Contract Management: Comments on Proposed Services Acquisition	 
Reform Act (30-APR-03, GAO-03-716T).				 
                                                                 
Since 1997, federal spending on services has grown 11 percent and
now represents more than 60 percent of contract spending	 
governmentwide. Several significant changes in the		 
government--including funding for homeland security--are expected
to further increase spending on services. Adjusting to this new  
environment has proven difficult. Agencies need to improve in a  
number of areas: sustaining executive leadership, strengthening  
the acquisition workforce, and encouraging innovative contracting
approaches. Improving these areas is a key goal of the proposed  
Services Acquisition Reform Act (SARA). 			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-716T					        
    ACCNO:   A06772						        
  TITLE:     Contract Management: Comments on Proposed Services       
Acquisition Reform Act						 
     DATE:   04/30/2003 
  SUBJECT:   Federal procurement				 
	     Federal procurement policy 			 
	     Procurement planning				 
	     Proposed legislation				 
	     Strategic planning 				 

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GAO-03-716T

Testimony Before the Committee on Government Reform, House of
Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. EDT Wednesday, April
30, 2003 CONTRACT

MANAGEMENT Comments on Proposed Services Acquisition Reform Act

Statement of William T. Woods, Director Acquisition and Sourcing
Management

GAO- 03- 716T

This is a work of the U. S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

The growth in spending on service contracts, combined with decreases in
the acquisition workforce and an increase in the number of high- dollar
procurement actions, create a challenging acquisition environment. It is
important that agencies have the authorities and tools they need to
maximize their performance in this new environment. The initiatives
contained in the Services Acquisition Reform Act (SARA) address a number
of longstanding

issues in contracting for services and should enable agencies to improve
their performance in this area. For example: Section 201: Chief
Acquisition Officers. Appointing a Chief Acquisition

Officer would establish a clear line of authority, accountability, and
responsibility for acquisition decisionmaking.

Section 103: Government- Industry Exchange Program. A professional
exchange program would allow federal agencies to gain from the knowledge
and expertise of the commercial acquisition workforce.

At the same time, GAO is concerned about some provisions in SARA. For
example:

Section 211: Ensuring Efficient Payment. While GAO supports the intent of
this proposal to make payments to government contractors more timely, GAO
has reservations concerning its implementation. GAO*s work shows that
agencies have been hampered by problems such as high payment volume,
inadequate payment systems, and weak controls. GAO*s review of spending
and workforce trends in federal procurement

highlights the significance of services acquisitions. The table below
shows the percent of contract dollars spent on services by federal
agencies.

Percent of Contract Dollars Spent on Services In Fiscal Year 2001 Since
1997, federal spending on services has grown 11 percent and now represents
more than 60 percent of contract spending governmentwide. Several
significant changes in the

government* including funding for homeland security* are expected to
further increase spending on services. Adjusting to this new

environment has proven difficult. Agencies need to improve in a number of
areas: sustaining executive leadership, strengthening

the acquisition workforce, and encouraging innovative contracting
approaches. Improving these areas is a key goal of SARA. GAO is not making
recommendations.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 716T. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact William T. Woods at (202) 512- 4841 or woodsw@ gao.
gov. Highlights of GAO- 03- 716T, Committee on

Government Reform, House of Representatives

April 30, 2003

CONTRACT MANAGEMENT

Comments on Proposed Services Acquisition Reform Act

Page 1 GAO- 03- 716T

Mr. Chairman and Members of the Committee: Thank you for inviting the
General Accounting Office (GAO) to participate in today*s hearing on the
proposed Services Acquisition Reform Act of 2003 (SARA). Over the past
several years, the federal acquisition environment has changed
dramatically. Spending for services has increased significantly and now
represents more than 60 percent of all federal contract spending. At the
same time, there has been a reduction in the size of the acquisition
workforce, and the use of alternative contracting approaches has been
growing. The purpose of SARA is to provide federal

agencies with additional tools for addressing these developments. We fully
support this objective, and look forward to continuing to work with this
Committee and others in finding ways to promote more efficient and
effective acquisitions.

In my testimony today, I will:  Summarize recent trends in contract
spending and in the acquisition

workforce, and  Discuss our views on selected provisions of SARA based on
relevant GAO

reports. We recently issued several reports on acquisition spending and
workforce trends. These reports show that spending on services
acquisitions is increasing at a time when the acquisition workforce is
decreasing.

Our report on spending and workforce trends in federal procurement 1 shows
that federal agencies continue to buy far more services than goods. Since
1997, spending on services has grown 11 percent. In fiscal year 2001, over
60 percent of the more than $220 billion in goods and services purchased
by the federal government was for services. 2 At six agencies,

1 Federal Procurement: Spending and Workforce Trends, GAO- 03- 443
(Washington, D. C.: Apr. 30, 2003). 2 Federal agencies spent about $140
billion on services and about $81 billion on goods for contracts valued at
more than $25,000. The Federal Procurement Data System does not provide
similar information for contracts valued at $25,000 or less. However, the
combined total of purchases of goods and services for fiscal year 2001 was
more than $235 billion. Contract Spending

and Workforce Trends Spending Trends

Page 2 GAO- 03- 716T

procurement of services exceeded 75 percent of their total spending on
contracts; at one agency, the Department of Energy, nearly 100 percent of
total spending via contracts was for services (see fig. 1).

Figure 1: Percent of Contract Dollars Spent on Services in Fiscal Year
2001

Spending on services could increase even further, at least in the short
term, given the President*s recent request for additional funds for
defense and homeland security. The degree to which individual agencies are
currently contracting for services and the growth of services spending
underscore the importance of ensuring that service acquisitions are
managed properly.

Industry and government experts alike recognize that the key to a
successful transformation toward a more effective acquisition system is
having the right people with the right skills. To increase the efficiency
and effectiveness of acquiring goods and services, the government is
relying more on judgment and initiative versus rigid rules to make
purchasing decisions.

Agencies have to address governmentwide reductions in the acquisition
workforce. At the same time, government contract actions exceeding
Workforce Challenges

Page 3 GAO- 03- 716T

$25,000 have increased significantly* by 26 percent between fiscal years
1997 and 2001 (see table 1).

Table 1: Federal Acquisition Personnel and Workload Acquisition workforce
Changes in contract actions, fiscal years 1997 through 2001

Agency Total Sept. 2001 Percent change in

workforce since fiscal year 1997

Change in total contract actions

(percent) Change in contract

actions exceeding $25,000 (percent)

Change in contract actions

under $25,000 (percent)

Governmentwide 103,053 -5 -6 26 -7 DOD 68,513 -9 5 27 4 USDA 5,703 -6 -79
25 -81 DOE 1,449 10 4 19 -3 GSA 2,743 11 -75 68 -82 HHS 2,490 9 -29 44 -31
DOJ 1,457 -2 -11 26 -13 NASA 1,246 -4 -38 -12 -50 DOT 1,514 -7 -37 27 -48
Treasury 2,561 8 12 15 11 VA 2,562 -6 29 -12 30 Sources: OPM, FPDS, and
FAA.

Over the past year, GAO issued four reports on the management and training
of the government*s acquisition workforce. 3 While the agencies 4 we
reviewed are taking steps to address their future acquisition workforce

needs, each is encountering challenges in their efforts. In particular,
shifting priorities, missions, and budgets have made it difficult for
agencies to predict, with certainty, the specific skills and competencies
the acquisition workforce may need.

3 Acquisition Workforce: Department of Defense*s Plans to Address
Workforce Size and Structure Challenges, GAO- 02- 630 (Washington, D. C.:
Apr. 30, 2002); Acquisition Workforce: Status of Agency Efforts to Address
Future Needs, GAO- 03- 55 (Washington, D. C.: Dec. 18, 2002); Acquisition
Workforce: Agencies Need to Better Define and Track the Training of Their
Employees, GAO- 02- 737 (Washington, D. C.: Jul. 29, 2002); and

Acquisition Management: Agencies Can Improve Training on New Initiatives,

GAO- 03- 281 (Washington, D. C.: Jan. 15, 2003). 4 Department of Defense
(DOD), General Services Administration (GSA), National Aeronautics and
Space Administration (NASA), the Department of Energy (DOE), the
Department of Veterans Affairs (VA), the Department of the Treasury, and
the Department of Health and Human Services (HHS).

Page 4 GAO- 03- 716T

Training is critical in ensuring that the acquisition workforce has the
right skills. To deliver training effectively, leading organizations
typically prioritize and set requirements for those in need of training to
ensure their training reaches the right people. Agencies we reviewed 5 had
developed specific training requirements for their acquisition workforce
and had efforts underway to make training available and raise awareness of
major acquisition initiatives. However, they did not have processes for
ensuring that training reaches all those who need it. And while agencies
had also developed a variety of systems to track the training of their
personnel, they experienced difficulties with these systems.

We have issued a number of reports on key provisions of SARA. These
reports address the areas of acquisition leadership, workforce, contract
innovations, as well as other proposals.

Our discussions with officials from leading companies, which we reported
on last year, 6 indicate that a procurement executive or Chief Acquisition
Officer plays a critical role in changing an organization*s culture and
practices. In response to many of the same challenges faced by the federal
government* such as a lack of tools to ensure they receive the best value
over time* each of the companies we studied changed how they acquired
services in significant ways. For example, each elevated or expanded the
role of the company*s procurement organization; designated *commodity*

managers to oversee key services; and/ or made extensive use of
crossfunctional teams. Taking a strategic approach paid off. One official,
for example, estimated that his company saved over $210 million over a
recent 5- year period by pursuing a more strategic approach.

Bringing about these new ways of doing business, however, was challenging.
To overcome these challenges, the companies found they

5 The agencies we reviewed for the two reports on training included
Department of Defense (DOD), General Services Administration (GSA),
National Aeronautics and Space Administration (NASA), the Department of
Energy (DOE), the Department of Veterans Affairs (VA), Department of the
Treasury, the Department of Health and Human Services (HHS) and the
Federal Aviation Administration (FAA).

6 Best Practices: Taking a Strategic Approach Could Improve DOD*s
Acquisition of Services, GAO- 02- 230 (Washington, D. C.: Jan. 18, 2002).
GAO Work Related to

SARA Leadership Section 201: Chief Acquisition Officer

Page 5 GAO- 03- 716T

needed to have sustained commitment from their senior leadership* first,
to provide the initial impetus to change, and second, to keep up the
momentum.

Section 201 of SARA would create a Chief Acquisition Officer (CAO) within
each civilian executive agency. We support this provision. By granting the
CAO clear lines of authority, accountability, and responsibility for
acquisition decision- making, SARA takes a similar approach as leading
companies in terms of the responsibility and decision- making authority of
these individuals.

Comptroller General David Walker testified earlier this month 7 that
strategic human capital management must be the centerpiece of any serious
government transformation effort and that federal workers can be

an important part of the solution to the overall transformation effort. In
July 2001, 8 he recommended that Congress explore greater flexibilities to
allow federal agencies to enhance their skills mix by leveraging the
expertise of private sector employees through innovative fellowship
programs.

The acquisition professional exchange program proposed in section 103 of
SARA could enhance the ability of federal workers to successfully
transform the way the federal government acquires services. The program,
which is modeled after the Information Technology Exchange Program

included in the recently passed E- Government Act of 2002, 9 would permit
the temporary exchange of high- performing acquisition professionals
between the federal government and participating private- sector entities.

We support this provision, which begins to address a key question we face
in the federal government: Do we have today, or will we have tomorrow, the
ability to manage the procurement of the increasingly sophisticated
services the government needs? Following a decade of downsizing and

7 Human Capital: Building on the Current Momentum to Address High- Risk
Issues,

GAO- 03- 637T (Washington, D. C.: Apr. 8, 2003). 8 Human Capital: Building
the Information Technology Workforce to Achieve Results,

GAO- 01- 1007T (Washington, D. C.: July 31, 2001). 9 Public Law 107- 347,
Section 209. Acquisition Workforce

Section 103: GovernmentIndustry Exchange Program

Page 6 GAO- 03- 716T

curtailed investments in human capital, federal agencies currently face
skills, knowledge, and experience imbalances that, without corrective
action, will worsen. The program established by section 103 would allow
federal agencies to gain from the knowledge and expertise of privatesector
professionals and entities.

Section 102 of SARA would establish an acquisition workforce training fund
using five percent of the fees generated by governmentwide contract
programs. We recently completed a review of fees charged on governmentwide
contracts* covering all five designated executive

agencies for governmentwide acquisition contracts and the General Services
Administration*s Schedules program. 10 The Office of Management and
Budget*s guidance directs agencies operating governmentwide information
technology contracts to transfer fees in excess of costs to the
miscellaneous receipts account of the U. S. Treasury*s General Fund.
Further, some of these contracts operate under revolving fund statutes
that limit the use of fees to the authorized purposes of the funds.

Quality training is important, and we recognize the need for adequate
funds for training. In our view, however, the procuring agencies should
ensure that adequate funding is available through the normal budgeting
process to provide the training the acquisition workforce needs. We are
concerned about relying on contract program fees* which can vary from year
to year and which are intended to cover other requirements* as a source of
funding for such an important priority as workforce training.

Several sections of SARA would encourage the use of innovative contract
types that could provide savings to the government. For example,
performance- based contracts can offer significant benefits, such as
encouraging contractors to find cost- effective ways of delivering
services. Share- in- savings contracting, one type of performance- based
contracting, is an agreement in which a client compensates a contractor
from the

financial benefits derived as a result of the contract performance. 10
Contract Management: Interagency Contract Program Fees Need More
Oversight,

GAO- 02- 734 (Washington, D. C.: July 25, 2002). Our review showed that in
some years contract fees exceeded costs and in others the fees fell short
of covering the costs incurred. From fiscal year 1999 to 2001, the revenue
generated by the GSA*s Schedules program fees exceeded program costs by
over 50 percent. We recommended that the fee be adjusted. Based on our
recommendation, GSA initiated action toward a 25- percent reduction in the
fee it charges for using the Schedules program. Section 102: Acquisition
Workforce Training Fund

Innovative Contracting

Page 7 GAO- 03- 716T

Share- in- savings contracting can motivate contractors to generate
savings and revenues for their clients. We issued a report earlier this
year in response to your request that we determine how the commercial
sector uses share- in- savings contracting. 11 We examined four commercial
sharein- savings contracts and identified common characteristics that made
them successful.

In the commercial share- in- savings contracts we reviewed, we found four
conditions that facilitated success:  An expected outcome is clearly
specified. By outcomes, we mean such

things as generating savings by eliminating inefficient business practices
or identifying new revenue centers. It is critical that a client and
contractor have a clear understanding of what they are trying to achieve.

 Incentives are defined. Both the client and contractor need to strike a
balance between the level of risk and reward they are willing to pursue.

 Performance measures are established. By its nature, share- in- savings
cannot work without having a baseline and good performance measures to
gauge exactly what savings or revenues are being achieved. Agreement must
be reached on how metrics are linked to contractor intervention.

 Top management commitment is secured. A client*s top executives need to
provide contractors with the authority needed to carry out solutions,
since change from the outside is often met with resistance. They also need
to help sustain a partnership over time since relationships between the
contractor and client can be tested in the face of changing market
conditions and other barriers.

The companies in our study found that successful arrangements have
generated savings and revenues. In one case highlighted in our report,
$980,000 was realized in annual energy savings.

We have not found share- in- savings contracting to be widespread in the
commercial sector or the federal government. Excluding the energy
industry, we found limited references to companies or state agencies that
use or have used the share- in- savings concept. In addition, there are
few documented examples of share- in- savings contracting in the federal

11 Contract Management: Commercial Use of Share- in- Savings Contracting,
GAO- 03- 327 (Washington, D. C.: Jan. 31, 2003). Section 301: Share- in-
Savings

Initiatives

Page 8 GAO- 03- 716T

government. Officials in federal agencies we spoke with noted that such
arrangements may be difficult to pursue given potential resistance and the
lack of good baseline performance data. In addition, in previous work, 12
Department of Energy headquarters officials told us they believe such

contracts can be best used when federal funding is unavailable. To achieve
the potential benefits from the use of share- in- savings contracting, it
may be worthwhile to examine ways to overcome potential issues. For
example, in a letter to the Office of Federal Procurement Policy

in March of this year, 13 we recognized that share- in- savings
contracting represents a significant change in the way the federal
government acquires services. To address this challenge, we underscored
the need for the Office of Federal Procurement Policy to develop guidance
and policies that could ensure that (1) appropriate data are collected and
available to meet mandated reporting requirements regarding the effective
use of share- in- savings contracting, and (2) members of the federal
acquisition workforce understand and appropriately apply this new
authority.

Section 401 authorizes agencies to treat a contract or task order as being
for a commercial item if it is performance- based* that is, it describes
each task in measurable, mission- related terms, and identifies the
specific outputs* and the contractor provides similar services and terms
to the public. This provision, which would only apply if the contract or
task order were valued at $5 million or less, would provide another tool
to promote greater use of performance- based contracting.

Our spending and workforce trends report shows that in fiscal year 2001,
agencies reported that 24 percent of their eligible service contracts, by
dollar value, were performance- based. However, there was wide variation
in the extent to which agencies used performance- based contracts. As
figure 2 shows, 3 of the 10 agencies in our review fell short of the
Office of Management and Budget*s goal that 10 percent of eligible service
contracts be performance- based.

12 Energy Conservation: Contractor*s Efforts at Federally Owned Sites,
GAO/ RCED- 94- 96 (Washington, D. C.: Apr. 29, 1994). 13 Contract
Management: OFPP Policy Regarding Share- in- Savings Contracting Pursuant
to the E- Government Act of 2002, GAO- 03- 552R (Washington, D. C.: Mar.
24, 2003). Section 401: Additional

Incentives for Use of Performance- Based Contracting for Services

Page 9 GAO- 03- 716T

Figure 2: Percentage of Eligible Contracts Considered Performance Based a
DOE and VA officials stated that their internal data systems report a
higher use of performancebased contracting in fiscal year 2001 than the
data in FPDS. For example, DOE officials believed 77 percent of their
eligible contracts were performance based, while VA officials believed
their agency*s figure should be about 11 percent. b Figure reflects data
for DOT only; FAA could not provide performance- based service contracting

data because it was not an integral part of its management information
systems.

In our September 2002 report, 14 we recommended that the Administrator of
the Office of Federal Procurement Policy clarify existing guidance to
ensure that performance- based contracting is appropriately used,

particularly when acquiring more unique and complex services that require
strong government oversight. If section 401 is enacted, we believe that
clear guidance will be needed to ensure effective implementation. The
Office of Federal Procurement Policy might be assisted in developing and
updating meaningful guidance by establishing a center for excellence to
identify best practices in service contracting, as required by section
401. A center for excellence may help federal agencies learn about
successful ways to implement performance- based contracting. 14 Contract
Management: Guidance Needed for Using Performance- Based Service
Contracting, GAO- 02- 1049 (Washington, D. C.: Sept., 23, 2002).

Page 10 GAO- 03- 716T

Section 501 would authorize those civilian agencies approved by the Office
of Management and Budget to use so- called *other transactions* for
projects related to defense against or recovery from terrorism, or
nuclear, biological, chemical, or radiological attacks. Other transactions
are agreements that are not contracts, grants, or cooperative agreements.
This authority would be similar to that currently available to the
Departments of Homeland Security and Defense. Because statutes that apply
only to procurement contracts do not apply to other transactions, this
authority may be useful to agencies in attracting

firms that traditionally decline to do business with the government. In
fact, our work shows that the Department of Defense has had some success
in using other transactions to attract nontraditional firms to do business
with the government. Our work also has shown, however, that there is a
critical need for guidance on when and how other transactions may best be
used. The guidance developed by the Department of Defense may prove
helpful to other agencies should the Congress decide to expand the
availability of other transaction authority.

Section 211 provides for a streamlined payment process under which service
contractors could submit invoices for payment on a biweekly or a monthly
basis. Biweekly invoices would be required to be submitted electronically.

While we support the intent of this proposal* to make payments to
government contractors more timely* implementation of this provision could
result in increased improper payments and stress already weak systems and
related internal controls. Agency efforts to address improper payment
problems have been hampered by high payment volume, speed of service,
inadequate payment systems and processes, internal control weaknesses, and
downsizing in the acquisition and financial management community. Until
federal agencies make significant progress in eliminating their payment
problems, requirements to accelerate service contract payments would
likely increase the risk of payment errors, backlogs, and late payment
interest.

Section 213 would provide for agency- level protests of acquisition
decisions alleged to violate law or regulation. An agency would have
Section 501: Authority to Enter

Into Certain ProcurementRelated Transactions and to Carry Out Certain
Prototype Projects

Additional Comments on SARA Proposals

Section 211: Ensuring Efficient Payment

Section 213: Agency Acquisition Protests

Page 11 GAO- 03- 716T

20 working days to issue a decision on a protest, during which time the
agency would be barred from awarding a contract or continuing with
performance if a contract already had been awarded. If an agency- level
protest were denied, a subsequent protest to GAO that raised the same
grounds and was filed within 5 days would trigger a further stay pending
resolution of that protest.

We believe that a protest process that is effective, expeditious, and
independent serves the interests of all those involved in or affected by
the procurement system. Section 213 appears to address each of these
criteria. First, although protests currently may be filed with the
procuring agencies, section 213 would provide for a more effective agency-
level protest process by requiring that an agency suspend, or *stay,* the
procurement until the protest is resolved. Second, the process would be
relatively expeditious because decisions would be required within 20
working days. Having an expeditious process at the agency is especially
important

because section 213 would provide for a stay both during the agency- level
protest and then during any subsequent GAO protest. It should be noted,
though, that 20 working days may not be adequate for a thorough review,

particularly in complex procurements. Finally, requiring protests to be
decided by the head of the agency may help to mitigate longstanding
concerns about a perceived lack of independence when decisions on agency-
level protests are issued by officials closely connected with the decision
being protested. Section 402 would provide for a change to the Federal
Acquisition

Regulation to include the use of time- and- materials and labor- hour
contracts for commercial services commonly sold to the general public.
This change would make it clear that such contracts are specifically

authorized for commercial services. The Federal Acquisition Regulation
states that a time- and- materials contract may be used only when it is
not possible to estimate accurately the extent or duration of the work or
to anticipate costs with any reasonable degree of confidence. Therefore,
adequate surveillance is required to give reasonable assurance that the
contractor is using efficient methods and effective cost controls.

Section 404 would designate as a commercial item any product or service
sold by a commercial entity that over the past 3 years made 90 percent of
its sales to private sector entities. We are concerned that the provision

allows for products or services that had never been sold or offered for
sale in the commercial marketplace to be considered a commercial item. In
Section 402: Authorization of

Additional Commercial Contract Types

Section 404: Designation of Commercial Business Entities

Page 12 GAO- 03- 716T

such cases, the government may not be able to rely on the assurances of
the marketplace in terms of the quality and pricing of the product or
service.

The growth in spending on service contracts, combined with decreases in
the acquisition workforce and an increase in the number of high- dollar
procurement actions, create a challenging acquisition environment. It is
important that agencies have the authorities and tools they need to
maximize their performance in this new environment. The initiatives
contained in SARA address a number of longstanding issues in contracting
for services, and should enable agencies to improve their performance in
this area.

Mr. Chairman, this concludes my statement. I will be happy to answer any
questions you may have. Contact and Acknowledgments For further
information, please contact William T. Woods at

(202) 512- 4841. Individuals making key contributions to this testimony
include Blake Ainsworth, Christina Cromley, Timothy DiNapoli, Gayle
Fischer, Paul Greeley, Oscar Mardis, and Karen Sloan. Conclusion

(120243)

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