DOD Acquisitions: Contracting for Better Outcomes (07-SEP-06,	 
GAO-06-800T).							 
                                                                 
The Department of Defense's (DOD) spending on goods and services 
has grown significantly since fiscal year 2000 to well over $250 
billion annually. Prudence with taxpayer funds, widening	 
deficits, and growing long-range fiscal challenges demand that	 
DOD maximize its return on investment, while providing		 
warfighters with the needed capabilities at the best value for	 
the taxpayer. DOD needs to ensure that its funds are spent	 
wisely, and that it is buying the right things, the right way. In
this testimony, GAO discusses (1) recent trends in DOD		 
contracting activity and the environment in which this activity  
takes place, and (2) practices which undermine its ability to	 
establish sound business arrangements, particularly those	 
involving the selection and oversight of DOD's contractors and	 
incentivizing their performance. This statement is based on work 
GAO has completed over the past 6 years covering a range of DOD  
acquisition and contracting issues. Some of these issues are	 
long-standing. GAO has identified DOD contract management as a	 
high-risk area for more than decade. With awards to contractors  
large and growing, DOD will continue to be vulnerable to	 
contracting fraud, waste or misuse of taxpayer dollars, and	 
abuse.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-800T					        
    ACCNO:   A54601						        
  TITLE:     DOD Acquisitions: Contracting for Better Outcomes	      
     DATE:   09/07/2006 
  SUBJECT:   Contract administration				 
	     Contract oversight 				 
	     Defense procurement				 
	     Internal controls					 
	     Policy evaluation					 
	     Procurement planning				 
	     Procurement practices				 
	     Business operations				 
	     Business planning					 
	     F-22 Aircraft					 

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GAO-06-800T

     

     * Recent Contracting Trends
     * Sound Business Arrangements
          * Competition and Sound Pricing
          * Incentivizing Contractors
          * Contract Oversight
     * Scope and Methodology
     * Contact and Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony

Before the Subcommittee on Defense, Committee on Appropriations, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Thursday, September 7, 2006

DOD ACQUISITIONS

Contracting for Better Outcomes

Statement of David M. Walker

Comptroller General of the United States

GAO-06-800T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss challenges that the Department of
Defense (DOD) faces to achieving better acquisition outcomes. With DOD
spending well over $250 billion annually to acquire products and services,
prudence with taxpayer funds, widening deficits, and growing long-range
fiscal challenges demand that DOD maximize its return on investment and
provide the warfighter with needed capabilities at the best value for the
taxpayer. DOD needs to ensure that its funds are spent wisely, and, in
doing so, it needs to ensure that it is buying the right things, the right
way. Several elements are essential to achieving this objective, including
a sound business case supporting executable programs, sound business
arrangements, and clear lines of responsibility and accountability.

My testimony today is based on work we have completed over the past 6
years that covered a range of acquisition and contracting issues and which
was conducted in accordance with generally accepted government auditing
standards. My testimony will focus on (1) DOD's recent contracting trends,
such as the spending on goods and services and the environment in which
this activity takes place; and (2) selected practices which undermine
DOD's ability to establish solid business arrangements, particularly those
involving the selection and oversight of DOD's contractors and
incentivizing their performance. As requested, we have included briefing
slides that we previously gave to your staff regarding these issues and I
will make reference to specific slides during the course of my testimony.

First, I would like to reiterate the broader context. Given current
policies, in the next few decades the nation will face large and growing
structural deficits due to known demographic trends, rising healthcare
costs and current revenue-to-expenditure gaps. At the same time, weapons
programs are commanding more and more resources as DOD undertakes
increasingly ambitious efforts to transform its ability to confront
current and potential threats. Further, managing DOD is a challenge as it
is one of the world's largest and most complex organizations, spending
billions of dollars each year to sustain key business operations that
support our forces. While DOD has embarked on a series of efforts to
reform its business operations, serious challenges and inefficiencies
remain. In fact, eight individual areas that GAO considers to be high risk
because of their greater vulnerabilities to fraud, waste, abuse and
mismanagement are specific to DOD. Some of these issues are long-standing;
for example, we have identified DOD weapon systems acquisition and
contract management as high-risk areas for more than a decade.1 In a
report issued in July,2 we concluded that, with awards to contractors
large and growing, DOD will continue to be vulnerable to contracting
fraud, waste or misuse of taxpayer dollars, and abuse. While DOD has
acknowledged its vulnerabilities and taken some actions to address them,
many of the initiatives are still in their early stages and it is too soon
to tell what impact they may have.

Further, there are numerous factors that can contribute to poor
acquisition outcomes, which in turn erode DOD's buying power. We list some
of these factors on slide 2. This list is illustrative and not intended to
be exhaustive, and the risk these factors pose may manifest itself
differently depending on the nature of the acquisition. To start, DOD's
tendency to look for revolutionary solutions that depend on the maturation
and availability of critical technologies often results in programs taking
longer, costing more and delivering less capability than originally
promised to the warfighter. Further, DOD wants often do not reflect "true"
requirements-in other words, based on credible threats and risk-based
needs-resulting in a mismatch between wants, needs, affordability and
sustainability. Once true requirements are established, they need to be
stable. At times, DOD has allowed new requirements to be added well into
the acquisition cycle, significantly stretching technology and creating
design challenges, and exacerbating program budget overruns. Of course,
defining requirements, managing contracts and overseeing contractors
requires a capable workforce that is up to meeting these challenges,
adheres to sound contracting practices, and provides contractors with
incentives that are based on results, rather than attitudes and efforts.

                           Recent Contracting Trends

With this context in mind, I would like to turn now to recent trends in
DOD's contracting activities. If you would turn to slide 4, DOD's spending
on goods and services has increased by 88 percent since fiscal year 2000.
In fiscal year 2005, DOD obligated nearly $270 billion on contracts for
products, research and development efforts, and services, such as for
information technology and management support.

1 GAO, GAO's High-Risk Program, GAO-06-497T (Washington, D.C.: Mar. 15,
2006); and GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
Jan. 2005).

2 GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud,
Waste, and Abuse, GAO-06-838R (Washington, D.C.: July 7, 2006).

All indications are that this upward trend will continue. Aside from
growth in dollar value, there have also been changes in what DOD is
buying. DOD's new weapon system programs are expected to be the most
expensive and complex ever, and will consume an increasingly large share
of DOD's budget. To illustrate, in the last 5 years DOD has doubled its
commitment to major weapon systems from $700 billion to $1.4 trillion. DOD
is counting on these efforts to fundamentally transform military
operations. The Army, for example, is undertaking the Future Combat
Systems program-a family of weapons, including 18 manned and unmanned
ground vehicles, air vehicles, sensors and munitions, that will be linked
by an information network-to enable its combat force to become lighter,
more agile, and more capable. Future Combat Systems' procurement will
represent 60 to 70 percent of Army procurement from fiscal years 2014 to
2022.

The Army, however, is not alone in pursuing complex and costly systems.
For example, the Air Force is modernizing its tactical aircraft fleet as
part of the $200 billion Joint Strike Fighter program and the F-22A Raptor
aircraft, which is expected to cost more than $65 billion. Similarly, the
Navy's Virginia class submarine is expected to cost about $80 billion,
while the DDG-51 class of destroyer is expected to cost some $70 billion.
DOD's development of such systems requires more funds than may reasonably
be expected to be available. For example, we testified in April 2006 that
the Navy's shipbuilding plan projects a supply of shipbuilding funds that
will double by 2011 and will stay at high levels for years to follow.3

As overall obligations have increased, so has DOD's reliance on the
private sector to provide services to fulfill DOD's missions and support
its operations. In some cases, the growth in services reflects that DOD is
using a different acquisition approach to support its missions. For
example, DOD is now buying launch services, rather than rockets. Service
contracts pose a number of challenges in terms of defining requirements,
establishing expected outcomes, and assessing contractor performance.

3 GAO, Defense Acquisitions: Actions Needed to Get Better Results on
Weapons Systems Investments, GAO-06-585T (Washington, D.C.: April 5,
2006).

Additionally, in recent years, federal agencies including DOD have moved
away from using in-house contracting capabilities and are making greater
use of existing contracts awarded by other agencies. If you would turn now
to slide 7, these interagency contracts are intended to

           o  leverage the government's buying power;
           o  provide a faster and easier method for procuring commonly used
           goods and services, and
           o  reduce initial contracting administrative costs.

DOD is the largest user of these interagency contracting vehicles, and
their availability has enabled DOD to save time by paying other agencies
to award and administer contracts for goods and services on its behalf.
DOD, however, lacks complete information about purchases made through
other agencies' contracts. Moreover, our work and that of some agency
inspectors general have uncovered instances of improper use of interagency
contracts, including issuing orders that were outside the scope of the
underlying contract, failing to follow procedures intended to ensure best
pricing, and failing to establish clear lines of accountability and
responsibility. Further, in some instances fee-for-service arrangements
may have led to an inordinate focus on meeting customer demands at the
expense of complying with sound contracting policy and required ordering
procedures. These and other issues led us to designate management of
interagency contracting a governmentwide high-risk issue in January 2005.
Ensuring the proper use of interagency contracts must be viewed as a
shared responsibility which requires that agencies clearly define
responsibilities and adopt clear, consistent, and enforceable policies and
processes that balance the need for customer service with the requirements
of contract regulations.

At the same time that the amount, nature, and complexity of contract
activity has increased, DOD's acquisition workforce has remained
relatively unchanged in size and faces certain skill gaps and serious
succession planning challenges. DOD's acquisition workforce must have the
right skills and capabilities if it is to effectively implement best
practices and properly manage the goods and services it buys. We noted in
a report issued in 2003, and again in July 2006, however, that procurement
reforms, changes in staffing levels, workload, and the need for new skill
sets have placed unprecedented demands on the acquisition workforce.4
Moreover, DOD's current civilian acquisition workforce level reflects the
considerable downsizing that occurred in the 1990s. DOD's approach to
acquisition workforce reduction during the 1990s was not oriented toward
shaping the makeup of the workforce; rather, DOD relied primarily on
voluntary turnover and retirements, freezes on hiring authority, and its
authority to offer early retirements and buyouts to achieve reductions.
Indeed, during our work on the early phases of DOD downsizing, some DOD
officials voiced concerns about what was perceived to be a lack of
attention to identifying and maintaining a balanced, basic level of skills
needed to maintain in-house capabilities.

                          Sound Business Arrangements

I would like to turn now to briefly discuss some of DOD's practices in
three areas-(1) competition and sound pricing; (2) incentivizing
contractors; and (3) contract oversight-that increase risks and undermine
DOD's ability to establish sound business arrangements.

Competition and Sound Pricing

Our work has identified a number of issues related to competition and
pricing in DOD's efforts to obtain needed goods and services. Under the
Competition in Contracting Act of 1984, DOD contracting officers are, with
certain exceptions, to solicit offers and award contracts using full and
open competition, in which all responsible sources are permitted to
compete. As shown on slide 10, DOD reports that only forty-one percent of
its contract obligations in fiscal year 2005 were made on contracts that
were awarded using full and open competition. The impact of not using full
and open competition is reflected in one recent example involving the
Army's award of sole-source contracts for security guards. In this case,
we found that the Army devoted twice as many contract dollars-nearly $495
million-to sole-sourced contracts for security guards at 46 of 57 Army
installations, despite the Army's recognition that it was paying about 25
percent more for its sole-source contracts than for those it previously
awarded competitively.

4 GAO, Federal Procurement: Spending and Workforce Trends, GAO-03-443
(Washington, D.C.: April 30, 2003); and GAO, Contract Management: DOD
Vulnerabilities to Contracting Fraud, Waste, and Abuse, GAO-06-838R
(Washington, D.C.: July 7, 2006).

6 GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive
Fees Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec.
19, 2005); and GAO, Defense Acquisitions: DOD Wastes Billions of Dollars
through Poorly Structured Incentives, GAO-06-409T (Washington, D.C.: April
5, 2006).

Incentivizing Contractors

Another element of a sound business arrangement is the fee mechanism used
to incentivize excellent contractor performance. In December 2005, we
reported that DOD gives its contractors the opportunity to collectively
earn billions of dollars through monetary incentives. 6 Unfortunately, we
found DOD programs routinely engaged in practices that failed to hold
contractors accountable for achieving desired outcomes and undermined
efforts to motivate results-based contractor performance, such as

           o  evaluating contractor performance on award-fee criteria that
           are not directly related to key acquisition outcomes (e.g.,
           meeting cost and schedule goals and delivering desired
           capabilities to the warfighter);
           o  paying contractors a significant portion of the available fee
           for what award-fee plans describe as "acceptable, average,
           expected, good, or satisfactory" performance, which sometimes did
           not require meeting the basic requirements of the contract; and
           o  giving contractors at least a second opportunity to earn
           initially unearned or deferred fees.

As a result, DOD has paid out an estimated $8 billion in award fees on
contracts in our study population, regardless of whether acquisition
outcomes fell short of, met, or exceeded DOD's expectations. On slide 15,
we have included four cases in which contractors that were behind schedule
and over cost were paid between 74 and 100 percent of the available award
fee.

Despite paying billions of dollars in award and incentive fees, DOD has
not compiled data or developed performance measures to evaluate the
validity of its belief that award and incentive fees improve contractor
performance and acquisition outcomes. DOD's strategies for incentivizing
its contractors, especially on weapon system development programs, are
symptomatic of a lack of discipline, oversight, transparency, and
accountability in DOD's acquisition process.

Contract Oversight

I would like to briefly discuss the third element of sound business
arrangements, DOD's oversight of its service contracts. Government
monitoring and inspection of contractor activity, if not done well, can
contribute to a lack of accountability and poor acquisition outcomes. In
2005, we reported that DOD's monitoring of nearly a third of the 90
service contracts we reviewed was insufficient.7 In these cases, we
identified a number of contributing factors, including DOD's failure to
assign government performance monitors and the fact that personnel are
usually assigned such duties on a part-time basis and not evaluated on how
well they performed their duties. DOD and senior military acquisition
policy officials acknowledged that the priority of contracting offices is
awarding contracts, not ensuring that trained performance monitors are
assigned early so that contract oversight can begin upon contract award.
Ultimately, however, if appropriate monitoring is not being done, DOD is
at risk for paying contractors more than the value of the services they
performed.

In closing, these three illustrative business arrangement issues, along
with those we have identified in DOD's acquisition and business management
processes, present a compelling case for change. In short, it takes a
myriad of things to go right for acquisitions to be successful, but only a
few things to go wrong to cause major problems. Slide 17 provides examples
of the impact that these problems can have on reducing the government's
buying power. Such examples illustrate the outcomes of poor acquisition
executions. The debate now centers on future investments and what return
on investment will be realized.

Finally, on slide 18 you will find a number of actions that can and should
be taken to improve acquisition outcomes. By implementing the
recommendations we have made on individual issues, DOD can improve
specific processes and activities and save huge amounts of taxpayer
dollars. At the same time, by working more broadly to improve its
acquisition practices, DOD can set the right conditions for becoming a
smarter buyer, getting better acquisition outcomes, and making more
efficient use of its resources in what is sure to be a more fiscally
constrained environment. DOD's written acquisition policies reflect many
of our recommendations and often incorporate best practices. As such, the
policies provide the basis for sound decisions and actions. The policies,
however, are not consistently manifested on decisions made on individual
acquisitions. In these cases, officials are rarely held accountable when
acquisitions go astray. It is essential to create an environment conducive
to changing behaviors and to recognize that achieving sound acquisition
outcomes are a shared responsibility between the Congress, DOD, and the
contractor community. Unless changes are made, DOD will continue on a path
where wants, needs, affordability and sustainability are mismatched, with
predictably and recurring unsatisfactory results.

7 GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts,  GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

                                    - - - -

Mr. Chairman and members of the subcommittee, this concludes my testimony.
I would be happy to answer any questions you may have.

                             Scope and Methodology

In preparing for this testimony, we relied principally on previously
issued GAO reports. We also obtained data on DOD's contract activity from
DOD's DD350 database and from the General Services Administration's
Federal Procurement Data System. We have previously expressed concerns
about the accuracy of the data contained in the Federal Procurement Data
System. We determined, however, that the data were sufficiently reliable
for the purposes of this testimony. We also obtained data from the Office
of Personnel Management regarding DOD's acquisition workforce. For the
purposes of this report, we selected 14 occupation series including
contracting, business, purchasing, quality assurance and supply and
inventory management personnel. We conducted our work in April and July
2006 in accordance with generally accepted government auditing standards.

                       Contact and Staff Acknowledgments

For further information regarding this testimony, please contact Katherine
V. Schinasi 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 testimony. Key contributors to this report were Lily
Chin, David E. Cooper, Brendan Culley, Thomas Denomme, Timothy DiNapoli,
Paul Francis, Alan Frazier, Christopher Kunitz, Michele Mackin, William
Russell, Adam Vodraska, and Karen Zuckerstein.

(120568)

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Highlights of GAO-06-800T , a testimony before the Subcommittee on
Defense, Committee on Appropriations, House of Representatives

September 7, 2006

DOD ACQUISITIONS

Contracting for Better Outcomes

The Department of Defense's (DOD) spending on goods and services has grown
significantly since fiscal year 2000 to well over $250 billion annually.
Prudence with taxpayer funds, widening deficits, and growing long-range
fiscal challenges demand that DOD maximize its return on investment, while
providing warfighters with the needed capabilities at the best value for
the taxpayer. DOD needs to ensure that its funds are spent wisely, and
that it is buying the right things, the right way.

In this testimony, GAO discusses (1) recent trends in DOD contracting
activity and the environment in which this activity takes place, and (2)
practices which undermine its ability to establish sound business
arrangements, particularly those involving the selection and oversight of
DOD's contractors and incentivizing their performance.

This statement is based on work GAO has completed over the past 6 years
covering a range of DOD acquisition and contracting issues. Some of these
issues are long-standing. GAO has identified DOD contract management as a
high-risk area for more than decade. With awards to contractors large and
growing, DOD will continue to be vulnerable to contracting fraud, waste or
misuse of taxpayer dollars, and abuse.

DOD obligated nearly $270 billion on contracts for goods and services in
fiscal year 2005, an 88 percent increase over the amount obligated in
fiscal year 2000. All indications are that this upward trend will
continue. Aside from growth in dollar value there have also been changes
in what DOD is buying. DOD's new weapons system programs are expected to
be the most expensive and complex ever and will consume an increasingly
large share of its budget. In the last 5 years DOD has doubled its
commitment to major weapon systems from $700 billion to $1.4 trillion, and
DOD is counting on these efforts to fundamentally transform military
operations. As overall obligations have increased so has its reliance on
the private sector to provide services to fulfill DOD's missions and
support its operations. Additionally, in recent years DOD has increased
its use of existing contracts awarded by other agencies (i.e. interagency
contracts). While this approach provides a number of benefits, our work,
and that of some agency inspector generals, revealed instances of improper
use, including issuing orders that were outside the scope of the
underlying contract as well as failing to establish clear lines of
accountability and responsibility. While the amount, nature, and
complexity of DOD contract activity have increased, its acquisition
workforce has remained relatively unchanged in size. At the same time, the
acquisition workforce faces certain skills gaps and serious succession
planning challenges.

There are a number of DOD practices which undermine its ability to
establish sound business arrangements. For example, with regard to
competition and pricing, we recently found that the Army acquired guard
services under authorized sole-source contracts at 46 of 57 Army
installations, despite the Army's recognition that it was paying about 25
percent more for its sole-source contracts than for those it previously
awarded competitively. Another element of a sound business arrangement is
the fee mechanism used to incentivize excellent contractor performance. In
December 2005, we reported that DOD gives its contractors the opportunity
to collectively earn billions of dollars through monetary incentives.
Unfortunately, we found DOD programs routinely engaged in practices that
failed to hold contractors accountable for achieving desired outcomes and
undermined efforts to motivate results-based contractor performance. As a
result, DOD paid out an estimated $8 billion in award fees on contracts in
our study population, regardless of whether acquisition outcomes fell
short of, met, or exceeded DOD's expectations. DOD also increased its risk
of poor acquisition outcomes by not assuring that another element of a
sound business arrangement, contractor oversight, was sufficient. For
example, in 2005 we reported that DOD's oversight on nearly a third of 90
service contracts reviewed was insufficient, in part because DOD failed to
assign performance monitors.
*** End of document. ***