Contract Management: Trends and Challenges in Acquiring Services 
(22-MAY-01, GAO-01-753T).					 
								 
Federal agencies spend billions of tax dollars each year to buy  
services ranging from clerical support and consulting services,  
to information technology services such as network support, to	 
the management and operation of government facilities, such as	 
national laboratories. Last year alone, the federal government	 
acquired more than $87 billion in services--a 24 percent increase
in real terms from fiscal year 1990. Some service procurements	 
are not being done efficiently, putting taxpayer dollars at risk.
In particular, agencies are not clearly defining their		 
requirements, fully considering alternative solutions, performing
vigorous price analyses, and adequately overseeing contractor	 
performance. This testimony (1) describes service contracting	 
trends and the changing acquisition environment, (2) discusses	 
the challenges confronting the government in acquiring services, 
and (3) highlights some efforts underway to address these	 
challenges. GAO found that (1) purchases of services now account 
for about 43 percent of federal contracting expenses--the largest
single spending category, (2) the growth of services has largely 
been driven by the government's increased purchases of		 
information technology services and professional, administrative,
and management support services, (3) the poor management of	 
service contracts undermines the government's ability to obtain  
good value for the money spent and continues to be a high-risk	 
area for the two biggest service purchasers, the Departments of  
Defense and Energy, and (4) performance-based service contracts  
and stressing the importance of integrating strategic human	 
capital management into agency planning are two ways to address  
some of the contract management and human capital challenges.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-753T					        
    ACCNO:   A01045						        
  TITLE:     Contract Management: Trends and Challenges in Acquiring  
             Services                                                         
     DATE:   05/22/2001 
  SUBJECT:   Contract oversight 				 
	     Personnel management				 
	     Federal procurement				 
	     Service contracts					 

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GAO-01-753T
     
A

Testimony Before the Subcommittee on Technology and Procurement Policy,
Committee on Government Reform, House of Representatives

For Release on Delivery 10: 00 a. m., EDT, Tuesday, CONTRACT May 22, 2001
MANAGEMENT

Trends and Challenges in Acquiring Services Statement of David E. Cooper,
Director, Acquisition and Sourcing Management

GAO- 01- 753T

GAO United States General Accounting Office

Page 1 GAO- 01- 753T Contract Management

Mr. Chairman and Members of the Subcommittee: Thank you for inviting me to
participate in the Subcommittee's hearing on the challenges confronting the
government's acquisition of services. Federal agencies spend billions of tax
dollars each year to buy services ranging from clerical support and
consulting services, to information technology services such as network
support, to the management and operation of government facilities, such as
national laboratories. The amount being spent on services is growing
substantially. Last year alone, the federal government acquired more than
$87 billion in services- a 24percent increase in real terms from fiscal year
1990.

Our work continues to show that some service procurements are not being done
efficiently, putting taxpayer dollars at risk. In particular, agencies are
not clearly defining their requirements, fully considering alternative
solutions, performing vigorous price analyses, and adequately overseeing
contractor performance. Further, it is becoming increasingly evident that
agencies are at risk of not having enough of the right people with the right
skills to manage service procurements. Consequently, a key question we face
in the government is whether we have today, or will have tomorrow, the
ability to acquire and manage the procurement of increasingly sophisticated
services the government needs.

My statement today will  describe service contracting trends and the
changing acquisition

environment,  discuss the challenges confronting the government in
acquiring services,

and  highlight some efforts underway to address these challenges.

Page 2 GAO- 01- 753T Contract Management

Federal contracting began declining in the late 1980s as the Cold War drew
to a close and defense spending decreased. This decline in federal
contracting continued for most of the 1990s, reaching a low of about $187
billion 1 in fiscal year 1999. Spending subsequently increased to about

$204 billion in fiscal year 2000. As figure 1 shows, between fiscal year
1990 and fiscal year 2000, purchases of supplies and equipment fell by about
$25 billion, while purchases of services increased by $17 billion, or about
24 percent. Consequently, purchases for services now account for about 43
percent of federal contracting expenses- the largest single spending
category.

1 All dollars figures used in this section have been converted to constant
fiscal year 2000 dollars. Additionally, the figures exclude actions under
$25, 000 and those made by government purchase cards. Trends in Service

Contracting and the Changing Acquisition Environment

Page 3 GAO- 01- 753T Contract Management

Figure 1: Changes in Federal Contract Spending, Fiscal Year 1990 to Fiscal
Year 2000

Source: GAO analysis of data extracted from the Federal Procurement Data
System for actions exceeding $25,000.

The growth in services has largely been driven by the government's increased
purchases of two types of services:

 information technology services, which increased from $3.7 billion in
fiscal year 1990 to about $13.4 billion in fiscal year 2000; and

 professional, administrative, and management support services, which rose
from $12.3 billion in fiscal year 1990 to $21.1 billion in fiscal year 2000.

102

70 37

13

103

78 34

17

85

77 34

15

83

76 34

15

71

80 31

18

72

77 31

18

69

77 30

17

67

77 27

17

67

79 27

16

66

80 25

17

77

87 24

16 0 50

100 150

200 250

Construction Research and development Services Supplies and equipment 1990
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Fiscal years Billions of constant fiscal year 2000 dollars

Page 4 GAO- 01- 753T Contract Management

The increase in the use of service contracts coincided with a 21- percent
decrease in the federal workforce, 2 which fell from about 2.25 million
employees as of September 1990 to 1.78 million employees as of September
2000.

As federal spending and employment patterns were changing, changes were also
occurring in the way that federal agencies buy services. Specifically, there
has been a trend toward agencies purchasing professional services using
contracts awarded and managed by other agencies. For example, in 1996, the
General Services Administration (GSA) began offering information technology
services under its Federal Supply Schedule program, 3 and it now offers
services ranging from professional engineering to laboratory testing and
analysis to temporary clerical and professional support services. The use of
the schedule program to acquire services has increased significantly over
the past several years.

Other governmentwide contracts have also come into use in recent years. The
Federal Acquisition Streamlining Act of 1994 authorized federal agencies to
enter into multiple award, task- and delivery- order contracts for goods and
services. These contracts provide agencies with a great deal of flexibility
in buying goods or services while minimizing the burden on government
contracting personnel to negotiate and administer contracts. The Clinger-
Cohen Act of 1996 authorized the use of multiagency contracts and what have
become known as governmentwide agency contracts to facilitate purchases of
information technology- related products and services such as network
maintenance and technical support, systems engineering, and integration
services.

2 Reflects the total civilian employment for executive branch agencies,
excluding the U. S. Postal Service and the Postal Rate Commission. 3 Under
the schedule program, GSA negotiates contracts with vendors for a wide
variety of mostly commercial- type products and services, and permits other
agencies to place orders under these contracts directly with the vendors.
Traditionally, the program had generally been used for common goods, such as
office supplies and furniture. According to GSA, it takes 268 days to award
a contract using traditional methods, but it takes only 15 days, on average,
to award an order under the schedule program.

Page 5 GAO- 01- 753T Contract Management

While we have seen the environment change considerably, what we have not
seen is a significant improvement in federal agencies' management of service
contracts. Put simply, the poor management of service contracts undermines
the government's ability to obtain good value for the money spent. This
contributed to our decision to designate contract management a high- risk
area for the Departments of Defense and Energy, the two largest purchasers
within the federal government. Improving contract management is also among
the management challenges faced by other agencies. Compounding these
problems are the agencies' past inattention to strategic human capital
management. As you may know, in January 2001, we designated strategic human
capital management a governmentwide high- risk area.

Our work, as well as work by other oversight agencies, continues to identify
examples of long- standing problems in service contracting, including poor
planning, inadequately defined requirements, insufficient price evaluation,
and lax oversight of contractor performance. For example,

 We found that the Department of Defense's (DOD) broadly defined work
descriptions for information technology services orders placed against
several governmentwide contracts prevented establishing firm prices for the
work. 4 Work descriptions defined services broadly because the orders
covered several years of effort, and officials were uncertain what support
they would need in future years. The 22 orders we reviewed- with a total
value of $553 million- typically provided for reimbursing the contractors'
costs, leaving the government bearing most of the risk of cost growth.
Further, although competition helps agencies ensure they obtain the best
value under contracts, a majority of these orders were awarded without
competing proposals having been received.

 The DOD Inspector General found problems with each of the more than 100
contract actions- with a total value of $6.7 billion- for professional,
administrative, and management support services it reviewed. 5 For example,
contracting officials typically did not use experience from prior
acquisitions of the same services to help define requirements more clearly.
In one case, officials continued to award cost reimbursement contracts-

4 Contract Management: Few Competing Proposals for Large DOD Information
Technology Orders (GAO/ NSIAD- 00- 56, Mar. 20, 2000). 5 Contracts for
Professional, Administrative, and Management Support Services (Office of the
Inspector General, Department of Defense, Mar. 10, 2000). Challenges Faced
by

the Government In Acquiring Services

Page 6 GAO- 01- 753T Contract Management

and accepted the risk of cost overruns- despite 39 years of experience
purchasing the same services from the same contractor. Further, officials
typically did not prepare well- supported independent cost estimates to help
them assess whether the costs contractors proposed were reasonable. Finally,
the Inspector General found that oversight of contractor performance was
inadequate in a majority of cases, and in some cases DOD officials could not
show that they had actually reviewed the contractors' work.

 We found that DOD personnel sought competing quotes from multiple
contractors on only a handful of orders for information technology services
placed against GSA's federal supply schedule contracts. 6 On 17 orders-
valued at $60.5 million- contracting officers generally compared the labor
rates offered by their preferred contractor with labor rates of various
other contractors' supply schedule contracts instead of seeking competing
quotes. This limited analysis did not provide a meaningful basis for
assessing whether a contractor would provide high- quality, costeffective
services because it did not evaluate the proposed number of labor hours and
mix of labor skill categories. Therefore, contracting officers' ability to
ensure that DOD got the best services at the best prices was significantly
undermined.

 The Inspector General at the Department of Transportation found that on an
$875- million contract for technical support services, the Federal Aviation
Administration did not develop reliable cost estimates or use these
estimates to assess whether costs the contractor proposed were reasonable. 7
Further, the agency generally did not gather data to evaluate the quality of
contractor performance nor ensure that contractor personnel had the
education and experience required for the jobs they were being paid to
perform.

 The Inspector General at the Department of Energy reported on a $218-
million contract for security services at its Oak Ridge operations. 8 This
contract was intended to consolidate security services under a single
contractor and to reduce costs by reducing staffing and eliminating
duplicative management structures. Oak Ridge officials, however, did not

6 Contract Management: Not Following Procedures Undermines Best Pricing
Under GSA's Schedule (GAO- 01- 125, Nov. 28, 2000). 7 Technical Support
Services Contract: Better Management Oversight and Sound Business Practices
Are Needed (Office of the Inspector General, Department of Transportation,
Sept. 28, 2000).

8 The Restructure of Security Services by the Oak Ridge Operations Office
(Office of the Inspector General, Department of Energy, Oct. 31, 2000).

Page 7 GAO- 01- 753T Contract Management

define what security- related work the new contractor would perform and did
not analyze staffing levels or propose cost reduction measures to promote
efficient contractor performance. Consequently, the number of security
personnel actually increased from 640 prior to the consolidation to 744
afterwards, while Oak Ridge incurred an estimated $7.5 million in avoidable
costs instead of achieving an anticipated $5 million in savings.

While these examples highlight the need for federal agencies to improve
their management of service contracts, their capacity to do so is at risk
because of past inattention to strategic human capital management. We are
concerned that federal agencies' human capital problems are eroding the
ability of many agencies- and threaten the ability of others- to perform
their missions economically, efficiently, and effectively. For example, we
found that the initial rounds of downsizing were set in motion without
considering the longer term effects on agencies' performance capacity.
Additionally, a number of individual agencies drastically reduced or froze
their hiring efforts for extended periods. Consequently, following a decade
of downsizing and curtailed investments in human capital, federal agencies
currently face skills, knowledge, and experience imbalances that, without
corrective action, could worsen given the number of current federal civilian
workers that are eligible to retire through 2005.

I would like to use DOD's experience to illustrate this problem. As we
recently testified, 9 DOD's approach to civilian workforce reduction was not
oriented toward shaping the makeup of the force. Rather, DOD relied
primarily on voluntary turnover and retirements, freezes on hiring
authority, and its authority to offer early retirements and "buy- outs" to
achieve reductions. As a result, DOD's current workforce is not balanced and
therefore risks the orderly transfer of institutional knowledge. According
to DOD's Acquisition 2005 Task Force, 10 11 consecutive years of downsizing
produced serious imbalances in the skills and experience of the highly
talented and specialized civilian acquisition workforce, putting DOD on the
verge of a retirement- driven talent drain.

9 Human Capital: Major Human Capital Challenges at the Departments of
Defense and State (GAO- 01- 565T, Mar. 29, 2001). 10 Shaping the Civilian
Acquisition Workforce of the Future (Final Report of the Acquisition 2005
Task Force to the Under Secretary of Defense, Acquisition, Technology, and
Logistics and the Under Secretary of Defense, Personnel and Readiness, Oct.
2000).

Page 8 GAO- 01- 753T Contract Management

DOD's leadership had anticipated that using streamlined acquisition
procedures would improve the efficiency of contracting operations and help
offset the effects of workforce downsizing. However, the DOD Inspector
General reported that the efficiency gains from using streamlined procedures
had not kept pace with acquisition workforce reductions. The Inspector
General reported that while the workforce had been reduced by half, DOD's
contracting workload had increased by about 12 percent 11 and that senior
personnel at 14 acquisition organizations believed that workforce reductions
led to problems such as less contractor oversight.

While I have discussed DOD's problems at length, we believe our concerns are
equally valid regarding the broader civilian agency contracting community.
For example, our analysis of personnel data maintained by the Office of
Personnel Management (OPM) shows that while DOD downsized its workforce to a
greater extent than the civilian agencies during the 1990s, both DOD and the
civilian agencies will have about 27 percent of their current contracting
officers eligible to retire through the end of fiscal year 2005.
Consequently, without appropriate workforce planning, federal agencies could
lose a significant portion of their contracting knowledge base.

Congress and the administration are taking steps to address some of these
contract management and human capital challenges, in particular by
emphasizing the increased use of performance- based service contracts and by
stressing the importance of integrating strategic human capital management
into agency planning.

Performance- based contracts describe desired outcomes rather than direct
work processes. 12 According to the Office of Federal Procurement Policy,
the use of performance- based contracts should result in lower prices and
improved performance, among other benefits. To encourage their use, in April
2000, the Procurement Executives Council- a senior level coordinating body
comprised of officials from more than 20 federal

11 DOD Acquisition Workforce Reduction Trends and Impacts (Office of the
Inspector General, Department of Defense, Feb. 29, 2000). 12 A performance-
based contract describes the government's requirements in terms of desired
results and measurable outcomes, establishes procedures to manage
performance that does not meet standards, and includes performance
incentives where appropriate. Some Efforts are

Underway to Address Service Contracting Challenges

Page 9 GAO- 01- 753T Contract Management

departments and agencies- established a goal that 50 percent of service
contracts will be performance- based by fiscal year 2005. The goal of
increasing the use of performance- based contracts was reaffirmed in a March
9, 2001, memorandum issued by the Office of Management and Budget (OMB).
Further, as required by last year's defense authorization act, 13 the
Federal Acquisition Regulation was revised on May 2, 2001, to establish a
preference for using performance- based contracting when acquiring services.

While we support the use of performance- based approaches, it should be
recognized that performance- based contracting is not a new concept. The
Office of Federal Procurement Policy issued a policy letter in April 1991
that directed using performance- based contracting to the maximum extent
practicable. However, this approach was not widely adopted by federal
agencies, and the Procurement Executives Council's interim goal of having 10
percent of service contracts awarded in fiscal year 2001 be performance-
based is indicative of the current level of performance- based contracting
in the government. Consequently, the extent to which agencies provide the
necessary training, guidance, and tools to their workforce, and establish
metrics to monitor the results of the contracts awarded using performance-
based approaches, will affect whether this effort achieves its intended
results.

With regard to human capital management, it is clear that both OPM and OMB
have substantial roles to play. OPM has begun stressing to agencies the
importance of integrating strategic human capital management into agency
planning and has focused more attention on developing tools to help
agencies. For example, it has developed a workforce planning model and has
launched a website to facilitate information sharing about workforce
planning issues. OMB has played a more limited role; however, OMB's role in
setting governmentwide management priorities and defining resource
allocations will be critical to inducing agencies to integrate strategic
human capital into their core business processes. Toward that end, OMB's
current guidance to agencies on preparing their strategic and annual
performance plans states that the plans should set goals in such areas as
recruitment, retention, and training, among others. Earlier this month, OMB
instructed agencies to submit a workforce analysis to it by June 29, 2001.
The analysis is to include summary information on the

13 The Floyd D. Spence National Defense Authorization Act for Fiscal Year
2001, P. L. 106- 398, Oct. 30, 2000.

Page 10 GAO- 01- 753T Contract Management

demographics of the agencies' permanent, seasonal, and temporary workforce;
projected attrition and retirements; an evaluation of workforce skills;
expected changes in the agency's work; recruitment, training, and retention
strategies being implemented; and barriers to maintaining a highquality and
diverse workforce. The information developed may prove useful in identifying
human capital areas needing greater attention.

Over the past decade, federal spending patterns changed, the federal
workforce declined, and new contracting vehicles and techniques were
introduced. Consequently, the current environment in which the government
acquires services is significantly different than the one it operated under
in 1990. However, the government's long- standing difficulties with managing
service contracts have not changed, and it is clear that agencies are not
doing all they can to ensure that they are acquiring services that meet
their needs in a cost- effective manner.

The increasing significance of contracting for services has prompted- and
rightfully so- a renewed emphasis by Congress and the executive agencies to
resolve long- standing problems with service contracts. To do so, the
government must face the twin challenges of improving its acquisition of
services while simultaneously addressing human capital issues. One cannot be
done without the other. Expanding the use of performance- based contracting
approaches and emphasizing strategic human capital planning are welcomed and
positive steps, but sustained leadership and commitment will be required to
ensure that these efforts mitigate the risks the government currently faces
when contracting for services.

Mr. Chairman, this concludes my prepared statement. I will be happy to
respond to any questions you or other Members of the Subcommittee may have.
Conclusion

Page 11 GAO- 01- 753T Contract Management

For further information, please contact David E. Cooper at (202) 512- 4841.
Individuals making key contributions to this testimony included Don
Bumgardner, Ralph Dawn, Tim DiNapoli, Julia Kennon, Gordon Lusby, Monty
Peters, Ron Schwenn, and John Van Schaik. Contact and

Acknowledgement

(120059)

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