[Federal Register Volume 76, Number 176 (Monday, September 12, 2011)]
[Notices]
[Pages 56227-56242]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-23165]


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OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy


Publication of the Office of Federal Procurement Policy (OFPP) 
Policy Letter 11-01, Performance of Inherently Governmental and 
Critical Functions

AGENCY: Office of Management and Budget, Office of Federal Procurement 
Policy.

ACTION: Notice of final policy letter.

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SUMMARY: The Office of Federal Procurement Policy (OFPP) in the Office 
of Management and Budget (OMB) is issuing a policy letter to provide to 
Executive Departments and agencies guidance on managing the performance 
of inherently governmental and critical functions. The guidance 
addresses direction to OMB in the Presidential Memorandum on Government 
Contracting, issued on March 4, 2009, to clarify when governmental 
outsourcing of services is, and is not, appropriate, consistent with 
section 321 of the Duncan Hunter National Defense Authorization Act 
(NDAA) for Fiscal Year 2009 (Pub. L. 110-417). Section 321 requires OMB 
to: (i) Create a single definition for the term ``inherently 
governmental function'' that addresses any deficiencies in the existing 
definitions and reasonably applies to all agencies; (ii) establish 
criteria to be used by agencies to identify ``critical'' functions and 
positions that should only be performed by Federal employees; and (iii) 
provide guidance to improve internal agency management of functions 
that are inherently governmental or critical. The Presidential 
Memorandum is available at http://www.whitehouse.gov/the_press_office/Memorandum-for-the-Heads-of-Executive-Departments-and-Agencies-Subject-Government/. Section 321 may be found at http://www.dod.gov/dodgc/olc/docs/2009NDAA_PL110-417.pdf.

DATES: The effective date of OFPP Policy 11-01 is October 12, 2011.

FOR FURTHER INFORMATION CONTACT: Mathew Blum, OFPP, (202) 395-4953 or 
[email protected], or Jennifer Swartz, OFPP, (202) 395-6811 or 
[email protected].

SUPPLEMENTARY INFORMATION: 

A. Overview

    OFPP is issuing a policy letter to provide guidance on managing the 
performance of inherently governmental and critical functions. The 
policy letter is intended to implement direction in the President's 
March 4, 2009, Memorandum on Government Contracting that requires OMB 
to ``clarify when governmental outsourcing for services is and is not 
appropriate, consistent with section 321 of Public Law 110-417 (31 
U.S.C. 501 note).'' The policy letter:
     Clarifies what functions are inherently governmental and 
must always be performed by Federal employees. The policy letter 
provides a single definition of ``inherently governmental function'' 
built around the well-established statutory definition in the Federal 
Activities Inventory Reform Act (FAIR Act), Public Law 105-270. The 
FAIR Act defines an activity as inherently governmental when it is so 
intimately related to the public interest as to mandate performance by 
Federal employees. The definition provided by this policy letter will 
replace existing definitions in regulation and policy, including the 
Federal Acquisition Regulation (FAR). The policy letter provides 
examples and tests to help agencies identify inherently governmental 
functions.
     Explains what agencies must do when work is ``closely 
associated'' with inherently governmental functions. Specifically, when 
functions that generally are not considered to be inherently 
governmental approach being in that category because of the nature of 
the function and the risk that performance may impinge on Federal 
officials' performance of an inherently governmental function, agencies 
must give special consideration to using Federal employees to perform 
these functions. If contractors are used to perform such work, agencies 
must give special management attention to contractors' activities to 
guard against their expansion into inherently governmental functions. 
The policy letter includes examples to help agencies identify closely 
associated functions and a checklist of responsibilities that must be 
carried out

[[Page 56228]]

when agencies rely on contractors to perform these functions.
     Requires agencies to identify their ``critical functions'' 
in order to ensure they have sufficient internal capability to maintain 
control over functions that are core to the agency's mission and 
operations. The policy letter holds an agency responsible for making 
sure it has an adequate number of positions filled by Federal employees 
with appropriate training, experience, and expertise to understand the 
agency's requirements, formulate alternatives, manage work product, and 
monitor any contractors used to support the Federal workforce. Federal 
officials must evaluate, on a case-by-case basis, whether they have 
sufficient internal capability, taking into account factors such as the 
agency's mission, the complexity of the function, the need for 
specialized staff, and the potential impact on mission performance if 
contractors were to default on their obligations.
     Outlines a series of agency management responsibilities to 
strengthen accountability for the effective implementation of these 
policies. Agencies must take specific actions, before and after 
contract award, to prevent contractor performance of inherently 
governmental functions and overreliance on contractors in ``closely 
associated'' and critical functions. Agencies are also required to 
develop agency-level procedures, provide training, and designate senior 
officials to be responsible for implementation of these policies.
    OFPP will work with the Federal Acquisition Regulatory Council, the 
Defense Acquisition Regulations Council and the Civilian Agency 
Acquisition Council to develop and implement appropriate changes to the 
FAR to implement this policy letter. In addition, OFPP will review 
other relevant policy documents, such as guidance in OMB Circular A-76 
implementing the FAIR Act, and take appropriate action to ensure they 
conform to the policies in this letter. Finally, OFPP will work with 
the Federal Acquisition Institute and the Defense Acquisition 
University on appropriate training materials for the acquisition 
workforce and other affected stakeholders.

B. Summary of Proposed and Final Policy Letters

    The Presidential Memorandum on Government Contracting required the 
Director of OMB to develop guidance addressing when governmental 
outsourcing of services is, and is not, appropriate. The Memorandum 
states that the line between inherently governmental activities that 
should not be outsourced and commercial activities that may be subject 
to private-sector performance has become blurred, which may have led to 
the performance of inherently governmental functions by contractors 
and, more generally, an overreliance on contractors by the government. 
It directs OMB to clarify when outsourcing is, and is not, appropriate, 
consistent with section 321 of the NDAA for Fiscal Year (FY) 2009.
    Section 321 directs OMB to: (1) Create a single, consistent 
definition for the term ``inherently governmental function'' that 
addresses any deficiencies in the existing definitions and reasonably 
applies to all agencies; (2) develop criteria for identifying critical 
functions with respect to the agency's mission and operations; (3) 
develop criteria for determining positions dedicated to critical 
functions which should be reserved for Federal employees to ensure the 
department or agency maintains control of its mission and operations; 
(4) provide criteria for identifying agency personnel with 
responsibility for (a) maintaining sufficient expertise and technical 
capability within the agency, and (b) issuing guidance for internal 
activities associated with determining when work is to be reserved for 
performance by Federal employees; and (5) solicit the views of the 
public regarding these matters.

1. Proposed Policy Letter

    OMB's OFPP issued a proposed policy letter on March 31, 2010, 
entitled ``Work Reserved for Performance by Federal Government 
Employees,'' to implement the requirements of the President's 
Memorandum and section 321 (75 FR 16188-97). The proposed policy 
letter, which was issued after OFPP reviewed current laws, regulations, 
policies, and reports addressing the definition of inherently 
governmental functions, as well as feedback from a public meeting held 
in the summer of 2009, proposed to consolidate in one document a number 
of policies, definitions, and procedures associated with identifying 
when work must be performed by Federal employees that are currently 
addressed in multiple guidance documents, including the Federal 
Acquisition Regulation (FAR), OMB Circular A-76, and various OMB 
memoranda. The document proposed the following policy actions to 
address inherently governmental functions, functions closely associated 
with inherently governmental functions, and functions that are critical 
to the agencies' mission and operations.
a. Proposed Steps To Address Inherently Governmental Functions
     Create a single definition for the term ``inherently 
governmental function'' by directing agencies to adhere to the 
statutory definition for this term set forth in the FAIR Act and 
eliminate variations of this definition found in other documents, such 
as the FAR and OMB Circular A-76.
     Preserve a long-standing list of examples set out in the 
FAR of the most common inherently governmental functions, such as the 
determination of agency policy, hiring of Federal employees, and 
awarding of Federal contracts.
     Refine existing criteria (e.g., addressing the exercise of 
discretion) and provide new ones (e.g., focused on the nature of the 
function), to help an agency decide if a particular function that is 
not identified on the list of examples is, nonetheless, inherently 
governmental.
b. Proposed Steps To Address Functions Closely Associated With 
Inherently Governmental Functions
     Reiterate requirements in the Omnibus Appropriations Act, 
2009 (Pub. L. 111-8) to give special consideration to Federal employee 
performance of functions closely associated with inherently 
governmental ones.
     Reinforce and refine guidance in the FAR and Attachment A 
of OMB Circular A-76 requiring special management attention when 
contractors perform functions closely associated with inherently 
governmental functions to guard against their expansion into inherently 
governmental functions. Steps might entail providing clearer 
prescriptions in the statement of work of what the contractor may and 
may not do, and ensuring adequate and adequately trained personnel to 
oversee the contractor's work.
     Preserve a long-standing list of examples set out in the 
FAR of the most common functions closely associated with inherently 
governmental functions, such as support for policy development or 
support for the selection of contractors.
c. Proposed Steps To Address Critical Functions
     Recognize a new category of work, ``critical functions,'' 
which must be evaluated to determine the extent to which performance by 
Federal employees is required. Define the term as a function that is 
``necessary to the

[[Page 56229]]

agency being able to effectively perform and maintain control of its 
mission and operations.''
     Hold an agency responsible for making sure that, for 
critical functions, it has an adequate number of positions filled by 
Federal employees with appropriate training, experience, and expertise 
to understand the agency's requirements, formulate alternatives, manage 
work product, and monitor any contractors used to support the Federal 
workforce. To meet this responsibility, require Federal officials to 
evaluate, on a case-by-case basis, whether they have sufficient 
internal capability, taking into account factors such as the agency's 
mission, the complexity of the function, the need for specialized 
staff, and the potential impact on mission performance if contractors 
were to default on their obligations.
     Make clear that, so long as agencies have the internal 
capacity needed to maintain control over their operations, they are 
permitted to allow contractor performance of positions within critical 
functions (subject to any other applicable legal or regulatory 
requirements).
    Finally, the proposed policy letter would require agencies to take 
specific actions, before and after contract award, to prevent 
contractor performance of inherently governmental functions and 
overreliance on contractors in the performance of ``closely 
associated'' and critical functions. Agencies would also be required to 
develop agency-level procedures, provide training, and designate senior 
officials to be responsible for implementation of these policies. The 
proposed policy letter emphasized the need for a shared responsibility 
between the acquisition, program and human capital offices within the 
agency to effectively implement its provisions.
    The proposed policy letter was published in the Federal Register on 
March 31, 2010 (75 FR 16188-97) for public comment. OFPP encouraged 
respondents to offer their views on a series of questions to elicit 
feedback on some of the more difficult or pressing policy challenges, 
such as whether and how best to use the ``discretion'' test to identify 
inherently governmental functions, how best to explain the difference 
between critical functions and functions that are closely associated 
with the performance of inherently governmental functions, and how to 
properly classify certain functions related to acquisition support and 
security.
    For additional background on the proposed policy letter, see 
discussion in the preamble at 75 FR16188-94.

2. Final Policy Letter

    Based on public comments received in response to the proposed 
policy letter (which are discussed in greater detail below), and 
additional deliberations within the Executive Branch, OFPP has refined 
the proposed policy letter to:
     Rename the policy letter ``Performance and Management of 
Inherently Governmental and Critical Functions'' to more accurately 
capture its scope and purpose;
     Add to the illustrative list of inherently governmental 
functions the following: (i) All combat, (ii) security operations in 
certain situations connected with combat or potential combat, (iii) 
determination of an offer's price reasonableness, (iv) final 
determinations about a contractor's performance, including approving 
award fee determinations or past performance evaluations and taking 
action based on those evaluations, and (v) selection of grant and 
cooperative agreement recipients;
     Clarify the illustrative list of functions closely 
associated with the performance of inherently governmental functions to 
expressly recognize a variety of work to support Federal acquisitions 
that includes conducting market research, developing inputs for 
independent government cost estimates, drafting the price negotiations 
memorandum and collecting information, performing an analysis or making 
a recommendation for a proposed performance rating to assist the agency 
in determining its evaluation of a contractor's performance;
     Establish a comprehensive responsibilities checklist for 
functions closely associated with inherently governmental functions;
     Caution that, in many cases, functions include multiple 
activities that may be of a different nature--some activities within a 
function may be inherently governmental, some may be closely 
associated, and some may be neither--and by evaluating work at the 
activity level, an agency may be able to more easily differentiate 
tasks within a function that may be performed only by Federal employees 
from those tasks that can be performed by either Federal employees or 
contractors;
     Clarify that determining the criticality of a function 
depends on the mission and operations, which will differ between 
agencies and within agencies over time;
     Establish that if an agency makes a decision to insource 
some portion of a function that is currently being performed for the 
agency by a combination of small and large businesses, the ``rule of 
two'' should be applied to determine who will perform the work that 
remains in the private sector (the ``rule of two'' requires that 
acquisitions be reserved for award to small businesses, or certain 
subsets of small businesses, if there are two or more responsible small 
businesses capable of performing the work at fair market prices); and
     Reorganize and consolidate the discussion of management 
associated with inherently governmental, closely associated, and 
critical functions to more clearly recognize that oversight 
responsibilities for these functions are interrelated and should not be 
stove-piped.

C. Public Comments

    OFPP received public comments from more than 30,350 respondents on 
the proposed policy letter. All but approximately 110 comments were 
submitted in the format of a form letter. Respondents were divided in 
their reaction to the proposed guidance. One form letter, submitted by 
approximately 30,000 respondents, expressed concern about excessive 
outsourcing and recommended expanding the definition of an inherently 
governmental function to encompass critical functions and functions 
closely associated with inherently governmental functions. The letter 
also proposed augmenting the list of inherently governmental functions 
to include all security functions and intelligence activities, training 
for interrogation, military and police, and maintenance and repair of 
weapons systems. A second form letter, submitted by approximately 240 
respondents, raised significantly different concerns, cautioning that 
the policy letter and the increased attention on having non-inherently 
governmental functions performed by Federal employees will 
inappropriately discourage Federal managers and agencies from taking 
full and effective advantage of the private sector and the benefits of 
contracting. The roughly 110 responses that were not form letters were 
generally supportive of OFPP's efforts to clarify policies and 
management responsibilities, though respondents were divided over 
whether too much or not enough work would be reserved for Federal 
employees if policies were implemented as proposed.
    Copies of the public comments received are available for review at 
http://www.regulations.gov (Docket ID OFPP-2010-0001). A short summary 
description of the comments and OFPP's responses and changes adopted in 
the final policy letter are set forth below.

[[Page 56230]]

1. Scope of the Policy Letter

    A number of respondents offered views on the general focus of the 
policy letter. Several respondents stated that the policy letter was 
too narrowly focused and cautioned that the overall tone of the policy 
letter, as set by the title and purpose section, could be construed as 
being concerned only about ensuring that work is properly reserved for 
Federal employees--as opposed to also needing to strike the right 
balance between work that may be contracted out and work that must be 
reserved. Some respondents recommended that the scope of the policy 
letter be broadened to more expressly address the performance of 
commercial activities and advisory and assistance services.
    Response: OFPP concurs that the overall purpose of the policy 
letter should be clarified. While a key goal of the policy letter is to 
ensure that inherently governmental work is reserved for Federal 
employees, agencies have an equally important responsibility, in cases 
where work is not inherently governmental, to evaluate how to strike 
the best balance in the mix of work performed by Federal employees and 
contractors to both protect the public's interest and serve the 
American people in a cost-effective manner. The policy letter's title 
and purpose statement have been revised accordingly. In particular, 
rather than focusing the title on work reserved for Federal employees, 
it now focuses on performance of inherently governmental and critical 
functions, which expressly acknowledges that functions closely 
associated with inherently governmental functions and critical 
functions are often performed by both Federal employees and 
contractors, and states that reliance on contractors is not, by itself, 
a cause for concern, provided that the work that they perform is not 
work that should be reserved for Federal employees and that Federal 
officials are appropriately managing contractor performance.
    OFPP does not believe the scope of the policy letter should be 
broadened to include an extended discussion of contractor performance 
of commercial activities and instead prefers to keep the main focus on 
inherently governmental functions, functions closely associated with 
them, and critical functions. Recent studies of the role of employees 
and contractors, and the overall increase in reliance on contractors 
over the past decade, do not suggest a general difficulty or hesitation 
in taking advantage of contractors to provide expertise, innovation, 
and cost-effective support to Federal agencies. By contrast, these 
studies and general contracting trends, as well as the President's 
Memorandum on Government Contracting in March 2009, point to a need for 
guidance to clarify when work must be performed by Federal employees 
and the steps agencies need to take to ensure they maintain control of 
their mission and operations, when extensive work is performed by 
contractors. OFPP believes any questions regarding the intended use of 
contractors will largely be addressed by clarifying the overall scope 
of the policy letter, as described above, and reinforcing that an 
agency may frequently be able to address overreliance on contractors by 
allocating additional resources to contract management while continuing 
to use contractors for support.
    OFPP carefully considered the merits of adding discussion on 
advisory and assistance services and other professional and technical 
services. These functions are likely to be commonly found among those 
considered to be either critical or closely associated with inherently 
governmental functions and spending in this area has grown 
disproportionately over the past few years. In November 2010, OFPP 
identified these functions for special management consideration based 
on concern of increased risk of losing control of mission and 
operations as identified through a review of reports issued in recent 
years, such as by the Government Accountability Office, the Commission 
on Wartime Contracting, agency Inspectors General, Congressional 
Committees, and the Acquisition Advisory Panel. Agencies were 
instructed to consider if contractor support for these ``special 
interest functions'' is being used in an appropriate and effective 
manner and if the mix of Federal employees and contractors in the 
agency is appropriately balanced. See OFPP Memorandum, Service Contract 
Inventories, Memorandum to Chief Acquisition Officers and Senior 
Procurement Executives (November 5, 2010), available at http://www.whitehouse.gov/sites/default/files/omb/procurement/memo/service-contract-inventories-guidance-11052010.pdf. OFPP will work with 
agencies as they review their use of support contractors in these areas 
and consider the need for additional guidance in conjunction with these 
efforts.

2. Inherently Governmental Functions

    Respondents offered a number of comments regarding the scope of the 
definition of ``inherently governmental function,'' the tests proposed 
to determine whether or not a function is inherently governmental, and 
the illustrative list of examples.
    a. Definition. Many respondents stated that use of the FAIR Act 
definition of an inherently governmental function is reasonable. Some 
respondents, including those offered through one of the two form 
letters, urged that the definition be expanded to include functions 
closely associated with inherently governmental functions and critical 
functions, in order to effectively prevent the inappropriate 
outsourcing of work that should be reserved for performance by Federal 
employees. A number of respondents inquired as to OMB's plans for 
ensuring that, going forward, the definition set forth in the policy 
letter is recognized as the single authorized definition for the term.
    Response: Based on its review of public comments, prior feedback 
(including that provided at a public meeting held in the summer of 
2009, in connection with the President's Memorandum on Government 
Contracting) and its review of relevant reports (such as the report of 
the Congressionally-chartered Acquisition Advisory Panel), OFPP 
believes the FAIR Act definition is reasonable. OFPP does not believe 
it is appropriate to expand the definition to encompass closely 
associated or critical functions. Agencies must give special attention 
to functions falling into those categories to ensure that the 
government does not lose control of either inherently governmental 
functions (in the case of closely associated functions) or activities 
that are core to the agency's mission or operations (in the case of 
critical functions), but such functions can, in appropriate 
circumstances, be performed by contractors.
    To ensure that the definition in the FAIR Act is recognized as the 
single authorized definition for the term, OFPP intends to work with 
the Federal Acquisition Regulatory Council, the Defense Acquisition 
Regulations Council and the Civilian Agency Acquisition Council to 
develop and implement appropriate changes to the FAR to implement this 
policy letter. In addition, OFPP will review other relevant policy 
documents, such as OMB Circular A-76, and take appropriate action to 
ensure they conform to the policies in this letter.
    b. Tests. Respondents generally did not raise concerns regarding 
the continued use of tests to help agencies determine if functions are 
inherently governmental, but a number cautioned

[[Page 56231]]

of potential pitfalls, and others offered suggestions for how 
application of the tests could be improved. A number of 
recommendations, mostly clarifications, were offered to help improve 
the ``discretion'' test, which asks agencies to evaluate if the 
discretion associated with the function, when exercised by a 
contractor, would have the effect of committing the government to a 
course of action. Recommendations included: (i) Emphasizing that the 
evaluation should generally focus on how much discretion is left to 
government employees as opposed to how much discretion has been given 
to contractors, and (ii) distinguishing between fact-finding and making 
decisions based on the fact-finding. A number of comments questioned 
the likely effectiveness of the proposed ``nature of the function 
test,'' which would ask agencies to consider if the direct exercise of 
sovereign power is involved. Some respondents suggested that the term 
``sovereign'' be explained while others concluded that the manner in 
which sovereign authority is exercised is so varied that it is better 
explained by example than further definition. A few respondents 
recommended that the final policy letter adopt a new ``principal-
agent'' test that would require agencies to identify functions as 
inherently governmental where serious risks could be created by the 
performance of these functions by those outside government, because of 
the difficulty of ensuring sufficient control over such performance.
    Response: OFPP has made refinements to the ``discretion'' test. 
First, it has more fully distinguished the type of discretion that may 
be appropriately exercised by a contractor from that which would not be 
appropriately exercised by a contractor. Second, it has clarified that 
inappropriate delegations of discretion can be avoided by: (i) 
Carefully delineating in the statement of work contractor 
responsibilities and types of decisions expected to be made in carrying 
out these responsibilities and effectively overseeing them and (ii) 
subjecting the contractor's discretionary decisions and conduct to 
meaningful oversight and, whenever necessary, to final approval by an 
agency official. OFPP agrees that it is appropriate to consider how 
much discretion is left to government employees but, at the same time, 
also believes there is merit in considering the nature of the 
discretion given to contractors, as well as whether circumstances, such 
as time constraints, may limit the ability to effectively manage the 
contractor's actions or inappropriately restrict government employees' 
final approval authority. It also concluded that the proposed language 
was sufficiently clear to help agency officials differentiate between 
fact-finding that could appropriately be performed by contractors from 
binding decision-making based on fact-finding that needed to be 
performed by Federal employees.
    Only minimal changes were made to the ``nature of the function 
test.'' OFPP appreciates that the value of this test may be limited, 
but believes it still can contribute to an agency's overall 
understanding and analysis in differentiating between functions that 
are inherently governmental and those that are not. OFPP considered, 
but did not adopt, the ``principal-agent'' test. While recognizing that 
risk is an underlying factor in reserving work for Federal employees 
and the definition of inherently governmental function, OFPP concluded 
that the test would not likely lead to identification of significantly 
different functions as inherently governmental and was concerned that 
application of the test could lead to greater confusion about what may 
be performed by contractors and what must be performed by Federal 
employees.
    c. Examples. While most respondents did not object to retaining a 
list with illustrative examples, they offered mixed reactions to the 
specific examples given. A number of respondents felt the proposed list 
is too narrow and should be modified to add additional functions while 
at least one respondent thought the list was too broad. Many of those 
who believed the list was too narrow suggested the addition of 
functions involving private security contractors, especially when 
performed in hostile environments or involving intelligence. Some 
acquisition functions were also recommended for the list, such as 
developing independent government cost estimates, and preparing 
documentation in support of a price negotiation memorandum and price 
reasonableness determination. One respondent who thought the list was 
too broad recommended refinements to more precisely identify the 
inherently governmental characteristic of the action, such as ``a judge 
exercising the authority of the Federal government'' rather than ``the 
performance of adjudicatory functions.'' The respondent explained that 
deciding a dispute is not, per se, inherently governmental since 
arbitration and alternative dispute resolution processes can be 
performed by non-Federal employees, even when one of the parties is a 
Federal agency.
    Response: Based on public comment and additional deliberations, 
OFPP has added to the list of inherently governmental functions: (i) 
All combat and (ii) security operations in certain situations connected 
with combat or potential combat. OFPP concluded these were clear 
examples of functions so intimately related to public interest as to 
require performance by Federal Government employees; hence, the 
addition of these activities to the list of inherently governmental 
functions would contribute to clarifying the line between what work 
must be reserved for Federal employees and what work may be performed 
by contractors. OFPP also clarified that making final determinations 
about a contractor's performance (including approving award fee 
determinations or past performance evaluations) and taking action based 
on these assessments are also inherently governmental because such 
actions involve the exercise of substantial discretion. In addition, 
OFPP added selection of grant and cooperative agreement recipients to 
the list of examples of inherently governmental functions because such 
actions bind the government.
    With respect to contract pricing, the list identifies price 
reasonableness determinations as inherently governmental. This includes 
approval of any evaluation relied upon to support a price 
reasonableness determination, such as a price negotiation memorandum or 
approval of documentation cited as the government's independent cost 
estimate, which, by definition, must be the government's own final 
analysis. That said, an agency is not precluded from using the services 
of a contractor to develop inputs for government cost estimates or to 
draft a price negotiation memorandum as long as whatever the government 
relies upon to determine price reasonableness has been reviewed and 
approved by a government employee. As in other situations where a 
Federal official must review and approve documents prepared by a 
contractor, the Federal official's review and approval must be 
meaningful; that is to say, it cannot be a ``rubber stamp'' where the 
government is completely dependent on the contractor's superior 
knowledge and is unable to independently evaluate the merits of the 
contractor's draft or to consider alternatives to that draft. For that 
reason, while an agency may appropriately choose to have Federal 
employees prepare documentation in support of a price negotiation 
memorandum and price reasonableness

[[Page 56232]]

determination, OFPP does not view this work as inherently governmental, 
but rather closely associated with an inherently governmental 
function--and has added this work to the list of closely associated 
functions. If this work is performed by contractors, the agency must 
apply special management attention to ensure the work does not expand 
to include decision-making (which is inherently governmental) or 
otherwise interfere with the government's ability to exercise 
independent judgment, in this case, to determine that offered prices 
are fair and reasonable.
    Regarding the performance of adjudicatory functions, OFPP retained 
the language on the proposed list, without change, and notes that the 
language currently in the FAR and the proposed policy letter already 
provides a carve-out for certain types of adjudicatory functions that 
are not inherently governmental, such as those relating to arbitration 
or other methods of alternative dispute resolution.
    Similar to the list appearing in the FAR today, the list in the 
final policy letter is illustrative and not exhaustive. In addressing 
security operations, for example, the list identifies where security 
operations would be inherently governmental in connection with combat. 
This should not be read as a determination that all security performed 
in any hostile situation other than actual combat may be performed by 
contractors. Rather it means that those situations should be evaluated 
on a case-by-case basis to determine what security functions and 
activities are inherently governmental and what can be performed by 
contractors with appropriate management and oversight.
    Finally, OFPP has added a caveat to recognize that many functions 
include multiple activities, some of which may not be inherently 
governmental. These other activities performed in conjunction with the 
function may be closely associated or neither inherently governmental 
nor closely associated. This caveat helps to clarify that the 
identification of a function on the list does not mean every action 
associated with the function is inherently governmental. For additional 
discussion, see response to comment no. 5, below.

3. Functions Closely Associated With Inherently Governmental Functions

    Respondents offered a range of comments. Some call into question 
the purpose of this category; others raise concerns about the extent to 
which contractors should perform these functions; still others offer 
refinements to the proposed list of examples.
    a. Purpose. A number of respondents recommended that the guidance 
on closely associated functions be clarified. Many of them pointed out 
that discussion of this concept appears to overlap with the new concept 
of critical function in that both appear to address the same risk, 
namely of the government losing control of its operations. Some thought 
this confusion might be avoided by defining the term ``closely 
associated'' so that its scope as a functional category can be more 
clearly understood. Others favored adding an explanation of the 
different purposes served by the two concepts. Some proposed doing away 
with the category, pointing out that the ``closely associated'' concept 
is more appropriately viewed as a management practice rather than as a 
separate functional category.
    Response: OFPP does not agree that the concept of ``closely 
associated'' should be eliminated, as it serves an important management 
purpose in helping agencies guard against losing control of inherently 
governmental functions. However, OFPP agrees that the concept is more 
relevant to management practices, or internal control mechanisms, as 
opposed to serving as a stand-alone functional category. For this 
reason, the discussion of this concept in the policy letter has been 
reorganized so that it is now addressed as part of the discussion on 
identifying inherently governmental functions. This reorganization 
should also help to clarify the different reasons for tracking 
contractors who are performing closely associated functions and those 
who are performing critical functions. In the case of closely 
associated functions, the agency is trying to prevent contractor 
performance from interfering with Federal employees' ability to perform 
inherently governmental functions. In the case of critical functions, 
the agency is looking to determine if the agency is at risk of losing 
control of its ability to perform its mission and operations. OFPP does 
not believe a definition will necessarily provide greater clarity, but 
has created a new checklist to summarize in one place the various 
actions that must be taken if the agency determines that contractor 
performance of a function closely associated with an inherently 
governmental function is appropriate.
    b. Performance. A number of respondents (including those using one 
of the two form letters) stated that only Federal employees should be 
allowed to perform functions closely associated with inherently 
governmental functions (with contractor performance allowed only in 
limited or exceptional circumstances). These respondents generally 
recommended that the concept of ``closely associated'' be incorporated 
into the definition of inherently governmental function to effectively 
protect the government against improper reliance on contractors.
    Response: Agencies must carefully guard against contractor 
performance of inherently governmental functions, but managing this 
risk does not require that performance of closely associated functions 
be reserved exclusively for Federal employees. Such a bar would 
inappropriately limit an agency's ability to take advantage of a 
contractor's expertise and skills to support the agency in carrying out 
its mission. For example, limiting performance of functions closely 
associated with inherently governmental functions could inappropriately 
limit an agency's ability to take advantage of a Federally Funded 
Research Development Center (FFRDC) or University Affiliated Research 
Center that provides essential engineering, research, development, and 
analysis capabilities to support agencies in the performance of their 
responsibilities and mission. As explained in FAR 35.017: ``An FFRDC 
meets some special long-term research or development need which cannot 
be met as effectively by existing in-house or contractor resources. 
FFRDCs enable agencies to use private sector resources to accomplish 
tasks that are integral to the mission and operation of the sponsoring 
agency.''
    Effective risk management can be achieved if agencies are mindful 
of their responsibility to give special consideration to Federal 
employee performance and effectively apply special management attention 
when contractor performance is determined to be appropriate. With 
respect to special consideration, the policy letter reminds agencies of 
their responsibilities under the law and OMB's management guidance on 
this issue. (These responsibilities are also reiterated in guidance 
OFPP issued last fall to help agencies in evaluating the activities of 
their service contractors in accordance with section 743 of Division C 
of the Consolidated Appropriations Act, 2010 (Pub. L. 111-117). See 
OFPP Memorandum Service Contract Inventories (refer to response to 
comment no. 1, above, for cite).
    With respect to contractor performance of closely associated 
functions, the final policy letter includes a new checklist that 
summarizes the various contract

[[Page 56233]]

management actions that agencies must take to ensure contractors are 
not performing, interfering with, or undermining the agency's decision-
making responsibilities. The checklist, which is largely taken from 
existing guidance in the FAR and other documents, identifies steps such 
as: (i) Establishing specified ranges of acceptable decisions and/or 
conduct in the contract, (ii) assigning a sufficient number of 
qualified government employees to perform contract management, (iii) 
ensuring reasonable identification of contractors and contractor work 
products if there is a risk that the public will confuse contractor 
personnel or work products with government officials or work products, 
and (iv) avoiding or mitigating conflicts of interest.
    In the case of an FFRDC, the FAR has long required that such 
organizations conduct their business in a manner befitting their 
special relationship with the government--which includes access, beyond 
that which is common to the normal contractual relationship, to 
government and supplier data, including sensitive and proprietary data, 
and to employees and installations equipment and real property. As 
stated in FAR 35.017, FFRDCs must operate in the public interest with 
objectivity and independence, be free from organizational conflicts of 
interest, and have full disclosure of their affairs to the sponsoring 
agency.
    c. Examples. Respondents offered varied reactions to maintaining a 
list of examples of ``closely associated'' functions. Several felt a 
list should not be included in the final policy letter because it 
introduces unnecessary ambiguity and allows for unnecessarily broad 
interpretation that could include either an inappropriate presumption 
in favor of insourcing or an inappropriate presumption that the work is 
appropriately performed by a contractor. Of those who favored (or did 
not oppose) the continued use of a list, some felt the list was too 
broad, either because it included functions where the potential for 
encroaching on inherently governmental responsibilities should not be 
viewed as a significant concern in need of heightened scrutiny or 
because the function as described was indistinguishable from those 
identified as inherently governmental.
    Response: OFPP believes the list, which is currently set forth in 
the FAR, continues to serve as a useful tool to assist agencies in 
identifying functions where they must give special consideration to 
performance by Federal employees or special contract management 
attention if performed by contractors. The reorganized discussion of 
this issue (as described above) in combination with the checklist 
should help to avoid inappropriate presumptions regarding the 
performance of these functions.
    With respect to the substance of the list, OFPP has made three 
types of modifications. First, as was done with the list of inherently 
governmental functions, OFPP has added a caveat that many functions 
include multiple activities, only some of which are closely associated 
with inherently governmental. Other activities performed in conjunction 
may be inherently governmental or not closely associated. This caveat 
helps to clarify that the identification of a function on the list does 
not mean every action associated with the function is closely 
associated with an inherently governmental function. (See comment no. 
5, below for additional discussion.) Second, the list more carefully 
delineates activities that are performed in direct support of 
inherently governmental functions (e.g., analyses and feasibility 
studies to support the development of policy), which are closely 
associated activities, from those that involve making binding decisions 
(e.g., the final shape of a policy), which are inherently governmental. 
Third, OFPP has added additional examples to further describe the types 
of acquisition support that are closely associated functions. These 
added functions include: Conducting market research, developing inputs 
for independent government cost estimates, assisting in the development 
of a price negotiation memorandum, and supporting agency personnel in 
evaluating a contractor's performance, such as by collecting 
information or conducting an analysis that can be used by a Federal 
employee to make a determination about the quality of the contractor's 
performance.

4. Critical Functions

    A number of respondents recognized that the creation of ``critical 
function'' as a new category helps to fill a void in current policy, 
but sought clarification and recommended refinements to ensure agencies 
properly identify and address functions that are at the core of an 
agency's mission and operations. Some confusion was voiced, as noted 
above, regarding the difference between critical functions and closely 
associated with inherently governmental functions. Some respondents 
suggested that a list providing examples of critical functions be 
developed, similar to that developed for inherently governmental and 
closely associated functions, but others advised against developing a 
list, noting that the criticality of a function depends on an agency's 
mission and current capabilities. A number of respondents addressed how 
an agency might go about differentiating between a critical and a non-
critical function. Some suggested that agencies be authorized, if not 
encouraged, to identify categories of service contracts that may be 
presumed to be non-critical in order to avoid unnecessary analyses. 
Others expressed concern that a list will lead to inappropriate 
generalizations that will hinder, rather than facilitate, meaningful 
rebalancing.
    Response: OFPP intends to work with FAI and DAU to develop 
appropriate training to support the successful implementation of the 
policy letter. However, OFPP does not support the creation of a list of 
critical functions. A function's criticality is dependent on an 
agency's mission and operations. The policy letter has been clarified 
to emphasize that the criticality of a function depends on mission and 
operations, which will differ between agencies and potentially within 
agencies over time. Whether an agency is over reliant on a contractor 
to perform a critical function also will vary from agency to agency 
depending on its current internal capabilities compared to those needed 
to maintain control of its mission and operations. Similarly, OFPP does 
not support the creation of a government-wide list of non-critical 
functions, as this may also differ between agencies based on their 
mission and operations.

5. Terminology

    Several respondents raised concerns regarding how the policy letter 
uses the terms ``function,'' ``activity,'' and ``position.'' These 
respondents state that the terms are used interchangeably to cover 
different concepts, namely: (1) A process, (2) tasks undertaken in 
conjunction with the process, and (3) billets filled by individuals to 
perform tasks. They recommend that clarification be provided, perhaps 
with the addition of definitions.
    Response: OFPP recognizes that the terms have different meanings 
and agrees that more careful use of these terms may help to avoid 
inappropriately broad generalizations regarding the characterization of 
work. A function, for example, often includes multiple activities, or 
tasks, some of which may be inherently governmental, some of which may 
be closely associated with inherently governmental work, and some may 
be neither. By identifying work at the activity level, an agency can 
more easily differentiate tasks within a function that may be performed 
only by

[[Page 56234]]

Federal employees from those tasks that can be performed by either 
Federal employees or contractors without blurring the line between the 
role of Federal employees and contractors. The chart below provides 
several examples. For instance, within the function of source 
selection, the tasks of determining price reasonableness and awarding a 
contract are inherently governmental, the task of preparing a technical 
evaluation and price negotiation memorandum are closely associated 
(provided the government has sufficient time and knowledge to 
independently evaluate alternative recommendations and decide which is 
in the government's best interest) and (although not shown on the 
table), the task of ensuring the documents are in the contract file is 
neither inherently governmental nor closely associated.

----------------------------------------------------------------------------------------------------------------
                                                                            Work that is closely associated with
                                    Work that is inherently governmental   inherently governmental functions and
             Function                and therefore must be performed by       that may be performed by either
                                              Federal employees               Federal employees or contractors
----------------------------------------------------------------------------------------------------------------
Budget development...............  The determination of budget policy,     Support for budget preparation, such
                                    guidance, and strategy, and the         as workforce modeling, fact finding,
                                    determination of Federal program        efficiency studies, and should-cost
                                    priorities or budget requests.          analyses.
Policy and regulatory development  The determination of the content and    Support for policy development, such
                                    application of policies and             as drafting policy documents and
                                    regulations.                            regulations, performing analyses,
                                                                            feasibility studies, and strategy
                                                                            options.
Human resources management.......  The selection of individuals for        Support for human resources
                                    Federal Government employment,          management, such as screening
                                    including the interviewing of           resumes in accordance with agency
                                    individuals for employment, and the     guidelines.
                                    direction and control of Federal
                                    employees.
Acquisition planning, execution,   During acquisition planning:            Support acquisition planning by:
 and management.                   (1) Determination of requirements,      (1) Conducting market research,
                                   (2) approval of a contract strategy,    (2) developing inputs for government
                                    statement of work, incentive plans,     cost estimates, and
                                    and evaluation criteria,               (3) drafting statements of work and
                                   (3) independent determination of         other pre-award documents.
                                    estimated cost based on input from
                                    either in-house or contractor sources
                                    or both.
                                   During source selection:                Support source selection by:
                                   (1) Determination of price              (1) Preparing a technical evaluation
                                    reasonableness of offers,               and associated documentation;
                                   (2) participation as a voting member    (2) participating as a technical
                                    on a source selection board, and        advisor to a source selection board
                                   (3) awarding of contracts.               or as a nonvoting member of a source
                                                                            evaluation board; and
                                                                           (3) drafting the price negotiation
                                                                            memorandum.
                                   During contract management:             Support contract management by:
                                   (1) Ordering of any changes required    (1) Assisting in the evaluation of a
                                    in contract performance or contract     contractor's performance (e.g., by
                                    qualities,                              collecting information, performing
                                   (2) determination of whether costs are   an analysis, or making a
                                    reasonable, allocable, and allowable,   recommendation for a proposed
                                   (3) participation as a voting member     performance rating); and
                                    on performance evaluation boards,      (2) providing support for assessing
                                   (4) approval of award fee                contract claims and preparing
                                    determinations or past performance      termination settlement documents.
                                    evaluations, and
                                   (5) termination of contracts.
----------------------------------------------------------------------------------------------------------------

    Further analyzing work from the perspective of the number of 
positions required to perform an activity enables an agency to 
differentiate those tasks that may require rebalancing from those that 
do not. The fact that contractors are performing some portion of a 
particular activity is not an automatic signal that rebalancing is 
required, except where work is inherently governmental. In other cases, 
the number of positions, or slots, that should be held by government 
employees versus contractor personnel to perform a particular activity 
will depend on a number of considerations, such as whether the work is 
critical or closely associated with inherently governmental functions, 
the particular mission of the agency, the current capability of 
government employees to understand the mission and manage contractors, 
and how the function will be delivered to the agency by the contractor.
    A number of clarifications have been made throughout the document 
to capture these differences, such as in connection with the lists of 
inherently governmental and closely associated functions in Appendix A 
and Appendix B. OFPP does not believe definitions need to be added to 
the policy letter at this time, but will review with the FAR Council if 
further clarification is required as regulatory changes are develop to 
implement the policy letter.

6. Small Business Contracting

    Many respondents expressed concern that the rebalancing called for 
in the policy letter could harm small businesses. These respondents 
offered a number of recommendations to mitigate this impact, such as 
excluding all contracts that were awarded under set-asides from 
insourcing without a formal justification and approval, and having the 
Small Business Administration review proposed insourcing actions.
    Response: OFPP does not anticipate a widespread shift away from 
contractors as a result of the requirements in the policy letter. As 
the policy letter explains, insourcing is intended to be a management 
tool--not an end in itself--to address certain types of overreliance on 
contractors. In many cases, overreliance may be corrected by allocating 
additional resources to contract management--i.e., an agency does not 
necessarily need to take work away from contractors and have it 
performed by Federal employees. However, some insourcing is taking 
place and will be undertaken in the future in some situations, such as 
where an agency determines that outsourced work is inherently 
governmental or

[[Page 56235]]

where the agency is at risk of losing control of its operations 
regarding work of a critical nature. To minimize the negative impact of 
these actions on small businesses, the final policy letter requires 
agencies to take two actions. First, when prioritizing what contracted 
work should be reviewed for potential insourcing, agencies are 
instructed to generally place a lower priority on reviewing work 
performed by small businesses where the work is not inherently 
governmental and where continued contractor performance does not put 
the agency at risk of losing control of its mission and operations. 
Second, agencies are instructed to apply the ``rule of two'' to work 
that will continue to be performed by contractors following the 
insourcing of part of the work (the rule of two calls for a contract to 
be set aside for small businesses when at least two small businesses 
can do the work for a fair market price). Application of this rule 
should increase the amount of residual work remaining in the hands of 
small businesses that can perform the work cost effectively.

7. Human Capital Planning

    A number of respondents acknowledged the connection that exists 
between human capital planning, clear guidance on the performance of 
inherently governmental, closely associated, and critical functions, 
and the ability to effectively evaluate the need for rebalancing. 
However, reactions were mixed regarding the value of addressing hiring 
ceilings and funding constraints. Some thought these were appropriate 
considerations for assessing the current and desired mix of Federal 
employees and contractors in an organization. Others felt that the 
assessment should remain focused exclusively on the nature of the 
function.
    Response: Striking the right balance of work performed by Federal 
employees and contractors is a shared responsibility between human 
capital, acquisition, program, and financial management offices. Issues 
such as hiring ceilings and funding constraints were referenced in the 
guidance document because these issues are part of the challenges that 
agency officials must address in executing their responsibilities and 
determining the best mix of labor resources. OFPP and other 
organizations within OMB are working with the Chief Human Capital 
Officers (CHCO) Council to ensure agency human capital officers 
understand their role and responsibilities. OMB will work with the CHCO 
Council to determine the appropriate type of supplementary materials 
that might be needed when the policy letter is finalized.

8. Other Issues

    a. The role of cost in rebalancing decisions. Several respondents 
raised concern that the policy letter provides insufficient guidance on 
the parameters for insourcing when based on a determination that public 
sector performance is more cost effective than private sector 
performance. They suggested that the policy letter lay out the steps 
for performing a cost comparison and define key terms such as ``cost 
effective,'' ``fully loaded cost'' and ``indirect cost.''
    Response: The proposed policy letter's discussion of insourcing 
focuses primarily on situations where an agency identifies improper 
reliance on contractors, namely, where the outsourced work is 
inherently governmental, or where the agency is at risk of losing 
control of its mission and operations. These circumstances, in 
particular, were highlighted in section 321 of the FY 2009 NDAA and the 
President's Memorandum on Government Contracting and have been the 
subject of reports issued in recent years addressing the use of 
contractors. The policy letter acknowledges that cost may also be a 
basis for insourcing, and requires in such situations that agency 
officials ensure that the agency's analysis fairly takes into account 
the full cost of performance by both sectors to support a determination 
that insourcing will save money. OFPP agrees that additional guidance 
in this area may be beneficial, and is reviewing the need for such 
guidance, but believes that additional coverage of the type described 
by the respondents, if appropriate, is better addressed as a supplement 
to existing guidance on insourcing, such as that in Appendix 3 of OMB 
Memorandum M-09-26, Managing the Multi-Sector Workforce (July 29, 
2009), which implements section 736 of Division D of the Omnibus 
Appropriations Act, 2009 (Pub. L. 111-8), or Circular A-76, which 
addresses the use of public-private competition to outsource or 
insource work that may appropriately be performed by either sector.
    b. Management responsibilities. Some respondents recommended that 
the contents of the policy letter be reorganized, such as by 
consolidating the discussion of management responsibilities, rather 
than addressing these responsibilities separately for inherently 
governmental, closely associated and critical functions. A few 
respondents also recommended listing, either in the text or an 
additional appendix, all laws that require work to be performed by 
Federal employees.
    Response: OFPP has reorganized the policy letter to create a 
comprehensive and consolidated discussion of management 
responsibilities that agencies must undertake before and after awarding 
a contract to ensure proper and effective implementation of policies 
associated with the performance of inherently governmental, closely 
associated, and critical functions. This consolidated discussion of 
pre-award and post-award responsibilities more clearly recognizes that 
oversight responsibilities for each of these functional categories are 
interrelated. The policy letter includes citations to relevant laws 
with government-wide or broad applicability but does not include a list 
of all laws requiring reservation, a number of which are agency-
specific and best addressed individually by affected agencies.
    c. Tribal organizations. Representatives of Tribal organizations 
requested that language be added to the policy letter exempting Federal 
government agreements with Tribal government organizations under the 
Indian Self-Determination and Education Assistance Act (ISDEAA), as 
amended, 25 U.S.C. 450 et seq. They provided a number of statutory and 
policy reasons for differentiating these agreements, which address a 
government-to-government relationship, from government procurement 
contracts, the principal purpose of which is to acquire products and 
services for the direct benefit or use of the United States Government. 
They stated that the ISDEAA, at 25 U.S.C. 458aaa-9, expressly exempts 
the former agreements from the application of Federal acquisition 
regulations.
    Response: The policy letter is issued pursuant to section 6(a) of 
the Office of Federal Procurement Policy Act, which charges the 
Administrator for Federal Procurement Policy with providing overall 
policy direction for agencies' acquisition of products and services. In 
accordance with the OFPP Act, the policy letter focuses on the 
relationship between the Federal government and its contractors--that 
is, entities who are providing a product or service for the direct 
benefit of an agency under a Federal procurement contract. The policy 
letter is not intended to modify or otherwise affect any rights or 
limitations set forth under the Act, including either the right of 
Tribal governments to assume and carry out functions under the ISDEAA 
or limitations imposed by the ISDEAA on a Tribal government's ability 
to assume

[[Page 56236]]

responsibility for an inherently Federal function as that term is used 
under the Act.
    d. Foreign indirect hire employees working with U.S. Forces. During 
the disposition of comments, a question was raised regarding the 
applicability of this guidance to foreign indirect hire employees, as 
that term is defined in Defense Department (DoD) guidance.
    Response: DoD guidance defines indirect hire employees as ``local 
national personnel assigned by the host government to work with U.S. 
Forces.'' This guidance goes on to state that such personnel are not 
employees of the United States and cannot perform inherently 
governmental functions.'' See DOD Financial Management Regulation, 
Volume 5, Chapter 33, ] 330204 (August 2010). Nothing in this policy 
letter is intended to modify the Department's guidance. Thus, 
restrictions on the use of contractors to perform inherently 
governmental functions would also apply to foreign indirect hire 
employees working with U.S. Forces.

Daniel I. Gordon,
Administrator.

POLICY LETTER 11-01

TO THE HEADS OF CIVILIAN EXECUTIVE DEPARTMENTS AND AGENCIES

SUBJECT: Performance of Inherently Governmental and Critical Functions

    1. Purpose. This guidance establishes Executive Branch policy 
addressing the performance of inherently governmental functions and 
critical functions. The policy is intended to assist agency officers 
and employees in ensuring that only Federal employees perform work that 
is inherently governmental or otherwise needs to be reserved to the 
public sector. The policy is further intended to help agencies manage 
functions that are closely associated with inherently governmental 
functions and critical functions, which are often performed by both 
Federal employees and contractors.
    Nothing in this guidance is intended to discourage the appropriate 
use of contractors. Contractors can provide expertise, innovation, and 
cost-effective support to Federal agencies for a wide range of 
services. Reliance on contractors is not, by itself, a cause for 
concern, provided that the work that they perform is not work that 
should be reserved for Federal employees and that Federal officials are 
appropriately managing and overseeing contractor performance.
    2. Authority. This policy letter is issued pursuant to section 6(a) 
of the Office of Federal Procurement Policy Act, 41 U.S.C. 405(a), the 
President's March 4, 2009, Memorandum on Government Contracting, and 
section 321 of the Duncan Hunter National Defense Authorization Act for 
Fiscal Year 2009, Public Law 110-417.
    3. Definitions.
    ``Inherently governmental function,'' as defined in section 5 of 
the Federal Activities Inventory Reform Act, Public Law 105-270, means 
a function that is so intimately related to the public interest as to 
require performance by Federal Government employees.
    (a) The term includes functions that require either the exercise of 
discretion in applying Federal Government authority or the making of 
value judgments in making decisions for the Federal Government, 
including judgments relating to monetary transactions and entitlements. 
An inherently governmental function involves, among other things, the 
interpretation and execution of the laws of the United States so as --
    (1) to bind the United States to take or not to take some action by 
contract, policy, regulation, authorization, order, or otherwise;
    (2) to determine, protect, and advance United States economic, 
political, territorial, property, or other interests by military or 
diplomatic action, civil or criminal judicial proceedings, contract 
management, or otherwise;
    (3) to significantly affect the life, liberty, or property of 
private persons;
    (4) to commission, appoint, direct, or control officers or 
employees of the United States; or
    (5) to exert ultimate control over the acquisition, use, or 
disposition of the property, real or personal, tangible or intangible, 
of the United States, including the collection, control, or 
disbursement of appropriations and other Federal funds.
    (b) The term does not normally include--
    (1) gathering information for or providing advice, opinions, 
recommendations, or ideas to Federal Government officials; or
    (2) any function that is primarily ministerial and internal in 
nature (such as building security, mail operations, operation of 
cafeterias, housekeeping, facilities operations and maintenance, 
warehouse operations, motor vehicle fleet management operations, or 
other routine electrical or mechanical services).
    ``Critical function'' means a function that is necessary to the 
agency being able to effectively perform and maintain control of its 
mission and operations. Typically, critical functions are recurring and 
long-term in duration.
    4. Policy. It is the policy of the Executive Branch to ensure that 
government action is taken as a result of informed, independent 
judgments made by government officials. Adherence to this policy will 
ensure that the act of governance is performed, and decisions of 
significant public interest are made, by officials who are ultimately 
accountable to the President and bound by laws controlling the conduct 
and performance of Federal employees that are intended to protect or 
benefit the public and ensure the proper use of funds appropriated by 
Congress. To implement this policy, agencies must reserve certain work 
for performance by Federal employees and take special care to retain 
sufficient management oversight over how contractors are used to 
support government operations and ensure that Federal employees have 
the technical skills and expertise needed to maintain control of the 
agency mission and operations.
    (a) Performance of work by Federal employees. To ensure that work 
that should be performed by Federal employees is properly reserved for 
government performance, agencies shall:
    (1) ensure that contractors do not perform inherently governmental 
functions (see section 5-1);
    (2) give special consideration to Federal employee performance of 
functions closely associated with inherently governmental functions 
and, when such work is performed by contractors, provide greater 
attention and an enhanced degree of management oversight of the 
contractors' activities to ensure that contractors' duties do not 
expand to include performance of inherently governmental functions (see 
sections 5-1(a) and 5-2(a) and Appendices B and C); and
    (3) ensure that Federal employees perform and/or manage critical 
functions to the extent necessary for the agency to operate effectively 
and maintain control of its mission and operations (see sections 5-1(b) 
and 5-2b).
    (b) Management and oversight of Federal contractors. When work need 
not be reserved for Federal performance and contractor performance is 
appropriate, agencies shall take steps to employ and train an adequate 
number of government personnel to administer contracts and protect the 
public interest through the active and informed management and 
oversight of contractor performance, especially where contracts have 
been awarded for the performance of critical functions, functions 
closely

[[Page 56237]]

associated with the performance of inherently governmental functions, 
or where, due to the nature of the contract services provided, there is 
a potential for confusion as to whether work is being performed by 
government employees or contractors. Contract management should be 
appropriate to the nature of the contract, ensure that government 
officials are performing oversight at all times, and make clear to 
other government organizations or to the public when citizens are 
receiving service from contractors.
    (c) Strategic human capital planning.
    (1) As part of strategic human capital planning, agencies shall--
    (i) dedicate a sufficient amount of work to performance by Federal 
employees in order to build competencies (both knowledge and skills), 
provide for continuity of operations, and retain institutional 
knowledge of operations;
    (ii) ensure that sufficient personnel with appropriate training, 
experience, and expertise are available, and will remain available for 
the duration of the contract, to manage and oversee every contractor's 
performance and evaluate and approve or disapprove the contractor's 
work products and services, recruiting and retaining the necessary 
Federal talent where it is lacking; and
    (iii) consider the impact of decisions to establish a specified 
level of government employee authorizations (or military end strength) 
or available funding on the ability to use Federal employees to perform 
work that should be reserved for performance by such employees and take 
appropriate action if there is a shortfall.
    (2) Agencies' annual Human Capital Plan for Acquisition shall 
identify specific strategies and goals for addressing both the size and 
capability of the acquisition workforce, including program managers and 
contracting officer's representatives. The number of personnel required 
to administer a particular contract is a management decision to be made 
after analysis of a number of factors. These include, among others:
    (i) scope of the activity in question;
    (ii) technical complexity of the project or its components;
    (iii) technical capability, numbers, and workload of Federal 
management officials;
    (iv) inspection techniques available;
    (v) proven adequacy and reliability of contractor project 
management;
    (vi) sophistication and track record of contract administration 
organizations within the agency;
    (vii) importance and criticality of the function; and
    (viii) the level of risk associated with performance of the 
function and its performance by a contractor.
    5. Implementation guidelines and responsibilities. Agencies shall 
use the guidelines below to determine: (1) whether their requirements 
involve the performance of inherently governmental functions, functions 
closely associated with inherently governmental functions, or critical 
functions; and (2) the type and level of management attention necessary 
to ensure that functions that should be reserved for Federal 
performance are not materially limited by or effectively transferred to 
contractors and that functions that are suitable for contractor 
performance are properly managed. Determining the type and level of 
management required typically requires agencies to consider the 
totality of circumstances surrounding how, where, and when work is to 
be performed. Special exceptions to these guidelines may exist, such as 
for statutorily authorized personal services contracting.
    5-1. Guidelines for identifying inherently governmental functions 
and critical functions. Agencies must ensure that inherently 
governmental functions are reserved exclusively for performance by 
Federal employees. Agencies must further ensure that a sufficient 
number of Federal employees are dedicated to the performance and/or 
management of critical functions so that Federal employees can provide 
for the accomplishment of, and maintain control over, their mission and 
operations. Proper identification of inherently governmental and 
critical functions is the first step for meeting these requirements.
    (a) Determining whether a function is inherently governmental. 
Every Federal Government organization performs some work that is so 
intimately related to the public interest as to require performance by 
Federal Government employees. Agencies should review the definition of 
inherently governmental functions in section 3, any other statutory 
provisions that identify a function as inherently governmental, and the 
illustrative list of inherently governmental functions in Appendix A. 
In no case should any function described in the definition, identified 
in statute as inherently governmental, or appearing on the list be 
considered for contract performance. If a function is not listed in 
Appendix A or identified in a statutory provision as inherently 
governmental, agencies should determine whether the function otherwise 
falls within the definition in section 3 by evaluating, on a case-by-
case basis, the nature of the work and the level of discretion 
associated with performance of the work using the tests below.
    (1) Tests for identifying inherently governmental functions. A 
function meeting either of the following tests should be considered 
inherently governmental.
    (i) The nature of the function. Functions which involve the 
exercise of sovereign powers of the United States are governmental by 
their very nature. Examples of functions that, by their nature, are 
inherently governmental are officially representing the United States 
in an inter-governmental forum or body, arresting a person, and 
sentencing a person convicted of a crime to prison. A function may be 
classified as inherently governmental based strictly on its uniquely 
governmental nature and without regard to the type or level of 
discretion associated with the function.
    (ii) The exercise of discretion.
    (A) A function requiring the exercise of discretion shall be deemed 
inherently governmental if the exercise of that discretion commits the 
government to a course of action where two or more alternative courses 
of action exist and decision making is not already limited or guided by 
existing policies, procedures, directions, orders, and other guidance 
that:
    (I) identify specified ranges of acceptable decisions or conduct 
concerning the overall policy or direction of the action; and
    (II) subject the discretionary decisions or conduct to meaningful 
oversight and, whenever necessary, final approval by agency officials.
    (B) A function may be appropriately performed by a contractor 
consistent with the restrictions in this section--including those 
involving the exercise of discretion that has the potential for 
influencing the authority, accountability, and responsibilities of 
government officials--where the contractor does not have the authority 
to decide on the overall course of action, but is tasked to develop 
options or implement a course of action, and the agency official has 
the ability to override the contractor's action. The fact that 
decisions are made, and discretion exercised, by a contractor in 
performing its duties under the contract is not, by itself, 
determinative of whether the contractor is performing an inherently 
governmental function. For instance, contractors routinely, and 
properly, exercise discretion in performing functions for the Federal 
Government when, providing advice, opinions, or recommended actions, 
emphasizing certain conclusions, and, unless

[[Page 56238]]

specified in the contract, deciding what techniques and procedures to 
employ, whether and whom to consult, what research alternatives to 
explore given the scope of the contract, or how frequently to test.
    (C) A function is not appropriately performed by a contractor where 
the contractor's involvement is or would be so extensive, or the 
contractor's work product so close to a final agency product, as to 
effectively preempt the Federal officials' decision-making process, 
discretion or authority. Such circumstances may be avoided by: (i) 
carefully delineating in the statement of work the contractor's 
responsibilities and types of decisions expected to be made in carrying 
out these responsibilities and (ii) having Federal employees oversee 
and, as necessary, give final approval of contractor conduct and 
decisions. This requires that a sufficient number of in-house personnel 
with the appropriate training and expertise be available and remain 
available through the course of the contract to make independent and 
informed evaluations of the contractor's work, approve or disapprove 
that work, perform all inherently governmental functions, and preclude 
the transfer of inherently governmental responsibilities to the 
contractor. Agencies should consider whether time constraints, the 
operational environment, or other conditions may limit their ability to 
effectively manage the contractor's actions or inappropriately restrict 
their final approval authority. If this is the case, government 
performance may be the only way that Federal officials can retain 
control of their inherently governmental responsibilities. For example, 
providing security in a volatile, high-risk environment may be 
inherently governmental if the responsible Federal official cannot 
anticipate the circumstances and challenges that may arise, and cannot 
specify the range of acceptable conduct (as required by paragraph 5-
1(a)(1)(ii)). Agencies should also consider if the level of management 
and oversight that would be needed to retain government control of the 
operation and preclude the transfer of inherently governmental 
responsibilities to the contractor would result in unauthorized 
personal services. In such cases, the function should not be contracted 
out.
    (2) Functions closely associated with inherently governmental 
functions. As agencies identify inherently governmental functions, they 
should bear in mind that certain services and actions that generally 
are not considered to be inherently governmental functions may approach 
being in that category because of the nature of the function and the 
risk that performance may impinge on Federal officials' performance of 
an inherently governmental function. See Appendix B for list of 
examples. Although closely associated functions are not reserved 
exclusively for performance by Federal employees, section 736 of 
Division D of the Omnibus Appropriations Act, 2009, Public Law 111-8, 
requires civilian agencies subject to the FAIR Act to give special 
consideration to using Federal employees to perform these functions. 
Similarly, the Department of Defense is required to ensure special 
consideration is given to Federal employee performance consistent with 
the requirements of 10 U.S.C. 2463. The Department is further required, 
to the maximum extent practicable, to minimize reliance on contractors 
performing functions closely associated with inherently governmental 
functions consistent with 10 U.S.C. 2330a. Civilian agencies shall 
refer to OMB Memorandum M-09-26, Managing the Multi-Sector Workforce 
(July 29, 2009), Attachment 3 for criteria addressing the in-sourcing 
of work under Public Law 111-8. The OMB Memorandum is available at 
http://www.whitehouse.gov/sites/default/files/omb/assets/memoranda_fy2009/m-09-26.pdf.
    (b) Determining whether a function is critical. Determining the 
criticality of a function requires the exercise of informed judgment by 
agency officials. The criticality of the function depends on the 
mission and operations, which will differ between agencies and within 
agencies over time. In making that determination, the officials shall 
consider the importance that a function holds for the agency and its 
mission and operations. The more important the function, the more 
important that the agency have internal capability to maintain control 
of its mission and operations. Examples of critical functions might 
include: analyzing areas of tax law that impose significant compliance 
burdens on taxpayers for the Internal Revenue Service's Office of the 
Taxpayer Advocate and performing mediation services for the Federal 
Mediation and Conciliation Service. Where a critical function is not 
inherently governmental, the agency may appropriately consider filling 
positions dedicated to the function with both Federal employees and 
contractors. However, to meet its fiduciary responsibility to the 
taxpayers, the agency must have sufficient internal capability to 
control its mission and operations and must ensure it is cost effective 
to contract for the services.
    (1) Sufficient internal capability--
    (i) generally requires that an agency have an adequate number of 
positions filled by Federal employees with appropriate training, 
experience, and expertise to understand the agency's requirements, 
formulate alternatives, take other appropriate actions to properly 
manage and be accountable for the work product, and continue critical 
operations with in-house resources, another contractor, or a 
combination of the two, in the event of contractor default; and
    (ii) further requires that an agency have the ability and internal 
expertise to oversee and manage any contractors used to support the 
Federal workforce.
    (2) Determinations concerning what constitutes sufficient internal 
capability must be made on a case-by-case basis taking into account, 
among other things the:
    (i) agency's mission;
    (ii) complexity of the function and the need for specialized skill;
    (iii) current strength of the agency's in-house expertise;
    (iv) current size and capability of the agency's acquisition 
workforce; and
    (v) effect of contractor default on mission performance.
    (c) Handling of work performed by Federally Funded Research and 
Development Centers (FFRDCs) and University Affiliated Research Centers 
(UARCs). In some circumstances, work that is closely associated with 
the performance of inherently governmental functions, or work that is 
critical to maintaining control of an agency's mission and operations, 
may be performed by FFRDCs or UARCs (with appropriate oversight by 
Federal officials and pursuant to properly executed contracts). These 
contractors provide essential engineering, research, development, and 
analysis capabilities to support agencies in the performance of their 
responsibilities and mission. FFRDCs and UARCs and their employees are 
not allowed to perform inherently governmental functions. Agencies 
shall also refer to the requirements in FAR Part 37 regarding 
requirements pertaining to the conduct of FFRDCs.
    5-2. Management responsibilities in connection with the planning 
and awarding of contracts.
    (a) Pre-award. As part of acquisition planning, agencies shall 
confirm that the services to be procured do not include work that must 
be reserved for performance by Federal employees and that the agency 
will be able to manage the contractor consistent with its

[[Page 56239]]

responsibility to perform all inherently governmental functions and 
maintain control of its mission and operations. For the procurement of 
services above the simplified acquisition threshold, the contract file 
shall include documentation of this confirmation from the agency head 
or designated requirements official to the contracting officer. The 
contract file should include analysis that establishes, at a minimum, 
that:
    (1) the function to be contracted does not appear on the list of 
inherently governmental functions in Appendix A and does not otherwise 
qualify as an inherently governmental function, taking into 
consideration, as necessary, the tests in subsection 5-1(a);
    (2) a statute, such as an annual appropriations act, does not 
identify the function as inherently governmental or otherwise require 
it to be performed by Federal employees;
    (3) the proposed role for the contractor is not so extensive that 
the ability of senior agency management to develop and consider options 
or take an alternative course of action is or would be preempted or 
inappropriately restricted;
    (4) if the function is closely associated with an inherently 
governmental one--
    (i) special consideration has been given to using Federal employees 
to perform the function in accordance with applicable law and 
implementing guidance;
    (ii) the agency has sufficient capacity and capability to give 
special management attention to contractor performance, limit or guide 
the contractor's exercise of discretion, ensure reasonable 
identification of contractors and contractor work products, avoid or 
mitigate conflicts of interest, and preclude unauthorized personal 
services;
    (iii) the agency will comply with the checklist of responsibilities 
in Appendix C; and
    (5) if the function is a critical function, the agency has 
sufficient internal capability to control its mission and operations as 
provided at subsection 5-1(b).
    (b) Post-award. Agencies should review, on an ongoing basis, the 
functions being performed by their contractors, paying particular 
attention to the way in which contractors are performing, and agency 
personnel are managing, contracts involving functions that are closely 
associated with inherently governmental functions (see subsection 5-
1(a) and Appendix B) and contracts involving critical functions (see 
subsection 5-1(b)). These reviews should be conducted in connection 
with the development and analysis of inventories of service contracts. 
Through the use of an inventory, an agency manager can gain insight 
into where, and the extent to which, contractors are being used to 
perform activities by analyzing how contracted resources are 
distributed by function and location across the agency and within its 
components. Civilian agencies should refer to section 743 of Division C 
of the Consolidated Appropriations Act, 2010 (Public Law 111-117) and 
OFPP Memorandum to Chief Acquisition Officers and Senior Procurement 
Executives, Service Contract Inventories, November 5, 2010. Department 
of Defense services and agencies should refer to section 2330a of Title 
10 of the United States Code.
    (1) Contractor performance of inherently governmental functions. If 
a determination is made that a contractor is performing work that is 
inherently governmental (or involves unauthorized personal services), 
but the contract, properly defined, does not entail performance of 
inherently governmental functions or unauthorized personal services, 
the agency shall take prompt corrective actions. In some cases, 
government control over, and performance of, inherently governmental 
responsibilities can be reestablished by strengthening contract 
oversight using government employees with appropriate subject matter 
expertise and following the protocols identified in FAR 37.114 (see 
also Appendix C). However, agencies must ensure that increasing the 
level of government oversight and control does not result in 
unauthorized personal services as provided by FAR 37.104 If government 
control of inherently governmental functions cannot be reestablished, 
agencies will need to in-source work on an accelerated basis through 
the timely development and execution of a hiring plan timed, if 
possible, to permit the non-exercise of an option or the termination of 
that portion of the contract being used to fulfill inherently 
governmental responsibilities.
    (2) Overreliance on contractors to perform critical functions. 
While contractor performance of critical functions is common, if the 
agency determines that internal control of its mission and operations 
is at risk due to overreliance on contractors to perform critical 
functions, requiring activities should work with their human capital 
office to develop and execute a hiring and/or development plan. 
Requiring activities should also work with the acquisition office to 
address the handling of ongoing contracts and the budget and finance 
offices to secure the necessary funding to support the needed in-house 
capacity. Agencies should also consider application of the 
responsibilities outlined in Appendix C, as appropriate.
    If an agency has sufficient internal capability to control its 
mission and operations, the extent to which additional work is 
performed by Federal employees should be based on cost considerations. 
Supporting cost analysis should address the full costs of government 
and private sector performance and provide like comparisons of costs 
that are of a sufficient magnitude to influence the final decision on 
the most cost effective source of support for the organization.
    (c) Analyzing functions. A function often includes multiple 
activities, or tasks, some of which may be inherently governmental, 
some of which may be closely associated with inherently governmental 
work, and some may be neither. By evaluating work at the activity 
level, an agency may be able to more easily differentiate tasks within 
a function that may be performed only by Federal employees from those 
tasks that can be performed by either Federal employees or contractors 
without blurring the line between the role of Federal employees and 
contractors.
    5-3. Management responsibilities in connection with small business 
contracting.
    (a) Lower prioritization for review. When prioritizing what 
outsourced work should be reviewed for potential insourcing, agencies 
generally should place a lower priority on reviewing work performed by 
small businesses when the work is not inherently governmental and where 
continued contractor performance does not put the agency at risk of 
losing control of its mission or operations, especially if the agency 
has not recently met, or currently is having difficulty meeting, its 
small business goals, including any of its socioeconomic goals. The 
agency should involve its small business advocate if considering the 
insourcing of work currently being performed by small businesses.
    (b) Considerations when contracted work is identified for 
insourcing. If part of a contracted function to be insourced is 
currently being performed by both small and large businesses, the 
``rule of two'' should be applied in deciding between small and large 
businesses that will perform the contracted work that remains in the 
private sector. The ``rule of two'' set out in FAR subpart 19.5 
requires that acquisitions be reserved for award to small businesses, 
or certain subsets of small businesses, if there are

[[Page 56240]]

two or more responsible small businesses capable of performing the work 
at fair market prices. The agency should involve its small business 
representative in the same manner as it would in working with the 
acquisition and program office in evaluating opportunities for small 
businesses for new work. In addition, if contracted work not currently 
being performed by small businesses is reduced as part of an 
insourcing, the agency should carefully consider during recompetition 
whether it can be totally or partially set-aside for small businesses.
    5-4. Additional agency management responsibilities.
    (a) Duty of Federal employees. Every Federal manager and their 
employees have an obligation to help avoid performance by contractors 
of responsibilities that should be reserved for Federal employees. 
Although contractors provide important support to the agency, they may 
not be motivated solely by the public interest, and may be beyond the 
reach of management controls applicable to Federal employees. As part 
of this obligation, Federal managers and employees who rely on 
contractors or their work product must take appropriate steps, in 
accordance with agency procedures, to ensure that any final agency 
action complies with the laws and policies of the United States and 
reflects the independent conclusions of agency officials and not those 
of contractors. These steps shall include increased attention and 
examination where contractor work product involves advice, opinions, 
recommendations, reports, analyses, and similar deliverables that are 
to be considered in the course of a Federal employee's official duties 
and may have the potential to influence the authority, accountability, 
and responsibilities of the employee.
    (b) Development of agency procedures. Agencies shall develop and 
maintain internal procedures to address the requirements of this 
guidance. Those procedures shall be reviewed by agency management no 
less than every two years.
    (c) Training. Agencies shall take appropriate steps to help their 
employees understand and meet their responsibilities under this 
guidance. Steps should include training, no less than every two years, 
to improve employee awareness of their responsibilities.
    (d) Review of internal management controls. Agencies should 
periodically evaluate the effectiveness of their internal management 
controls for reserving work for Federal employees and identify any 
material weaknesses in accordance with OMB Circular A-123, Management's 
Responsibility for Internal Control, and OFPP's Guidelines for 
Assessing the Acquisition Function, available at http://www.whitehouse.gov/omb/circulars_a123/.
    (e) Designation of responsible management official(s). Each Federal 
agency with 100 or more full-time employees in the prior fiscal year 
shall identify one or more senior officials to be accountable for the 
development and implementation of agency policies, procedures, and 
training to ensure the appropriate reservation of work for Federal 
employees in accordance with this guidance. Each such agency shall 
submit the names and titles of the designated officials, along with 
contact information, by June 30 annually to OMB on the following MAX 
Web site: https://max.omb.gov/community/x/VwkQIg.
    6. 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 not 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.
    7. Effective date. This policy letter is effective October 12, 
2011.

Daniel I. Gordon,

Administrator.

Appendix A. Examples of inherently governmental functions

    The following is an illustrative list of functions considered to be 
inherently governmental. This list should be reviewed in conjunction 
with the list of functions closely associated with inherently 
governmental functions found in Appendix B to better understand the 
differences between the actions identified on each list.
    Note: For most functions, the list also identifies activities 
performed in connection with the stated function. In many cases, a 
function will include multiple activities, some of which may not be 
inherently governmental.
    1. The direct conduct of criminal investigation.
    2. The control of prosecutions and performance of adjudicatory 
functions (other than those relating to arbitration or other methods of 
alternative dispute resolution).
    3. The command of military forces, especially the leadership of 
military personnel who are performing a combat, combat support or 
combat service support role.
    4. Combat.
    5. Security provided under any of the circumstances set out below. 
This provision should not be interpreted to preclude contractors taking 
action in self-defense or defense of others against the imminent threat 
of death or serious injury.
    (a) Security operations performed in direct support of combat as 
part of a larger integrated armed force.
    (b) Security operations performed in environments where, in the 
judgment of the responsible Federal official, there is significant 
potential for the security operations to evolve into combat. Where the 
U.S. military is present, the judgment of the military commander should 
be sought regarding the potential for the operations to evolve into 
combat.
    (c) Security that entails augmenting or reinforcing others (whether 
private security contractors, civilians, or military units) that have 
become engaged in combat.
    6. The conduct of foreign relations and the determination of 
foreign policy.
    7. The determination of agency policy, such as determining the 
content and application of regulations.
    8. The determination of budget policy, guidance, and strategy.
    9. The determination of Federal program priorities or budget 
requests.
    10. The selection or non-selection of individuals for Federal 
Government employment, including the interviewing of individuals for 
employment.
    11. The direction and control of Federal employees.
    12. The direction and control of intelligence and counter-
intelligence operations.
    13. The approval of position descriptions and performance standards 
for Federal employees.
    14. The determination of what government property is to be disposed 
of and on what terms (although an agency may give contractors authority 
to dispose of property at prices with specified ranges and subject to 
other reasonable conditions deemed appropriate by the agency).
    15. In Federal procurement activities with respect to prime 
contracts:
    (a) determining what supplies or services are to be acquired by the 
government (although an agency may

[[Page 56241]]

give contractors authority to acquire supplies at prices within 
specified ranges and subject to other reasonable conditions deemed 
appropriate by the agency);
    (b) participating as a voting member on any source selection 
boards;
    (c) approving of any contractual documents, including documents 
defining requirements, incentive plans, and evaluation criteria;
    (d) determining that prices are fair and reasonable;
    (e) awarding contracts;
    (f) administering contracts (including ordering changes in contract 
performance or contract quantities, making final determinations about a 
contractor's performance, including approving award fee determinations 
or past performance evaluations and taking action based on those 
evaluations, and accepting or rejecting contractor products or 
services);
    (g) terminating contracts;
    (h) determining whether contract costs are reasonable, allocable, 
and allowable; and
    (i) participating as a voting member on performance evaluation 
boards.
    16. The selection of grant and cooperative agreement recipients 
including: (a) approval of agreement activities, (b) negotiating the 
scope of work to be conducted under grants/cooperative agreements, (c) 
approval of modifications to grant/cooperative agreement budgets and 
activities, and (d) performance monitoring.
    17. The approval of agency responses to Freedom of Information Act 
requests (other than routine responses that, because of statute, 
regulation, or agency policy, do not require the exercise of judgment 
in determining whether documents are to be released or withheld), and 
the approval of agency responses to the administrative appeals of 
denials of Freedom of Information Act requests.
    18. The conduct of administrative hearings to determine the 
eligibility of any person for a security clearance, or involving 
actions that affect matters of personal reputation or eligibility to 
participate in government programs.
    19. The approval of Federal licensing actions and inspections.
    20. The collection, control, and disbursement of fees, royalties, 
duties, fines, taxes and other public funds, unless authorized by 
statute, such as title 31 U.S.C. 952 (relating to private collection 
contractors) and title 31 U.S.C. 3718 (relating to private attorney 
collection services), but not including:
    (a) collection of fees, fines, penalties, costs or other charges 
from visitors to or patrons of mess halls, post or base exchange 
concessions, national parks, and similar entities or activities, or 
from other persons, where the amount to be collected is predetermined 
or can be readily calculated and the funds collected can be readily 
controlled using standard cash management techniques, and
    (b) routine voucher and invoice examination.
    21. The control of the Treasury accounts.
    22. The administration of public trusts.
    23. The drafting of official agency proposals for legislation, 
Congressional testimony, responses to Congressional correspondence, or 
responses to audit reports from an inspector general, the Government 
Accountability Office, or other Federal audit entity.
    24. Representation of the government before administrative and 
judicial tribunals, unless a statute expressly authorizes the use of 
attorneys whose services are procured through contract.

Appendix B. Examples Of Functions Closely Associated With The 
Performance Of Inherently Governmental Functions

    The following is an illustrative list of functions that are 
generally not considered to be inherently governmental but are closely 
associated with the performance of inherently governmental functions. 
This list should be reviewed in conjunction with the list of inherently 
governmental functions in Appendix A to better understand the 
differences between the actions identified on each list.
    Note: For most functions, the list also identifies activities 
performed in connection with the stated function. In many cases, a 
function will include multiple activities, some of which may not be 
closely associated with performance of inherently governmental 
functions.
    1. Services in support of inherently governmental functions, 
including, but not limited to the following:
    (a) performing budget preparation activities, such as workload 
modeling, fact finding, efficiency studies, and should-cost analyses.
    (b) undertaking activities to support agency planning and 
reorganization.
    (c) providing support for developing policies, including drafting 
documents, and conducting analyses, feasibility studies, and strategy 
options.
    (d) providing services to support the development of regulations 
and legislative proposals pursuant to specific policy direction.
    (e) supporting acquisition, including in the areas of:
    i) acquisition planning, such as by--
    I) conducting market research,
    II) developing inputs for government cost estimates, and
    III) drafting statements of work and other pre-award documents;
    ii) source selection, such as by--
    I) preparing a technical evaluation and associated documentation;
    II) participating as a technical advisor to a source selection 
board or as a nonvoting member of a source selection evaluation board; 
and
    III) drafting the price negotiations memorandum; and
    iii) contract management, such as by--
    I) assisting in the evaluation of a contractor's performance (e.g., 
by collecting information performing an analysis, or making a 
recommendation for a proposed performance rating), and
    II) providing support for assessing contract claims and preparing 
termination settlement documents.
    (f) Preparation of responses to Freedom of Information Act 
requests.
    2. Work in a situation that permits or might permit access to 
confidential business information or other sensitive information (other 
than situations covered by the National Industrial Security Program 
described in FAR 4.402(b)).
    3. Dissemination of information regarding agency policies or 
regulations, such as conducting community relations campaigns, or 
conducting agency training courses.
    4. Participation in a situation where it might be assumed that 
participants are agency employees or representatives, such as attending 
conferences on behalf of an agency.
    5. Service as arbitrators or provision of alternative dispute 
resolution (ADR) services.
    6. Construction of buildings or structures intended to be secure 
from electronic eavesdropping or other penetration by foreign 
governments.
    7. Provision of inspection services.
    8. Provision of legal advice and interpretations of regulations and 
statutes to government officials.
    9. Provision of non-law-enforcement security activities that do not 
directly involve criminal investigations, such as prisoner detention or 
transport and non-military national security details.

Appendix C. Responsibilities Checklist For Functions Closely Associated 
With Inherently Governmental Functions

    If the agency determines that contractor performance of a function 
closely associated with an inherently governmental function is 
appropriate, the agency shall--

[[Page 56242]]

    (1) limit or guide a contractor's exercise of discretion and retain 
control of government operations by both--
    (i) establishing in the contract specified ranges of acceptable 
decisions and/or conduct; and
    (ii) establishing in advance a process for subjecting the 
contractor's discretionary decisions and conduct to meaningful 
oversight and, whenever necessary, final approval by an agency 
official;
    (2) assign a sufficient number of qualified government employees, 
with expertise to administer or perform the work, to give special 
management attention to the contractor's activities, in particular, to 
ensure that they do not expand to include inherently governmental 
functions, are not performed in ways not contemplated by the contract 
so as to become inherently governmental, do not undermine the integrity 
of the government's decision-making process as provided by subsections 
5-1(a)(1)(ii)(b) and (c), and do not interfere with Federal employees' 
performance of the closely-associated inherently governmental functions 
(see subsection 5-2(b)(2) for guidance on steps to take where a 
determination is made that the contract is being used to fulfill 
responsibilities that are inherently governmental);
    (3) ensure that the level of oversight and management that would be 
needed to retain government control of contractor performance and 
preclude the transfer of inherently governmental responsibilities to 
the contractor would not result in unauthorized personal services as 
provided by FAR 37.104;
    (4) ensure that a reasonable identification of contractors and 
contractor work products is made whenever there is a risk that 
Congress, the public, or other persons outside of the government might 
confuse contractor personnel or work products with government officials 
or work products, respectively; and
    (5) take appropriate steps to avoid or mitigate conflicts of 
interest, such as by conducting pre-award conflict of interest reviews, 
to ensure contract performance is in accordance with objective 
standards and contract specifications, and developing a conflict of 
interest mitigation plan, if needed, that identifies the conflict and 
specific actions that will be taken to lessen the potential for 
conflict of interest or reduce the risk involved with a potential 
conflict of interest.

[FR Doc. 2011-23165 Filed 9-9-11; 8:45 am]
BILLING CODE P