[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14338-14346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7868]



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OFFICE OF MANAGEMENT AND BUDGET

Performance of Commercial Activities, OMB Circular No. A-76

AGENCY: Office of Management and Budget, Executive Office of The 
President.

ACTION: Notice of Transmittal Memorandum No. 15, to the OMB Circular 
No. A-76, ``Performance of Commercial Activities,'' ``Revised 
Supplemental Handbook.''

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SUMMARY: The Office of Management and Budget (OMB) publishes its 
revisions to the Supplemental Handbook issued as a part of its August 
4, 1983, OMB Circular No. A-76, ``Performance of Commercial 
Activities.'' Circular No. A-76 was

[[Page 14339]]
originally published in the August 16, 1983, Federal Register, at pages 
37110-37116.
    The Revised Supplemental Handbook seeks the most cost-effective 
means of obtaining commercial support services and provides new 
administrative flexibility in the Government's make or buy decision 
process. The revision modifies and, in some cases, eliminates cost 
comparison requirements for recurring commercial activities and the 
establishment of new or expanded interservice support agreements; 
reduces reporting and other administrative burdens; provides for 
enhanced employee participation; eases transition requirements to 
facilitate employee placement; maintains a level playing field for cost 
comparisons between Federal, interservice support agreement and private 
sector offers, and seeks to improve accountability and oversight to 
ensure that the most cost effective decision is implemented. The 
proposed revision improves upon existing guidance by clarifying 
provisions that may have made the cost comparison process unnecessarily 
difficult or lead to less than optimal outcomes.

DATES: The provisions of the Revised Supplemental Handbook are 
effective March 27, 1996 and shall apply to all cost comparisons in 
progress that have not yet undergone bid opening or where the in-house 
bid has not yet otherwise been revealed.

AVAILABILITY: Copies of the Revised Supplemental Handbook may be 
obtained by contacting The Executive Office of the President, Office of 
Administration, Publications Office, Washington, DC 20503, at (202) 
395-7332. This document is also accessible on the OMB Home Page. The 
on-line OMB Home Page address (URL) is http://www.whitehouse.gov/WH/
EOP/omb

FOR FURTHER INFORMATION CONTACT: The Budget Analysis and Systems 
Division, NEOB Room 6104, Office of Management and Budget, 725 17th 
Street, NW., Washington, DC 20503, Telephone Number: (202) 395-6104, 
Fax Number (202) 395-7230.

SUPPLEMENTARY INFORMATION: OMB received 26 comments in response to its 
request for comments on proposed revisions to the Supplemental 
Handbook, published in the October 23, 1995, Federal Register, page 
54394: fifteen from Federal agencies; ten from industry or trade groups 
and one from an employee organization. A summary of the substantive 
agency and public comments and changes made to the Supplemental 
Handbook is attached.
Alice M. Rivlin,
Director.

Attachment--Summary of Agency and Public Comments and Changes Made to 
the OMB Circular A-76 Supplemental Handbook

Introduction

    1. Americans want to ``get their money's worth'' and want a 
Government that is more businesslike and better managed. The 
reinvention of Government begins by focusing on core mission 
competencies and service requirements. Managers must begin by asking 
some fundamental questions, like: why are we in this business; has 
industry changed so that our involvement or level of involvement is no 
longer required; is our approach cost effective and, finally, assuming 
the Government has a legitimate continuing role to play, what is the 
proper mix of in-house, contract and interservice support agreement 
resources.
    2. The OMB Circular A-76 Revised Supplemental Handbook is designed 
to enhance Federal performance through competition and choice. It seeks 
the most cost effective means of obtaining commercial products and 
support services and provides new administrative flexibility in the 
Government's make or buy decision process. The revisions modify and in 
some cases eliminate cost comparison requirements for recurring 
commercial and interservice support agreement services; reduce 
reporting and other administrative burdens; provide for enhanced 
employee participation; ease transition requirements; provide a level 
playing field, while recognizing the differences between Government and 
private sector accounting and performance measurement systems, and seek 
to improve accountability and oversight to ensure that the most cost 
effective decision is, in fact, implemented.
    3. The purpose of Circular A-76 is not to convert work to or from 
in-house, contract or interservice support agreement performance. 
Rather, it is designed to: (1) Balance the interests of the parties 
involved, (2) provide a level playing field between public and private 
sector offerors, and (3) encourage competition and choice in the 
management and performance of recurring commercial activities. In 
establishing common ground rules for public-public and public-private 
competitions, the Revised Supplement protects the procurement process, 
establishes a common baseline for cost and quality assessments, creates 
certain ``good employer'' relationships for affected Federal and 
contract employees and determines competitively who is best prepared to 
do the work. It is designed to empower Federal managers to make sound 
business decisions related to the provision of recurring product or 
support service requirements.

Summary of Comments and Changes

1. Inherently Governmental Functions

    Inherently governmental functions, as defined in the Office of 
Federal Procurement Policy (OFPP) Policy Letter 92-1, ``Inherently 
Governmental Functions'' (Federal Register, September 30, 1992, page 
45096 and the Federal Register, January 26, 1996, page 2627 
implementing the Policy Letter through the Federal Acquisition 
Regulations at Sections 7.103, 7.105 and 7.500) are not subject to 
performance by contract. Therefore, management decisions that involve 
the transfer of inherently governmental work between agencies, 
including interservice support agreements (ISSAs), are not subject to 
the Circular or the Revised Supplemental Handbook. Likewise, decisions 
involving business management practices, the development of joint 
ventures, asset sales, the devolution of activities to State and local 
governments, the termination of obsolete services or the decision to 
exit an entire business line are not subject to the cost comparison 
requirements of the Circular.
    Agency and Public Comments: Several commenters suggested that 
individual functions should be defined as either inherently 
governmental or commercial. One commenter suggested that the revision 
modifies the definition of what is inherently governmental by including 
exemptions for certain activities from the cost comparison requirements 
of the Circular. Although the draft proposed to update and expand the 
list of commercial activities attached to the August 1983 Circular A-
76, the listing remains unchanged. OMB is not considering revisions to 
the Circular itself nor is OMB revising OFPP Policy Letter 92-1. The 
Circular's listing of commercial activities is illustrative. It is not 
meant to be all-encompassing. Activities at a greater or lesser degree 
of specificity may be considered commercial activities. Questions 
regarding whether a function is or is not commercial or inherently 
governmental may be forwarded to OMB for review.
    The Supplement clarifies that certain commercial activities are 
exempt from the cost comparison requirements of the

[[Page 14340]]
Circular and may be converted to or from in-house, contract or 
interservice support agreements without cost comparison, for reasons 
other than cost. Inherently governmental activities are not commercial 
in nature, are not subject to the Circular and cannot be converted to 
contract performance.

2. Reliance on the Private Sector

    The Revised Supplement delegates to agency management additional 
authority to determine the proper mix of in-house, contract and 
interservice support agreement resources. While the Revision retains 
the 1983 Supplement's requirements to contract new or expanded work, 
unless a cost comparison is conducted to support conversion to in-house 
or interservice support agreement performance, it also requires 
conversion to contract only when it is cost effective. The decision to 
conduct a cost comparison is itself within the agency's discretion.
    Agency and Public Comments: Industry and trade group commenters, 
generally, sought a ``reinvigorated'' policy statement of strict 
reliance on the private sector. In their view, the Revision should 
require or, at a minimum, permit the direct conversion of all 
commercial activities to contract performance, without cost comparison. 
Objections were made to the proposal to permit agencies to continue 
their existing interservice support agreements for commercial 
activities, without cost comparison.
    OMB is not, at this time, considering changes to the Circular A-76 
itself. The Circular requires reliance on the private sector when shown 
to be economically justified. It does not require the conversion of in-
house work to contract, as a matter of policy, unless a cost 
comparison, conducted in accordance with its Supplement, demonstrates 
it to be in the best interests of the taxpayer.

3. Exemptions From Cost Comparison

    The Circular itself exempts certain recurring commercial activities 
from cost comparison, including: Mobilization requirements within the 
Department of Defense, the conduct of research and development (R&D), 
and direct patient care activities in Government hospitals or other 
health facilities.
    The Revision clarifies this policy to permit activities that are 
exempt from cost comparison requirements of the Circular to be retained 
in-house or converted to or from in-house, contract or interservice 
support agreement performance, without cost comparison. The list of 
functions exempted from cost comparison is expanded to include: 
national security activities, mission critical core activities, and 
temporary emergency requirements.
    Agency and Public Comments: There was a general level of agreement 
among all commenters that the addition of these functions to the list 
of those exempt from cost comparison was needed and appropriate. 
Several commenters took exception to the proposed 10 percent of total 
FTE limit for ``core activities.'' The Revision removes this limitation 
and, thereby, provides a significantly expanded level of administrative 
flexibility to identify functions as ``core'' and exempt them from cost 
comparison. In place of the 10 percent core limit, one commenter 
requested the right to appeal agency determinations of their core 
requirements and decision to convert from in-house to contract 
performance on the basis of a core designation. This change has not 
been made. The determination of a ``core'' function is, fundamentally, 
a management decision.

4. Annual Inventory and Reporting Requirements

    The revision eliminates required study schedules and quarterly 
study status reporting, as unnecessary and administratively burdensome. 
Agencies are, however, required to maintain an inventory of commercial 
activities with information on completed cost comparisons.
    Agency and Public Comments: There was general agreement that the 
existing OMB inventory and reporting system was unnecessary and 
administratively burdensome. In accordance with one commenter's 
suggestion, all inventory requirements are now identified in Appendix 
3. These requirements are consistent with the Department of Defense 
Commercial Activity Inventory and Reporting System, to permit 
Government wide aggregations of data by function and reason code. At 
their discretion, civilian agencies should be able to duplicate the DOD 
inventory and reporting system without significant time or expense.

5. Waivers

    The 1983 Supplement permitted agencies to issue cost comparison 
waivers, if effective price competition is available and a 
determination is made that an in-house Most Efficient Organization 
(MEO) has no reasonable chance of winning a competition with the 
private sector. Agencies were not permitted to waive cost comparison 
requirements to convert from contract to in-house performance and there 
is no mention of waivers with respect to interservice support agreement 
competitions.
    The Revision broadens an agency's authority to waive cost 
comparisons to convert to or from in-house, contract or interservice 
support agreement, without cost comparison, if it is found that: (1) 
The conversion will result in a significant financial or service 
quality improvement and that the conversion will not serve to reduce 
significantly the level or quality of competition in the future award 
or performance of work or (2) there is a finding that the in-house or 
contract (in the case of a possible conversion from contract to in-
house performance) offers have no reasonable expectation of winning a 
competition. In general, if an agency undertakes a major independently 
conducted business analysis and determines that significant savings--in 
excess of the minimum differential--can be achieved by conversion or, 
if significant performance improvements are likely, beyond what could 
be reasonably expected from a reorganization of the current approach, 
the agency may be justified in waiving the A-76 cost comparison. The 
Revision clarifies that agency waivers, with supporting documentation, 
are subject to public review and the A-76 administrative appeal 
process. Finally, the Revision also formalizes OMB's waiver guidance on 
DOD Base Closures and expands it to include commercial activities at 
civilian agency locations that have announced a date-certain closure.
    Agency and Public Comments: There was a general level of agreement 
among all commenters that the authority to issue waivers needed to be 
broadened to include the conversion of work to or from in-house, 
contract or interservice support agreement. There was also a general 
level of agreement that the waiver requirements of the 1983 Supplement 
were too narrow--only one waiver having been issued in over 12 years. 
Concern was expressed, however, for the organizational level authorized 
to issue such waivers. Originally, the comment draft limited the waiver 
decision to the Secretary. In response to a number of comments, the 
authority to issue a cost comparison waiver may now be delegated to the 
Assistant Secretary level. Within DOD, this authority may be further 
delegated to the Assistant Service Secretaries. This delegation 
facilitates the appeal of waiver decisions, which has also been 
clarified in the Revision over the comment draft.

6. Employee Participation

    The Revision provides additional guidance regarding the development 
of

[[Page 14341]]
the Performance Work Statement, in-house management plan and cost 
estimate. The Revision encourages agencies to consult with employees 
and involve them at the earliest possible stages of the competition 
process, subject to the restrictions of the procurement process and 
conflict of interest statutes. Agencies are requested to afford 
employees and private sector interests an opportunity to comment on 
solicitations prior to the opening of bids. This will ensure that the 
solicitation is complete and that all parties are treated fairly. The 
Revision also affords additional time to interested parties to submit 
cost comparison appeals.
    Agency and Public Comments: There was very little comment or 
disagreement on this issue. One commenter felt that it was particularly 
important that the Revision clarify employee participation 
opportunities. The 1983 Supplement was silent on this issue.

7. Performance Standards

    The 1983 Supplement did not permit conversion decisions to be based 
upon the comparison of performance measures or standards. The Revision 
authorizes conversion to or from in-house, contract or interservice 
support agreement performance, if an agency determines that performance 
meets or exceeds generally recognized performance and cost standards. 
Performance standard-based competitions must reflect the agency's fully 
allocated costs of performance and must be certified as being in full 
compliance with the Managerial Cost Accounting Concepts and Standards 
for the Federal Government, Statement of Recommended Accounting 
Standards Number 4, or subsequent guidance. The cost comparability 
procedures described in the Revision, such as those related to fringe 
benefit factors, will also be used in assessing performance against 
these standards.
    Agency and Public Comments: There was very little comment or 
disagreement on this issue, although one commenter suggested that the 
use of existing manuals to establish performance standards for Federal 
employees is too new an idea. Performance measures and cost standards 
are becoming more widely used to assess performance in government and 
in the private sector. Indeed their development is required by the 
Government Performance Results Act (GPRA). As noted by several 
commenters, the difficulty lies in assuring that historical performance 
measures are accurate and comparable. The Revision establishes required 
levels of oversight and certification to ensure that a high degree of 
comparability is reached. The question was raised whether performance 
standard-based cost comparisons could be used in interservice support 
agreement comparisons. The Revision clarifies the paragraph to note 
that the answer is yes, but only when those standards are consistent 
with the comparative costing rules of the Revision. This may require 
some detailed analysis of industry standards and adjustments to 
internal agency performance measures.

8. Conversions With Federal Employee Placement

    The Revision authorizes the conversion of functions involving 11 or 
more FTE to contract performance, without cost comparison, if fair and 
reasonable prices can be obtained from qualified commercial sources and 
all directly affected Federal employees serving on permanent 
appointments are reassigned to other comparable Federal positions for 
which they are qualified.
    Agency and Public Comments: There was strong support and strong 
opposition to this provision. One commenter suggested that no 
conversions should be authorized without a cost comparison--even if all 
Federal employees are placed in other comparable Federal positions. It 
was suggested that this new administrative flexibility denies taxpayers 
the benefits of a cost comparison and fails to accommodate public 
employee interests. Short of eliminating this provision, OMB was asked 
to assure the right to appeal such decisions and that placement be 
limited to the commuting area. In contrast, another commenter objected 
to the idea that failure to place a single employee could require a 
cost comparison or otherwise delay a direct conversion to contract.
    The provision has been modified to clarify that in addition to 
assuring placement in ``comparable Federal positions,'' the conversion 
to contract with placement and without cost comparison is limited to 
competitive awards. These direct conversions to contract must retain 
the benefits of full and open competition. In the absence of adverse 
actions to Federal employees and similar to the policy of reliance on 
the private sector for new starts and expansions, Federal managers 
should be permitted to rely on the competitive dynamics of the private 
sector.
    The request to limit Federal employee placements to the commuting 
area has been rejected. The request is too limiting and not in the 
long-term best interests of either the Government, who has an interest 
in redirecting important resources, or individual employees.
    The comment draft admonished Federal managers not to modify, 
reorganize or divide functions for the purpose of circumventing the 
requirements of the Revised Supplement. One commenter further requested 
the ability to appeal individual organizational changes. While the 
Revision expands the appeal process to permit interested parties to 
appeal not only costing questions, as permitted under the 1983 
Supplement, but also general compliance issues, it does not permit 
appeals of basic organizational decisions. The A-76 appeal process is 
not a surrogate to resolve management-union complaints.

9. The 10 FTE or Less Rule

    The 1983 Supplement's 10 FTE or less rule that permits the 
conversion of a function to contract performance without cost 
comparison--even with adverse employee impacts--is extended by the 
Revision to the conversion of similarly sized activities to in-house or 
interservice support agreement performance, without cost comparison.
    Agency and Public Comments: One commenter suggested that the 10 FTE 
or less threshold be raised to 50 FTE. This change would permit the 
conversion of activities to or from in-house, contract or interservice 
support agreement, without cost comparison and without placement 
(adverse action would be authorized). This recommendation was not 
accepted.
    The 10 FTE or Less Rule is a recognition that there is a break-even 
point where the cost of conducting the comparison is not likely to 
outweigh the expected benefits. The 10 FTE or Less Rule has long been 
accepted as a reasonable approximation of this point. The Revision does 
not change this requirement. Based upon agency experience, we believe 
that cost comparisons at the 11-50 FTE levels do result in significant 
MEO and competition savings.

10. MEO Implementation

    The Revision eliminates the 1983 Supplement's 180-day MEO 
implementation requirement. The Revision requires agencies to develop a 
transition plan for each competitive solicitation. This approach should 
permit agencies to plan for employee placements and facilitate a more 
orderly transition of work to or from in-house, contract or 
interservice support agreement.
    The Revision permits agencies to assume that current organizational 
structures and wage grade systems reflect their MEO. A signed 
certification is required and may be based upon an

[[Page 14342]]
number of reinvention initiatives. Certified MEO decisions are not 
subject to appeal.
    Agency and Public Comments: There was very little comment or 
disagreement on the MEO implementation change. Taken in combination 
with the Revision's new requirement to conduct Post-MEO Performance 
Reviews, the provision permits for better employee and workload 
transition planning.
    Several commenters, however, asked for permission to consider 
existing interservice support agreement reimbursable rates as fully 
competitive costs, under the Circular, for purposes of comparisons with 
the private sector. This change has not been made. In general, these 
rates do not currently reflect the requirements of the CFO Act, GPRA or 
the FASB, nor do they reflect the fringe benefits, liability, overhead, 
depreciation, capital, contract administration, or other cost 
adjustments necessary for a level playing field to exist, such as 
Federal taxes. They are also often structured to permit the cross-
subsidization of one service to another within the agency's revolving 
fund.

11. Cost Comparison Completion

    The 1983 Supplement makes no mention of study completion time 
frames. However, because functions could not be converted to contract 
or in-house performance without a cost comparison, there has been an 
incentive to never complete the cost comparison, if the desired outcome 
is to maintain the status quo. The Revision requires agencies to report 
to OMB on any study not completed within 18 months for single function 
studies and 36 months for multi-function studies and the corrective 
actions taken.
    Agency and Public Comments: Several commenters objected to the 
suggestion that A-76 cost comparisons (including the development of the 
PWS and Management Plan) can or should be completed within 18 to 36 
months. Other commenters objected that the time frames were too long 
and did not reflect the 45-90 day average solicitation response times 
required by most Government service support solicitations.
    The required report is to OMB. It is not a requirement to complete 
a study. However, where a study has not been completed, the agency must 
explain what the problem is and what the agency is doing to assure that 
study completion times will be reasonable. The analogy to the private 
sector's solicitation response requirement is inappropriate, as the 
Government is also developing historical workload and minimum 
performance standard data. It is not expected that cost comparisons 
conducted for possible conversion from contract to in-house performance 
will require these longer time frames, as the workload and performance 
measures are, generally, well developed.

12. Post-MEO Performance Reviews

    Contracts are regularly inspected for performance and subjected to 
financial audit. As a matter of accountability, the Revision requires 
agencies to conduct Post-MEO Performance Reviews on not less than 20 
percent of all functions retained or converted to in-house performance 
as a result of a cost comparison. These reviews will confirm that the 
MEO was properly estimated and implemented and that work is being 
performed in accordance with the terms, quality standards and costs 
specified in the PWS.
    Agency and Public Comments: This proposal was found to be 
insufficient by several commenters, while it was strenuously objected 
to by several others. One commenter asked that the requirement be 
eliminated as an additional and unnecessary administrative burden. The 
name was changed from Post-MEO Performance Audit to Post-MEO 
Performance Review to assuage concerns over the level of detail 
required.
    OMB is committed to ensuring that the cost comparison process is 
fair and equitable. A major private sector complaint has been that 
Government agencies ``buy-in.'' The problem is that the private sector 
undergoes extensive contract performance inspections, evaluations, and 
financial audits, while the in-house organization is currently subject 
to none of these oversight reviews. It was urged that 100 percent of 
all in-house cost comparison ``wins'' be subjected to Post-MEO Review. 
There is, however, concern for the administrative burdens being imposed 
by the Circular. Therefore, the Revision retains a 20 percent 
requirement.
    Several commenters suggested that if the MEO is found to be in 
default, it should not be allowed to compete under a new solicitation. 
This recommendation has not been accepted. The Revision calls for the 
contracting officer to retreat first to the next low offeror, if 
feasible. If retreat to the next low offeror (contract bid) is not 
feasible, a new cost comparison is required. In retreating to the next 
low offeror, a conversion to contract without additional cost 
comparison is possible.
    One commenter suggested that Post-MEO Reviews be announced in the 
Commerce Business Daily. This recommendation has not been accepted 
because it would be burdensome. To ensure compliance over time, the A-
76 inventory and reporting system will require agencies to prepare an 
annual list of completed cost comparisons retained in-house or by 
contract and the number of Post-MEO Reviews completed. This listings 
will be made available to the public upon request.
    One commenter asked whether failure to comply with the Transition 
Plan implementing the MEO would be construed as a default. Changes have 
been made to clarify that a significant failure to implement the 
Transition Plan, such that it would invalidate the cost comparison, 
would be considered a default. Another commenter suggested making the 
review due one year after implementation of the MEO. The 180-day MEO 
implementation requirement no longer exists and since the MEO may be 
implemented via the transition plan establishing a hard date to conduct 
the review is difficult. It must be completed within the cost 
comparison period. The time frame for completing Post-MEO Performance 
Reviews is left to the discretion of the agency, but must be within the 
contract or cost comparison period.

13. The Streamlined Cost Comparison Alternative

    In addition to the generic cost comparison methodology, a 
streamlined cost comparison process has been developed for activities 
involving 65 FTE or less. This approach avoids the cost comparison's 
current reliance on the procurement process, until a final decision to 
contract has been made. Within the policies and procedures laid out by 
the Revision, existing contracts can be used to determine competitive 
private sector costs.
    Agency and Public Comments: The streamlined cost comparison 
methodology was generally accepted and even widely acclaimed. The only 
real disagreement centered on the size of functions that could be cost 
compared using the approach, which was established in the comment draft 
at not more than 50 FTE.
    Several commenters asked that the threshold be unlimited or raised 
significantly. OMB did not expect that either the private sector or the 
unions would accept an unlimited streamlined approach, as it could be 
applied to convert to or from in-house, contract or interservice 
support agreement. One commenter, believing that most A-76 cost 
comparisons to date have involved less than 50 FTE, suggested that all 
such functions be required to use the Streamlined cost comparison 
approach provided by the draft. This

[[Page 14343]]
recommendation was not accepted for the reasons noted above. Under the 
streamlined approach and as a matter of equity, there is no opportunity 
for the development of an in-house MEO, nor is there an opportunity for 
the private sector to sharpen its competitive bid. The process relies 
on current in-house and contract costs.
    One commenter was concerned that contracting officers, as Federal 
employees, might be inclined to select the more costly comparable 
contracts, in order to give Federal employees a competitive advantage. 
To mitigate against this possibility, it was suggested that industry 
``input'' in the selection of comparable contracts is necessary. We 
disagree. We are not prepared to make such an assumption nor is OMB 
prepared to impose the additional administrative burdens implied by 
such a process on the agencies. The contracting officer's selection of 
comparable contracts--adjusted for scope and quality, are not subject 
to appeal.
    Two other important comments were received on this issue. First, 
there was a request that a policy statement be included that it is the 
policy of the Government to consolidate mutually supporting functions 
to the extent possible, to achieve economies of scale. This 
recommendation has not been accepted, because A-76 is not the place for 
such a policy determination and should rather be left to agency 
managers. It was also recommended that the section include a 
prohibition on breaking functions down to permit the use of the 
streamlined approach. Like the prohibition against modifications and 
reorganizations to permit direct conversion to contract, the comment 
draft has been revised to prohibit agencies from reorganizing 
specifically to permit the use of a streamlined cost comparison.

14. Sector-Specific Cost Comparison Methodologies

    The Revision provides sector-specific cost comparison methodologies 
for aircraft and aviation services and for motor vehicle fleet 
management services. Additional sector- specific cost comparison 
methodologies are expected and interested parties are encouraged to 
work with OMB on their development.
    Agency and Public Comments: While comments were received in 
response to the two industry cost comparison methodologies outlined in 
the draft, there were no objections to the concept of sector-specific 
cost comparisons or their development.
    Initially, the General Services Administration (GSA) raised 
concerns about the proposed cost comparison requirements for comparing 
interservice support agreement performance of motor vehicle fleet 
services. GSA was concerned that the requirement might conflict with 
the GSA Administrator's statutory authorities regarding motor vehicles. 
After further discussion, OMB and GSA agreed to jointly issue the 
guidance in Appendix 7 on the conduct of these comparisons. Changes 
were also made to the aircraft and aviation cost comparison methodology 
to reflect cost accounting improvements suggested by industry and made 
through the Interagency Committee for Aviation Policy (ICAP).

15. Costing Changes

    a. Labor. Based upon the Air Force Management Engineering Agency 
(AFMEA) man-hour availability report, the Revision increases the annual 
available productive hours per Federal employee from 1744 hours to 
1776. Fringe benefit factors are updated and expanded to include the 
projected costs of retirement health benefits to the Government. The 
standard retirement cost factor for the Federal Government's complete 
share of the weighted CSRS/FERS retirement cost to the Government, 
based upon the full dynamic normal cost of the retirement systems; the 
normal cost of accruing retiree health benefits based on average 
participation rates; Social Security; and Thrift Savings Plan (TSP) 
contributions has been increased from 21.7 percent to the current 
(1996) rate of 23.7 percent of base payroll for all agencies.
    Agency and Public Comments: There was very little comment or 
disagreement on the cost of labor or fringe. One commenter noted that 
the number of productive military hours in a given year are not cited 
and suggested that a 30 percent cost penalty be added to in-house bids 
that assume continued or mixed military operations. The Revision has 
been changed to require the Service's Comptroller to establish the 
number of military productive hours in a year.
    b. Material Costs. The escalation rates for supplies received from 
GSA and DLA are removed. The escalation issues reflected in the 1983 
Supplement are now reflected in the reimbursable rates used by these 
agencies.
    Agency and Public Comments: There was very little comment or 
disagreement on the cost of materials.
    c. Overhead. The inclusion of direct and indirect operations and 
general and administrative overhead has long been an area that has led 
to difficulty and controversy. This controversy has been aggravated by 
the fact that the Supplemental Handbook requires, generally, the 
calculation of the competitive costs of in-house MEO performance, not 
the fully allocated cost of in-house (or contract) performance. In an 
effort to resolve this problem and improve the integrity of the cost 
comparison process, the Revision requires a standard overhead cost 
factor of 12 percent of direct labor costs.
    Agency and Public Comments: Industry and trade groups strongly 
supported the standard overhead cost factor concept. It has been their 
sense that agencies have significantly understated overhead in A-76 
cost comparisons, generally. One commenter, recognizing the difference 
between fully allocated costs and the comparative cost approach 
utilized by the Supplement, suggested a rate of 15 percent instead of 
the 12 percent in the comment draft. Agencies were either silent on the 
issue, agreed, or agreed in principle but recommended a range of 
alternative factors (ranging from 5 percent to 12 percent).
    The Revision continues to require a 12 percent standard overhead 
cost rate in each cost comparison. Within DOD, however, the Revision 
distinguishes civilian from military overhead. DOD military overhead 
will be established by the Service Comptroller. It should also be 
reemphasized that the Revision permits any agency to submit data to 
justify any one of a series of alternative agency-wide standard cost 
factors to OMB for approval.
    d. Cost of Capital. The 1983 Supplement did not require agencies to 
consider the cost of capital in the development of their in-house cost 
estimate, though such costs were effectively included in competitive 
contract offers. The Revision requires that agencies include the cost 
of capital for those assets purchased two years before or during the 
cost comparison performance period and not provided to the contractor 
as Government Owned and Contract Operated (GOCO) equipment or 
facilities. Neither capital nor depreciation costs of GOCO facilities 
and equipment are included in the cost comparison. This change is 
designed to remove current incentives to delay cost comparisons while 
new, more efficient equipment is acquired and to reflect the real costs 
of new assets to the taxpayer.
    Agency and Public Comments: There was very little comment or 
disagreement on the limited inclusion of the cost of capital.
    e. Severance Pay. The 1983 Supplement permitted agencies to 
calculate severance at 2% of direct labor or as determined by a Mock 
RIF. Based

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upon the low actual severance rates incurred to date and to avoid the 
significant administrative costs and delays attendant with conducting a 
detailed Mock RIF, the comment draft would have restricted severance 
costs added to the contract bid to 2% of labor costs.
    Agency and Public Comments: Upon review, several commenters 
suggested that the 2 percent severance factor is too low given current 
downsizing efforts. Placement is getting more and more difficult and a 
wider range of services are now being considered for conversion. It was 
also noted that recent emphasis on interservice support agreements and 
franchising will result in the elimination of additional placement 
opportunities.
    To accommodate these concerns, the Revision now uses a factor of 4 
percent. Agencies may also develop agency-wide severance pay factors, 
with associated documentation, for approval by OMB.
    f. Contract Administration. The 1983 Supplement permitted agencies 
to use a contract administration factor (Table 3-1) or more accurate 
data. Again, in an effort to improve upon the integrity of the cost 
comparison process and reduce the administrative burdens of conducting 
a cost comparison, the Revision requires the use of Table 3-1, but the 
factors have been increased for most studies. This approach balances 
recent changes in Federal procurement regulations, that make contract 
administration easier, with concern that proper oversight is achieved.
    Agency and Public Comments: There was very little comment or 
disagreement on the cost factor for contract administration.
    g. Gain or loss on Assets. The 1983 Supplement permitted agencies 
to add to the contract price the loss taken on any asset excessed, even 
if the asset is used by the in-house MEO and not made available to the 
contractor. The Revision does not permit any losses to be calculated on 
any asset not included in the MEO. Assets used by the MEO and not made 
available to the contractor can only be calculated as gains and 
subtracted from the contractor's bid.
    Agency and Public Comments: There was very little comment or 
disagreement on this issue.
    h. The minimum Differential. The minimum differential represents 
three costs; (1) costs not specifically included in the in-house cost 
estimate; (2) unknown morale and other disruption costs caused by a 
conversion decision; and (3) a minimum level of estimated savings to 
the taxpayer. The differential also applies to conversion to in-house 
performance.
    Agency and Public Comments: There was very little comment or 
disagreement on the minimum differential, although one commenter 
recommended its elimination. Initially, the draft provided for the 
minimum differential to be set at 10 percent of the labor costs in line 
1 of the cost comparison form. It was noted, however, that this 
differential can become more and more burdensome as studies involve 
larger groups of employees. For this reason the minimum differential is 
capped for conversions to or from in-house, contract or interservice 
support agreement performance at the lesser of 10 percent of in-house 
personnel-related costs (Line 1) or 10 million over the performance 
period. Whenever a cost comparison involves a mix of existing in-house, 
contract, new or expanded requirements, or assumes full or partial 
conversions to in-house performance, each portion is addressed 
individually and the total minimum differential is calculated 
accordingly.
    I. Prorating of Asset Costs. The Revision provides that assets made 
available to the contractor are eliminated from consideration in the 
cost comparison. Only the remaining competitive costs of operations or 
maintenance are included. Assets not made available to the contractor 
are included at their depreciation values.
    Agency and Public Comments: One commenter suggested that assets 
used by more than one in-house activity should also be treated as a 
common cost and not included in the Government's in-house estimate. The 
problem is that conversion to contract or interservice support 
agreement will change that asset's consumption rate. Equity requires 
that all assets used by the MEO and not provided to the contractor be 
treated as having value, particularly when the contractor must replace 
those assets at a direct cost to that contractor's competitive offer.

16. Other Changes

    Other changes in the Revised Supplement are designed to address 
specific problems that have been raised over the years. These include 
the following:

a. Interservice Support Agreements

    The 1983 Supplement required agencies to conduct cost comparisons 
with the private sector prior to entering into an interservice support 
agreement (ISSA). The 1983 Supplement also required all existing 
interservice support providers to cost compare their current operations 
not later than September 30, 1987, or all related work would be 
converted directly to contract performance.
    The Revision clarifies policies regarding the use of interservice 
support agreements and establishes revised cost comparison 
requirements. ISSAs may offer agencies the opportunity to reduce costs 
through economies of scale. As a result and to encourage agency 
consideration of ISSAs, the Revision permits agencies to consolidate 
existing, new or expanded work requirements to ISSAs, without cost 
comparison, if that work is transferred prior to October 1, 1997, and 
the consolidation does not result in a conversion of work to or from 
contract performance and the conversion is not otherwise authorized by 
the Revision. Effective October 1, 1997, the Revision will permit 
agencies to continue and to renew existing ISSA agreements without cost 
comparison. Agency heads may also consolidate support services into 
new, intra-service revolving or franchise funds without cost 
comparison--assuming that such a consolidation does not involve the 
conversion of work to or from in-house or contract performance. 
Effective October 1, 1997, and unless otherwise exempt from the cost 
comparison requirements of the Circular, new or expanded interservice 
support requests must be justified by a cost comparison. ISSAs that 
have themselves, however, conducted a cost comparison with the private 
sector may, at the customer agency's discretion, accept new or expanded 
work without further cost comparison on the customer or provider 
agency's part, until the provider agency's workload increases by 30 
percent or 65 FTE, at which time another provider cost comparison is 
required.
    Agency and Public Comments: Reaction to proposed interservice 
support agreement cost comparison requirements was as mixed as it was 
strong. The industry and trade group commenters were opposed to the 
cost comparison process outlined in the Revision, as weakening the 
provisions of the 1983 Supplement, though it is recognized that the 
1983 provisions were not complied with in practice. The Revision, 
generally, only restricts the growth of these activities and then only 
as determined by a cost comparison.
    In contrast and with only one exception, Federal agencies were 
equally opposed to any requirement to compete even new or expanded work 
with the private sector, prior to initiating an interservice support 
agreement. Agencies are concerned that requiring A-76 cost comparisons 
for interservice support agreements will have a chilling effect upon 
the efficient

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use of such agreements. In the view of the several commenters, the 
under-utilization of existing Government capacity is already cause for 
concern. The agencies were also opposed to the inclusion of 
depreciation, capital, contract administration costs and the minimum 
differential, when comparing interservice support agreement costs with 
agency or contract offers. More importantly, these commenters expressed 
concern that the administrative flexibilities made available by ISSAs 
will be lost if subject to A-76 administrative appeal.
    To further full and open competition, OMB has, in large part, not 
adopted these agency recommendations. Interservice support agreements 
are designed to provide commercial activities, under contract and under 
an agreed upon reimbursable rate. Existing ISSAs will continue at the 
customers option. The Revision relies on competition to determine their 
growth. It is inappropriate to simply displace a private sector offeror 
by resorting to internal agreements. Concerns for administrative 
flexibility are met by the Revision's use of exemptions, waiver 
opportunities and the incentives created to encourage existing ISSAs to 
compete directly with the private sector. Nevertheless, in an effort to 
encourage agencies to consider ISSAs, the draft was changed to permit 
agencies to consolidate work to ISSAs prior to October 1, 1997, without 
a cost comparison.
    One commenter that strongly agreed with the draft's outline and 
requirements, also sought to have the Revision clarify what a proposing 
agency needed to submit in response to a requesting agency's 
solicitation and to clarify the requesting agency's right to reject an 
ISSA proposal. These changes have been made. The requirement was also 
clarified to permit Federal and State governments to provide and 
receive services without cost comparison to meet emergency disaster 
relief requirements.
    Finally, several commenters suggested that a specific exception be 
granted to inherently governmental activities, particularly interagency 
contract administration services. As previously noted, inherently 
governmental functions are not subject to the cost comparison 
requirements of the Circular or this Supplement. The Revision 
clarifies, however, that inherently governmental levels of contract 
administration are not subject to the cost comparison requirements of 
the Supplement.

b. Military Personnel

    The 1983 Supplement provided that commercial activities performed 
by military personnel were to be converted to civilian performance. 
This resulted in a reluctance to cost compare certain activities. The 
Revision permits the military Services to cost military personnel at 
the composite rate issued by the DOD Comptroller and, if retained in-
house, would permit these activities to continue to be performed by 
military personnel. This change does not, however, authorize the 
conversion from in-house civilian to military personnel.
    Agency and Public Comments: There was very little comment or 
disagreement on this issue.

c. Source Selection

    There have been complaints that the 1983 Supplement was too cost 
determinative and that it relied too heavily on the low bid offeror. 
The benefits of competition should be expressed in terms of the quality 
of services and in terms of cost to the taxpayer. The problem has been 
how the Government's quality of services will be evaluated and by whom, 
when: (a) A Government agency itself has a vested interest in the 
competition and (b) the best overall private sector offeror chosen from 
among qualified and responsive offerors is not the low contract 
offeror. Guidance is provided on the use of competitive negotiation or 
source selection techniques in A-76 cost comparisons. The Revision 
permits agencies to conduct cost comparisons and award to other than 
the low private sector offeror.
    Agency and Public Comments: The private sector, generally, raised 
concerns regarding the use of ``best value'' contracts and the 
inclusion of ``past performance'' in the selection process. While 
recognizing that the Revision includes needed guidance on the use of 
source selection and negotiated procurement in a cost comparison with a 
vested Government interest, these commenters sought assurances that the 
Government's in-house bid would also undergo a ``best value'' and a 
``past performance'' evaluation. The problem, of course, is that the A-
76 process assumes that the selected private sector offeror will 
compete with a duly authorized Government cost estimate. A costing 
penalty that would assume that the in- house bid was not a good past 
performer was suggested, but not quantified, or accepted.
    A-76 has long assumed that in-house performance is acceptable and, 
thus, the in-house bid has always been treated as a responsive, 
responsible offer. This is not unlike what is done in the private 
sector when a true make or buy decision is being analyzed. While it is 
true that as much as 25 percent of a contractor's technical proposal 
may be weighted for evaluation purposes for past performance, the 
contractor's bid does not directly include past performance in 
competition with the Government's cost estimate. The recommendation has 
not, therefore, been accepted.

d. Appeals

    Following a tentative waiver or cost comparison decision, the A-76 
Administrative Appeals process is invoked. The procedure does not 
authorize an appeal outside the agency or judicial review, nor does it 
authorize sequential appeals.
    The Revision extends the time frame that appeals may be submitted 
from 15 working days to 20. The agency may extend the appeal period to 
a maximum of 30 work days if the cost study is particularly complex.
    Agency and Public Comments: One commenter placed great emphasis on 
the appeals process and was generally supportive of the process 
outlined by the Revision. Greater latitude in the range of issues that 
are subject to appeal, clarification as to the right to appeal agency 
waiver decisions, and for the right to appeal to an authority outside 
of the agency was requested. The Revision was changed to clarify that 
appeals may be made, based upon the factual information contained in 
agency waiver justifications. Changes were also made to modify the 
scope of eligible appeals to include: formal information denials, 
instances of clear A-76 policy violations, and to clarify that 
streamlined and sector specific cost comparisons were subject to 
appeal.
    Not accepted was a recommendation to permit appeals of agency 
reorganizational decisions. The issue here is the establishment of an 
agency's reorganization for the alleged ``purpose'' of violating the 
Circular. The recommendation could potentially subject all 
modifications and organizational changes to an A-76 appeal. Also not 
accepted was a recommendation that appeals be decided by another 
agency. The request to appeal to an outside agency was not accepted, 
because it would be administratively burdensome and because experience 
with the Circular has not shown intra-agency appeals to be flawed. We 
should note, however, that the Revision raises the level of the appeal 
authority above that provided in the 1983 Supplement. Finally, one 
commenter requested authority to

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appeal agency ``core'' determinations. This recommendation was not 
accepted; these are non-appealable management decisions.
    One commenter noted that the appeals procedures did not 
specifically address the use of performance measures as permitted by 
Part I, Chapter 1.C.7. An additional paragraph clarifying this point 
has been included in the Revision.
    Another commenter suggested that the private sector should be able 
to initiate a cost comparison requirement and, further, appeal any 
agency decision to dismiss private proposals to contract out or conduct 
a cost comparison. This recommendation was not accepted. The decision 
to conduct a cost comparison, like other management decisions, is left 
to the agency's discretion without appeal. While vendors may make 
proposals to agency mangers to contract out and may identify ways to 
reduce cost or overhead and improve services, there is no 
administrative recourse provided by this Supplement, if the agency opts 
not to conduct a study.

e. Right of First Refusal

    The concept of the Right-of-First-Refusal was first established by 
the 1979 Supplemental Handbook. This concept holds that, as a condition 
of contract award, the contractor in an A-76 decision to convert from 
in-house to contract performance shall provide adversely affected 
Federal employees the ``Right-of-First-Refusal'' for jobs created in 
the contractor's organization as a result of the award of the contract. 
The Revision reaffirms this as a superior requirement, while 
incorporating E.O. 12933, ``Non- Displacement of Qualified Workers 
Under Certain Contracts,'' dated October 20, 1994, which extends the 
Right-of-First-Refusal to existing and to subsequent contract employees 
in this or follow-on contracts.
    Agency and Public Comments: There was no comment on this issue.

[FR Doc. 96-7868 Filed 3-29-96; 8:45 am]
BILLING CODE 3110-01-P