Federal Contracting: Share-in-Savings Initiative Not Yet Tested  
(26-JUL-05, GAO-05-736).					 
                                                                 
Federal agencies spend billions of dollars every year on	 
information technology and are increasingly using		 
performance-based contracting methods where agencies specify	 
desired outcomes and allow contractors to design the best	 
solutions to achieve those outcomes. Share-in-savings contracting
is one such method under which a contractor provides funding for 
a project, and the agency compensates the contractor from any	 
savings derived as a result of contract performance. The	 
E-Government Act of 2002 authorized the use of share-in-savings  
contracting for information technology and required implementing 
regulations by mid-September 2003. The Office of Management and  
Budget (OMB) reported in December 2004 that no share-in-savings  
contracts had been awarded. The act's authority expires in	 
September 2005. The act required GAO to assess the effectiveness 
of share-in-savings contracts. Because no such contracts have	 
been awarded, GAO cannot provide an assessment. Instead, GAO	 
reviewed the status of regulations and tools available to	 
agencies in developing these contracts and identified the reasons
agencies have not used the authority provided by the act. OMB and
the General Services Administration (GSA) generally agreed with  
GAO's report.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-736 					        
    ACCNO:   A31120						        
  TITLE:     Federal Contracting: Share-in-Savings Initiative Not Yet 
Tested								 
     DATE:   07/26/2005 
  SUBJECT:   Contract administration				 
	     Contract performance				 
	     Federal procurement				 
	     Federal procurement policy 			 
	     Federal regulations				 
	     Information technology				 
	     Policy evaluation					 
	     Performance-based contracting			 

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GAO-05-736

United States Government Accountability Office

GAO

                       Report to Congressional Committees

July 2005

FEDERAL CONTRACTING

                   Share-in-Savings Initiative Not Yet Tested

GAO-05-736

July 2005

FEDERAL CONTRACTING

Share-in-Savings Initiative Not Yet Tested

[IMG]

  What GAO Found

More than 2 years after enactment of the E-Government Act of 2002,
implementing regulations and OMB guidance for using share-in-savings
contracts for information technology have yet to be issued. OMB officials
indicate, however, that implementing regulations and share-in-savings
guidance will be issued in the near future. GSA-which the act holds
responsible for helping agencies identify share-in-savings opportunities,
among other requirements-established a share-in-savings program office in
February 2003. A few months later, GSA launched two Web-based tools, one
of which is designed to assist agencies in identifying cost-effective uses
for the share-in-savings approach and producing business cases for using
sharein-savings for information technology projects. As of March 2005,
this tool had been used more than 200 times. A total of 15 business cases
were deemed potential share-in-savings candidates, however, none of these
resulted in a contract award.

GSA hired a contractor that developed a 2-day training course for
share-insavings contracting, but only 21 federal acquisition employees
have taken the course. And even though GSA prequalified six contractors as
viable information technology system solution providers with commercial
share-insavings experience, no agencies have taken advantage of these
opportunities to award a share-in-savings contract.

Officials from 11 agencies cited a number of reasons that the
share-insavings initiative has not resulted in the award of contracts for
information technology projects. Reasons include

o  lack of implementing regulations;

o  difficulty determining baseline costs;

o  	a belief that the return on investment using share-in-savings
contracts is insufficient;

o  	concerns among agency officials that they still would have to obtain
funding for cancellation and termination liability, which can be a
significant sum; and

o  	too few acquisition employees have been trained to use the
share-insavings contracting technique.

Since OMB expects the implementing regulations and share-in-savings
guidance to be issued soon, at least some of the reasons agencies cited
for not using the share-in-savings contracting authority for information
technology soon could be addressed. Whether or not other reasons can be
overcome may not be known unless the authority is extended.

                 United States Government Accountability Office

Contents

Letter                                                                   1 
                                  Results in Brief                          2 
                                     Background                             3 
          Share-in-Savings Regulations and Guidance Lag Behind Progress in 
                                    Other Areas                             5 
           Use of Share-in-Savings Authority Hindered by Issues Related to 
               Regulations, Baseline Costs, Up-front Funding, and Training  7 
                                    Conclusions                            11 
                                  Agency Comments                          11 
                               Scope and Methodology                       12 

Abbreviations

FAR Federal Acquisition Regulation GSA General Services Administration OMB
Office of Management and Budget

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
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separately.

United States Government Accountability Office Washington, DC 20548

July 26, 2005

The Honorable Susan M. Collins
Chairman
The Honorable Joseph I. Lieberman
Ranking Minority Member
Committee on Homeland Security and Governmental Affairs
United States Senate

The Honorable Thomas M. Davis
Chairman
The Honorable Henry A. Waxman
Ranking Minority Member
Committee on Government Reform
House of Representatives

Federal agencies spend billions of dollars every year on information
technology to improve mission-related or administrative processes. To try
to maximize the prospects for success of information technology projects,
agencies are increasingly using performance-based contracting methods
where they specify desired outcomes and allow the contractors to design
the best solutions to achieve those outcomes. Share-in-savings contracting
is a performance-based technique, under which a contractor provides the
initial funding for a project and the agency then compensates the
contractor from any financial benefits derived as a result of contract
performance.

The E-Government Act of 2002 authorized the use of share-in-savings
contracting to obtain information technology.1 This authority is set to
expire at the end of September 2005. The act required that implementing
regulations be issued no later than September 2003. It also required that
the Office of Management and Budget (OMB) report to Congress on the
use of this authority, and that we report on our assessment of the
effectiveness of share-in-savings contracting. In December 2004, OMB
reported that no share-in-savings contracts for information technology
projects had been awarded. We cannot, therefore, provide an assessment

1Section 210, Public Law 107-347 (Dec. 17, 2002), codified at 41 U.S.C. S:
266a and 10 U.S.C. S: 2332.

  Results in Brief

of the effectiveness of this contracting method. As agreed with your
offices, however, we (1) determined the status of regulations, guidance,
and program level support available to agencies in developing
share-insavings contracts for information technology, and (2) identified
the reasons agencies have not used the authority provided by the
legislation.

To determine the status of share-in-savings regulations, guidance, and
program-level support, we obtained documentation from and interviewed
officials with OMB and the General Services Administration (GSA), which is
responsible for identifying potential share-in-savings opportunities and
providing guidance to the agencies. To determine the reasons agencies have
not entered into share-in-savings contracts for information technology, we
interviewed officials at seven agencies with high-dollar contracting in
information technology during fiscal year 2003. We also interviewed
officials at four additional agencies that had expressed interest in
annual budget submissions to OMB in using share-in-savings contracts for
information technology. We conducted our review from February 2005 through
June 2005 in accordance with generally accepted government auditing
standards.

More than 2 years after enactment of the E-Government Act of 2002, the
regulations required to implement the authority to use share-in-savings
contracts for information technology have yet to be issued. Although
proposed regulations were issued in July 2004, the final regulations are
still undergoing review. OMB also is developing additional guidance to
ensure that share-in-savings projects are based on sound business cases.
OMB officials indicated that the implementing regulations and guidance
would be issued soon. GSA has established a program office and launched
two Web-based tools to assist agencies in identifying suitable
share-insavings projects and to help them evaluate the merits of
prospective projects. Fifteen out of more than 200 projects evaluated
through the use of one of these tools warranted further consideration,
according to GSA, but to date, none of these projects has resulted in the
award of a share-insavings contract. GSA has arranged for training courses
to teach the federal acquisition workforce how to use share-in-savings
contracting and identify suitable information technology candidates. Only
21 federal employees, however, have taken the training.

Officials cited various reasons to explain the lack of share-in-savings
contracts for information technology. The reasons included the absence of
implementing regulations, the difficulty of determining baseline costs,
and concerns that the return on investment may be too low to attract
potential

Background

contractors. Agency officials told us they are reluctant to use
share-insavings contracting until the implementing regulations are
finalized. In addition, officials said that even though contractors would
be required to provide up-front funding, agencies would still need
available appropriations to cover potential cancellation or termination
liability, which can be a significant sum. Officials also said that too
few acquisition personnel have been trained to use this innovative
contracting technique.

Since OMB expects the implementing regulations and share-in-savings
guidance to be issued soon, at least some of the reasons agencies cited
for not using the authority for information technology soon could be
addressed. Whether or not other reasons can be overcome may not be known
unless the authority is extended.

We provided a draft of this report to OMB and GSA for their review and
comment. Both agencies concurred with the report. OMB provided further
observation on the development of regulations and guidance for
implementing the share-in-savings initiative.

Share-in-savings contracts fall under the umbrella of performance-based
contracting, in which a federal agency specifies the outcome or result it
desires and lets the contractor decide how best to achieve the desired
outcome. In theory, share-in-savings contracting can provide a number of
potential benefits to both an agency and its contractor. For example, an
agency can ask a contractor to provide up-front funding, in which case
most of the financial risk of the project shifts from the government to
the contractor. The agency also can leverage the contractor's stake in the
success of a project since the contractor receives payment only after
demonstrating that the project-a new or upgraded information technology
system, for example-saves the agency money. Unexpected problems, such as a
delay in system installation, could erase some of the projected savings,
so the contractor has an incentive to effectively manage overall costs,
schedule, and performance. In short, the contractor is paid for results,
not just for effort. Because of the increased financial risk a contractor
assumes, a contractor can earn a greater return with a share-insavings
contract compared to the return on a traditional contract.

In 1996, the Clinger-Cohen Act authorized limited pilot programs to test
the feasibility of share-in-savings contracts for information technology.
In 2002, the E-Government Act expanded authority to award share-in-savings
contracts in fiscal years 2003 through 2005 to acquire information
technology solutions and provided incentives for agencies to enter into
such contracts. For example, agencies are allowed to retain, in their

information technology accounts, any savings above amounts paid to their
contractors. The act required the OMB to report to Congress on the number
of share-in-savings contracts entered into under this initiative. In
December 2004, the OMB reported that no contracts for information
technology projects had been awarded.

In 2003, we issued two reports related to the use of share-in-savings
contracts.2 Our January 2003 report, which focused on commercial use of
share-in-savings contracting, found that this approach can be an effective
technique to motivate contractors to generate savings and revenues for
clients. To be successful, though, clients and contractors need to agree
on goals and objectives and how to achieve them. Our March 2003
correspondence to OMB addressed the need for OMB's Office of Federal
Procurement Policy to ensure that members of the federal acquisition
workforce understand and appropriately apply the authority of the
E-Government Act of 2002.

The Department of Energy has used share-in-savings contracting for
technology solutions to reduce energy consumption. Congress authorized the
department, among other federal agencies, to use a type of share-insavings
contract for private financing of energy-efficiency improvements in
federal facilities.3 Rather than use up-front appropriations from
Congress, the department asked energy service contractors to contribute
the up-front costs for identifying a federal facility's energy needs as
well as buying, installing, operating, and maintaining energy-efficient
equipment to reduce energy bills. In return, the contractors get a share
of the energy savings generated by the improvements. We have found that
agencies that have used energy savings performance contracts have reduced
their energy consumption and achieved other goals.4

We have raised questions, however, about the use of share-in-savings
contracts for energy-efficiency improvements. For example, a number of

2GAO, Contract Management: Commercial Use of Share-in-Savings Contracting,
GAO-03-327 (Washington, D.C.: Jan. 31, 2003) and GAO, Contract Management:
OFPP Policy Regarding Share-in-Savings Contracting Pursuant to the
E-Government Act of 2002, GAO-03-552R (Washington, D.C.: Mar. 24, 2003).

3These share-in-savings contracts, called Energy Savings Performance
Contracts, were first introduced under the Comprehensive Omnibus Budget
Reconciliation Act of 1985, Public Law 99-272, which amended the National
Energy Conservation Policy Act.

4GAO, Energy Savings: Performance Contracts Offer Benefits, but Vigilance
Is Needed to Protect Government Interests, GAO-05-340 (Washington, D.C.:
June 22, 2005).

factors may cause third-party financing of long-term capital improvement
projects to be more expensive than the direct use of available
appropriated funds.5 This is so because the interest rate paid by a
contractor for needed capital typically would be higher than if the
improvements were funded through appropriations. Inevitably, by opting to
use a share-in-savings contract, the federal agency would have to take
into account the contractor's higher cost of financing than if the agency
had funded the project itself. Another area of concern is how
share-insavings contracts should be reflected in the federal budget, an
issue about which federal budget agencies disagree. On the one hand, OMB
believes that share-in-savings budget authority, contract obligations, and
outlays should be recognized on a year-to-year basis. In other words, only
the first year's costs, not the cumulative annual costs of energy
share-in-savings contracts, would need to be reflected in the agency's
budget in the year the contract is awarded. On the other hand, the
Congressional Budget Office believes that the budget should reflect long
term share-in-savings contract commitments as new obligations at the time
the contract is signed, consistent with government accounting principles.
6 In a recent report, we raised similar concerns.7 Finally, the extent to
which energy savings cover costs remains uncertain, and we have
recommended more oversight of energy savings performance contracts and
other steps to

                                       8

ensure cost-effectiveness.

Final regulations to implement the share-in-savings authority in the
E-Government Act of 2002 have yet to be published. Additional guidance on
the use of this method also lags behind the progress made in establishing
a share-in-savings program office and providing agencies with some
share-in-savings tools and related training.

The E-Government Act required that the Federal Acquisition Regulation
(FAR) be revised by mid-September 2003 to implement the share-insavings
authority contained in the act. It was not until July 2004, however,

  Share-in-Savings Regulations and Guidance Lag Behind Progress in Other Areas

5GAO, Capital Financing: Partnerships and Energy Savings Performance
Contracts Raise Budgeting and Monitoring Concerns, GAO-05-55 (Washington,
D.C.: Dec. 16, 2004).

6Congressional Budget Office, Third-Party Financing of Federal Projects:
Economic and Budget Issue Brief (Washington, D.C.: June 1, 2005).

7GAO-05-55.

8GAO-05-340.

that a proposed revision to the FAR was published in the Federal Register
for public comment. As of July 2005, the final FAR rule was still awaiting
approval by OMB's Office of Federal Procurement Policy. The act also
required the OMB to develop guidance for techniques to permit agencies to
retain a portion of resulting financial savings after payment of the
contractor's share of the savings. OMB officials told us they plan to
develop a broader policy memorandum providing agencies with additional
guidelines to ensure share-in-savings contracting success. As of July
2005, the policy memorandum had not been issued. OMB officials indicated,
however, that implementing regulations and share-in-savings guidance would
be completed in the near future.

The act assigned GSA responsibility for helping federal agencies identify
information technology projects as potential share-in-savings candidates
and for providing guidance on determining share ratios and baselines from
which savings may be measured. GSA established a share-in-savings program
office in February 2003, and in July of that year launched two Web-based
tools to help agencies identify and evaluate share-in-savings
opportunities. The Business Case Decision Tool is designed to assist
agencies in developing business cases on the basis of realistic baseline
costs to ensure that use of share-in-savings contracts would be
costeffective. The Proposal Evaluation Tool is used to evaluate the merits
of contractor share-in-savings proposals. According to the program office
director, agencies started using the Business Case Decision Tool in
September 2003. As of March 2005, various agencies have used the tool to
conduct 219 analyses, resulting in the identification of 15 information
technology projects as potential share-in-savings candidates. Although
some of these 15 potential projects are still under consideration, various
steps remain to be completed, and none has yet resulted in a
share-insavings contract award.

GSA hired a contractor to train agencies in identifying suitable
share-insavings projects, structuring solicitations, and analyzing
proposals. The training, which has been available to agencies since July
2004, is a 2-day course and costs $650 per student. As of March 21, 2005,
a total of 21 federal acquisition employees from six agencies had taken
the training. The same training is now being offered by the Federal
Acquisition Institute, an entity within OMB charged with developing the
curriculum

needed to train the civilian agency workforce.9 Two classes have been
scheduled, one in June 2005, and the other before the E-Government Act's
authority expires in September 2005. The Federal Acquisition Institute may
exercise an option to provide five additional share-in-savings training
classes in fiscal year 2006.

Finally, in July 2004, GSA established blanket purchase agreements with
six contractors; each of which is a major information technology solution
provider with commercial share-in-savings contracting experience. A
blanket purchase agreement is a simplified method of filling the
government's anticipated repetitive needs for supplies or services by
establishing charge accounts with qualified sources of supply. The
agreements may subsequently be used by agencies to procure specific goods
or services. As of June 2005, however, since no share-in-savings project
is ready for the contracting phase, no agencies have used the blanket
purchase agreements.

Officials from 11 agencies cited several reasons the share-in-savings
contracting authority for information technology has not led to the award
of share-in-savings contracts. Reasons include a lack of final
implementing regulations and OMB guidance on how to budget and account for
retained savings and the difficulty of determining baseline costs. Some
officials said contractors are reluctant to get involved in
share-in-savings contracts because the return on investment is believed to
be too low. In addition, officials told us that even though contractors
would provide up-front funding for a share-in-savings contract, some
amount of appropriated funds would still be required. Officials also said
that too few acquisition personnel have been trained to use this
innovative contracting technique.

  Use of Share-in-Savings Authority Hindered by Issues Related to Regulations,
  Baseline Costs, Up-front Funding, and Training

Implementing Regulations Agency officials told us they are reluctant to
use share-in-savings and OMB Guidance Not contracting until the FAR
implementing regulations are finalized. Because Yet Issued
share-in-savings contracting is considered innovative within the federal

government, agency officials said they need clear regulations to
understand when and how to use this technique.

9The Federal Acquisition Institute is under the direction of the OMB's
Office Federal Procurement Policy. The Institute also partners with the
Defense Acquisition University to provide training to both military and
civilian acquisition personnel.

We also highlighted the need for guidance in our March 2003 correspondence
to OMB's Office of Federal Procurement Policy.10 Given the federal
government's limited experience with share-in-savings contracting, as well
as limited understanding of the conditions that foster successful
implementation in commercial share-in-savings contracts, we reported that
members of the federal acquisition workforce need to understand and
appropriately apply the E-Government Act's new authority. Toward that end,
we recommended that OMB develop the necessary guidance. To date, OMB has
not responded to our recommendation. While GSA's guidance may be helpful
in identifying potential candidates, additional guidance is still needed
from OMB on accounting for savings in excess of amounts paid to the
contractor and developing sound business cases with firm baselines.

    Baseline Costs Difficult to Determine

Another reason agency officials say they have not used share-in-savings
contracting is the difficulty in determining a baseline cost. A baseline
cost is the cost of current operations. Without an accurate baseline,
agreed to by the agency as well as the contractor, savings cannot be
correctly measured, leaving both the agency and the contractor at risk of
not receiving their fair share of savings, if any are generated. The
contractor cannot determine with any certainty that the savings would
cover its costs, let alone result in a profit. Our past work on commercial
use of share-insavings contracts suggests that the business process and
administrative cost information necessary to calculate a baseline may not
be available in some cases.11 Agency officials told us that in the
information technology area, calculating a baseline can be very
complicated. It can be difficult, for example, to isolate the direct
savings from a reduction in the time an employee spends on a new task as a
result of a new, automated information system replacing one or more old
tasks. Further, in our past financial reporting, we have described the
type of systemic challenges agencies face in accurately determining the
baseline costs of programs, which could impede agencies' use of
share-in-savings contracting. For example, we reported in the 2004
Financial Report of the United States Government that the federal
government's ability to reliably measure the full costs of certain
programs is hampered by a significant number of

10GAO-03-552R. 11GAO-03-327.

material weaknesses related to financial systems, fundamental
recordkeeping, financial reporting, and incomplete documentation.12

    Return on Investment Believed to Be Too Low

Even if a baseline could be established, most agency officials we
interviewed said an obstacle to using share-in-savings contracting would
be not having a potential savings pool large enough to provide contractors
an appealing return on investment. The GSA share-in-savings program office
and the Office of the Secretary of Defense's Business Initiative Council
determined that a successful share-in-savings business case requires a
savings-to-investment ratio of at least 3 to 1. However, a business case
review in 2004 by the Defense Commissary Agency illustrates the potential
difficulty in meeting that target. Last year, that agency determined that
an inadequate return on investment was a primary reason a share-in-savings
contract would not be used to buy a replacement retail transaction system
for its hundreds of commissaries.13 On two occasions, the agency requested
information from contractors on installing a replacement retail
transaction system under a share-in-savings contract. Concerns about fewer
commissaries in the future, as a result of anticipated military base
closures, and other cost uncertainties led contractors to request a
guaranteed minimum number of system replacements to protect profit margins
associated with their initial investments. The agency did not provide
minimum guarantees, and a share-in-savings contract was not awarded.

    Appropriations Still Necessary

Another reason, according to officials, agencies may not have used
sharein-savings contracting to acquire information technology solutions is
that the E-Government Act requires funds to be available for the first
year of the contract. Even though the contractor pays the up-front costs,
the agency still needs appropriated funds to cover cancellation and

12Our report is included in a report for fiscal year 2004: The Department
of the Treasury, 2004 Financial Report of the United States Government
(Washington, D.C.: December 2004).

13The Commissary Advanced Retail Transaction System is to replace legacy
technologies with a commercial, off-the-shelf, point-of-sale system that
includes hardware, software, and related support services, such as a help
desk, maintenance, installation, and on-site consulting services.

termination liability, in the event the government ends the project.14
However, agency officials advised that these funds can represent a
significant share of the total cost of an information technology project.
Accordingly, so that any savings would stay with the government, agency
officials said they are motivated to use appropriated funds for
information technology projects and to award traditional contracts. This
is the reason that the Internal Revenue Service decided not to award a
share-in-savings contract to modernize its taxpayer identification system
for non-U.S.

15

citizens.

In the past, when we interviewed Department of Energy officials about
using share-in-savings contracts for energy-efficiency improvements, they
said this contracting technique is best used to finance projects when
federal funding is thought to be unavailable.16 According to Department of
Energy officials, they would prefer the agency pay for the entire project,
because all of the savings would stay with the government.

Few Acquisition Personnel We have previously reported that training on the
E-Government Act's

Have Been Trained 	share-in-savings acquisition initiative would be
essential to its effective implementation.17 However, few acquisition
personnel have been trained on when and how to use share-in-savings
contracting. As of March 21,

14The government has the right to terminate the entire contract at any
time or cancel subsequent program years. If the government chooses to
cancel or terminate the contract, certain amounts may still be owed to the
contractor. The E-Government Act allows the amount of cancellation or
termination liability to be negotiated by the contracting parties. As an
incentive, the act gives agencies various options to fund these costs. In
certain circumstances, agencies can even enter into share-in-savings
contracts if the full costs of cancellation or termination are not
available. However, if an agency chooses to leave a portion unfunded,
first-year funds must still be available. Also, under the act, the
unfunded amount will never be more than the lesser of $5 million or 25
percent of the total cost of cancellation or termination.

15The Internal Revenue Service assigns an individual taxpayer
identification number to non-U.S. citizens who file tax returns. The
agency's legacy system has become costly, inefficient, and dependent on
redundant manual processes. According to the agency, the modernized
replacement system will reengineer the individual taxpayer identification
and numbering process to eliminate duplicate efforts, unnecessary clerical
hand-offs, and manual processing. The agency had intended to procure the
system with a share-in-savings contract authorized under the E-Government
Act. Instead, the Internal Revenue Service issued a $2.8 million task
order off an existing contract.

16GAO, Energy Conservation: Contractors' Efforts at Federally Owned Sites,
GAO/RCED-94-96 (Washington, D.C.: Apr. 29, 1994).

17GAO-03-552R.

Conclusions

Agency Comments and Our Evaluation

2005, only 21 federal acquisition employees had received share-in-savings
training from GSA's share-in-savings training contractor. The training
developed by the contractor addresses the technical and organizational
share-in-savings issues needed to be understood for successful contracts.
For example, negotiating a share-in-savings contract can be a highly
technical and time-consuming process and requires a certain level of
business acumen. As covered in the training, the use of share-in-savings
contracting demands a good understanding of requirements; agreement on
baseline costs, use of metrics to measure savings, confidence in
savingsshare ratios; and the identification and mitigation of risks.

With only a few months remaining before authority for the initiative is
due to expire, no federal agencies have used the share-in-savings
authority provided by the E-Government Act to award contracts. Therefore,
neither OMB nor we has a basis for assessing the effectiveness of
share-in-savings contracts for information technology to improve agencies'
mission-related or administrative processes. Agencies' limited exposure to
share-in-savings contracting for information technology has not extended
much beyond the initial steps of analyzing potential business cases. As a
result, the act's authority has not actually been tested.

Since OMB expects the implementing regulations and share-in-savings
guidance to be issued soon, at least some of the reasons agencies cited
for not using the share-in-savings contracting authority for information
technology soon could be addressed. Although it is too early to know
whether or not other reasons can be overcome, the issuance of implementing
regulations and OMB guidance may soon create better conditions under which
to test the share-in-savings initiative. If Congress wants to test the
effectiveness of share-in-savings contracts for information technology,
Congress would need to extend the authority beyond the scheduled September
2005 expiration.

We received comments on a draft of this report from OMB and GSA. Both
agencies concurred with the report.

In oral comments, OMB officials acknowledged that issuance of the
sharein-savings implementing regulations and OMB guidance has been delayed
longer than anticipated. The officials cited the need to ensure that the
regulations and OMB guidance are clear on how to successfully manage
share-in-savings complexities, such as establishing a baseline,
determining a reasonable return on investment, and ultimately developing a
sound

business case. OMB officials commented that shortly after enactment of the
E-Government Act, the agency started efforts to develop the
share-insavings regulations and guidance and noted the October 2003
advanced notice of proposed rulemaking and the July 2004 publication of
the proposed rule as examples of the results of such efforts. OMB
officials also noted that the final rule was drafted in February 2005.
However, OMB officials told us they continue to work with other agencies
to ensure that the final policy is clear on how to successfully handle the
complexities of the share-in-savings planning and budgeting processes.
Although OMB officials could not tell us precisely when, they anticipate
that the final rule and OMB guidance will be published in the near future.

In e-mailed comments, GSA generally agreed with our report but believed
the title of the report did not accurately describe the efforts taken to
test share-in-savings. GSA commented that the report's title implies that
nothing has been done, despite the agency's efforts in promoting the use
of share-in-savings and that certain portions of the concept have been
tested, although outside of the E-Government Act's authority. We recognize
that the government has used share-in-savings contracts under other
authorities. However, the government has not awarded any share-insavings
contracts under the E-Government Act's authority, and therefore, the
authority has not been tested. We also recognize in the report the work
GSA did to promote the use of share-in-savings contracting.

To determine the regulations, guidance, and program-level support that
exist to assist agencies in developing share-in-savings contracts, we
interviewed officials and obtained documentation from OMB and GSA. We
participated in a 1-day course adapted from GSA's 2-day training course,
which was led by the contractor, Beacon Associates Inc. of Bel Air,
Maryland.

To determine the reasons agencies have not entered into share-in-savings
contracts, we interviewed officials from seven defense and civilian
agencies that used contracting vehicles other than share-in-savings to
award high dollar-value contracts for information technology in fiscal
year 2003. We identified the agencies with high-dollar information
technology spending by reviewing contract actions reported in the Federal
Procurement Data System, the government's repository for contracting data.
Though that system has recognized limitations, it was sufficient for
purposes of identifying a mix of defense and civilian agencies with high
levels of spending on information technology.

  Scope and Methodology

We interviewed agency officials who had shown an interest in using
sharein-savings contracts to buy information technology. We identified
these officials by reviewing their agencies' Exhibit 300, an OMB budget
justification and reporting requirements document that is required for the
procurement of major information technology systems. We also contacted the
GSA for help in identifying agencies that explored share-in-savings
opportunities. Finally, we interviewed and obtained information from the
Department of Defense's Business Initiatives Council. The Department of
Defense established the council to improve business operations by
identifying and implementing business reforms, such as share-in-savings
contracting for information technology. The agencies we obtained
information from as to why they opted not to use the E-Government Act's
share-in-savings contracting authority are the Army, Navy, Air Force, and
the Defense Commissary Agency in the Department of Defense; the
Departments of Agriculture, Health and Human Services, Interior, and
Justice; GSA; the Internal Revenue Service; and the Office of Personnel
Management.

We are sending copies of this report to interested congressional
committees, the Director of OMB, the Administrator of General Services,
and the chief acquisition officers at the 11 agencies from which we
obtained information. We will also make copies available to others upon
request. In addition, the report will be available at no charge on the GAO
Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me
at (202) 512-4841 or [email protected]. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Major contributors to this report were Carolyn Kirby,
Assistant Director; Daniel Hauser; Noah Bleicher; Lily Chin; Johnetta
Gatlin-Brown; and Russell Reiter.

William T. Woods
Director
Acquisition and Sourcing Management

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