Contract Management: Opportunities to Improve Surveillance on	 
Department of Defense Service Contracts (17-MAR-05, GAO-05-274). 
                                                                 
The Department of Defense (DOD) is the federal government's	 
largest purchaser of contractor services, spending $118 billion  
in fiscal year 2003 alone--an increase of 66 percent since fiscal
year 1999. DOD is expected to rely increasingly on contractors to
carry out its mission. In recent reports, DOD has identified	 
inadequate surveillance on service contracts. This report	 
examines how DOD manages service contract surveillance. It looks 
at the extent of DOD's surveillance on a selection of service	 
contracts, reasons why insufficient surveillance occurred, and	 
efforts to improve surveillance.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-274 					        
    ACCNO:   A19596						        
  TITLE:     Contract Management: Opportunities to Improve	      
Surveillance on Department of Defense Service Contracts 	 
     DATE:   03/17/2005 
  SUBJECT:   Contract administration				 
	     Contract oversight 				 
	     Contract performance				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Employee training					 
	     Policy evaluation					 
	     Prioritizing					 
	     Service contracts					 
	     Policies and procedures				 

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GAO-05-274

                 United States Government Accountability Office

GAO Report to the Secretary of Defense

March 2005

CONTRACT MANAGEMENT

Opportunities to Improve Surveillance on Department of Defense Service Contracts

                                       a

GAO-05-274

[IMG]

March 2005

CONTRACT MANAGEMENT

Opportunities to Improve Surveillance on Department of Defense Service Contracts

What GAO Found

Surveillance varied on the 90 contracts we reviewed. Surveillance was
insufficient on 26 of the contracts we reviewed but was sufficient on 64
contracts. Fifteen had no surveillance because no personnel were assigned
such responsibilities; the other 11 had assigned personnel but could not
provide evidence of surveillance due to incomplete documentation. Also,
some surveillance personnel did not receive required training before
beginning their assignments.

According to DOD officials, insufficient surveillance occurred because
surveillance is not as important to contracting officials as awarding
contracts and therefore, does not receive the priority needed to ensure
that surveillance occurs. The Army, unlike the Air Force and Navy
organizations we visited, does not require surveillance personnel to be
assigned responsibility prior to contract award. We also found that
surveillance personnel involved in our review were not evaluated on how
well they perform their surveillance duties. Further, surveillance was
usually a parttime responsibility and some personnel felt that they did
not have enough time in a normal workday to perform their surveillance
duties.

DOD has taken steps to implement provisions in the National Defense
Authorization Act for Fiscal Year 2002 intended to improve the general
management and oversight of service contract procurement and, in October
2004, DOD issued a policy that emphasized the proper use of other
agencies' contracts. However, these efforts did little to improve service
contract surveillance. On a more specific item, DOD did issue guidance
that now requires appointment of surveillance personnel during the early
planning phases of cost-reimbursable and time and materials service
contracts. At the military service level, in April 2004, the Army revised
its acquisition instructions and began requiring surveillance on some
professional support service contracts; but, the revision did not apply to
those contracts awarded before the enactment date that were still in
effect.

                 United States Government Accountability Office

Contents

Letter

Results in Brief
Background
Sufficiency of Service Contract Surveillance Varied
Contract Surveillance Not Always a High Priority
DOD Initiatives Affecting Surveillance
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

1

                                                         2 4 7 12 13 16 16 17

Appendix I Scope and Methodology

Appendix II	Roles of Contracting Officers and Surveillance Personnel

Appendix III Contracts Reviewed

Appendix IV Comments from the Department of Defense

Tables

Table 1: Summary of Surveillance on DOD Service Contracts 8 Table 2:
Surveillance Personnel Training 10

Figure

Figure 1: DOD Spending on Services, FY 1999 through FY 2003 5

Abbreviations

ACA-North Army Contracting Agency-North Region
AFMC Air Force Materiel Command
DFARS Defense Federal Acquisition Regulation Supplement
DOD Department of Defense
FAR Federal Acquisition Regulation
GSA General Service Administration
NAVSEA Naval Sea Systems Command
OSD Office of the Secretary of Defense

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United States Government Accountability Office Washington, DC 20548

March 17, 2005

The Honorable Donald H. Rumsfeld
Secretary of Defense
Washington, D.C.

Dear Secretary Rumsfeld:

The Department of Defense (DOD) is the federal government's largest
purchaser of contractor provided services and its spending on those
services has increased significantly over the past few years. Spending for
services has increased about 66 percent since fiscal year 1999 and this
trend is expected to continue as DOD increasingly relies more on
contractors to carry out aspects of its mission. In fiscal year 2003, DOD
spent over $118 billion on services-about 57 percent of its procurement
dollars.

Because of the increasing use of contractors and the large expenditures
involved, quality assurance surveillance-oversight of the services being
performed by the contractor-is important to provide assurance that
contractors are providing timely and quality services and to help mitigate
any contractor performance problems. Surveillance is not a one-step
process. It begins with properly training personnel for assignment of
surveillance responsibilities and involves ongoing surveillance actions
throughout the performance period of the contract to ensure the
government receives the services it contracted for in a timely manner.
Surveillance includes creating an official record documenting that the
contractor's performance was acceptable or unacceptable.

Because of past problems with inadequate surveillance identified by DOD,1
GAO reports determining that contract management and oversight has not
always been adequate,2 and DOD's increasing reliance on service
contracts, our overall review objective was to determine how DOD
manages service contract surveillance. To address this issue we

1DOD Inspector General, Acquisition: Contracts for Professional,
Administrative, and Management Support Services, D-2004-015 (Oct. 30,
2003) and D-2000-100 (Mar. 10, 2000).

2GAO, Major Management Challenges and Program Risks: Department of
Defense, GAO-03-98 (Washington, D.C.: January 2003) and GAO, High-Risk
Series: An Update, Department of Defense Contract Management, GAO-05-207
(Washington D.C.: January 2005).

(1) examined the extent surveillance was performed on a selection of
service contracts, (2) identified reasons for why insufficient
surveillance occurred, and (3) identified recent efforts to help improve
surveillance.

To conduct our work, we met with representatives of the Office of the
Secretary of Defense (OSD) and the military services to discuss how
contract surveillance is carried out across DOD and what efforts are being
made to improve surveillance. We also selected and reviewed 90 service
contracts and their associated surveillance records. The 90 contracts had
a total value of about $385.7 million at the time of contract award, but
that value has increased significantly over time. These contracts were
awarded primarily at three military commands within the military
departments: (1) the Army Contracting Agency-North Region (ACA-North) at
Fort Monroe, Virginia; (2) the Naval Sea Systems Command (NAVSEA) at the
Navy Ship Yard, Washington, D.C.; and (3) the Air Force Materiel Command
(AFMC) at Wright-Patterson Air Force Base, Ohio.3 Each of these
organizations spends significant funding for services within their
respective military department. Although our results are not projectable
across all of DOD's service contracts, they are illustrative of the
challenges involved in conducting surveillance for services. We contacted
contracting officers, surveillance personnel, and procurement management
officials associated with each of the selected contracts to obtain
information about surveillance. We did not include research and
development contracts or construction contracts in the contracts selected
because the surveillance process typically differs for these types of
contracts. A more detailed discussion of our scope and methodology is in
appendix I. We conducted our review from January 2004 to February 2005 in
accordance with generally accepted government auditing standards.

                                Results in Brief

Surveillance varied on the 90 contracts we reviewed. Surveillance was
insufficient on 26 of the contracts we reviewed but was sufficient on 64
contracts. Fifteen of the 26 contracts had no surveillance activity
because no personnel were assigned surveillance responsibilities. The
other 11 contracts had surveillance personnel assigned but could not
provide evidence that surveillance was being conducted because of
incomplete documentation. Further, some surveillance personnel did not
receive required training prior to beginning their surveillance
assignments on

3We also reviewed a small number of contracts associated with the Office
of the Secretary of Defense and other defense agencies.

contracts. In some instances surveillance was very rigorous. For example,
a Navy contract for critical submarine hull repair involved Navy personnel
and an independent specialist using live video to observe all the repairs
in real-time.

DOD officials attributed insufficient surveillance to a number of factors.
Contract surveillance is not always a top priority for contracting
officers and managers who oversee contracting organizations told us that
surveillance is not given the same importance as getting the contract
awarded. Also, the Army, unlike the Air Force and Navy organizations we
visited, does not require that surveillance personnel be assigned to
service contracts prior to contract award. In addition, no organization we
visited consistently evaluates surveillance personnel on how well they
perform their surveillance responsibilities. Finally, some surveillance
personnel believe they do not have enough time in a normal workday to
perform surveillance, a factor that may be influenced by declining
personnel levels in DOD functional offices responsible for conducting
surveillance.

DOD has begun implementing some initiatives that have the potential to
improve service contract management and oversight practices on a broad
basis. DOD has taken steps to implement provisions in the National Defense
Authorization Act for Fiscal Year 20024 intended to improve the management
and oversight of service contract procurement and, in October 2004, it
issued a policy that emphasized the proper use of other agencies'
contracts. However, little has been done as part of these efforts to
specifically improve DOD service contract surveillance practices. For
specific types of contracts-cost-reimbursement5 and time and materials6
service contracts-DOD established additional guidance, in September 2004,
that requires surveillance personnel be appointed to these contracts
during the early planning phase to provide appropriate oversight. Also, in
April 2004, the Army began requiring surveillance for the first time on
certain types of professional support service contracts; however, Army

4Section 801, National Defense Authorization Act for Fiscal Year 2002,
Public Law 107-107, Dec. 28, 2001.

5Cost-reimbursement contracts provides for Government's payment of
allowable costs incurred by the contractor. Federal Acquisition Regulation
16.301-1, Cost-Reimbursement Contracts (hereinafter FAR).

6Time-and-materials contracts that provide for acquiring supplies or
services on the basis of direct contractor labor hours at fixed rates and
materials at cost. FAR 16.601, Time-and-Materials Contracts.

officials told us this requirement did not apply to contracts of this type
awarded prior to April 2004 that are still in effect.

We are making four recommendations to help improve DOD service contract
surveillance and one recommendation to help ensure that the Army is
conducting surveillance on certain types of service contracts awarded and
still in use prior to April 2004. DOD concurred with four of our
recommendations and partially concurred with a fifth and identified
actions it has taken or plans to take to address them.

                                   Background

DOD and the federal government classify procurements as either the
purchase of goods or services. DOD procures many types of services ranging
from research and development efforts on major weapon systems to operating
military installations.7 Service contracts, because they involve the
contractor providing a service rather than a good, by nature require
different approaches in describing requirements and overseeing contractor
performance than the purchases of goods. DOD spends more of its
procurement funds on services than it does on goods. Moreover, DOD spends
significantly more than any other federal agency on services. DOD spending
on services has been increasing significantly over the last several
years-about 66 percent since fiscal year 1999-to a level of $118 billion
in fiscal year 2003 (see fig. 1).

7The DOD and the federal government have 24 different categories of
service contracts. These categories range from contracts for information
technology and medical services to base operating support.

          Figure 1: DOD Spending on Services, FY 1999 through FY 2003

Dollars in millions

                                      118

1999

                              2000 2001 2002 2003

Fiscal year

                       Source: GAO analysis of DOD data.

Surveillance and documentation that it occurred are required by the
Federal Acquisition Regulation (FAR)8 and the Defense Federal Acquisition
Regulation Supplement (DFARS).9 Moreover, documentation is necessary to
help ensure accountability over the surveillance process. Surveillance
involves government oversight of contractors with the purpose of ensuring
that the contractor (the service provider) performs the requirements of
the contract and the government (the service receiver or customer)
receives the service as intended. Surveillance begins with trained
personnel being nominated for and assigned surveillance responsibilities,
and then conducting surveillance actions throughout the performance period
of the contract to ensure the government receives the services required by
the contract.

While surveillance is required by the DFARS, specific methods are not
prescribed. DOD organizations use various methods to conduct surveillance,
ranging from formal written assessments (monthly, semi

8FAR 37.602-2, Quality Assurance and FAR 46.104, Contract Administration
Office Responsibilities.

9 Defense Federal Acquisition Regulations Supplement 246.102.

annually, or annually) of contractor performance prepared by DOD
surveillance personnel to more informal observations or inspections of
contractor performance by surveillance personnel. The methods used
generally relate to the dollar value of the contract and the risk
associated with the service being provided.

Proper documentation of surveillance is required. Proper documentation is
not only stressed in the DFARS but also in other DOD guidance that
requires performance-based service contracts,10-which DOD is requiring to
be used more often in the acquisition of services-to have a surveillance
plan. Surveillance of contractor performance should be documented as it is
conducted. DOD guidance maintains that this documentation constitutes an
official record and the surveillance personnel assessing performance are
to use a checklist to record their observations of the contractor's
performance. The guidance also concludes that all performance should be
documented whether it is acceptable or not.

Surveillance personnel11 are usually not considered part of DOD's
acquisition workforce. Instead, surveillance personnel represent the DOD
functional organization receiving the service and are usually assigned
surveillance as an ancillary responsibility in addition to their primary
job. For example, if a DOD weapon system program office (a functional
organization) has a need to contract for professional support services,
the program office would assist the contracting officer by defining
contract requirements and methods of contractor performance and by
nominating an official to serve as the surveillance personnel.
Surveillance personnel are likely to be full-time employees of the DOD
organization needing the service and are generally knowledgeable about the
aspects of the service to be provided by the contractor. This knowledge is
useful in assessing contractor performance. However, it is the contracting
officer's responsibility to assign surveillance personnel and to ensure
that surveillance is conducted on the contract. The surveillance personnel
act as a liaison between the contracting officer and the contractor. If
less than

10Guidebook for Performance-Based Services Acquisition in the Department
of Defense, December 2000.

11The military services, including the contracting offices we visited
during this review use different terms to describe personnel involved in
surveillance including: Quality Assurance Personnel (QAP), Quality
Assurance Evaluator (QAE), Contracting Officer's Representative (COR),
Contracting Officer's Technical Representative (COTR) and Task Order
Manager (TOM). For purposes of this report, we will refer to all these
positions as surveillance personnel.

adequate contractor performance is noted by the surveillance personnel,
they notify the contracting officer as a first step toward corrective
action. Appendix II shows in more detail the roles of contracting officers
and surveillance personnel.

Congressional concern over the management of DOD's growing services
procurement led Congress to include provisions in section 801 of the
National Defense Authorization Act for Fiscal Year 200212 designed to
improve management and oversight of services procurement and reinforce
compliance with all applicable statutes, regulations, directives, and
other requirements, regardless of whether the services were procured
through DOD contracts or those of another agency. We have previously
reported on section 801, but at that time DOD had not completely
determined how to implement specifics of the legislation.13 In our prior
report, we stated that DOD and the military departments had a management
structure and a process in place for reviewing individual acquisitions
valued at $500 million or more, but the approach did not provide a
departmentwide assessment of how spending for services could be more
effective.

In October 2004, to help reinforce the requirements of section 801, DOD
issued a policy designed to emphasize the proper use of other agencies'
contracts. DOD spends billions of dollars every year using other agencies'
contracts and is the largest purchaser of services from GSA's multiple
award schedules program.

  Sufficiency of Service Contract Surveillance Varied

The use of surveillance varied on the 90 contracts we reviewed. While 26
of the 90 DOD contracts we reviewed had insufficient surveillance, 64
contracts had sufficient, documented surveillance that in some instances
was extensive. More specifically, 25 of the 26 contracts with insufficient
surveillance were contracts for services that DOD obtained by using GSA
contracts available under its multiple award schedules program. In
addition, 13 surveillance personnel had not completed required training
prior to being assigned surveillance responsibilities. Our review also
found that 64 contracts had sufficient, documented surveillance and in
some of these instances, surveillance was extensive.

12Public Law 107-107, Dec. 28, 2001.

13GAO, Contract Management: High-Level Attention Needed to Transform DOD
Services Acquisition, GAO-03-935 (Washington, D.C.: Sep. 10, 2003).

Surveillance Personnel Not Always Assigned and Surveillance Documentation
Insufficient

For the 90 DOD service contracts we reviewed, 26 of the contracts (29
percent) had insufficient surveillance in that they lacked assigned
surveillance personnel or complete documentation of surveillance.14 Of
these 26 contracts, 15 contracts had no surveillance personnel assigned.
Additionally, 11 of the 26 contracts had insufficient documentation to
show if surveillance was occurring. Table 1 summarizes our findings for
the 90 contracts and shows that there were more instances of insufficient
surveillance related to the Army contracts compared to the Navy. All of
the Air Force contracts we reviewed had surveillance. (See app. III for a
more detailed summary of the 90 contracts.)

           Table 1: Summary of Surveillance on DOD Service Contracts

                              Dollars in millions

                            Total contracts reviewed

                                      Number of contracts Number of contracts
                                       with no surveillance with insufficient
         DOD organization Number of contracts Award amount personnel assigned
                                                     evidence of surveillance

Air Force

                               AFMC 20 $39.0 0 0

                         Other organizations 8 2.4 0 0

Army

                             ACA-North 19 86.2 7 2

                        Other organizations 11 20.7 6 1

Navy

             NAVSEA                20         226.6          0              0 
       Other organizations              6      8.7           1              4 
        OSD and other DOD               6      2.1           1              4 
            agencies                                                
              Total                90         $385.7         15            11 

Source: GAO analysis of DOD data.

Our further analyses of the 90 contracts found only one common
characteristic as to whether surveillance was affected by other
contractual

14The $46.6 million was the total value of the 26 contracts at the time
they were awarded. Contracts can increase in value for a number of reasons
after they are awarded. Contracts can increase in value when additional
contract options are exercised, the scope of the contract changes, etc.
For example, one NAVSEA contract increased from $225,000 at contract
award, but has the potential to increase to $96 million. Many of the
contracts we reviewed increased in value since they were awarded.

factors. Specifically, we found that of the 45 interagency contracts we
reviewed where DOD awarded them using GSA's multiple award schedules
program,15 25 had insufficient surveillance. GAO has recently identified
issues with DOD's use of interagency contracts in general and reported
that they were not being effectively managed.16

We also found that the contract award amount was not always a good
indication of the total value of the services that needed to be
surveilled. While the award amount of the 90 contracts we reviewed was
$385.7 million in fiscal year 2003, the amount of funds obligated on about
one-half of these contracts had grown to about $1.5 billion as of November
2004.17 We found that for some of the 15 contracts without surveillance
personnel assigned, the contract amounts have more than tripled over the
course of the contract. For example, one Army contract for educational
services was awarded for $271,690 but had increased to $900,125.

We did not find that the sufficiency of surveillance was related to other
factors, including type of service contract (fixed price or
costreimbursable), type of services being procured, use of
performance-based contract methods, or dollar value at award. For some of
the contracts without sufficient documentation of surveillance, we asked
the personnel how the government's interests were being protected. They
told us they were conducting surveillance, but they had not been keeping
documented records to verify surveillance had taken place.

15GSA's multiple award schedules program provides federal agencies with a
simplified process of acquiring commonly used supplies and services in
varying quantities while obtaining volume discounts. In return, agencies
utilizing the schedules program provide GSA with a user fee to cover GSA's
administrative expenses.

16GAO, High-Risk Series: An Update, GAO-05-207 (Washington D.C.: January
2005).

17 We did not obtain the total amount of obligations for about one-half of
the contracts.

Surveillance Personnel Training Not Always Completed Prior to Surveillance
Beginning

Surveillance training, despite DOD regulations requiring such training,
was not always completed prior to personnel being assigned surveillance
responsibilities. Such training explains their responsibilities and
identifies methods of conducting surveillance. On the contracts we
reviewed, 13 surveillance personnel had not received the required
training. Without timely training, surveillance personnel may not know how
to perform their duties. We found examples of this late training at each
of the commands we visited including 10 instances at AFMC, 2 instances at
NAVSEA, and 1 instance at ACA-North. In some cases, surveillance personnel
had not completed training until several months after assignment to a
contract. See table 2 for a summary of surveillance personnel training
information.

                    Table 2: Surveillance Personnel Training

Surveillance personnel Surveillance personnel not Military command
assigned to contracts trained before assignment

Air Force Materiel Command 60

ACA-North 13

NAVSEA 31

Total 104

                       Source: GAO analysis of DOD data.

Surveillance Often Sufficient and Used to Identify Insufficient Contractor
Performance

We found that 64 of the 90 contracts we reviewed had surveillance
personnel who were assigned their surveillance responsibilities and were
conducting and documenting surveillance. The 64 contracts included 20 that
were awarded using GSA's multiple award schedules program. The amount of
surveillance varied depending on the type of service being provided. In
some instances, the surveillance was a very detailed, rigorous process.
For example, one Navy contract we reviewed involved critical submarine
hull repair. The surveillance on the services was extensive and involved
Navy personnel and an independent specialist using live video to observe
all the repairs in real time. For lower risk contracts, such as one
involving maintenance of an Army recruiting internet site, surveillance
was significantly less formal because the contractor and surveillance
personnel actually shared office space and had daily interaction.

If surveillance is done properly, it has the potential to identify poor
contractor performance and mitigate problems on a contract. For example,
on one of the contracts we reviewed, AFMC was having problems with a
custodial contract worth approximately $3 million. The surveillance
personnel assigned to the job followed the surveillance plan

and documented observations and customer complaints that the contractor
was not meeting some of the contract requirements for a few consecutive
months. In each instance, the contractor was asked to reperform the tasks
that were deemed unacceptable and the surveillance personnel informed the
contracting officer of the issues. As the problems continued, the
contracting officer involved the contractor's corporate headquarters and
arranged a meeting to resolve the underlying problems. Two main problems
were identified. Some tasks the government expected to be performed were
not in the contract, and the contractor was providing poor service on
other tasks. Both of these problems were remedied and surveillance showed
the contractor subsequently received high ratings. Another example where
surveillance caught insufficient performance was on a NAVSEA contract
worth approximately $14 million. The surveillance on this contract was
structured so that the government would rate each contractor employee's
performance. Two contract employees were not performing as required and
the corporate headquarters subsequently replaced both of them within in a
few months.

AFMC and NAVSEA Practices Help Provide Sufficient Surveillance

NAVSEA and AFMC have policies that help ensure that surveillance begins as
soon as possible on contracts. Both organizations require surveillance
personnel to be assigned before or at contract award. Based on the
contracts reviewed, we found that both organizations complied with their
respective policies-each contract we reviewed had someone assigned to
conduct surveillance. In contrast, the Army and ACA-North have no policy
requiring surveillance personnel be assigned at or before contract award.
Of the 26 contracts we identified as having insufficient surveillance, 16
were Army contracts, including 9 ACA-North contracts. The Air Force
requires a team be created prior to the award of service contracts. This
team is comprised of at least the contracting officer, a representative
from the buying entity, and the surveillance personnel who will be
assigned to the contract. This policy helps assure that surveillance is
given a higher priority because the contract cannot be awarded until the
team has met.

  Contract Surveillance
  Not Always a
  High Priority

Surveillance was not always given high priority by either the contracting
or functional organizations, according to officials responsible for the
contracts we reviewed. These officials told us getting the contracts
awarded, and thus supporting the customer, takes priority over assuring
trained surveillance personnel are assigned prior to contract award. The
Army, unlike the Air Force and Navy organizations we visited, does not
require surveillance personnel to be assigned to contracts prior to the
contract award date. Officials also told us almost all surveillance
personnel are not evaluated on their surveillance responsibilities in
their performance assessments because surveillance is considered a
part-time or ancillary activity. Also, some surveillance personnel feel
they do not have sufficient hours during their normal workday to get the
job done.

                             Surveillance Secondary
                             to Awarding Contracts

Federal and DOD acquisition regulations do not require surveillance
personnel to be assigned prior to contract award. Contracting officials
from all three service commands as well as OSD and senior military
acquisition policy officials stated that, in general, the priority of
contracting offices is awarding contracts, not assuring that trained
surveillance personnel are assigned early on so that surveillance can
begin upon contract award. Contracting officials told us that their
primary objective is to get the necessary contracts awarded in order to
support the functional office (the service customer) and that delaying a
contract award because of delays in the assignment or training of
surveillance personnel does not normally occur. It is the assignment of
surveillance personnel that is usually delayed until after contract award
because contracting officers cannot assign them until they are nominated
by the functional office. NAVSEA and AFMC, however, have recognized the
importance of timely assignment and require contracting officers to assign
surveillance personnel by contract award. The Army and ACA-North have no
such requirement. For all the NAVSEA contracts we reviewed, surveillance
personnel were timely assigned.

Surveillance Personnel Not Rated on Surveillance Responsibilities

A further indication that surveillance is not always given a high priority
is that almost all personnel involved in our review are not rated on
performance of their surveillance responsibilities. NAVSEA and Army policy
indicates that surveillance responsibilities should at least be considered
in performance ratings, and Army training material indicates that
surveillance performance should be evaluated; however, in almost all
cases, personnel were not being assessed on these responsibilities.
Officials at NAVSEA told us they plan to issue a policy memo encouraging
the functional organizations to include surveillance duties in performance
ratings. While these efforts demonstrate a willingness to hold
surveillance

personnel accountable through ratings, they provide no plans or processes
to help accomplish this. OSD and senior acquisition policy officials also
acknowledge that assessing surveillance personnel on their
responsibilities could improve accountability but told us this could
require modifications to job descriptions, which could be a difficult
task.

Some Air Force and Navy Surveillance Personnel Feel Not Enough Time to
Perform Surveillance

DOD Initiatives Affecting Surveillance

Several Air Force and Navy personnel told us they do not always have
sufficient time to focus on surveillance responsibilities; thus, possibly
contributing to inadequate surveillance or leaving at risk the potential
for not detecting contractor performance problems. Five NAVSEA
surveillance personnel out of 17 we talked to told us they felt they did
not have enough time, in a normal workday, to fully perform their
surveillance duties. They told us they are usually assigned surveillance
as a part-time duty to be done in additional to their regular, full-time
job responsibilities. NAVSEA contract managers agreed that surveillance
personnel at times do need to work additional hours to ensure surveillance
is done. According to OSD and senior acquisition policy officials, this
situation is occurring, in part, due to a reduction in the staffing of
functional offices that nominate personnel to perform surveillance duties.

DOD is in the process of implementing some initiatives that may help
improve contract management and oversight practices. DOD has taken some
steps to implement provisions in the National Defense Authorization Act
for Fiscal Year 200218 designed to help improve the general management and
oversight of service contract procurement and also recently issued a
policy emphasizing the proper use of other agencies' contracts. DOD also
recently established additional guidance on contract surveillance for
cost-reimbursable and time and materials service contracts that states
that surveillance personnel should be appointed to these types of service
contracts during the early contract planning phase to help improve
oversight. In addition, a recently revised Army acquisition instruction
clarified surveillance requirements for certain types of service contracts
for which the Army was not previously requiring surveillance.

18Section 801, Public Law 107-107, Dec. 28, 2001.

DOD Efforts to Improve Service Contract Management and Oversight

DOD has taken some steps to implement provisions in section 801 of the
National Defense Authorization Act for Fiscal Year 2002,19 which was
intended to improve DOD management and oversight of services procurement
and reinforce compliance with all applicable statutes, regulations,
directives, and other requirements, regardless of whether the services are
procured through a DOD contract or other agencies' contracts. DOD also
recently issued a policy placing emphasis on the proper use of other
agencies' contracts, such as GSA's schedules program.

Regarding establishment of a management and review structure for service
contracts, we reported in September 200320 that DOD and the military
departments each had a management structure in place for reviewing
individual service contracts valued at $500 million or more prior to
contract award, but that approach did not provide a departmentwide
assessment of how spending for services could be more effective. During
our current review, we found that DOD and the military departments
continue to focus their efforts on activities that lead up to contract
awards and do not track or assess the sufficiency of surveillance on
service contracts regardless of their dollar value or risk. As a result,
little has been done as part of implementing section 801 to specifically
improve DOD surveillance practices.

Section 801 of the act,21 as well as DOD policy, requires that certain
data elements on service contracts be collected and analyzed to help
support management decisions. The requirement applies to contracts for
services valued at $100,000 or more. While DOD has been collecting data to
comply with the act, no data related to contract surveillance is being
collected because neither the act nor DOD guidance requires collection of
this type of data. As a result, DOD is not tracking whether the assignment
of surveillance personnel has taken place. Without this data, DOD and the
military departments will likely continue to have limited visibility over
the timely assignment of surveillance personnel and the results of
surveillance.

19Section 801, Public Law 107-107, Dec. 28, 2001.

20GAO, Contract Management: High-Level Attention Needed to Transform DOD
Services Acquisition, GAO-03-935 (Washington, D.C.: Sept. 10, 2003).

21Public Law 107-107, Dec. 28, 2001.

Further, DOD's October 2004 policy, which placed emphasis on the proper
use of other agencies' contracts, does not specifically address
surveillance. The policy focuses on ensuring that DOD's procurement
processes and procedures are done correctly. As discussed earlier,
surveillance on contracts awarded using interagency arrangements is an
area where we found efforts could be improved-25 of the 26 contracts we
determined to have insufficient surveillance were contracts using GSA's
schedules program.

Additional DOD Surveillance Guidance for Cost Reimbursable and Time and
Materials Service Contracts

In September 2004, OSD issued additional guidance to the military services
on service contracts called cost-reimbursable and time and material
contracts. The guidance stresses the need for the assignment of
surveillance personnel for these contracts because they usually require
significant government surveillance during contract performance to ensure
the government receives good value.

The additional DOD guidance was issued in response to a 2003 DOD Inspector
General report that found surveillance was inadequate for 29 of 43
cost-reimbursable contract actions.22 The Inspector General found that
surveillance personnel were designated in writing, as required, on only 21
of 43 contract actions. Further, for these 21 contracts, 13 had
insufficient surveillance. DOD's September 2004 guidance was issued to
help correct some of these inadequacies.

Revised Army Acquisition Instruction

Revised Army acquisition instructions, issued in April 2004, now require
surveillance personnel to be assigned for a certain type of service
contract called Contract Advisory and Assistance Services.23 Senior Army
acquisition and other officials at the ACA-North told us that, in the
past, these contracts required less surveillance because they were
generally seen as lower risk; in addition, the officials noted that
shortages of personnel in the functional offices also contributed to
conducting less surveillance on this type of service contract. The Army
was unable to provide us information on the quantity and dollar amounts
associated with

22DOD Inspector General, Acquisition: Contracts for Professional,
Administrative, and Management Support Services, D-2004-015 (Oct. 30,
2003).

23Contract Advisory and Assistance Services, CAAS, are contracts where
contractors provide professional consultation and assistance to government
organizations contracting for services.

Conclusions

Recommendations for Executive Action

these contracts that did not have surveillance; as a result, we were
unable to determine the overall significance of this issue. We are
encouraged that the Army has now decided to require surveillance for this
type of contract. However, the new acquisition instructions are not
retroactive and therefore do not provide a means to require surveillance
for Contract Advisory and Assistance Services contracts awarded prior to
April 2004 and still in effect.

If surveillance is not conducted, not sufficient, or not well documented,
DOD is at risk of being unable to identify and correct poor contractor
performance in a timely manner. Ultimately, if surveillance is not being
done, DOD can be at risk of paying contractors more than the value of the
services they performed. Key to sufficient surveillance are personnel
trained in how to conduct surveillance, assigned at or prior to contract
award, held accountable for their surveillance duties, and conducting and
documenting surveillance throughout the period of the contract. While DOD
has taken some actions to improve management and oversight of service
contracts, more can be done to ensure these practices are in place.

To help improve service contract surveillance and further mitigate risk,
we recommend that the Secretary of Defense

o  	ensure that the proper surveillance training of personnel and their
assignment to service contracts occurs no later than the date of contract
award;

o  	develop practices to help ensure accountability for personnel carrying
out surveillance responsibilities;

o  	ensure that DOD's service contract review process and associated data
collection requirements provide information that will provide more
management visibility over contract surveillance; and

o  	revise the October 2004 policy on proper use of other agencies'
contracts to include guidance on conducting surveillance of services
procured from other agencies' contracts.

Further, we recommend that the Secretary of Defense direct the Secretary
of the Army to assign surveillance personnel to conduct surveillance, as
appropriate, on ongoing Contract Advisory and Assistance Services
contracts awarded prior to April 2004.

  Agency Comments
  and Our Evaluation

DOD provided us with written comments on a draft of this report. DOD
concurred with four of our recommendations and partially concurred with a
fifth recommendation and identified actions it has taken or plans to take
to address them. The comments appear in appendix IV.

DOD partially concurred with our recommendation that the Secretary develop
practices to help ensure accountability for personnel carrying out
surveillance responsibilities. DOD stated that it will review the
feasibility of including a performance goal in a contracting officer
representative's (surveillance personnel) annual performance evaluation
which would address the representative's performance of their surveillance
duties.

We believe DOD's willingness to review and determine the feasibility of
this issue is a step in the right direction and we believe it could lead
to a process that holds surveillance personnel accountable for their
surveillance responsibilities. Whether this is done using annual
performance evaluations or by other means, we believe it can only lead to
more sufficient surveillance on DOD service contracts.

We are sending copies of this report to the Secretaries of the Air Force,
the Army, and the Navy; appropriate congressional committees; and other
interested parties. We will also provide copies to others on request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov.

If you or your staff has questions concerning this report, please contact
me at (202) 512-4841 or by e-mail at [email protected], or James Fuquay at

(937) 258-7963. Key contributors to this report were R. Elizabeth DeVan,
Johnetta Gatlin-Brown, Arthur James, Victoria Klepacz, John Krump,
Jean Lee, Don Springman, and Robert Swierczek.

Sincerely yours,

David E. Cooper, Director
Acquisition and Sourcing Management

                       Appendix I: Scope and Methodology

To conduct our work, we selected and reviewed 90 Department of Defense
(DOD) service contracts, each with a contract action for an amount over
$100,000 in fiscal year 2003, and their associated surveillance records.
For each contract, we reviewed surveillance actions for up to a 1-year
period. Collectively, these contracts had a value of $385.7 million at the
time of contract award. The majority of these contracts (59) were awarded
primarily at three military commands within the military departments: (1)
the Army Contracting Agency-North Region (ACA-North) at Fort Monroe,
Virginia; (2) the Naval Sea Systems Command (NAVSEA) at the Navy Ship
Yard, Washington, D.C.; and (3) the Air Force Materiel Command (AFMC) at
Wright-Patterson Air Force Base, Ohio. Each of these organizations spends
significant funding for services within their respective military
department. An additional 31 primarily Army, Navy and Air Force contracts
that were selected were awarded using the General Service Administration's
schedules program; these contracts had been analyzed in a recent GAO
review.1 (See app. III for a listing of the contracts we reviewed.)

Our selection of contracts was not large enough to allow projection of our
findings across DOD. In addition, it did not include research and
development service contracts for weapon systems and construction
contracts as the surveillance process typically differs for these types of
service contracts.

We met with procurement management officials at the three military
commands as well as senior acquisition policy officials for each of the
military departments and OSD. We also contacted contracting officials or
surveillance personnel associated with all 90 contracts selected to
discuss the surveillance on each contract.

We reviewed the federal and DOD acquisition regulations and policies, as
well as the instructions and regulations of the military departments and
the commands we visited, to determine their processes for assigning
surveillance personnel and performing surveillance on service contracts.

To assess whether DOD's service contract management and oversight process
developed to comply with section 801 of the National Defense

1GAO, Contract Management: Guidance Needed to Promote Competition for
Defense Task Orders, GAO-04-874 (Washington, D.C.: July 2004).

Appendix I: Scope and Methodology

Authorization Act for Fiscal Year 20022 addressed contract surveillance,
we reviewed the implementation policies of OSD and the military
departments along with their associated data collection efforts. We also
discussed DOD's efforts with senior OSD acquisition officials.

We conducted our review from January 2004 to February 2005 in accordance
with generally accepted government auditing standards.

                      2 Public Law 107-107, Dec. 28, 2001.

Appendix II: Roles of Contracting Officers and Surveillance Personnel

                                End of Contract

                       Source: GAO analysis of DOD data.

                        Appendix III: Contracts Reviewed

Total obligations Description of services Award amount as of Nov. 24, 2004
Air Force

AFMC

                        Management Support Services   $27,369,377 $13,425,866 
                          ADP & Telecommunication      4,466,003            - 
                                  Services                        
                          ADP & Telecommunication      1,300,000    1,300,000 
                                  Services                        
                         Fueling & Other Petroleum     1,211,480    5,036,280 
                                  Services                        
                           Administrative Support       768,310             - 
                                  Services                        
                           Administrative Support       692,042             - 
                                  Services                        
                          Trash/Garbage Collection      438,855       999,831 
                                  Services                        
                          ADP & Telecommunication       343,481     1,336,647 
                                  Services                        
                          ADP & Telecommunication       340,749    39,997,549 
                                  Services                        
                       Custodial/Janitorial Services    294,556     1,817,702 
                            Technical Assistance        283,980             - 
                           Research & Development       240,869             - 
                                 Facilities                       
                       Custodial/Janitorial Services    214,007     1,841,015 
                       Architect-Engineering Services   198,009     1,179,395 
                          Technical Representative      170,040     6,114,699 
                             Services/Aircraft                    
           16             ADP Data Entry Services       154,197             - 
           17          Architect-Engineering Services   134,555     1,002,798 
           18             ADP & Telecommunication       133,962       202,728 
                                  Services                        
           19             Technical Representative      117,764       654,266 
                             Services/Aircraft                    
           20             ADP & Telecommunication       111,000    27,203,283 
                                  Services                        
Other organizations                                            
           21          ADP System Acquisition Support   667,554             - 
                                  Services                        
           22          ADP System Acquisition Support   376,708             - 
                                  Services                        
           23           Systems Engineering Services    323,308             - 
           24           Management Support Services     320,123             - 
           25             ADP & Telecommunication       254,298             - 
                                  Services                        
           26          Other ADP & Telecommunication    210,239             - 
                                  Services                        
           27             ADP & Telecommunication       145,468             - 
                                  Services                        
                          ADP & Telecommunication                           - 
           28                     Services              140,655   

Appendix III: Contracts Reviewed

Evidence of Surveillance personnel Surveillance personnel Contract/ order
DOD contract/ order via surveillance assigned trained before duty pricing
typea GSA schedules

Yes                 Yes            Yes             FFP                  No 
Yes                 Yes            Yes             T&M                 Yes 
Yes                 Yes            Yes             FFP                  No 
Yes                 Yes            Yes             FFP                  No 
Yes                 Yes             -              LH                  Yes 
Yes                 Yes            Yes             LH                  Yes 
Yes                 Yes             -              FFP                  No 
Yes                 Yes            Yes             FFP                  No 
Yes                 Yes             -              T&M                  No 
Yes                 Yes             No             FFP                  No 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes            Yes             LH                  Yes 
Yes                 Yes             -              FFP                  No 
Yes                 n/a            n/a             FFP                  No 
Yes                 n/a            n/a             FFP                  No 
Yes                 Yes            Yes             LH                  Yes 
Yes                 n/a            n/a             FFP                  No 
Yes                 Yes            Yes            COST                  No 
Yes                 n/a            n/a             FFP                  No 
Yes                 Yes             -              T&M                  No 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes             No             T&M                 Yes 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes            Yes             FFP                 Yes 
Yes                 Yes             No             FFP                 Yes 

Appendix III: Contracts Reviewed

Total obligations Description of services Award amount as of Nov. 24, 2004
Army

ACA-North

                          Logistics Support Services    49,402,900 50,058,493 
                            Professional Services       21,717,754          - 
                        Engineering Technical Services  5,406,297  10,688,167 
                                Guard Services          3,637,858  38,176,593 
                            Professional Services       1,746,076           - 
                          Program Management/Support    1,107,053  64,850,669 
                                   Services                        
                           Trash/Garbage Collection      660,735      451,142 
                                   Services                        
                            Professional Services        543,651            - 
                            Professional Services        297,961            - 
                             Educational Services        271,690            - 
                            Professional Services        253,477            - 
                        Education & Training Services    175,450   63,576,850 
                           Non-nuclear Ship Repair       160,720    1,769,422 
                         Systems Engineering Services    159,111   28,038,198 
                       ADP & Telecommunication Services  157,015            - 
           44              Non-nuclear Ship Repair       152,000    3,446,965 
           45             Conservation & Development     144,718            - 
                            Facilities Maintenance                 
           46            Office Buildings Maintenance    129,250    1,175,090 
           47              Communications Services       110,463      110,463 
Other organizations                                             
           48           Engineering Technical Services  6,722,044           - 
           49          ADP & Telecommunication Services 5,999,724           - 
           50                  Medical Services         3,791,788           - 
           51             Special Studies & Analyses    1,659,302           - 
           52                  Medical Services         1,146,743           - 
           53                Programming Services        349,932            - 
           54            Patent & Trademark Services     288,417            - 
           55           ADP System Acquisition Support   238,992            - 
           56           Engineering Technical Services   192,894            - 
           57            Management Support Services     187,210            - 
           58           ADP System Acquisition Support   123,648            - 

Appendix III: Contracts Reviewed

Evidence of Surveillance personnel Surveillance personnel Contract/ order
DOD contract/ order via surveillance assigned trained before duty pricing
typea GSA schedules

Yes                 Yes            Yes            CPAF                  No 
No                  Yes            Yes             FFP                 Yes 
Yes                  No            n/a            CPAF                  No 
Yes                 Yes             No            FPAF                  No 
No                   No            n/a             FFP                 Yes 
Yes                 Yes            Yes             FFP                  No 
Yes                 Yes            Yes             FFP                  No 
No                   No            n/a             LH                  Yes 
No                   No            n/a             LH                  Yes 
No                   No            n/a             FFP                 Yes 
No                   No            n/a             FFP                 Yes 
Yes                 Yes            Yes             FFP                  No 
Yes                 Yes            Yes             FFP                  No 
No                   No            n/a             FFP                  No 
No                   No            n/a             FFP                 Yes 
Yes                 Yes            Yes             FFP                  No 
No                  Yes            Yes             FFP                 Yes 
Yes                 Yes            n/a             FFP                  No 
Yes                 Yes             No             FFP                  No 
No                   No            n/a             FFP                 Yes 
Yes                  No            n/a             FFP                 Yes 
No                  Yes             -              FFP                 Yes 
Yes                  No            n/a             T&M                 Yes 
Yes                 Yes             -              FFP                 Yes 
Yes                 Yes             -              T&M                 Yes 
No                   No            n/a             FFP                 Yes 
No                   No            n/a             FFP                 Yes 
No                   No            n/a             FFP                 Yes 
No                   No            n/a             FFP                 Yes 
No                   No            n/a             FFP                 Yes 

Appendix III: Contracts Reviewed

Total obligations Description of services Award amount as of Nov. 24, 2004
Navy

NAVSEA

                              Modification of         196,709,927 575,647,323 
                           Equipment/Ships/Docks                  
                        Systems Engineering Services   5,616,591   23,609,031 
                        Maintenance & Repair of Fire   4,791,859   75,750,011 
                             Control Equipment                    
                          Maintenance & Repair of                             
                           Electrical & Electric       4,757,680    3,105,727
                                 Equipment                        
                           Professional Services       3,180,123   36,978,828 
                           Professional Services       2,902,171   74,917,520 
                         Program Management/Support    2,083,517   21,189,632 
                                  Services                        
                       Equipment & Mats Testing/Fire   1,425,096   36,244,138 
                                  Control                         
                           Professional Services        990,787     3,523,667 
                       Engineering Technical Services   980,000    68,436,790 
                           Professional Services        733,450     7,252,297 
                           Professional Services        470,000     6,314,877 
                           Professional Services        400,340    12,605,550 
                         Program Management/Support     329,014    27,694,233 
                                  Services                        
                           Professional Services        274,510     7,146,906 
           74             Maintenance & Repair of       250,000    33,101,536 
                                 Equipment                        
           75              Professional Services        225,000    11,272,286 
           76              Professional Services        195,518    26,758,191 
           77          Maintenance & Repair of Ship &   148,320     1,118,694 
                              Marine Equipment                    
           78                 Salvage Services          136,364    38,460,222 
Other organizations                                            
           79           ADP Software, Equipment, and   2,794,083            - 
                               Tele-Training                      
           80           ADP Software, Equipment, and   2,586,967            - 
                               Tele-Training                      
           81          Other ADP & Telecommunication   1,177,846            - 
                                  Services                        
           82             ADP & Telecommunication       841,402             - 
                                  Services                        
           83            ADP Facility Operations &      830,491             - 
                                Maintenance                       
                          ADP & Telecommunication                           - 
           84                     Services              492,776   

Appendix III: Contracts Reviewed

Evidence of Surveillance personnel Surveillance personnel Contract/ order
DOD contract/ order via surveillance assigned trained before duty pricing
typea GSA schedules

Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes            Yes            CPAF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes             No            CPAF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes             No            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes             No            CPFF                  No 
Yes                 Yes             No            CPFF                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 n/a            n/a             FFP                  No 
Yes                 Yes            Yes            CPFF                  No 
Yes                 Yes             No            CPFF                  No 
Yes                 Yes            Yes            CPIF                  No 
Yes                 n/a            n/a            CPAF                  No 
No                  Yes            Yes             LH                  Yes 
No                  Yes            Yes             LH                  Yes 
No                  Yes            Yes             LH                  Yes 
No                  Yes             -              LH                  Yes 
Yes                  No            n/a             LH                  Yes 
No                   No            n/a             LH                  Yes 

                        Appendix III: Contracts Reviewed

Total obligations Description of services Award amount as of Nov. 24, 2004
OSD & Other Defense Agencies

       ADP Facility Operations & Maintenance           132,443              - 
          ADP & Telecommunication Services            1,033,000             - 
          ADP & Telecommunication Services             362,160              - 
               ADP & Telecom Services                  237,024              - 
          ADP & Telecommunication Services             185,355              - 
          ADP & Telecommunication Services             156,740              - 

Appendix III: Contracts Reviewed

Evidence of Surveillance personnel Surveillance personnel Contract/ order
DOD contract/ order via surveillance assigned trained before duty pricing
typea GSA schedules

No                  Yes             -             FFP                  Yes 
No                   No            n/a             -                   Yes 
No                  Yes             -             FFP                  Yes 
Yes                 Yes             -             FFP                  Yes 
No                  Yes             -              -                   Yes 
No                  Yes             -              -                   Yes 

Source: GAO.

aFFP - Firm Fixed Price
T&M - Time and Materials
LH - Labor Hour
COST - Cost Type
CPAF - Cost Plus Award Fee
FPAF - Fixed Price Award Fee
CPFF - Cost Plus Fixed Fee
CDIF - Cost Plus Incentive Fee

Appendix IV: Comments from the Department of Defense

Appendix IV: Comments from the Department of Defense

Appendix IV: Comments from the Department of Defense

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