Interagency Contracting: Franchise Funds Provide Convenience, but
Value to DOD is Not Demonstrated (29-JUL-05, GAO-05-456).	 
                                                                 
The Department of Defense (DOD) is the largest user of other	 
federal agencies' contracting services. The availability of these
contracting services has enabled DOD and other departments to	 
save time by paying other agencies to award and administer	 
contracts for goods and services on their behalf. DOD can access 
these contracting services a number of ways, such as ordering	 
directly from interagency contracts for commonly needed items.	 
DOD also can pay someone else to do the work. For example, DOD	 
uses franchise funds, which are government-run, fee-for-service  
organizations that provide a portfolio of services, including	 
contracting services. As part of a congressional mandate, GAO	 
assessed whether franchise funds ensured fair and reasonable	 
prices for goods and services, whether DOD analyzed purchasing	 
alternatives, and whether DOD and franchise funds ensured value  
by defining contract outcomes and overseeing contractor 	 
performance.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-456 					        
    ACCNO:   A31564						        
  TITLE:     Interagency Contracting: Franchise Funds Provide	      
Convenience, but Value to DOD is Not Demonstrated		 
     DATE:   07/29/2005 
  SUBJECT:   Contract administration				 
	     Contract performance				 
	     Contracting officers				 
	     Cost control					 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Federal funds					 
	     Federal procurement				 
	     Funds management					 
	     Interagency relations				 
	     Prices and pricing 				 
	     Procurement regulations				 
	     Program evaluation 				 
	     DOI GovWorks					 
	     Treasury FedSource 				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-05-456

     

     * Appendix I: Scope and Methodology
     * Appendix II: Franchise Fund Operating Principles
     * Appendix III: Overview of Contract Documents Used at GovWorks and
       FedSource
     * Appendix IV: Comments from the Department of Defense
     * Appendix V: Comments from the Department of the Treasury

                 United States Government Accountability Office

Report to Congressional Committees

GAO

July 2005

                            INTERAGENCY CONTRACTING

Franchise Funds Provide Convenience, but Value to DOD is Not Demonstrated

GAO-05-456

INTERAGENCY CONTRACTING

Franchise Funds Provide Convenience, but Value to DOD Is Not Demonstrated

  What GAO Found

GovWorks and FedSource, two of the franchise funds that DOD has relied on
for contracting services, have not always ensured fair and reasonable
prices while purchasing goods and services. The franchise funds also may
have missed opportunities to achieve savings from millions of dollars in
purchases, including engineering, telecommunications, or construction
services. In the course of its review, GAO examined $249 million worth of
orders and work assignments from the contracts the franchise funds used to
make purchases on DOD's behalf. In many cases, GovWorks sought but did not
receive competing proposals. GovWorks added substantial work-as much as 20
times above the original value of a particular order-without determining
that prices were fair and reasonable. FedSource generally did not ensure
competition for work, did not conduct price analyses, and sometimes paid
contractors higher prices for services than established in contracts with
no justification provided in the contract files.

For its part, DOD-in the absence of clear guidance on the proper use of
other agencies' contracting services-chose to use franchise funds on the
basis of convenience without analyzing whether using franchise funds'
contracting services was the best method for meeting purchasing needs. DOD
also lacks information about purchases made through other agencies
contracts, including franchise funds, which makes it difficult to make
informed decisions about the use of these types of contracts. The
franchise funds' business-operating principles require that they maintain
and evaluate cost and performance benchmarks against their competitors.
However, the franchise funds did not perform analyses that DOD could have
used to assess whether the funds deliver good value. The funds'
performance measures generally focus on customer satisfaction and
generating revenues. These measures create an incentive to increase sales
volume and meet customer demands at the expense of ensuring proper use of
contracts and good value.

DOD and the franchise funds-which share responsibility for ensuring value
through sound contracting practices such as defining contract outcomes and
overseeing contractor performance-did not adequately define requirements.
Without well-defined requirements, DOD and the franchise funds lacked
criteria to measure contractor performance effectively. On a separate
oversight-related issue, GAO found that the departments of the Interior
and the Treasury-each of which has responsibility in the successful
operation of the respective franchise funds-and the Office of Management
of Budget have performed little oversight of GovWorks and FedSource.

                 United States Government Accountability Office

Contents

  Letter 1

Results in Brief 2 Background 4 Franchise Funds Did Not Always Ensure Fair
and Reasonable

Prices or Competitive Procedures 8 DOD Focused on Convenience and Did Not
Pay Sufficient

Attention to Analyzing Contracting Alternatives 16 DOD and Franchise Funds
Did Not Pay Sufficient Attention to

Defining Outcomes or Overseeing Contractor Performance 21 Conclusions 28
Recommendations for Executive Action 29 Agency Comments and Our Evaluation
31

Appendix I Scope and Methodology

Appendix II Franchise Fund Operating Principles

Appendix III Overview of Contract Documents Used at GovWorks and FedSource

Appendix IV Comments from the Department of Defense

Appendix V Comments from the Department of the Treasury

  Tables

Table 1: Steps to Purchase Good or Service through GovWorks or

FedSource 6 Table 2: Contracting Methods Used by GovWorks or FedSource 7
Table 3: GovWorks Fiscal Year 2003 Orders 10 Table 4: FedSource Fiscal
Year 2003 Projects Reviewed 13 Table 5: GovWorks Fiscal Year 2003 Projects
Reviewed (in Millions

of Dollars) 37

           Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions
           of Dollars)                                                     38 
              Table 7: GovWorks Contract Documents Used to Define Desired 
                         Outcomes and Performance Criteria                 40 
             Table 8: FedSource Contract Documents Used to Define Desired 
                         Outcomes and Performance Criteria                 40 
Figures                                                                
           Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues       5 
            Figure 2: Example of Project for Which Army Paid FedSource 17 
                            Percent In Fees and Markups                    19 

Abbreviations

DOD                                    Department of Defense               
FAR                                         Federal Acquisition Regulation 
GSA                                        General Services Administration 

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.

United States Government Accountability Office Washington, DC 20548

July 29, 2005

Congressional Committees

In recent years, federal agencies have made increasing use of other
agencies' contracting services to purchase goods and services in less
turnaround time. Use of these services, generally referred to as
interagency contracting, has enabled federal agencies to reduce the time
they spend awarding and administering contracts in the face of acquisition
workforce reductions and growing workloads. Although these services have
grown rapidly and have helped streamline purchasing, using the many types
of contracts demands a high degree of business acumen and contracting
knowledge. Federal agencies can obtain contracting services through
entrepreneurial, fee-for-service organizations, which are government-run
but operate like businesses. Franchise funds are one such type of
organization.

We have reported on the challenges of using other agencies' contracting
services and have cited the need to effectively manage this contracting
environment. Indeed, we and the inspectors general of some federal
agencies have found instances in which interagency contracts have been
improperly used. Furthermore, we have reported that the agencies that
provide and the agencies that use interagency contracting assistance- such
as franchise funds-should be subject to improved oversight and controls,
clearer lines of accountability, and better policies, processes, and
implementation. It is for these reasons that we have designated management
of interagency contracting as a governmentwide high-risk

1

area.

The Department of Defense (DOD) is the largest customer for other
agencies' contracting services for purchases, typically ranging from
office supplies to information technology. Use of interagency contracts
has allowed DOD to focus more of its contracting offices' time and
attention on the acquisition of specialized, highly sophisticated defense
equipment. DOD uses two franchise funds in particular to make purchases on
its behalf-GovWorks, which is run by the Department of the Interior, and
FedSource, run by the Department of the Treasury. In fiscal year 2004,

1

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

                                Results in Brief

DOD paid these franchise funds more than $1.2 billion for purchases of
goods and services. (See figure 1.)

The Conference Report accompanying the National Defense Authorization Act
for Fiscal Year 2004 directed us to report on DOD's use of franchise
funds. 2 We assessed (1) whether franchise funds ensured fair and
reasonable prices for goods and services; (2) whether DOD analyzed
alternatives to determine the best method for acquiring certain goods and
services; and (3) whether DOD and franchise funds ensured value through
other sound contracting practices, such as defining contract outcomes, and
overseeing contractor performance.

To fulfill these objectives, we examined DOD's largest projects that
involved contracting assistance from GovWorks and FedSource in fiscal year
2003, the most recent year for which complete data were available at the
time we were planning our review. We reviewed 17 projects, including the
interagency contracts used, and orders and work assignments representing
$249 million in fiscal year 2003 DOD funding. We interviewed DOD customers
and officials at the two franchise funds and reviewed documentation to
assess the contracting practices used to place orders for goods and
services. The results of our review cannot be generalized to all types of
interagency contracts that DOD and the franchise funds used; however, we
believe we have sufficient information to make informed judgments on the
matters in this report. Appendix I provides details on our scope and
methodology. We conducted our work from June 2004 through June 2005 in
accordance with generally accepted government auditing standards.

In providing contracting services to DOD customers, the GovWorks and
FedSource franchise funds did not always obtain the full benefits of
competitive procedures, did not otherwise ensure fair and reasonable
prices, and may have missed opportunities to achieve savings on millions
of dollars in purchases. In half of the GovWorks orders we reviewed, we
found that GovWorks sought, but did not receive, competing proposals. In
more than half of the orders, GovWorks requested that contractors perform
substantial, additional work without determining that prices were fair and
reasonable. FedSource generally did not ensure competition for work, did
not conduct and document price analyses, and sometimes paid

2

H.R. Conf. Rep. No. 108-354 at 775-76 (2003).

contractors higher prices for services than were justified. In addition,
FedSource relied on administrative personnel who were not trained as
contracting officers to ensure that potential contractors had
opportunities to submit offers.

In the absence of clear guidance on the proper use of other agencies'
contracting services, DOD customers did not perform analyses of
contracting alternatives and chose to use the franchise funds on the basis
of convenience rather than as part of an acquisition plan. DOD also lacks
basic information about purchases made through franchise funds. Without
this data, it is difficult to assess whether franchise funds' contracting
services provide DOD value. For their part, although franchise funds'
business-operating principles require them to maintain and evaluate cost
and performance benchmarks against their competitors, the funds did not
perform analyses that DOD could use to assess whether the funds deliver
good value. Their performance measures generally focus on customer
satisfaction and generating revenues, rather than compliance with
contracting regulations. The fee-for-service arrangement provides
incentives to emphasize customer service to ensure sustainability of the
contracting operation at the expense of proper use of contracts and good
value.

DOD, GovWorks, and FedSource paid little attention to sound contracting
practices for which they shared responsibility to help ensure value:
carefully defining contract outcomes and specific criteria against which
contractor performance can be measured and providing effective contractor
oversight. DOD customers did not provide franchise funds with detailed
information about their needs. Without this information, the franchise
funds did not translate DOD's needs into well-defined contract
requirements that contained criteria to determine whether the contractor
performed successfully. In the absence of well-defined outcomes, DOD,
GovWorks, and FedSource lacked criteria to provide effective contractor
oversight. Regarding a separate oversight issue, the oversight of GovWorks
and FedSource themselves, we found that the departments of the Interior
and the Treasury and the Office of Management of Budget, each of which has
responsibility in the successful operation of these franchise funds, have
performed little oversight.

DOD and the franchise funds have undertaken a number of corrective actions
during the course of our review. To enhance their initiatives, we are
making recommendations to the Secretary of Defense to develop a
methodology for determining whether franchise funds' contracting services
are in the best interest of the government and to monitor and

                                   Background

evaluate DOD's use of these services. We also recommend that the
Secretaries of the Interior and the Treasury develop procedures and
performance measures to ensure that franchise funds' contracting officers
fulfill the requirements of procurement regulations while maintaining
their focus on customer service. To improve oversight of franchise funds,
we recommend that the Director of the Office of Management and Budget
expand its monitoring and reporting to include franchise funds'
contracting services and develop guidance to clarify roles and
responsibilities of customers and franchise funds in the contracting
process. In comments on a draft of this report, DOD, the departments of
the Interior and the Treasury, and the Office of Management and Budget
concurred with our recommendations and identified actions they have taken
or plan to take to address them. Written comments from DOD and the
Department of the Treasury are reproduced in their entirety in appendices
IV and V, respectively.

Franchise funds are government-run, self-supporting businesslike
enterprises managed by federal employees. Franchise funds provide a
variety of common administrative services, such as payroll processing,
information technology support, employee assistance programs, public
relations, and contracting. 3 This review focuses on DOD's use of the
franchise funds' contracting services. Franchise funds are required to
recover their full costs of doing business and are allowed to retain up to
4 percent of their total annual income. To cover their costs, the
franchise funds charge fees for services. The Government Management Reform
Act of 1994 authorized the Office of Management and Budget to designate
six federal agencies to establish the franchise fund pilot program. 4
Congress anticipated that the franchise funds would be able to provide
common administrative services more efficiently than federal agencies' own

3

Franchise fund enterprises are a type of intragovernmental revolving fund,
all of which have similar legal authority and operations and are generally
created to provide common administrative services. An intragovernmental
revolving fund is established to conduct continuing cycles of businesslike
activity within and between government agencies. An intergovernmental
revolving fund charges for the sale of goods or services and uses the
proceeds to finance its spending, usually without the need for annual
appropriations.

4

Between May 1996 and January 1997 pilots were designated to be established
at the departments of Commerce, Health and Human Services, the Interior,
the Treasury, and Veterans Affairs and at the Environmental Protection
Agency. Pub. L. No. 103-356, S: 403. The pilots were to expire after 5
years, at the end of fiscal year 1999, but have been extended several
times-and as of December 2004-Congress extended the date to October 1,
2005.

personnel. The original operating principles for franchise funds included
offering services on a fully competitive basis, using a comprehensive set
of performance measures to assess the quality of franchise fund services,
and establishing cost and performance benchmarks against their
competitors-other government organizations providing the same types of
services. 5 Although there are five franchise funds currently in
operation, DOD primarily uses two for contracting services-GovWorks,
operated by the Department of the Interior, and FedSource, operated by the
Department of the Treasury. Figure 1 shows the revenues for GovWorks and
FedSource and the percentage of revenue derived from doing business with
DOD in fiscal year 2004.

           Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues

Note: Revenues include the cost of the goods and services acquired and the
franchise funds' service charges or fees.

Effective contract management requires specialized knowledge and careful
attention to a range of regulatory requirements and contracting practices
designed to protect the government's interests. In obtaining contracting
services through a franchise fund, three main parties share
responsibilities for ensuring that proper procedures are followed:

     o government customer-the program office or agency in need of a good or
       service;
     o franchise fund-the federal entity that provides contracting services;
       and

Appendix II lists 12 original operating principles for franchise funds.

o  contractor-the vendor that provides the good or service desired by the
government customer.

DOD program officials are most familiar with the technical requirements
for the goods and services they need. DOD contracting officers can place
orders directly through many interagency contracts. Alternatively, DOD
pays the franchise fund to assume many of the contracting responsibilities
that normally would have been handled by DOD's contracting officers if the
customers had relied on them to purchase the goods or services. Whether
DOD makes purchases directly or through another agency, regulatory
procedures and requirements are the same, such as ensuring competition,
determining fair and reasonable pricing, and monitoring contractor
performance. Table 1 shows the basic steps to acquire a good or service
through GovWorks or FedSource.

    Table 1: Steps to Purchase Good or Service through GovWorks or FedSource

                        Step Organization Actions taken

DOD customer Identifies need for a good or service, sometimes develops
government cost estimate, prepares a description of the goods and services
needed, and sends it to franchise fund.

2 GovWorks or FedSource Provides DOD customer an estimated price for       
                           acquiring good or service.                         
3 DOD customer          Commits funds to pay franchise funds for purchase  
                           of good or service, plus fee.                      
4 GovWorks or FedSource Chooses a contracting vehicle from among several   
                           types; develops order for good or service to be    
                           provided under an existing contract or develops a  
                           new contract, conducts competition. Awards         
                           contract to a winning contractor or places order   
                           against an existing contract. Designates a         
                           contracting officer's representative or a          
                           contracting officer's technical representative to  
                           conduct contractor oversight. GovWorks generally   
                           appoints a representative from the customer        
                           agency.                                            
5 Contractor            Performs or subcontracts work for DOD according to 
                           order.                                             

6 DOD customer          Conducts contractor oversight.                     
7 Contractor            Submits invoice to franchise fund for work         
                           performed.                                         
8 GovWorks or FedSource Pays contractor for work performed.                

Source: GAO analysis of GovWorks' and FedSource's procedures.

GovWorks and FedSource can either make use of their own or other agencies'
contracts, or they can develop new, customized contracts to satisfy a DOD
customer's needs. GovWorks generally uses other agencies' contracts, and
FedSource generally uses its own contracts. Table 2 lists the various
types of contracting methods the franchise funds use.

           Table 2: Contracting Methods Used by GovWorks or FedSource

Contracting method Description

GSA schedule Under the General Services Administration (GSA) schedule
program, GSA negotiates contracts with vendors for a wide variety of goods
and services at varying prices. These contracts permit other agencies to
place orders directly with the vendors, providing agencies with a
simplified process of acquiring goods and services while obtaining volume
discounts.

Indefinite delivery/ indefinite quantity (ID/IQ)

Multiple-award and single-award These contracts can be used to acquire
goods or services when the exact date of future deliveries is unknown but
a recurring need is likely to arise. One type of indefinite delivery
contract is an indefinite quantity contract. Indefinite quantity contracts
provide for an indefinite quantity, within stated limits, of supplies or
services during a fixed period. The Federal Acquisition Regulation (FAR)
states a preference for multiple-awards of indefinite quantity contracts,
but award to a single vendor is also permitted. Almost all of the ID/IQ
contracts we reviewed were multiple-award.

Requirements               Under a requirements contract, the government   
                              designated activity is expected to purchase all 
                              of its needs for specific products or services  
                              from the holder of the contract.                
Blanket purchase agreement This type of agreement provides a simplified    
                              method of filling anticipated repetitive needs  
                              for supplies and services, allowing agencies to 
                              establish "charge accounts" with qualified      
                              vendors.                                        
8(a)                       Under the 8(a) program, the Small Business      
                              Administration enters into contracts with       
                              federal agencies and lets subcontracts for      
                              performing those contracts to eligible firms.   
                              Small businesses that are owned by socially and 
                              economically disadvantaged individuals and      
                              certified by the Small Business Administration  
                              are eligible for these contracts.               

Source: GAO analysis

While use of other agencies' contracting services may offer convenience
and efficiency, our prior work and that of some agency inspectors general
have identified problems with the use of other agencies' contracting
services, including lack of compliance with federal requirements for
competition and lack of contractor oversight. In prior work, we found that
increasing demands on the acquisition workforce and insufficient training
and guidance are among the causes for these deficiencies. 6 Two additional
factors are worth noting. First, the fee-for-service arrangement creates
an incentive to increase sales volume because revenue growth supports
growth of the organization. This incentive can lead to an inordinate focus
on meeting customer demands at the expense of complying with contracting
policy and required procedures. Second, it is not always clear where the
responsibility lies for such critical functions as describing
requirements, negotiating terms, and conducting oversight. Several
parties-the government customer, the agencies providing the contracting

6

GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005) contains a list of related products.

Page 7 GAO-05-456 Interagency Contracting

  Franchise Funds Did Not Always Ensure Fair and Reasonable Prices or
  Competitive Procedures

services, and, in some cases, the contractors-are involved with these
functions. But, as the number of parties grows, so too does the need to
ensure accountability. We have previously reported that ensuring the
proper execution of the contracting process is a shared responsibility of
all parties involved in the acquisition process and that specific
responsibilities need to be more clearly defined.

GovWorks and FedSource did not always obtain the full benefits of
competitive procedures, did not otherwise ensure fair and reasonable
prices, and may have missed opportunities to achieve savings on behalf of
DOD customers for millions of dollars worth of goods and services. With
limited evidence that prices were fair and reasonable, GovWorks sometimes
added millions of dollars of work to existing orders-as high as 20 times
the original order value. In addition, we found limited and inconsistent
evidence in the GovWorks and FedSource contract files we reviewed that the
franchise funds sought to negotiate prices or conducted price analysis
when required. DOD customers told us they were under the impression that
franchise funds ensure competition and analyze prices. However, we found
numerous cases in which these practices did not occur.

Criteria The FAR states that contracting officers must purchase goods and
services from responsible sources at fair and reasonable prices. Price
competition is the preferred method to ensure that prices are fair and
reasonable. The FAR also includes special competition procedures for
orders placed under the types of contracts the franchise funds use,
including GSA schedules and multiple-award contracts. DOD's procurement
regulations have additional procedures for ensuring competition when
purchasing services from these types of contracts with certain
exceptions-such as urgency or logical follow-on. For example, when
ordering from GSA schedules, DOD procurement regulations require
contracting officers to request proposals from as many contractors as
practicable and receive at least three offers. If three offers are not
received, a contracting officer must determine in writing that no
additional contractors can fulfill the requirement. Alternatively, the
contracting officer may provide notice to all schedule

                                    GovWorks

holders that could fulfill the requirement. 7 When prices for the specific
services being ordered are not established in the contract, the FAR and
GSA ordering procedures require contracting officers to analyze proposed
prices and to document that they are determined to be fair and reasonable.
For example, when labor rates are established in the contract, relying on
labor rates alone is not a good basis for deciding which contractor is the
most competitive. The labor rates do not reflect the full cost of the
order or critical aspects of the service being provided, such as the
number of hours and mix of labor skill categories needed to perform the
work. These procedures are designed to ensure that the government's
interests are protected when purchasing goods and services.

We reviewed 10 orders-totaling about $164 million in fiscal year 2003
funding-in which GovWorks provided contracting services to DOD's
customers. With the exception of two orders, which were placed against
GovWorks' own contracts, the orders we reviewed were placed against GSA
schedules. In 5 of the 10 cases, GovWorks sought, but did not receive,
competing proposals as required for the types of contracts used. In 3 of
the 10 cases, GovWorks sought and received multiple proposals for the
work. In the remaining 2 cases, GovWorks placed orders on a sole-source or
single-source basis and provided relevant explanations, such as an urgent
need for the work and an award to a small disadvantaged business. Table 3
provides details on these 10 orders, and additional information is
available in appendix I.

7

Section 803 of the National Defense Authorization Act for Fiscal Year
2002, Pub. L. No. 107-107 (2001), requires DOD to develop regulations
requiring DOD to solicit offers from all contractors that are offering the
required services under a multiple-award contract for orders exceeding
$100,000. For GSA schedule orders, section 803, as implemented, requires
that DOD solicit all contractors offering the required services under the
applicable schedule or enough contractors to ensure the receipt of three
offers. If three offers are not received, a contracting officer must
determine in writing that no additional contractors could be identified
despite reasonable efforts to do so. Under certain circumstances, section
803 allows waivers of competition for multiple-award contract orders and
GSA schedule orders. The implementing regulations in the Defense Federal
Acquisition Regulation Supplement became effective in October 2002.
Defense Federal Acquisition Regulation Supplement 208.404-70.

Table 3: GovWorks Fiscal Year 2003 Orders

                                                                   Time frame 
                                                                           to 
                                            Number of Award made       submit 
                                Contracting proposals to incumbent  proposals 
Customer Type of service method           received contractor       (days) 
GovWorks sought but did not receive                             
competing proposals                                             

       Air Force Aging Engineering          GSA Schedule 1 Yes             14 
          Landing Gear                                         
Life Extension                                              
Program                                                     
Air Force Deputy Chief of Staff          GSA Schedule 1 Yes              4 
Professional                                                
Air and Space Operations                                    
         Air Force                          Interior                          
          Material Network hardware         multiple     1 Yes              5
           Command                                             
                                            award              
      Army National Professional            GSA Schedule 1 No              13 
       Guard Bureau                                            
Chief Information Office                                    
Navy Program   Information technology    GSA Schedule 1 Yes              8 
Executive                                                   
Officer Information Technology                              
GovWorks sought and received competing                      
proposals                                                   
             Army Chief Information         GSA Schedule 2 Yes             16 
      Technology Office technology                             
Army National Guard  Information         GSA Schedule 3 No              45 
Bureau               technology                             
Army National Guard  Telecommunications  GSA Schedule 7 No              28 
Bureau                                                      
GovWorks placed sole- or single-source                      
orders                                                      
          Army Chief                        Interior                          
         Information Information technology 8(a)         1 No  Not applicable
              Office                                           
                                   hardware                    
Army Program  Logistics                  GSA Schedule 1 No  Not applicable 
Manager                                                     
Signals Warfare                                             

Source: GovWorks (data); GAO (analysis).

In the five cases for which GovWorks sought competing proposals but
received only one proposal for each order, GovWorks allowed 2 weeks or
less for proposals to be submitted. In four of these cases, orders were
ultimately placed with incumbent contractors to fill requirements for
ongoing programs. For example, when the Air Force's Office of the Deputy
Chief of Staff Air and Space Operations sought a contractor to provide
analytical services, GovWorks gave potential contractors 4 days-around
Christmas-to respond. The one contractor that responded was the incumbent
and received the order, which totaled $63.4 million. When the Air Force's
Aging Landing Gear Life Extension Program needed a contractor to provide
services involving landing gear technology, GovWorks invited 17
contractors to submit proposals and posted the solicitation on the
Internet allowing 14 days for proposals to be submitted. The incumbent
contractor, which had provided services to the program since its inception
in 1998, submitted the only proposal and received the order, which totaled
$19.8 million. Each of these 5 orders was subject to the standards for
obtaining competing offers for DOD orders, but in only the case of the
Aging Landing Gear Life Extension Program did contract documentation
indicate that GovWorks had attempted to meet Defense procurement
regulations for ordering from GSA schedules.

Our findings at GovWorks are consistent with our previous work on DOD's
use of other agencies' contracts. 8 In our prior work we found that the
reasons only one contractor responded to opportunities to compete for work
included a perception among potential contractors that incumbent
contractors have an advantage in competing for ongoing work and that very
short time frames to prepare proposals discouraged others from competing.
In this review, we found GovWorks received multiple proposals for work
when there was no incumbent contractor and longer time frames allowed for
competition to occur.

In the five cases in which competing proposals were sought but not
obtained, we found limited evidence of price analyses in GovWorks'
contract files. 9 In four of these cases, orders were subject to GSA
ordering procedures for services requiring a statement of work. In the
fifth case, an Interior multiple-award contract, the FAR required price
analysis. (See table 3.) Consequently, GovWorks should have determined
that the total price was fair and reasonable. GovWorks told us that it had
conducted analyses, but we found that the files generally included only
brief statements that prices had been determined reasonable, and GovWorks
generally could not provide us with documentation showing what data had
been gathered or analyses conducted to support the conclusion for the
cases we reviewed.

In 6 of the 10 cases we reviewed, GovWorks added substantial work beyond
what was originally planned without determining that prices were

8

GAO, Contract Management: Few Competing Proposals for Large DOD
Information Technology Orders , GAO/NSIAD-00-56 (Washington, D.C.: March
2000); GAO, Contract Management: Not Following Procedures Undermines Best
Pricing Under GSA's Schedule, GAO-01-125 (Washington, D.C.: November
2000); and GAO, Contract Management: Guidance Needed to Promote
Competition for Defense Task Orders, GAO-04-874 (Washington, D.C.: July
2004).

9

GovWorks primarily used GSA schedule contracts. When ordering services
that required a statement of work, GSA's Multiple-Award Schedules Program
Owners Manual required that offices placing orders consider the level of
effort and mix of labor proposed to perform specific tasks and make a
determination that task order pricing was fair and reasonable (app. A,
2001).

                                   FedSource

fair and reasonable. For example, GovWorks increased an original order
20-fold by adding $45.5 million for management consulting services for the
National Guard Bureau Chief Information Office. GovWorks modified another
National Guard order on numerous occasions, this time increasing the value
of the original order for an automated information system from $17.6
million to $44.6 million. An order for reconnaissance and surveillance
flight support to Army combatant commands increased in value from $7.4
million to $34.9 million. The order was intended to provide support in
Bosnia, for a period of 15 months with no option to renew, but was
expanded to include operations in Colombia, and the period of performance
was extended by more than 2 years. In each of these examples, GovWorks
assigned the additional work without conducting price analyses to
determine whether the prices charged were fair and reasonable.

We reviewed seven FedSource projects-amounting to $85 million in fiscal
year 2003-and found that the franchise fund did not compete orders it
placed under multiple-award contracts or perform analyses to ensure fair
and reasonable pricing. 10 FedSource commonly used multiple-award
contracts to make purchases for DOD. When placing orders against
multiple-award contracts, DOD is generally required to ensure that
contract holders have a fair opportunity to submit an offer and have that
offer fairly considered for each order with certain exceptions-such as
urgency or logical follow-on. 11 In addition, FedSource used Blanket
Purchase Agreements and requirements contracts for some of the projects we
reviewed. Table 4 provides detail on the seven projects, and additional
information is available in appendix I.

10

We found Treasury competitively awarded the indefinite delivery contracts
included in our review.

11

Defense Federal Acquisition Regulation Supplement 216.505-70.

Page 12 GAO-05-456 Interagency Contracting

Table 4: FedSource Fiscal Year 2003 Projects Reviewed
                   Contracting method used to fill fiscal year 2003
                                     requirements
                                 Indefinite delivery
                                 Indefinite quantity
                                                              Total number   Number of 
            Type of                                  Blanket   of fiscal          work 
                                                               year        
            service    Multiple- Single              purchase    2003 work assignments 
Customer     provided    award   award  Requirements agreement assignments    reviewed 
Walter Reed Staffing      o                              9             874          66 
Army                                                                       
Medical Center                                                             
U.S. Army     Construction      o                                      187          12 
Fort                                                                       
McCoy                                                                      
Army 88th         Staffing and o                                        31           5 
Regional                                                                   
Readiness Command construction                                             
at Fort Snelling                                                           
The          Information     o                                           5           5 
Pentagon                                                                   
technology                                                                 
Navy       Staffing                                          9         273          18 
Recruiting                                                                 
Command                                                                    
Lackland Air  Staffing        o         o      o                       185          14 
Force                                                                      
Base                                                                       
Brooke Army    Staffing       o         o      o                       248          25 
Medical                                                                    
Center                                                                     

Source: Department of Treasury (data); GAO (analysis).

The FedSource business model involves a two-step process of placing an
order under previously awarded contracts and subsequently developing work
assignments to define requirements for that order. In the first step,
contracting officers issue orders indicating the type and approximate
dollar value of work that FedSource anticipates will be required under
each contract. This estimated value is based on historical usage. The
second step is executed later when DOD identifies its needs. At this
point, FedSource administrative personnel define tasks and outcomes and
assign work to a contractor. In our past work, we recommended that the FAR
clarify that agencies should not award large, undefined orders against
multiple-award contracts and subsequently define specific tasks. 12 The
FAR was revised to encourage agencies to define work clearly so that the
total price for work could be established at the time orders are issued.
13

12

GAO/NSIAD-00-56.

13

FAR 16.505 (a).

Although this requirement was in effect for the period of our review, we
found that FedSource routinely allowed modifications to orders through
work assignments that substantially increased the total price of the
orders.

FedSource did not provide contractors the opportunity to submit offers for
orders under multiple-award contracts and have their offers fairly
considered, as required by the FAR. FedSource officials told us that their
business model does not provide contractors the opportunity to submit
offers on orders. Instead, FedSource officials told us that administrative
personnel were responsible for providing contractors a fair opportunity to
be considered for work under multiple-award contract orders when assigning
specific work to contractors. However, we found this generally did not
occur. Of the 120 work assignments we reviewed, 75 were for work under
multiple-award contracts. We found that in most of the 75 work
assignments, FedSource administrative personnel did not provide
contractors this opportunity. For example, FedSource used one of these
contracts to fill several individual support staff positions at Brooke
Army Medical Center at Fort Sam Houston and generally assigned work to one
of the three multiple-award contractors without providing the other two
contractors an opportunity to be considered. Justifications accompanying
these assignments stated that assigning work to more than one contractor
might create conflict among assigned staff over variations in pay and
benefits. The Army's Fort McCoy used FedSource to obtain contractor
support for a variety of construction projects, and FedSource assigned the
work noncompetitively for all 12 work assignments we reviewed to 1 of 3
multiple-award contract holders-totaling $7.2 million. The contract
holder, a firm specializing in staffing, subsequently passed the work
through to local construction companies that Fort McCoy officials had
identified. Justifications accompanying some of the projects stated that
the FedSource contracting officer's representative had determined that it
was "in the best interest of the government to award task orders to the
vendor that solicited and brought in the business." A FedSource quality
review later concluded that these justifications were inadequate. Many
months after the assignments were made, a second justification was placed
in the contract files citing numerous reasons for selecting the preferred
contractor. One of the reasons was that the project required expedited
effort to support urgent requirements, which might have been an acceptable
reason, except that the justification did not indicate that use of the
other two contractors would have resulted in unacceptable delays.

In another example, the Navy needed to fill several administrative
positions at its 31 regional recruiting centers around the country. Under
another purchasing arrangement, 14 FedSource assigned the work to two
contractors, one for recruiting centers east of the Mississippi River and
the other for centers to the west of the river. These arrangements did not
establish prices for any of the services provided, and FedSource personnel
told us that they accepted the prices provided by the contractors. This
type of purchasing arrangement does not justify purchasing from only one
source-contracting officers are still required to solicit price quotations
from other sources. However, there was no evidence FedSource personnel had
negotiated or analyzed these prices.

In addition, FedSource did not always demonstrate that prices were
reasonable. 15 For example, in two of the customer projects we reviewed,
FedSource made work assignments for construction services at the Army's
Fort McCoy and Fort Snelling against a contract for operational support.
Because the original contract had a very broad and undefined statement of
work that did not explicitly include construction, no prices for that type
of work had been established in the contract. For the project at Fort
McCoy, the contractor that received the assignment solicited prices from
potential subcontractors and presented their price, including a markup, to
FedSource. We did not find any analysis to determine that the contractor's
price was reasonable in FedSource's files. FedSource officials told us
that they have since awarded a separate contract for construction
services.

In four of the five projects involving staffing support, FedSource paid
contractors higher prices for services than were established in the
contract. Most of the files we reviewed contained no justifications for
the higher prices. For example, in our review of 25 work assignments for
staffing support services at an Army medical center, 14 of the work
assignments were priced higher than the price established in the
contracts. In 9 of these cases, FedSource had agreed to additional sick
leave or vacation time as part of the hourly rate, but FedSource's
contract file

14

FedSource filled this requirement using two blanket purchase agreements.
These blanket purchase agreements must follow section 13.303-5 of the FAR,
which requires obtaining quotes from other vendors.

15

The Treasury franchise fund primarily develops multiple-award contracts
under section 16.505 of the FAR. When ordering services that are not
specifically established in the contract, ordering offices are required to
establish prices using the pricing procedures of FAR subpart 15.4. FAR
Subpart 15.402 requires that supplies and services are purchased at fair
and reasonable prices.

  DOD Focused on Convenience and Did Not Pay Sufficient Attention to Analyzing
  Contracting Alternatives

contained no documentation indicating that the contractor employee
qualified for the additional benefits.

DOD did not follow sound management practices designed to ensure value
while expeditiously acquiring goods and services. DOD customers chose to
use franchise funds based on convenience, rather than as part of an
acquisition plan. DOD conducted little analysis, if any, to determine
whether using franchise funds' contracting services was the best method
for acquiring a particular good or service. For their part, although
franchise funds' business operating principles require that they maintain
and evaluate cost and performance benchmarks against their competitors,
they did not perform analyses that DOD could use to assess whether the
franchise funds deliver good value. Their performance measures generally
focus on customer satisfaction and generating revenues, rather than proper
use of contracts and sound management practices. This focus on customer
satisfaction and generating revenues provides an incentive to emphasize
customer service rather than ensuring proper use of contracts and good
value.

    DOD Selected Franchise Funds for Convenience with Limited Analysis of
    Alternatives

DOD customers told us that they did not formally analyze contracting
alternatives but generally chose to pay GovWorks and FedSource to provide
contracting services because the franchise funds provided quick and
convenient service. Some customers were dissatisfied with the speed and
quality of services provided by DOD's in-house contracting offices. For
example, two DOD customers told us that their contracting offices required
9 months to respond to their purchasing needs, while the franchise fund
required only a few weeks. The franchise fund's ability to place orders
quickly was valuable to DOD customers in these situations. DOD customers
said that franchise funds' contracting services were less restrictive than
other DOD contracting alternatives. Some DOD customers told us that
GovWorks and FedSource made it easier to spend funds at the end of a
fiscal year unlike DOD's in-house contracting offices. Two DOD customers
said that GovWorks made it easier to spend small amounts of funding
because GovWorks would place orders incrementally as funding became
available. Some DOD customers mentioned that using FedSource meant they
did not have to "live with the terms and conditions" of a long term
contract or that it was easier to replace problem contractor employees. In
one case, we were told that, if the organization had to fill positions
with government employees, it would have less flexibility to hire the
personnel it needed in a timely manner.

Analysis of contracting alternatives helps to ensure that purchases are
made by the most appropriate means and are in DOD's best interest;
however, DOD has no clear mechanism for making this determination when
using other agencies' contracting services. DOD's guidance on the use of
these vehicles has been evolving for several years and has not yet been
fully implemented. DOD also lacks a means to gather data on the use of
interagency contracts on a recurring basis, although it has been subject
over the years to various requirements to monitor interagency purchases.
In 2003, in response to a congressional mandate, 16 DOD was unable to
compile complete data on spending through interagency contracts. DOD
officials told us that their financial systems are not designed to collect
this data. Without this type of data, it is difficult to make informed
decisions about the use of other agencies' contracting services. DOD
issued guidance in October 2004 that requires the military departments and
defense agencies to determine whether using interagency contracts-such as
those the franchise funds manage-is in DOD's best interest. While this
guidance outlines procedures to be developed, and general factors to
consider, it does not provide specific criteria for how to make this
determination and does not require military departments and agencies to
report on the use of interagency contracts. DOD has directed the military
departments and defense agencies to develop their own guidance to
implement this policy. Congress has also recently taken action to ensure
DOD's proper use of interagency contracts. 17 The conference report
accompanying this legislation established expectations that DOD's
procedures will ensure that any fees paid by DOD to the contracting agency
are reasonable in relation to work actually performed.

In 2001, Congress adopted legislation requiring DOD to establish a
management structure and establishing savings goals for the procurement of
services. 18 The legislation also requires DOD to ensure that contracts
for services are entered into or issued and managed in compliance with
applicable laws and regulations regardless of whether the services are

16

National Defense Authorization Act for Fiscal Year 2003, Pub. L. No.
107-314 S: 824 (2002).

17

National Defense Authorization Act for Fiscal Year 2005, Pub. L. No.
108-375, S: 854 (2004). The act prohibits DOD from purchasing goods or
services through the use of an interagency contract unless the purchase is
made in accordance with procedures for reviewing and approving the use of
these contracts. These requirements take effect 180 days after the
enactment of the act.

18

10 U.S.C. S: 2330 as added by section 801 of the National Defense
Authorization Act for Fiscal Year 2002. Section 802 added a note to 10
U.S.C. S: 2330 establishing savings goals.

procured by DOD directly or through a non-DOD contract or task order. 19
One of the goals of this legislation was to allow DOD to improve the
management of the procurement of services. However, DOD generally chose to
use franchise funds for reasons of speed, convenience, and flexibility
rather than taking a strategic and coordinated approach to acquiring
services. We found that prior to choosing to use a franchise fund, DOD did
not analyze costs and benefits or prepare business cases to determine
whether the franchise fund provided better value-considering the fees it
charges-compared with other alternatives, such as using a DOD contracting
office or purchasing goods or services through another federal agency's
existing contract. As a result, DOD customers did not consider
opportunities to leverage their buying power when using franchise funds.
None of the DOD customers we spoke to analyzed trade-offs between total
price, including fees, and the benefits of convenience. For example, on a
group of work assignments for construction services valued at $7.2
million, the Army's Fort McCoy paid FedSource a total of about $1 million,
or 17 percent above the subcontractor's proposed price, for the contractor
markup and the franchise fund fee. Most of these assignments were placed
towards the end of the fiscal year. This may have led to a higher price
for the services than DOD would have paid in contracting directly with the
subcontractors. Figure 2 shows the general process by which the Army's
Fort McCoy used FedSource to obtain contractor support for construction
services.

10 U.S.C. S: 2330. DOD began implementing these requirements in May of
2002 by requiring the military components to propose their own process and
procedures for management and oversight of all acquisition services.

Page 18 GAO-05-456 Interagency Contracting

Figure 2: Example of Project for Which Army Paid FedSource 17 Percent In
Fees and Markups

The DOD customer said that FedSource made it easier than his own
contracting office to assign work with values greater that $25,000 late in
the fiscal year because FedSource's deadlines were not as strict. He also
speculated that the subcontractor probably would have charged more if
contracting directly with the government because dealing with the
government is cumbersome and costly. He did not have information to
indicate what the subcontractor's price might have been, nor did he
perform any formal analysis to compare FedSource with other contracting
opportunities.

Conducting a thorough analysis also might have given DOD a better
understanding of the fees paid to make purchases through the franchise
funds. For example, DOD customers sometimes paid a GovWorks fee, or

    Franchise Funds Emphasize Customer Service over Good Value

service charge, on top of a fee to use another agency's contract because
GovWorks generally uses other agencies' contracts to make purchases for
DOD customers. While some customers were aware of the fees they paid, in
two cases, DOD customers selected GovWorks because its fees were lower
than fees charged by other agencies; however, the customers did not
realize that GovWorks' fees were in addition to the other agencies' fees.
GovWorks' fees generally ranged from 2 percent to 4 percent of the price
for goods and services purchased, and our analysis showed that FedSource
fees ranged from 2 percent to 8 percent for the contracts and orders we
reviewed. Congress has mandated that DOD agencies report fees paid for the
use of other agencies' contracts in the past and required DOD to do so
again for fiscal year 2005. 20

The franchise funds' business operating principles require that they
maintain and evaluate cost and performance benchmarks against their
competitors. However, they did not perform analyses that DOD could use to
assess whether the franchise funds deliver good value. FedSource claims
that it achieves lower prices on goods and services because it aggregates
requirements and negotiates price discounts. Further, FedSource claims
that competition with other contracting offices provides an incentive to
provide better quality at lower cost. However, this incentive may not
drive costs down unless customers are sensitive to the cost of doing
business with one agency over another and make decisions based on costs.
Franchise fund officials told us that demonstrating these advantages was
difficult because they lacked insight into the prices customers would have
paid when using other contracting alternatives to fill their requirements.
FedSource officials also explained that quantifying the value of the other
benefits they provide-such as convenience and flexibility-is difficult.
Instead, GovWorks and FedSource have used such measures as growth in total
contracting activity and revenues as well as customer satisfaction but
have little data to demonstrate that they provide better quality and lower
price goods and services than other federal contracting alternatives can
provide. In fact, GovWorks marketing materials emphasize convenience and
value-added service rather than costs. In our prior work, we found that
fee-for-service contracting arrangements emphasize the overall
sustainability of the contracting

20

National Defense Authorization Act for Fiscal Year 2003, Pub. L. No.
107-314 S: 824 (2002), and S: 854 National Defense Authorization Act for
Fiscal Year 2005, Pub. L. No. 108-375 (2004). The fiscal year 2005
requirement applies to all fees imposed on purchases exceeding the
simplified acquisition threshold in fiscal years 2005 and 2006.

Page 20 GAO-05-456 Interagency Contracting

  DOD and Franchise Funds Did Not Pay Sufficient Attention to Defining Outcomes
  or Overseeing Contractor Performance

operation, as the fees collected are used to cover the costs of doing
business, which may lead to a focus on customer service at the expense of
compliance with contracting policy and procedures.

DOD, GovWorks, and FedSource did not follow federal contracting procedures
designed to ensure value while expeditiously acquiring goods and services.
DOD and the franchise funds did not define desired outcomes and the
specific criteria against which contractor performance could be measured
and paid limited attention to monitoring contractors' work. As we have
reported previously, it is not always clear where the responsibility lies
for such critical functions as describing requirements, negotiating terms,
and conducting oversight. Although the FAR states that contracting
officers are responsible for including appropriate quality requirements in
solicitations and contracts and for contract surveillance, the franchise
funds do not have sufficient knowledge about the DOD customers' needs to
fulfill these responsibilities without the assistance of the DOD customer.
Recently, the franchise funds contracting operations performed some
internal reviews that have findings similar to ours, and the funds are
working to address the problems. These shortcomings mirror many of the
findings of our previous work and are among the reasons we have designated
interagency contracting as a governmentwide high-risk area.

    GovWorks and FedSource Did Not Clearly Define Outcomes or Establish Criteria
    for Quality

In the GovWorks and FedSource cases we reviewed, required outcomes were
not well-defined, work was generally described in broad terms, and orders
sometimes specifically indicated that work would be defined more fully
after the order was placed. GovWorks and FedSource files we reviewed
lacked clear descriptions of outcomes to be achieved or requirements that
the contractor was supposed to meet.

The FAR states that contracting officers are responsible for including the
appropriate quality requirements in solicitations and contracts. Without
these criteria, accountability becomes harder to determine and the risk of
poor performance is increased. Clear definition of requirements promotes
better mutual understanding of the government's needs. In a typical
situation, the customer-a DOD program office, for example-is best
qualified to know what it needs. However, once a DOD program office
chooses to pay a franchise fund to make purchases on its behalf, the
office must then rely on the franchise fund to provide the contracting
expertise. The two parties have to work together to ensure that
requirements for purchases are well-defined with sufficient detail to
determine whether the desired outcomes were met and the goods and services
provided meet the government's needs. Critical information must be
documented in order to make these determinations. GovWorks and FedSource
use different processes, and the tables in appendix III explain some of
the pertinent contract documents used to define desired outcomes and
criteria.

In 7 of the 10 GovWorks orders we reviewed, statements of work were very
broad. For example, six of these orders contained language stating that
specific tasks could be added, deleted, or redefined throughout the period
of performance. In some cases, DOD program officials told us that the
statements of work were broad because they were not aware of all
requirements when the order was placed or because they were operating in a
constantly changing technological environment. DOD program officials also
told us that the broad statements of work gave them flexibility to add
requirements to existing orders as additional needs arose.

Orders placed by FedSource against its contracts contained only a very
general statement-generally just a few words-describing the work in broad
terms and an anticipated dollar value. These orders did not clearly
describe all services to be performed or supplies to be delivered so that
the full price for the work could be established when the order was
placed, as required by the FAR. As noted earlier, FedSource officials
explained that in their business model, orders were not intended to
describe specific work to be completed. Instead, FedSource administrative
personnel issued work assignments that were intended to provide the clear
descriptions of desired outcomes that the orders did not. However, we
found that these work assignments were often unclear as well. Five of
FedSource's largest customer projects for DOD involved use of contracts to
provide staff. Work assignments for staffing services often described the
position to be filled, including a general outline of duties. However, the
assignments did not contain criteria for evaluating the work performed by
contract employees.

In addition, when providing staffing support, FedSource uses these
contracts to fill positions individually, rather than describing
functional needs or desired results. For example, at an Army medical
center FedSource filled over 200 positions individually instead of
aggregating these positions into fewer functional requirements. This
acquisition approach does not provide contractors with the flexibility to
determine how best to staff a function and does not lend itself to a
performance-based approach. Under performance-based contracting, the
contracting agency specifies the outcome or result it desires and leaves
it to the contractor to decide how best to achieve the desired outcome. 21
FedSource officials said they were moving toward a more performance-based
contracting approach.

To determine whether an environment had been created that would allow
improper personal services relationships to develop, we interviewed
officials at five DOD program offices that used FedSource contracts to
staff individual positions. We asked questions about the work performed by
the contractor employees and the relationships between the DOD customers
and the contractor employees. The DOD officials said that generally: the
services provided by the contract employee were integral to agency
functions or missions; the contractor employees were providing services
comparable to those performed using civil service personnel; and the
services were provided on site and with the use of equipment provided by
the government. With regard to the work relationships, DOD customers told
us that government employees assigned and prioritized daily tasks for the
contractor employees. FedSource guidelines also state that the government
customer is responsible for verifying contract employee hours worked by
signing the contractor's weekly timesheet. Further, a FedSource internal
review found that statements of work contained "personal services-type
language like `under the direction of' or `oversee' or `duties' or `job
description.'" Our review also found documents that had been edited to
revise similar language. FedSource officials were aware of the potential
that these contracts might be used for personal services and took various
steps to clarify that personal services were not to be provided. For
example, FedSource officials provided training for DOD customers on how to
avoid creating a situation that had the appearance of personal services.
Although this training is a positive step, poorly defined statements of
work provided the opportunity for situations to arise in which personal
services relationships could develop.

FedSource relied on administrative staff, not contracting officers, to
work with the customer to define and assign the specific tasks to be
performed or the positions to be filled. A FedSource review found that
trained contracting staff was needed for developing task order
requirements and

Performance-based services contracting emphasizes that all aspects of an
acquisition be structured around the purpose of the work to be performed
as opposed to the manner in which the work is to be performed, or broad,
imprecise statements of work that preclude an objective assessment of
contractor performance.

Page 23 GAO-05-456 Interagency Contracting

    DOD Customers, GovWorks, and FedSource Did Not Specify Necessary Criteria
    for Contract Oversight

warranted contracting officers were required for issuing task orders. The
FedSource administrative employees do not have the same level of expertise
as contracting officers, who have specialized knowledge to ensure
compliance with federal regulations and guidelines. Inadequacies we found
in FedSource's contracting practices pointed to the challenges of relying
on administrative personnel rather than contracting experts to review
statements of work, choose appropriate contracting vehicles, ensure
adequate competition, and sign off on assignments of specific work.

DOD customers, GovWorks, and FedSource often relied on methods of contract
oversight that lacked performance measures to ensure that contractors
provided quality goods and services in a timely manner. Typically, the
franchise funds failed to include an oversight plan that contained
specific quality criteria in their contracts or orders. Without this
critical information, neither DOD nor the franchise funds could
effectively measure contractor performance.

The FAR and DOD's procurement regulations require contract surveillance
and documentation that it occurred. 22 Contract surveillance, also
referred to as oversight, is a contracting officer's responsibility, and
DOD pays the franchise fund to assume the responsibilities of contracting
officers. The Office of Management and Budget's Office of Federal
Procurement Policy has issued policy stating that contract oversight
begins with the assignment of trained personnel who conduct surveillance
throughout the performance period of the contract to ensure the government
receives the services required by the contract. 23 DOD guidance states
that 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 states

22

FAR 37.602-2, Quality assurance, FAR 46.104, Contract administration
office responsibilities, and Defense Federal Acquisition Regulation
Supplement 246.102.

23

Office of Federal Procurement Policy (Policy Letter 93-1). When
contracting for services, in particular highly specialized or technical
services, agencies should ensure that a sufficient number of trained and
experienced officials are available within the agency to manage and
oversee the contract administration function.

Page 24 GAO-05-456 Interagency Contracting

that all performance should be documented whether it is acceptable or not.
24

The GovWorks contract files we reviewed generally did not include
contractor monitoring plans, quality assurance surveillance plans, test
and acceptance plans, or other evidence of monitoring activities. However,
the files did contain evidence that a contracting officer's representative
from the DOD program office had been appointed to assist in performing
contractor oversight. Although ensuring that contract oversight occurs is
a contracting officer responsibility, GovWorks officials told us that
surveillance plans were not usually kept in the GovWorks contracting
officers' contract files. Instead, these plans were maintained by the
contracting officer's representative at the DOD customer agency. When we
asked about contract oversight, we found that in the absence of an agreed
upon oversight plan, DOD customers generally ensured that there was some
process in place for monitoring performance. Some customers described
status meetings and regular progress reports, but generally told us that
they had no specific criteria for monitoring contractor performance or
established measures for determining the quality of services. Although
GovWorks officials told us that their contracting officers did assist
customers in measuring quality services from the acquisition planning
stages through contract completion, we found little evidence that this
actually took place.

We found that FedSource generally did not ensure that contractor oversight
occurred. As was the case with GovWorks, FedSource officials told us that
they encouraged DOD to develop criteria for quality. However, FedSource
allowed general information-such as job descriptions-to serve as
requirements, even though the job descriptions contained no criteria for
measuring quality. These descriptions did not provide sufficient
information to establish an oversight plan. FedSource did not appoint
trained contracting officers' representatives from DOD to conduct on-site
monitoring. Instead, FedSource relied on its own administrative personnel,
who had been trained as contracting officers' technical representatives
but were not located on-site with the customer, to assess contractor
performance. Because they were not on-site, they could not observe the
quality of the contractors' work, and FedSource generally took the absence
of complaints from DOD customers as an indication that the

DOD, Guidebook for Performance-Based Services Acquisition in the
Department of Defense (Washington, D.C.: December 2000).

Page 25 GAO-05-456 Interagency Contracting

                 Oversight of Franchise Funds Has Been Limited

contractor was performing satisfactorily. A FedSource official explained
that FedSource guidelines state that the customer agency's acceptance of
the contract employee's time sheet indicates agreement that services have
met quality standards and requirements. This policy lacks clear criteria
and measures to determine whether the contractor has provided quality
services. In place of criteria, we found DOD customers said they generally
evaluated performance of contractor staff based on informal observation
and customer satisfaction.

The lack of adequate oversight is consistent with what we have reported in
our recent work on contractor oversight for DOD service contracts, where
we found that almost all of those that had insufficient oversight were
interagency contracts. DOD explained that contractor oversight is not as
important to contracting officials as awarding contracts and does not
receive the priority needed to ensure that oversight occurs. DOD concurred
with our recommendations to develop guidance on contractor oversight of
services procured from other agencies' contracts, to ensure that proper
personnel be assigned to perform contractor oversight in a timely manner
no later than the date of contract award, and that DOD's service contract
review process and associated data collection requirements provide
information that will provide management visibility over contract
oversight. 25

Aside from monitoring the contractors' performance, we also found that the
departments of the Interior and the Treasury, which operate GovWorks and
FedSource, respectively, and the Office of Management and Budget have
conducted infrequent reviews of franchise funds' procurement activities.
GovWorks and FedSource have recently conducted internal reviews of their
operations that have identified concerns similar to those we found.

A GovWorks' 2004 Management Review identified such issues as lack of
acquisition planning for work added to existing awards, unanticipated
increases in the amounts of orders, and inadequate documentation of many
requirements such as competitive procedures, determinations that changes
were within the scope of the contract, the basis of award decisions, and
that prices were fair and reasonable. FedSource officials

25

GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts , GAO-05-274 (Washington, D.C.:
March 2005).

Page 26 GAO-05-456 Interagency Contracting

recently started conducting "office assistance reviews." A June 2004
FedSource review identified lack of documentation, use of purchasing
agreements beyond their intended parameters and dollar limits, lack of
price analysis, lack of quality assurance plans, and the need for
warranted contracting officers rather than administrative personnel to
perform much of the work.

While the operating principles for franchise funds require the funds to
have comprehensive performance measures, these measures do not emphasize
compliance with contracting regulations and generally focus on customer
satisfaction, financial performance, and generating revenues to cover
operating costs. Several customers we interviewed were unaware of
compliance problems and told us that they believed the franchise funds
placed orders on a competitive basis, analyzed prices, or otherwise sought
to ensure the best deal for the government when the funds, in fact, did
not. GovWorks has taken steps that address concerns raised in its own
reviews, such as increased training for contracting officers, developing a
written acquisition procedures manual, and creating a uniform system of
contract file maintenance and sample documents to ensure adequate
documentation. GovWorks officials also told us they are trying to improve
competitive procedures by requiring all solicitations for DOD work to be
posted on e-Buy, an online system to request quotes for products and
services. 26 FedSource also has taken steps toward addressing concerns
raised in this report, such as quality assurance planning, hiring
contracting officers, and restructuring its operations. These initiatives
are underway, and it is too early to tell whether they will improve
contracting operations at the franchise funds.

The Office of Management and Budget's oversight of franchise funds has
been limited. The Office of Management and Budget and the Chief Financial
Officers Council established business-operating principles as a foundation
for effective franchise fund management and, as required by the Government
Management Reform Act, submitted an interim report on the franchise fund
pilot program to Congress in 1998. Among other efforts, the report
recommended that the franchise funds should continue to seek opportunities
to provide services at the least cost to the taxpayer,

e-Buy is an online Request for Quotations tool that allows federal buyers
to send requests and receive quotes for products and services available
under the GSA multiple-award schedules program. Implementing regulations
for section 803 in the Defense Federal Acquisition Regulation Supplement
state that posting of a request for quotations on "e-Buy" is one medium
for providing fair notice to all contractors as required by the
regulation.

Page 27 GAO-05-456 Interagency Contracting

                                  Conclusions

contributing to reducing duplicative administrative functions and
consequently to the costs of those functions. The report noted that the
franchise funds' performance measures were in varying stages of
development. The report recommended that the Office of Management and
Budget should report to Congress on franchise fund activity prior to the
expiration of the pilot authority and that the office should continue to
develop and implement operating guidance for the franchise fund program.
Although the Office of Management and Budget's budget examiners conduct
some monitoring of franchise funds as part of their general oversight
responsibilities, Office of Management and Budget representatives said
they have not conducted any comprehensive reviews of franchise funds since
they submitted the required report to Congress. Neither have they reviewed
the funds' contracting practices.

GovWorks and FedSource, created as a result of governmentwide initiatives
to improve efficiency, have streamlined contracting processes to provide
customers with greater flexibility and convenience. However, GovWorks and
FedSource have not always adhered to competitive procedures and other
sound contracting practices. They have paid insufficient attention to
basic tenets of the federal procurement system- taxpayers' dollars should
be spent wisely, steps should be taken to ensure fair and reasonable
prices, and purchases should be made in the best interest of the
government. One factor contributing to these deficiencies is that the
departments of the Interior and the Treasury have not ensured that the
franchise funds' contracting services follow the FAR and other procurement
policies. The franchise funds need to develop clear, consistent, and
enforceable policies and processes that comply with contracting
regulations while maintaining good customer service. Another contributing
factor is that the roles and responsibilities of the parties involved in
the interagency contracting process are not always clearly defined.
GovWorks and FedSource are ultimately accountable for compliance with
procurement regulations when they assume the role of the contracting
officer. However, they often depend on the customer for detailed
information about the customer's needs. To facilitate effective purchasing
and to help obtain the best value of goods and services, all parties
involved in the use of interagency contracts have a stake in clarifying
roles and responsibilities. Additionally, franchise funds sometimes face
incentives to provide good customer service at the expense of proper use
of contracts and good value. These pressures are inherent in the
fee-for-service contracting arrangement.

  Recommendations for Executive Action

Because the franchise funds have not always adhered to sound contracting
practices, DOD customers must be cautious when deciding whether franchise
fund contracting services are the best available alternative. In addition
to convenience and flexibility, decisions to use franchise funds should be
grounded in analysis of factors such as price and fees. Further, to
enhance DOD's ability to develop sound policies related to the use of
franchise funds, DOD needs measurable data that would allow it to assess
whether franchise funds' contracting services help lower contract prices,
reduce administrative costs, and improve the delivery of goods and
services. This information would also be useful in leveraging DOD's
overall buying power through strategic acquisition planning. No one knows
the total cost of using other agencies' contracting services. Without
understanding total cost, value is elusive. In addition, DOD customers
should ensure that taxpayers' dollars are spent wisely by sharing in the
responsibilities for developing clear contract requirements and oversight
mechanisms. DOD customers are the best source of information about their
specific needs and are also best positioned to oversee the delivery of
goods and services.

Given the incentive to focus on sustaining the franchise funds' operations
and the many service providers from which customers like DOD may choose,
objective oversight would help to ensure that franchise funds adhere to
procurement regulations and operate as intended. The Office of Management
and Budget, which designated and has previously evaluated the franchise
funds, is well positioned to periodically evaluate, monitor, and develop
guidance to improve the franchise funds' contracting activities.

While a number of actions to improve DOD's use of other agencies'
contracting services are already underway, to enhance these initiatives,
we make the following eight recommendations to DOD, the Interior, the
Treasury, and the Office of Management and Budget.

To ensure that DOD customers analyze alternatives when choosing franchise
funds and to provide DOD with the measurable data it needs to assess the
value of the franchise funds' contracting services, we recommend that the
Secretary of Defense take the following three actions:

     o Develop a methodology to help DOD customers determine whether use of
       franchise funds' contracting services is in the best interest of the
       government. The methodology should include analysis of tradeoffs.
     o Reinforce DOD customers' ability to define their needs and desired
       contract outcomes clearly. This skill includes working with franchise
       fund contracting officers to translate their needs into contract
       requirements and to develop oversight plans that ensure adequate
       contract monitoring.
          * monitor and evaluate DOD customers' use of franchise funds'
            contracting services, prices paid, and types of goods and
            services purchased. Prices include franchise fund fees and fees
            for use of other interagency contracts.
          * To ensure that GovWorks and FedSource adhere to sound contracting
            practices, we recommend that the Secretaries of the Interior and
            the Treasury take the following two actions:
     o develop procedures and performance measures for franchise fund
       contracting operations to demonstrate compliance with federal
       procurement regulations and policies while maintaining focus on
       customer service and
          * develop procedures for franchise fund contracting officers to
            work closely with DOD customers to define contract outcomes and
            effective oversight methods.
          * To ensure that the FedSource workforce has the skills to carry
            out contracting responsibilities, we recommend that the Secretary
            of the Treasury take the following action:
          * assign warranted contracting officers to positions responsible
            for performing contracting officer functions.
          * In order to provide incentives for the franchise funds to adhere
            to procurement regulations and to ensure that franchise funds
            operate as intended, we recommend that the Director of the Office
            of Management and Budget take the following two actions:
     o Expand monitoring to include franchise funds contracting operations'
       compliance with procurement regulations and policies. These findings
       should be available to customers to ensure transparency and
       accountability to customers and the Congress.
     o Develop guidance to clarify the roles and responsibilities of the
       parties involved in interagency contracting through franchise funds.

  Agency Comments and Our Evaluation

We provided a draft of this report to DOD, the departments of the Interior
and the Treasury, and the Office of Management and Budget for review and
comment. We received written comments from DOD and the Department of the
Treasury, which are reprinted in appendices IV and V respectively. The
Department of the Interior and the Office of Management and Budget
provided comments via e-mail.

DOD concurred with our recommendations and identified actions it has taken
or plans to take to address them. In response to our recommendation that
the Secretary of Defense develop a methodology to help DOD customers
determine whether the use of franchise funds' contracting services is in
the best interest of the government, DOD indicated that action had been
taken through the issuance of a policy memo titled Proper Use of Non-DOD
Contracts and subsequent policies issued by the military departments. We
acknowledge the DOD policy memo in our report and note that this guidance
describes general factors to consider but does not provide specific
criteria for how to make this determination. The policies issued by the
military departments establish procedures for review and approval of the
use of non-DOD contract vehicles, but do not address methods of
determining whether this is in the best interest of the government. Our
recommendation takes these actions into account and encourages DOD to go
further by developing a methodology to help customers assess contracting
alternatives.

In response to our recommendation that DOD reinforce DOD customers'
ability to define their needs and desired contract outcomes clearly, DOD
maintained that it is the responsibility of the franchise fund contracting
officer to decide whether or not the requirement is described accurately.
Nonetheless, DOD committed to issue a memo by August 31, 2005, reinforcing
the need for DOD customers to define clearly their requirements and
articulate clearly their desired outcomes in the acquisition process. We
believe that this memo, coupled with DOD's ongoing efforts to educate DOD
customers about the use of interagency acquisitions, are steps in the
right direction.

Finally, in response to our recommendation that DOD monitor and evaluate
DOD customers' use of franchise funds' contracting services, DOD concurred
but explained that the data capture systems that would provide this
information are not yet in place. DOD stated that the Federal Procurement
Data System-Next Generation would provide this capability in fiscal year
2006. However, data collection is just one step in the evaluation process.
In addition to collecting data, DOD will also need to compare alternatives
and prices in order to make more informed choices.

Further, the accuracy and reliability of interagency contracting data in
the Federal Procurement Data System-Next Generation will depend heavily on
accurate reporting by franchise funds.

The Department of the Interior concurred with our recommendations and
identified actions it has taken or plans to take to address them. The
Interior highlighted 2004 accomplishments and acknowledged a need for
better documentation to demonstrate compliance and value provided. The
Interior also committed to ensuring an adequate contracting staff and to
publishing information to help DOD determine the value of using the
franchise fund. In response to our recommendation that the Department of
the Interior develop procedures and performance measures for franchise
fund contracting operations to demonstrate compliance with federal
procurement regulations, the Interior highlighted a number of recent
efforts to improve performance, including its 2004 management control
review and performance improvement plan that will monitor compliance with
federal procurement regulations. This plan establishes a goal of 75
percent reduction in reportable findings. Interior also stated that it had
revised its acquisition review process, awarded a contract for a third
party acquisition review, and provided additional training to its staff.
Interior committed to continue monitoring performance and creating
guidance as needed. In response to our recommendation that the Interior
develop procedures for franchise fund contracting officers to work more
closely with DOD customers, the Interior highlighted efforts to train its
contracting officers and develop policies for working with DOD customers.

The Department of the Treasury concurred with our recommendations and
identified actions it has taken or plans to take to address them,
including centralization of FedSource's acquisition workforce under one
line of authority to allow for standardization and consistency. In
response to our recommendation that FedSource develop procedures and
performance measures for franchise fund contracting operations to
demonstrate compliance with federal procurement regulations, the Treasury
committed to continue to conduct reviews to measure and evaluate
compliance with federal procurement regulations and policies. This is a
positive step toward ensuring compliance. The Treasury also said that
FedSource had instituted performance-based statements of work for its
acquisitions. While this initiative focuses on some aspects of compliance
and is important in managing contractor performance, our recommendation
addresses the performance of the franchise fund. Developing performance
measures related to compliance with procurement regulations would
reinforce the agency's commitment to compliance and provide a means to
monitor and demonstrate progress. In response to our recommendation that
FedSource develop procedures for franchise fund contracting officers to
work more closely with DOD customers, the Treasury indicated that
FedSource will also develop procedures to provide its customers with clear
guidance for defining contract outcomes. In response to our recommendation
that FedSource assign warranted contracting officers to positions
responsible for performing contracting officer functions, Treasury stated
that FedSource has hired contracting officers to perform all contracting
officer functions.

OMB concurred with our recommendations that OMB expand its monitoring to
include franchise funds contracting operations' compliance with
procurement regulations and policies and develop guidance to clarify the
roles and responsibilities of the parties involved in interagency
contracting through franchise funds. OMB stated that its Office of Federal
Procurement Policy (OFPP) proposed to include the implementation of our
recommendations in an undertaking pertaining to governmentwide acquisition
contracts and incorporate franchise funds into that project. As part of
that project, OMB/OFPP is asking the designated agencies to develop plans
to ensure cost-effective and responsible contracting. The plans will
address (1) training to contracting staff; (2) customer staff training;
(3) management controls to ensure contracts are awarded in accordance with
applicable laws, regulations, and policies; (4) contract administration;
and (5) periodic management reviews. OMB acknowledged that this was only a
part of the solution. We encourage OMB to give additional consideration to
providing guidance that would clarify roles and responsibilities of the
parties involved in interagency contracting through franchise funds.

We are sending copies of this report to the Secretaries of Defense, the
Interior, and the Treasury; the Director of the Office of Management and
Budget; and interested congressional committees. We will provide copies to
others on request. This report will also be available at no charge on
GAO's Web site at http://www.gao.gov.

If you have any questions about this report or need additional
information, please call me at (202) 512-4841 ([email protected]). Contact
points for our Offices of Congressional Relations and Public Affairs may
be found on the last page of this report. Other staff making key
contributions to this report were Amelia Shachoy, Assistant Director; Lily
Chin; Lara Laufer; Janet McKelvey; Kenneth Patton; Monty Peters; and Ralph
Roffo.

In memory of Monty Peters (1948-2005), under whose skilled leadership this
review was conducted.

David E. Cooper, Director Acquisition and Sourcing Management

List of Congressional Committees

The Honorable John Warner Chairman The Honorable Carl Levin Ranking
Minority Member Committee on Armed Services United States Senate

The Honorable Ted Stevens Chairman The Honorable Daniel K. Inouye Ranking
Minority Member Subcommittee on Defense Committee on Appropriations United
States Senate

The Honorable Duncan Hunter Chairman The Honorable Ike Skelton Ranking
Minority Member Committee on Armed Services House of Representatives

The Honorable C. W. Bill Young Chairman The Honorable John P. Murtha
Ranking Minority Member Subcommittee on Defense Committee on
Appropriations House of Representatives

                       Appendix I: Scope and Methodology

We reviewed legislation establishing the franchise fund pilot program,
governmentwide guidance relating to the program, and reports summarizing
program outcomes. We held discussions with Office of Management and Budget
representatives responsible for overseeing and providing guidance for the
program and with Department of Defense (DOD) officials responsible for
oversight of procurement issues. We performed work at the franchise funds
managed by the departments of the Interior and the Treasury and
interviewed officials and reviewed records relating to Interior's GovWorks
and Treasury's FedSource programs. The Interior and Treasury franchise
funds accounted for about 76 percent of total revenues for the six
franchise funds during fiscal year 2003 (the most recently completed
fiscal year at the time we were planning our field work) and about 95
percent of all services the six funds provided DOD. Contracting services
the GovWorks and FedSource programs provided accounted for over 95 percent
of total revenues at the Interior and Treasury franchise funds. To gain
insight into how DOD customers were using franchise funds and into
franchise fund contracting processes, we reviewed documentation relating
to 17 selected customer projects totaling $249 million in funding provided
and interviewed GovWorks and FedSource contracting personnel responsible
for these projects and representatives of the DOD customers.

To determine how DOD customers determined whether franchise funds provided
a good value, we interviewed representatives of DOD customers for the
selected projects and reviewed available documentation relating to
decisions to use franchise fund contracts. We also reviewed information
available from the franchise funds that would indicate whether the
franchise funds provided a good value, and interviewed franchise fund
officials.

To determine how franchise fund contracting officers worked with DOD
customers to define measurable quality standards for goods and services
and develop effective oversight mechanisms, we reviewed contract
documentation for selected customer projects that would establish quality
standards, and documentation relating to contract oversight. We also
discussed these issues with franchise fund contracting personnel. In
addition, we discussed these issues with representatives of DOD customers
and reviewed available documentation.

To determine whether franchise funds followed the contracting practices
needed to ensure fair and reasonable prices, we reviewed contract
documentation for selected customer projects to assess the extent to which
contracting personnel sought competition for work and analyzed

Appendix I: Scope and Methodology

proposed prices to determine whether they were fair and reasonable, and
discussed these issues with contracting personnel. In addition, we
discussed these issues with representatives of DOD customers and reviewed
available documentation.

To select customer projects for review, we obtained data files from the
Department of the Interior's GovWorks and the Department of the Treasury's
FedSource contracting programs that reflected customer projects active
during fiscal year 2003, and the dollar value of customer funding provided
for these projects during the year. We ranked these projects in terms of
funding provided and selected projects representing the greatest dollar
value of customer funding provided-10 GovWorks projects accounting for
$164 million and 7 FedSource projects accounting for $85 million. Table 5
summarizes GovWorks projects, and table 6 summarizes FedSource projects.

Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions of
Dollars)                    
                                                             Fiscal year 2003
DOD customer                Contractor                    funding provided 
Army Chief Technology       Cherry Road Technology                   $26.1 
Office                                                    
Air Force Deputy Chief of   SAIC                                      21.3 
Staff Air and Space                                       
Operations                                                
Army National Guard Bureau  SRA International Inc,                    19.4 
Readiness Center                                          
Air Force Material Command  Lockheed Martin Inc.                      17.4 
Army Chief Information      TKC Communications Inc.                   15.1 
Office                                                    
Army National Guard Bureau  Booz Allen Hamilton Inc.                  14.4 
Chief Information Office                                  
Army Program Manager for    Lear Siegler Services Inc.                14.0 
Signals Warfare                                           
Army National Guard Bureau  Sprint Communications Company             13.6 
Readiness Center            LP                            
Air Force Aging Landing     General Atomics Inc.                      12.6 
Gear Life Extension Program                               
Navy Program Executive      Bearing Point                             10.6 
Officer for Information                                   
Technology                                                
Total                                                               $164.3 

Source: GovWorks data.

Note: Total may not add due to rounding.

Appendix I: Scope and Methodology

Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions of
Dollars)                 
                                                               Number of work
                            Fiscal year 2003 assignments  Selection process   
DOD customer             funding provided  reviewed   for work assignments 
Walter Reed Army Medical            $27.2          66   Random selection   
Center                                                
U.S. Army Fort McCoy                 13.2          12 Size                 
Army 88th Regional                   10.1           5 Size                 
Readiness Command at                                  
Fort Snelling                                         
The Pentagon                          9.7           5 Alla                 
Navy Recruiting Command               8.4          18   Random selection   
Lackland Air Force Base               8.2          14   Random selection   
Brooke Army Medical                   8.1          25   Random selection   
Center at Fort Sam                                    
Houston                                               
Total                               $84.9        145b 

Source: FedSource data.

a

One project only had five work assignments, and we reviewed all five
assignments for that project.

b We eliminated 25 of these work assignments from our analyses because
they used a contract that expired or that was discontinued by the end of
fiscal year 2003.

GovWorks contracting personnel fulfilled the requirements of each project
selected by award of a single order, and we reviewed contract
documentation related to the relevant order. FedSource contracting
personnel, in contrast, fulfilled the requirements of customer projects by
award of one or more contracts or orders. Further, FedSource personnel
initiated multiple work assignments-in some cases several hundred-to
define specific work what would be performed under each of the contracts
awarded or orders placed. Accordingly, we reviewed all contracts awarded
or orders placed to fulfill the requirements of the selected customer
projects and a sample of work assignments initiated under these contracts
or orders. To select sample work assignments for review, we first ranked
the work assignments in terms of dollar value of the work to be performed.
For those projects where a relatively small number of work assignments
accounted for a significant share of total project value, we selected the
highest dollar value assignments representing at least 50 percent of total
project value. For those projects where most individual work assignments
represented only a small fraction of total project value, we selected all
assignments valued at $150,000 or more and a sample- selected at random-of
the remaining work assignments.

We conducted our review between June 2004 and June 2005 in accordance with
generally accepted government auditing standards.

Appendix II: Franchise Fund Operating Principles

Operating principle        Description                                     
Services                   The enterprise should only provide common       
                              administrative support services.                
Organization               The organization would have a clearly defined   
                              organizational structure including readily      
                              identifiable delineation of responsibilities    
                              and functions and separately identifiable units 
                              for the                                         
                              purpose of accumulating and reporting revenues  
                              and costs. The funds of the organization        
                              must be separate and identifiable and not       
                              commingled with another organization.           
Competition                The provision of services should be on a fully  
                              competitive basis. The organization's operation 
                              should not be "sheltered" or be a monopoly.     
Self-sustaining/ full cost The operation should be self-sustaining. Fees   
recovery                   will be established to recover the "full        
                              costs," as                                      
                              defined by standards issued in accordance with  
                              the Federal Accounting Standards Advisory       
                              Board.                                          
Performance measures       The organization must have a comprehensive set  
                              of performance measures to assess each          
                              service that is being offered.                  
Benchmarks                 Cost and performance benchmarks against other   
                              "competitors" are maintained and evaluated.     
Adjustments to business    The ability to adjust capacity and resources up 
dynamics                   or down as business rises or falls, or as other 
                              conditions dictate, if necessary.               
Surge capacity             Resources to provide for "surge" capacity and   
                              peak business periods, capital investments, and 
                              new starts should be available.                 
                              The organization should specify that prior to   
Cessation of activity      curtailing or eliminating a service, the        
                              provider will                                   
                              give notice within a reasonable and mutually    
                              agreed time frame so the customer may obtain    
                              services elsewhere. Notice will also be given   
                              within a reasonable and mutually agreeable time 
                              frame to the provider when the customer elects  
                              to obtain services elsewhere.                   
                              Customers should be able to "exit" and go       
Voluntary exit             elsewhere for services after appropriate        
                              notification                                    
                              to the service provider and be permitted to     
                              choose other providers to obtain needed         
                              service.                                        
Full-time equivalents      Full-time equivalents would be accounted for in 
accountability             a manner consistent with the Federal            
                              Workforce Restructuring Act and Office of       
                              Management and Budget requirements, such as     
                              Circular A-11.                                  
                              Capitalization of franchises, administrative    
Initial capitalization     service, or other cross-servicing operations    
                              should                                          
                              include the appropriate full-time equivalents   
                              commensurate with the level of effort the       
                              operation has committed to perform.             

Source: Office of Management and Budget and the Chief Financial Officers
Council.

Note: These principles were developed by the Office of Management and
Budget and the U.S. Chief Financial Officers Council. The U.S. Chief
Financial Officers Council is an organization of the chief financial
officers and deputy chief financial officers of the largest federal
agencies and senior officials of the Office of Management and Budget and
the Department of the Treasury who work collaboratively to improve
financial management in the U.S. government.

Appendix III: Overview of Contract Documents Used at GovWorks and FedSource

    Table 7: GovWorks Contract Documents Used to Define Desired Outcomes and
                              Performance Criteria

Master contract   Master contract contains information about the general   
or another        scope of work; however, the exact dates and quantities   
agency's contract of future deliveries are not known. The contract also    
                     includes additional details, such as maximum or minimum  
                     quantities that can be ordered under each individual     
                     order and the maximum that it may order during a         
                     specified period of time, and the time frame that        
                     contract remains valid. Under the GSA schedules (also    
                     referred to as multiple-award schedules and Federal      
                     Supply Schedules) Program, GSA establishes long-term     
                     governmentwide contracts with commercial firms to        
                     provide access to commercial supplies and services.      
                     Schedule contracts contain much of the same information  
                     as other master contracts.                               
Purchase request  DOD customer describes the needs for goods or services   
                     and describes desired outcomes and quality standards     
                     that contractors are expected to meet.                   

Task or delivery orders Multiple orders can be written off of a master
contract. Orders define work to be performed; location of work; period of
performance; deliverable schedule; applicable performance standards; and
any special requirements. Individual orders shall clearly describe all
services to be performed or supplies to be delivered so the full cost or
price for the performance of the work can be established when the order is
placed.

    Source: GAO analysis of GovWorks documents and interviews with GovWorks
                                   officials.

Table 8: FedSource Contract Documents Used to Define Desired Outcomes and
                              Performance Criteria

Master contract Contracting officers develop master contract based on
anticipated needs. Master contract contains information about the general
scope of work; however, the exact dates and quantities of future
deliveries are not known. Also includes additional details, such as
maximum or minimum quantities that the government may order under each
individual order and the maximum that it may order during a specified
period of time, and the time frame that contract remains valid.

Order Multiple orders can be written off of master contract. FedSource
contracting officers issue orders to each contractor based on anticipated
business for the year. FedSource briefly describes types of services and
obligates funds to cover anticipated work. At this point, FedSource does
not know exact quantities or dates of future deliveries.

Purchase request DOD customer describes needs for goods or services.
Program office describes desired outcomes and quality standards that
contractors are expected to meet.

Work assignment FedSource uses work assignment to define work to be
performed, location of work, period of performance, deliverable schedule;
applicable performance standards, and any special requirements.

Source: GAO analysis of FedSource documents and interviews with FedSource
                                   officials.

Appendix IV: Comments from the Department of Defense

Appendix IV: Comments from the Department of Defense

Appendix IV: Comments from the Department of Defense

Appendix V: Comments from the Department of the Treasury

Appendix V: Comments from the Department of the Treasury

  GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov) . Each weekday, GAO posts GAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

                             Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

  To Report Fraud, Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

  E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Relations
Washington, D.C. 20548

Paul Anderson, Managing Director, [email protected] (202) 512-4800

  Public Affairs

U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

    PRINTED ON

RECYCLED PAPER
*** End of document. ***