
be inherently governmental?

B. Cost Effectiveness

    If the response to any of the following questions is 
affirmative, the agency may not have a valid requirement or not be 
obtaining the requirement in the most cost effective manner:
    (1) Is the statement of work so broadly written that it does not 
support the need for a specific service?
    (2) Is the statement of work so broadly written that it does not 
permit adequate evaluation of contractor versus in-house cost and 
performance?
    (3) Is the choice of contract type, quality assurance plan, 
competition strategy, or other related acquisition strategies and 
procedures in the acquisition plan inappropriate to ensure good 
contractor performance to meet the user's needs?
    (4) If a cost reimbursement contract is contemplated, is the 
acquisition plan inadequate to address the proper type of cost 
reimbursement to ensure that the contractor will have the incentive 
to control costs under the contract?
    (5) Is the acquisition plan inadequate to address the cost 
effectiveness of using contractor support (either long-term or 
short-term) versus in-house performance?
    (6) Is the cost estimate, or other supporting cost information, 
inadequate to enable the contracting office to effectively determine 
whether costs are reasonable?
    (7) Is the statement of work inadequate to describe the 
requirement in terms of ``what'' is to be performed as opposed to 
``how'' the work is to be accomplished?
    (8) Is the acquisition plan inadequate to ensure that there is 
proper consideration given to ``quality'' and ``best value''?

C. Control

    If the response to any of the following questions is 
affirmative, there may be a control problem:
    (1) Are there insufficient resources to evaluate contractor 
performance when the statement of work requires the contractor to 
provide advice, analysis and evaluation, opinions, alternatives, or 
recommendations that could significantly influence agency policy 
development or decision-making?
    (2) Is the quality assurance plan too general to monitor 
adequately contractor performance?
    (3) Is the statement of work so broadly written that it does not 
specify a contract deliverable or require progress reporting on 
contractor performance?
    (4) Is there concern that the agency lacks the expertise to 
evaluate independently the contractor's approach, methodology, 
results, options, conclusions, or recommendations?
    (5) Is the requirement for a function or service listed in 
appendix B of OFPP Policy Letter 92-1, or similar to a function or 
service on that list, such that greater management scrutiny is 
required of the contract terms and the manner of its performance?

D. Conflicts of Interests

    If the response to any of the following questions is 
affirmative, there may be a conflict of interests:
    (1) Can the potential offeror perform under the contract in such 
a way as to devise solutions or make recommendations that would 
influence the award of future contracts to that contractor?
    (2) If the requirement is for support services (such as system 
engineering or technical direction), were any of the potential 
offerors involved in developing the system design specifications or 
in the production of the system?
    (3) Has the potential offeror participated in earlier work 
involving the same program or activity that is the subject of the 
present contract wherein the offeror had access to source selection 
or proprietary information not available to other offerors competing 
for the contract?
    (4) Will the contractor be evaluating a competitor's work?
    (5) Does the contract allow the contractor to accept its own 
products or activities on behalf of the Government?
    (6) Will the work, under this contract, put the contractor in a 
position to influence Government decision-making, e.g., developing 
regulations, that will affect the contractor's current or future 
business?
    (7) Will the work under this contract affect the interests of 
the contractor's other clients?
    (8) Are any of the potential offerors, or their personnel who 
will perform the contract, former agency officials who--while 
employed by the agency--personally ad substantially participated in 
(a) the development of the requirement for, or (b) the procurement 
of, these services within the past two years?

E. Competition

    If the response to any of the following questions is 
affirmative, completion may be unnecessarily limited:
    (1) Is the statement of work narrowly defined with overly 
restrictive specifications or performance standards?
    (2) Is the contract formulated in such a way as to create a 
continuous and dependent arrangement with the same contractor?
    (3) Is the use of an indefinite quantity or term contract 
arrangement inappropriate to obtain the required services?
    (4) Will the requirement be obtained through the use of other 
than full and open competition?

[FR Doc. 94-12593 Filed 5-23-94; 8:45 am]
BILLING CODE 3110-01-M