Federal Acquisitions and Contracting: Systemic Challenges Need	 
Attention (17-JUL-07, GAO-07-1098T).				 
                                                                 
In fiscal year 2006, the federal government spent over $400	 
billion for a wide variety of goods and services, with the	 
Department of Defense (DOD) being the largest purchaser. Given	 
the large and growing structural deficit, the government must get
the best return it can on its investment in goods and services.  
For decades, GAO has reported on a number of systemic challenges 
in agencies' acquisition of goods and services. These challenges 
are so significant and wide-ranging that GAO has designated four 
areas of contract management across the government to be	 
high-risk. This testimony highlights four key acquisition	 
challenges agencies face: (1) separating wants from needs, (2)	 
establishing and supporting realistic program requirements, (3)  
using contractors in appropriate circumstances and contracts as a
management tool, and (4) creating a capable workforce and holding
it accountable. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1098T					        
    ACCNO:   A72833						        
  TITLE:     Federal Acquisitions and Contracting: Systemic Challenges
Need Attention							 
     DATE:   07/17/2007 
  SUBJECT:   Accountability					 
	     Contract administration				 
	     Federal procurement				 
	     Federal procurement policy 			 
	     Policy evaluation					 
	     Procurement planning				 
	     Procurement practices				 
	     Program management 				 
	     Strategic planning 				 

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GAO-07-1098T

   

     * [1]Separating Wants from Needs
     * [2]Establishing and Supporting Realistic Program Requirements
     * [3]Using Contractors in Appropriate Circumstances and Contracts
     * [4]Creating a Capable Workforce and Holding It Accountable
     * [5]Conclusions
     * [6]Contact and Staff Acknowledgments
     * [7]Governmentwide/Multiple Agencies
     * [8]Department of Defense
     * [9]Department of Energy
     * [10]Department of Homeland Security
     * [11]National Aeronautics and Space Administration
     * [12]Department of Transportation
     * [13]GAO's Mission
     * [14]Obtaining Copies of GAO Reports and Testimony

          * [15]Order by Mail or Phone

     * [16]To Report Fraud, Waste, and Abuse in Federal Programs
     * [17]Congressional Relations
     * [18]Public Affairs

Testimony

Before the Committee on Homeland Security and Governmental Affairs, U.S.
Senate

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, July 17, 2007

FEDERAL ACQUISITIONS AND CONTRACTING

Systemic Challenges Need Attention

Statement of David M. Walker
Comptroller General of the United States

GAO-07-1098T

Mr. Chairman and Members of the Committee:

Thank you for inviting me here today to discuss systemic challenges facing
the federal government in its acquisition of goods and services. The U.S.
federal government is the single largest buyer in the world, obligating
over $400 billion in fiscal year 2006 for a wide variety of goods and
services, including complex projects that often involve unproven
technologies. While acquisitions are made throughout government, the
majority of them are concentrated in a few agencies, particularly the
Department of Defense (DOD)--as shown in figure 1.

Figure 1: Fiscal Year 2006 Federal Government Acquisitions Obligations

Note: Due to rounding, dollar values do not add up to the specified total
value.

Recently, I have been quite vocal about the large and growing long-range
structural deficits the federal government faces. These are driven
primarily by known demographic trends and rising health care costs. These
structural deficits will mean escalating and ultimately unsustainable
federal deficits and debt levels. Given this fiscal reality, it is
imperative that the federal government gets the best return it can on its
investment in goods and services; the American people have the right to
expect no less. Table 1 shows the size of the federal government's total
fiscal exposure, how it has grown since the end of fiscal year 2000, and
the burden it would place on the American people.

Table 1: Understanding the Size of Major Reported Fiscal Exposures

Note: Percentage increases reflect actual data and may differ from
calculation of rounded numbers presented in table.

However, our work extending back decades has demonstrated that agencies
face a number of systemic challenges in their acquisition of goods and
services. In examining our defense work, I have observed 15 systemic
acquisition challenges facing DOD--which I have included in appendix I.
GAO's work examining acquisitions in other federal agencies indicates that
they often face similar challenges. For example, not only have we
identified contract management as a high-risk area for DOD, but also for
the Department of Energy (DOE) and the National Aeronautics and Space
Administration (NASA). Further, interagency contracting--a process in
which one agency uses another agency's contracts or contracting services
to acquire goods or services--was designated a high-risk area as well.

In my testimony today, I will highlight these acquisition challenges
categorized in four key areas:

           o separating wants from needs,
           o establishing and supporting realistic program requirements,
           o using contractors in appropriate circumstances and contracts as
           a management tool, and
           o creating a capable workforce and holding it accountable.

Separating wants from needs in an affordable and sustainable fashion will
be critical to improving management within the current fiscal environment.
No less important is the need for clearly defining program requirements
and sticking with them while also using the appropriate contract type with
sufficient oversight. Contract management challenges can jeopardize
successful acquisition outcomes in normal times, but also take on
heightened importance and significantly increase risks in the context of
contingency operations such as Iraq, Afghanistan, or Hurricane Katrina. A
significant part of this challenge relates to the evolving and enlarging
role of contractors in acquisitions, particularly through the use of
service contracts--which accounted for nearly 60 percent of fiscal year
2006 government acquisition obligations. This raises the question of what
work should be performed by contractors versus government personnel. This
is a major issue that is of growing concern and is in need of serious
attention by both the executive branch and Congress. In addition, an
accountable and capable workforce underlies the federal government's
ability to strategically plan and effectively manage individual programs
and contracts as the workforce includes the people needed to carry out
these functions, as well as the higher-level accountability needed to
address recurring and systemic problems. Tackling each of these systemic
challenges requires a fundamental and comprehensive re-examination of the
federal government's overall approach to contracting: what we buy, who we
buy from, and how we buy it. We also need to target waste in government
spending. Government waste is growing and far exceeds the cost of fraud
and abuse. Several of my colleagues in the accountability community and I
have developed a definition of waste, which is contained in appendix II.

My comments today are based on our wide-ranging work examining federal
acquisition efforts, often going back decades. We list relevant GAO
reports at the end of this statement. We conducted our work in accordance
with generally accepted government auditing standards.

Separating Wants from Needs

Given the current fiscal environment, agencies need to learn to separate
wants from needs to ensure that programs and investments provide the best
return within fiscal constraints. My first four observations on systemic
acquisition challenges relate to this need. They are that:

           o Agency budgets may not be fully linked to strategic goals and
           may not adequately consider likely agencywide resource
           limitations.
           o Agencies too often pursue their individual needs rather than
           collective needs.
           o Individual program and funding decisions may undercut sound
           policies.
           o Congressional direction sometimes requires agencies to buy items
           and provide services that have not been planned for and may not be
           needed.

Our work has shown that agencies sometimes budget and allocate resources
incrementally, largely based on historical precedents, rather than conduct
bottom-up reviews and allocate resources based on the broader goals and
objectives of agency strategic plans. For example, in March we reported
that DOD does not allocate resources on a strategic basis and that it
could improve its acquisition outcomes by adopting an integrated portfolio
management approach for allocating weapon system investments. We found
that military service allocations as a percentage of the department's
overall investment budget have remained essentially the same for the last
25 years, despite the dramatic changes that have occurred in the strategic
environment and warfighting needs during that time. Similarly, in July
2005 we reported that the Environmental Protection Agency budgeted and
allocated resources incrementally, largely based on historical precedents,
and that its process did not reflect a bottom-up review of the nature or
distribution of its current workload--either based on specific
environmental laws or the broader goals and objectives in the agency's
strategic plan.

Similarly, in our Information Technology Investment Management Model
(ITIM)1 we point out that information technology (IT) portfolio selection
criteria support an agency's mission, organizational strategies, and
business priorities and provide a link to the organization's strategic
plans and budget processes. However, in 2004 we reported that a
governmentwide survey of investment management processes found that only 6
of 26 agencies had fully implemented portfolio selection criteria--16 had
partially implemented them and 4 had not implemented them at all. This
remains an issue. For example, we reported just this year that the
Department of Homeland Security (DHS) is missing key elements of effective
investment management, such as procedures for implementing
project-specific investment management policies, as well as policies and
procedures for portfolio-based investment management. Further, it has yet
to fully implement either project- or portfolio-level investment control
practices. We noted that all told, this means DHS lacks the complete
institutional capability needed to ensure that it is investing in IT
projects that best support its strategic mission needs. In contrast,
successful commercial companies use portfolio management to adjust their
resource allocations across business areas based on changes in the
marketplace and the competitive environment. The government's failure to
successfully implement such an approach significantly risks wasting
investments on wants versus true needs in a time when resources are
limited.

1The ITIM framework is a maturity model composed of five progressive
stages of maturity that an agency can achieve in its IT investment
management capabilities. The framework can be used both to assess the
maturity of an agency's investment management processes and as a tool for
organizational improvement.

We have also seen examples of agencies having fragmented decision-making
processes for acquisition investments, failing to consider agencywide
needs and resource limitations. Successful commercial companies make
investment decisions that benefit the organization as a whole within
resource constraints. However, DOD continues to allow individual
organizational units to assess needs under separate processes, failing to
implement a departmental approach to investment decision-making.
Consequently, DOD has less assurance that its investment decisions address
the right mix of warfighting needs and it starts more programs than
current and likely future resources can support. Operationally, there can
be real consequences in agencies' pursuit of individual over collective
interests. For example, in December 2005 we reported that on the basis of
its experience with unmanned aircraft systems (UAS) in Persian Gulf
Operations, U.S. Central Command believed that communications
interoperability and payload commonality problems occurred because the
military services' UAS development programs had been service-specific and
insufficiently attentive to joint needs.

Some agencies have successfully considered wider needs. For example, in
March 2005 we reported that DHS had opened communication among its
acquisition organizations through its strategic sourcing and small
business programs. With strategic sourcing, DHS's organizations quickly
collaborated to leverage spending for various goods and services--such as
office supplies, boats, energy, and weapons--without losing focus on small
businesses, thus leveraging its buying power and increasing savings.

Individual program and funding decisions may also undercut sound policies.
We have noted that at some agencies, individual program units may make
investments in capabilities that can undercut agencywide goals. This can
occur when a disconnect exists between requirements and resources and can
lead to unnecessary duplication of effort and costs. For example, we
reported in 2006 that NASA's Deep Space Network and Ground Network
programs made investment decisions that were leading to the development of
separate array technologies to support overlapping requirements for the
same lunar missions.

Additionally, while congressional spending directions to agencies
sometimes facilitate accomplishment of agency goals, at other times they
may require agencies to buy items and provide services for which they had
not planned and which may not be needed. Agency spending actions which
otherwise would not be taken based on an objective value and risk
assessment with consideration of available resources work against good
strategic planning. Such spending can circumvent careful planning and
divert resources from more critical needs. This can also serve to
exacerbate our serious long-range fiscal imbalance.

Establishing and Supporting Realistic Program Requirements

After differentiating their unlimited wants from their true needs,
agencies need to translate their needs into appropriate, executable
programs. They need to set and communicate realistic system requirements
and better maintain stability in those requirements. They also need to
ensure that programs proceed through the acquisition process based on
having requisite knowledge and that programs are funded adequately.
However, too often we see failure in one or more of these key dimensions.
Specifically, I have observed that:

           o Agencies too often overpromise and underdeliver in the
           acquisition of major systems.
           o Programs too often experience requirements instability that
           causes delays and cost growth in fielding capabilities.
           o Programs too often proceed through the development and
           demonstration of systems without having achieved needed knowledge.
           o Agencies sometimes budget for less than is needed and put
           Congress in a position of having to decide whether to provide
           additional funding.

Agencies too often overpromise and underdeliver in the acquisition of
major systems as a consequence of programs competing with each other for
funding in a fiscally constrained environment. In examining defense
programs, we have reported that competition for funding had incentivized
programs to produce optimistic cost and schedule estimates, overpromise on
capability, suppress bad news, and forsake the opportunity to identify
better alternatives. In addition, because DOD starts more weapons programs
than it can afford, it invariably finds itself in the position of having
to shift funds to sustain programs--often to the point of undermining
well-performing programs to pay for poorly performing ones. I believe that
even if more funding were provided, it would not be a solution because
wants will usually exceed the funding available. Rather, we have to live
within our means, which requires us to make difficult choices between
wants and needs.

Once programs are under way, they often experience requirements
instability during major systems development, thereby lengthening the
duration of the program. As a result, the problem the program was seeking
to address changes or the user and acquisition communities may simply
change their minds about a program. The resulting program instability can
cause cost escalation, schedule delays, and fewer end items, and can make
it harder for the government to hold contractors accountable. For example,
in 2005 the Department of Justice inspector general found that the Federal
Bureau of Investigation's Trilogy project experienced significant cost
increases and schedule delays due to various factors including evolving
design requirements.

Acquisition programs that involve development and demonstration often face
another challenge--developing the requisite knowledge indicated by best
practices before proceeding through key knowledge points in the system
acquisition process. In examining DOD's operations, we have assessed
weapon acquisitions as a high-risk area since 1990. Although U.S. weapon
systems are the best in the world, the programs to acquire them often take
significantly longer and cost significantly more than promised and often
deliver smaller quantities and different capabilities than planned. In
fact, it is not unusual for estimates of time and money to be off by 20 to
50 percent. It does not, however, have to be so. Our best practices work
has shown that it is possible to get better outcomes if decisions are
based on high levels of knowledge.

Similarly, we have reported that other agencies do not ensure that major
acquisition programs have adequate knowledge before proceeding with
development. For example, the National Polar-orbiting Operational
Environmental Satellite System (NPOESS) project--a tri-agency (National
Oceanic and Atmospheric Administration, DOD, and NASA) effort--proceeded
into development before the design was proven and before the technologies
had properly matured, knowledge that is needed based on our best practices
work. In 2004 we reported that the contractor for the project was not
meeting expected cost and schedule targets on the new baseline because of
technical issues in the development of key sensors. Again, in November
2005, we reported that NPOESS continued to experience problems in the
development of a key sensor, resulting in schedule delays and anticipated
cost increases. Also, earlier this year we found that DOE lacks a
systematic process for ensuring that critical technologies have been
adequately demonstrated to work as intended before committing to major
construction projects to help maintain the nuclear weapons stockpile,
conduct research and development, and process nuclear waste for disposal.
In another example, we reported in March 2005 that DHS has adopted a
number of acquisition best practices in establishing an investment review
process. However, we also noted that this process did not include two
critical management reviews that would help ensure that (1) resources
match customer needs prior to beginning a major acquisition and (2)
program designs perform as expected before moving to production.

Our work has also shown that it is not uncommon to find an acquisition
program underfunded. In our review of defense programs, we often see cases
where the cost of a system in development grows and where, as a result,
the return on the defense dollar is reduced. While such cost growth may be
accommodated within an agency's budget through reductions in the number of
units to be acquired or by cutting other programs, it may also put
Congress in a position of having to decide to provide additional funding
if it finds accepting fewer units undesirable. As a consequence, other
needed programs may not be fully funded or overall government spending may
be increased, thereby adding to the federal deficit.

Using Contractors in Appropriate Circumstances and Contracts as a Management
Tool

The next set of systemic acquisition challenges relate to those faced at
the contract management level. First and foremost, I believe that we must
engage in a fundamental re-examination of when and under what
circumstances we should use contractors versus civil servants or military
personnel. This is a major and growing concern that needs immediate
attention. Once the decision to contract has been made, we have observed
challenges in setting contract requirements, using the appropriate
contract with the right incentives given the circumstances, and ensuring
proper oversight of these arrangements--especially considering the
evolving and enlarging role of contractors in federal acquisitions. The
failure to adequately address these challenges explains, in part, why
agencies continue to experience poor acquisition outcomes in buying major
systems, goods, and services. My observations are that:

           o Contracts, especially service contracts, often do not have
           definitive or realistic requirements at the outset to control
           costs and facilitate accountability.
           o Contracts typically do not accurately reflect the complexity of
           projects, or appropriately allocate risk between the contractor
           and the taxpayer.
           o Incentive and award fees are often paid based on contractor
           attitudes and efforts versus positive results.

Contracts, especially service contracts, often don't have definitive
requirements at the outset which are needed to control and facilitate
accountability. For example, in January we reported that many
reconstruction projects in Iraq have fallen short, in part because DOD had
not clearly defined its needs before it entered into contract
arrangements. The absence of well-defined requirements and clearly
understood objectives complicated efforts to hold DOD and contractors
accountable for poor acquisition outcomes in Iraq reconstruction.

Given the range of federal projects and circumstances, agencies'
contracting approaches vary widely, and with them, the level of risk. We
have found that agencies may not always use the most appropriate
contracting approach for the circumstance or effectively oversee their
use.

For example:

           o Time-and-materials contracts.  Time-and-materials
           contracts--agreements where contractors are paid based on the
           number of labor hours and materials--pose such risk to the
           government that federal regulations require contracting officers
           to make a determination and findings in writing that no other
           contract type is suitable before using such an arrangement. In a
           recent review of DOD's use of such contracts, we found that DOD
           contracting and program officials frequently did not justify why
           time-and-materials contracts were the only contract type suitable
           for the procurement. Further, with a few exceptions, we found that
           little effort had been made to convert follow-on work to a less
           risky contract type when historical pricing data existed, despite
           guidance to do so. We also found that oversight of
           time-and-materials contracts was lacking as contracting officers
           generally relied on contractor-provided monthly status reports to
           conduct oversight.

           o Interagency contracting. We added management of interagency
           contracting--the use of one agency's contract by another agency or
           the provision of contracting assistance and support by another
           agency-- to our high-risk list in 2005. Interagency contracts can
           leverage the government's buying power and provide a simplified
           and expedited method of procurement. However, the rapid growth in
           use of such contracts, combined with the limited expertise of some
           agencies in their use and recent problems related to their
           management, causes some concern. For example, in July 2005, we
           reported that the use of franchise funds--government-run,
           fee-for-service organizations providing a portfolio of services,
           including contracting services--at the Departments of the Interior
           and the Treasury have not always resulted in fair and reasonable
           prices for the government. We have also found that agencies often
           do not have visibility into and effective oversight of their
           interagency contracts. Last year, for instance, we reported that
           while DHS spending through interagency contracting totaled
           billions of dollars annually, and increased by 73 percent in the
           past year, the department did not systematically monitor its use
           of these contracts to ensure desired outcomes.

           o Undefinitized contract actions. DOD's use of undefinitized
           contract actions can also carry risk to the government and
           potentially waste taxpayer dollars. These agreements allow
           contractors to begin work before reaching final agreement on
           contract terms and are sometimes used by agencies to rapidly fill
           urgent needs. In June 2007, we reported that DOD did not meet the
           definitization time frame requirement of 180 days after award on
           60 percent of the 77 undefinitized contract actions we reviewed.
           In June 2004, we found that during Iraqi reconstruction efforts,
           when requirements were not clear, DOD often entered into contract
           arrangements that introduced risks. We reported that DOD
           authorized contractors to begin work before key terms and
           conditions, such as the projected costs of the work to be
           performed, were fully defined. In September 2006, we reported
           that, under this approach, DOD contracting officials were less
           likely to remove costs questioned by the Defense Contract Audit
           Agency auditors if the contractor had incurred these costs before
           reaching agreement on the work's scope and price. In one case, the
           Defense Contract Audit Agency questioned $84 million in an audit
           of a task order for an oil mission. In that case, the contractor
           did not submit a proposal until a year after the work was
           authorized, and DOD and the contractor did not negotiate the final
           terms of the contract until more than a year after the contractor
           had completed the work. As a result, the DOD contracting officer
           paid the contractor for all questioned costs but reduced the base
           used to calculate contractor profit by $45 million. As a result,
           the contractor was paid about $3 million less in fees.

           o Lead systems integrators. The use of lead systems
           integrators--prime contractors with increased responsibilities,
           such as collaborating with the government on system
           specifications--puts the government at additional risk because it
           complicates the relationship between the contractor and the
           government. We have found that agencies may use a lead systems
           integrator when they believe they do not have the capacity to
           manage a program, which is a risk in and of itself. This
           arrangement creates an inherent risk, as the contractor is given
           more discretion to make certain program decisions. Along with this
           greater discretion comes the need for more government oversight
           and an even greater need to develop well-defined outcomes at the
           outset. For example, since the program's inception, we have raised
           concerns about the Coast Guard's acquisition approach for its
           Deepwater program--including oversight of its lead systems
           integrator. For instance, we observed that the Coast Guard had not
           held its lead systems integrator accountable for taking steps to
           achieve competition among the suppliers of Deepwater assets. In
           June of this year, we reported that the Coast Guard has recently
           taken steps to hold the lead systems integrator accountable for
           problems that have arisen with the design and construction of
           certain Deepwater assets that will affect the lead systems
           integrator's roles and responsibilities in executing the program
           moving forward. On the other hand, a close partner-like
           relationship such as the one the Army has with its Future Combat
           Systems integrator can also pose risks. Specifically, the
           government can become increasingly invested in the results of
           shared decisions and runs the risk of being less able to provide
           oversight compared with an arms-length relationship.

A lack of oversight contributes to the risks of these contracting
approaches and can contribute to poor outcomes for critical government
projects. Compounding this risk is the growing reliance on contractors to
perform functions previously carried out by government personnel.
Emergency situations can further exacerbate this risk, providing
additional oversight challenges. For example, although U.S. military
forces in Iraq have used contractors to a far greater extent than in prior
operations, DOD lacks sufficient numbers of contractor oversight personnel
at deployed locations to oversee them. Similarly, in work examining
contracts undertaken in support of response and recovery efforts for
Hurricanes Katrina and Rita, we found that while monitoring was occurring
on the contracts we reviewed, the number of monitoring staff available was
not always sufficient or effectively deployed to provide oversight.

Contractors have an important role to play in the discharge of the
government's responsibilities, and in some cases the use of contractors
can result in improved economy, efficiency, and effectiveness. At the same
time, there may be occasions when contractors are used to provide certain
services because the government lacks another viable and timely option, or
due to the preferences of some government officials. In such cases, the
government may actually be paying more and incurring higher risk than if
such services were provided by federal employees. In this environment of
increased reliance on contractors, sound planning and contract execution
are critical for success. We have previously identified the need to
examine the appropriate role for contractors to be among the challenges in
meeting the nation's defense and other needs in the 21st century.

The proper role of contractors in providing services to the government is
currently the topic of some debate. In general, I believe there is a need
to focus greater attention on what type of functions and activities should
be contracted out and which ones should not, to review and reconsider the
current independence and conflict-of-interest rules relating to
contractors, and to identify the factors that prompt the government to use
contractors in circumstances where the proper choice might be the use of
civil servants or military personnel. Possible factors could include
inadequate force structure, outdated or inadequate hiring policies,
classification and compensation approaches, and inadequate numbers of
full-time equivalent slots.

We also have found that agencies sometimes pay contractors incentive and
award fees--financial bonuses or profit intended to motivate excellent
contractor performance--without a clear link to desired program outcomes.
We have reported that DOD, DOE, and NASA have not fared well at using
award and incentive-fee contracts to improve cost control behavior and
performance. For example, in 2005, we reported that DOD paid award and
incentive fees even when programs failed. About half of the 27 incentive
fee contracts that we reviewed failed or were projected to fail to meet a
key measure of program success, which was to complete the acquisition at
or below the target price. In March 2005, we reviewed 33 DOE contracts
using a performance incentive. Of those 33, we found that DOE had awarded
15 such contracts without an associate cost incentive or constraint, as
required by regulations. Thus, the contractor could receive full fees by
meeting all schedule baselines while substantially overrunning costs.
Earlier this year, we reported that NASA paid significant amounts of
available fee on all of the 10 contracts we reviewed, including those end
item contracts that did not deliver a capability within initial cost,
schedule, and performance parameters. In one case, NASA paid the
contractor 97 percent of the available award fee despite a delay in the
completion of the contract by over 2 years and an increase in the cost of
the contract of more than 50 percent. However, when properly tied to
program outcomes, incentive and award fees may have their desired effect.
Last year, we reported that DOE's use of an incentive fee contributed to
the early completion of the cleanup of a former nuclear weapons production
facility.

Creating a Capable Workforce and Holding It Accountable

The last set of challenges I will discuss relate to having a capable
acquisition workforce and holding it accountable. These challenges
underlie the federal government's ability to strategically plan and
effectively manage individual programs and contracts as they involve the
people needed to carry out these functions. My observations are that:

           o The government faces serious acquisition workforce challenges
           (e.g., size, skills and knowledge, and succession planning).
           o Key program staff rotate too frequently, thus promoting myopia
           and reducing accountability (i.e., tours based on time versus key
           milestones). Additionally, the revolving door between industry and
           agencies presents potential conflicts of interest.
           o Inadequate oversight has resulted in little or no accountability
           for recurring and systemic problems.
           o Lack of high-level attention reduces the chances of success in
           the acquisition, contracting, and other key business areas.

The acquisition workforce's workload and complexity of responsibilities
have been increasing without adequate agency attention to the workforce's
size, skills and knowledge, and succession planning. This situation is
made all the more challenging by the increasing use of contractors to
support program operations because of the additional oversight needed.

Though many agencies lack good data on their workforces, it is clear that
the size of the workforce has declined, while the size of government
expenditures for goods and services has risen significantly. These trends
represent a major challenge to the current workforce--dealing with a
significantly increased workload.

At the same time that the federal acquisition workforce has decreased in
numbers and the size of its investments in goods and services has
increased significantly, the nature of the role of the acquisition
workforce has been changing and, as a result, so have the skills and
knowledge needed in that workforce to manage more complex contracting
approaches. One way agencies have dealt with this situation is to rely
more heavily on contractor support. For example, DOD is relying on
contractors in new ways to manage and deliver weapon systems. On the basis
of our work looking at various major weapon systems, we have observed that
DOD has given contractors increased program management responsibilities to
develop requirements, design products, and select major system and
subsystem contractors. In part, this increased reliance has occurred
because DOD is experiencing a critical shortage of certain acquisition
professionals with technical skills related to systems engineering,
program management, and cost estimation. Without adequate oversight by and
training of federal employees overseeing contracting activities, reliance
on contractors to perform functions that once would have been performed by
members of the federal workforce carries risk. As I noted earlier, the use
of lead system integrators is being undertaken by agencies when they
believe they lack the expertise needed to manage complex acquisitions.

Our concern over the skills and knowledge of the workforce extends beyond
DOD. At times skills may be in short supply in both government and the
private sector. For example, in December 2006 we reported that employees
with certain information technology skills are in short supply in both the
federal and private sectors--particularly in enterprise architecture,
project management, and information security.

Demographic changes promise to further exacerbate agencies' acquisition
workforce problems. In 2006, Office of Personnel Management reported that
approximately 60 percent of the government's 1.6 million white collar
employees and 90 percent of about 6,000 federal executives will be
eligible for retirement over the next 10 years. The situation facing DOD
exemplifies this problem as more than half of DOD's workforce will be
eligible for early or regular retirement in the next 5 years. In fact,
Navy officials recently told us that they are already seeing a
"hemorrhaging" of senior contracting officers as large numbers have
started to retire. Agencies facing workforce challenges have used
strategic human capital planning to develop long-term strategies for
acquiring, developing, motivating, and retaining staff to achieve
programmatic goals. Additionally, agencies should engage in broad,
integrated succession planning and management efforts that focus on
strengthening their current and future organizational capacity to obtain
or develop the knowledge, skill, and abilities they need to meet their
missions. Without proper strategic human capital planning, the government
will not be a good position to adjust to this challenge.

We also have concerns that acquisition employees rotate too
frequently--both between programs and between government and industry. In
a recent assessment of selected DOD weapon systems, we found that many of
the programs had multiple program managers within the same development
phase, reducing accountability for poor program outcomes. We also reported
that the Coast Guard experienced high turnover of key Deepwater program
staff, resulting in the loss of knowledge on the teams responsible for
managing the program and overseeing the system integrator. Also, the
revolving door between industry and government may present potential
conflicts of interest. Federal ethics rules and standards have been put in
place to help safeguard the integrity of the procurement process by
mitigating the risk that employees will use their positions to influence
the outcomes of contract awards for future gain and that companies will
exploit this possibility. We currently have reviews under way examining
issues relating to the revolving door between federal employment and
contractors working for the government including DOD actions to assess
contractor hiring controls to address revolving door issues.

Our work at DOD and other agencies has shown that there have been
persistent acquisition problems, particularly for complex developmental
systems, but also for the increasingly complex contracting arrangements
being used by the government to purchase goods and services. For example,
we reported on DOE's weaknesses in managing its acquisitions and found
that DOE is only meeting its cost and schedule goals for its ongoing
construction projects about one-third of the time. We also found that
DOE's National Nuclear Security Administration has not developed a project
management policy, implemented a plan for improving its project management
practices, or fully shared project management lessons learned among its
sites. Similarly, we also have reported on weaknesses in the Federal
Aviation Administration's (FAA) management of its acquisition process as
the primary causes of its cost, schedule, and performance problems in
developing systems for air traffic control. Because of these weaknesses,
we continue to designate FAA's modernization program as a high-risk area.

A key part of addressing challenges to the acquisition workforce is having
mechanisms to hold the workforce accountable and ensure sufficient
high-level attention to systemic acquisition problems. We have noted the
importance of sustained leadership to ensure accountability for results
and addressing key deficiencies when faced with complex and long-term
challenges. In July 2006, we reported that DOD continues to face
vulnerabilities in contracting fraud, waste, and abuse, in part because it
lacks sustained senior leadership in providing direction and vision, as
well as in maintaining the culture of the organization. By not setting the
right tone at the top, DOD allows a certain level of vulnerability into
the acquisition process and problems to persist. Holding the workforce
accountable has certain prerequisites. For example, we have reported that
senior leaders have to provide program managers an executable business
case, empower them, support them, and align managers' tenures with
delivery dates.

We also have identified the need for similar high-level management
attention at other agencies. For example, we have raised concerns in the
past that DHS's Chief Procurement Officer (CPO) did not have clear
enforcement authority to ensure that acquisition initiatives are carried
out. DHS recently stated that the Under Secretary for Management has
authority as the Chief Acquisition Officer to monitor acquisition
performance, establish clear lines of authority for making acquisition
decisions, and manage the direction of acquisition policy for the
department, and that those authorities also devolve to the CPO. A formal
designation of a Chief Acquisition Officer and corresponding modifications
to existing management directives should help address our earlier
concerns. Similarly, after creating a Chief Operating Officer to head its
air traffic modernization program, FAA was able to adopt more leading
practices of private sector businesses to address cost, schedule, and
performance shortfalls that have plagued air traffic control acquisitions.
Also, our work looking at leading company practices used to acquire
services found that companies elevated their procurement organizations
from mission support to a more strategically important business unit that
exercises more control over the acquisition of services.

Further, on the basis of on our defense work, we have noted that an
essential ingredient for better ensuring that overall DOD business
transformation is implemented and sustained is to create a full-time and
separate Chief Management Officer (CMO) position to address key business
transformation challenges and stewardship responsibilities. Such a
position could institutionalize accountability for DOD's efforts to
improve its business operations, including prioritizing investments across
the department.

Conclusions

In closing, I would like to reemphasize why it is imperative that we
correct these systemic governmentwide acquisition challenges. The U.S.
government's current financial condition and long-term fiscal outlook
require it to seek the best return it can on its investment in goods and
services and make some difficult, but necessary, strategic choices between
unlimited wants and real, affordable, and sustainable needs. The federal
government needs to engage in a fundamental and comprehensive
re-examination of the federal government's overall approach to
contracting. This includes when and on what basis the government should
contract. In the day-to-day management and oversight of major projects and
purchases of goods and services, agencies will need to be realistic in
their requirements and technologies before they invest significant funds
in programs and strike a better balance among expediency, best value, and
oversight when entering into contracts for goods and services. Agencies
must also assess the skills, knowledge, and appropriate size of their
acquisition workforce, and must also have key leadership positions to set
the right tone at the top and have high-level accountability to fix
recurring acquisition issues. We should have zero tolerance for waste and
mismanagement in times of surplus or deficit, but it will never be zero.
Much, however, can and should be done to minimize it.

We have made numerous specific recommendations to DOD and other agencies
on how to address these systemic acquisition challenges, many of which
have not been implemented. Where agencies are responding to our
recommendations, we are seeing some improvements in their acquisition
management. I appreciate this committee's attention to this important and
timely issue and look forward to working with you to see that agencies
continue to take actions to address these challenges.

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

Contact and Staff Acknowledgments

For further information regarding this testimony, please contact John P.
Hutton at (202) 512-4841 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs can be found on the
last page of this testimony. Key contributors to this testimony were
Theresa Chen, Laura Holliday, John Neumann, Kenneth Patton, Sylvia Schatz,
Karen Sloan, and Bruce Thomas.

Appendix I: Systemic Acquisition Challenges at the Department of Defense

           1. Service budgets are allocated largely according to top line
           historical percentages rather than Defense-wide strategic
           assessments and current and likely resource limitations.
           2. Capabilities and requirements are based primarily on individual
           service wants versus collective Defense needs (i.e., based on
           current and expected future threats) that are both affordable and
           sustainable over time.
           3. Defense consistently overpromises and underdelivers in
           connection with major weapons, information, and other systems
           (i.e., capabilities, costs, quantities, and schedule).
           4. Defense often employs a "plug and pray approach" when costs
           escalate (i.e., divide total funding dollars by cost per copy,
           plug in the number that can be purchased, then pray that Congress
           will provide more funding to buy more quantities).
           5. Congress sometimes forces the department to buy items (e.g.,
           weapon systems) and provide services (e.g., additional health care
           for non-active beneficiaries, such as active duty members'
           dependents and military retirees and their dependents) that the
           department does not want and we cannot afford.
           6. DOD tries to develop high-risk technologies after programs
           start instead of setting up funding, organizations, and processes
           to conduct high-risk technology development activities in low-cost
           environments, (i.e., technology development is not separated from
           product development). Program decisions to move into design and
           production are made without adequate standards or knowledge.
           7. Program requirements are often set at unrealistic levels, then
           changed frequently as recognition sets in that they cannot be
           achieved. As a result, too much time passes, threats may change,
           or members of the user and acquisition communities may simply
           change their mind. The resulting program instability causes cost
           escalation, schedule delays, smaller quantities and reduced
           contractor accountability.
           8. Contracts, especially service contracts, often do not have
           definitive or realistic requirements at the outset in order to
           control costs and facilitate accountability.
           9. Contracts typically do not accurately reflect the complexity of
           projects or appropriately allocate risk between the contractors
           and the taxpayers (e.g., cost plus, cancellation charges).
           10. Key program staff rotate too frequently, thus promoting myopia
           and reducing accountability (i.e., tours based on time versus key
           milestones). Additionally, the revolving door between industry and
           the department presents potential conflicts of interest.
           11. The acquisition workforce faces serious challenges (e.g.,
           size, skills, knowledge, and succession planning).
           12. Incentive and award fees are often paid based on contractor
           attitudes and efforts versus positive results (i.e., cost,
           quality, and schedule).
           13. Inadequate oversight is being conducted by both the department
           and Congress, which results in little to no accountability for
           recurring and systemic problems.
           14. Some individual program and funding decisions made within the
           department and by Congress serve to undercut sound policies.
           15. Lack of a professional, term-based Chief Management Officer at
           the department serves to slow progress on defense transformation
           and reduce the chance of success in the acquisitions/contracting
           and other key business areas.
			  
			  Appendix II: Definition of Waste

           Several of my colleagues in the accountability community and I
           have developed a definition of waste. As we see it, waste involves
           the taxpayers in the aggregate not receiving reasonable value for
           money in connection with any government-funded activities due to
           an inappropriate act or omission by players with control over or
           access to government resources (e.g., executive, judicial or
           legislative branch employees; contractors; grantees; or other
           recipients). Importantly, waste involves a transgression that is
           less than fraud and abuse. Further, most waste does not involve a
           violation of law, but rather relates primarily to mismanagement,
           inappropriate actions, or inadequate oversight. Illustrative
           examples of waste could include the following:
			  
                        o unreasonable, unrealistic, inadequate, or
                        frequently changing requirements;
                        o proceeding with development or production of
                        systems without achieving an adequate maturity of
                        related technologies in situations where there is no
                        compelling national security interest to do so;
                        o the failure to use competitive bidding in
                        appropriate circumstances;
                        o an over-reliance on cost-plus contracting
                        arrangements where reasonable alternatives are
                        available;
                        o the payment of incentive and award fees in
                        circumstances where the contractor's performance, in
                        terms of costs, schedule, and quality outcomes, does
                        not justify such fees;
                        o the failure to engage in selected pre-contracting
                        activities for contingent events; and
                        o congressional directions (e.g., earmarks) and
                        agency spending actions where the action would not
                        otherwise be taken based on an objective value and
                        risk assessment and considering available resources.
								
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[65]www.gao.gov/cgi-bin/getrpt?GAO-07-1098T .

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Highlights of [66]GAO-07-1098T , a testimony before the Committee on
Homeland Security and Governmental Affairs, United States Senate

July 17, 2007

FEDERAL ACQUISITIONS AND CONTRACTING

Systemic Challenges Need Attention

In fiscal year 2006, the federal government spent over $400 billion for a
wide variety of goods and services, with the Department of Defense (DOD)
being the largest purchaser. Given the large and growing structural
deficit, the government must get the best return it can on its investment
in goods and services.

For decades, GAO has reported on a number of systemic challenges in
agencies' acquisition of goods and services. These challenges are so
significant and wide-ranging that GAO has designated four areas of
contract management across the government to be high-risk.

This testimony highlights four key acquisition challenges agencies face:
(1) separating wants from needs, (2) establishing and supporting realistic
program requirements, (3) using contractors in appropriate circumstances
and contracts as a management tool, and (4) creating a capable workforce
and holding it accountable.

[67]What GAO Recommends

While GAO is making no new recommendations in this testimony, GAO has made
numerous recommendations through the years to improve government
acquisitions, many of which have not been implemented. Where agencies have
responded to our recommendations, we have seen some improvements in their
acquisition management.

Given the current fiscal environment, agencies must separate wants from
needs to ensure that programs provide the best return on investments. Our
work has shown that some agencies budget and allocate resources
incrementally, largely based on historical precedents, rather than
conducting bottom-up reviews and allocating resources based on agencywide
goals. We have also seen examples of agencies using fragmented
decision-making processes for acquisition investments. Agency spending
actions that would not otherwise be taken based on an objective value and
risk assessment and considering available resources, work against good
strategic planning. Such spending can circumvent careful planning and
divert resources from more critical needs, and can serve to exacerbate our
serious long-range fiscal imbalance.

Agencies also need to translate their true needs into executable programs
by setting realistic and stable requirements, acquiring requisite
knowledge as acquisitions proceed through development, and funding
programs adequately. However, agencies too often promise capabilities they
cannot deliver and proceed to development without adequate knowledge. As a
result, programs take significantly longer, cost more than planned, and
deliver fewer quantities and different capabilities than promised. Even if
more funding were provided, it would not be a solution because wants will
usually exceed the funding available.

No less important is the need to examine the appropriate circumstances for
using contractors and address contract management challenges. Agencies
continue to experience poor acquisition outcomes in buying goods and
services in part because of challenges in setting contract requirements,
using the appropriate contract with the right incentives, and ensuring
sufficient oversight. Exacerbating these challenges is the evolving and
enlarging role of contractors in performing functions previously carried
out by government personnel. Further, while contract management challenges
can jeopardize successful acquisition outcomes in normal times, they also
take on heightened importance and significantly increase risks in the
context of contingency operations such as Afghanistan, Iraq, or Hurricane
Katrina.

Finally, it is imperative that the federal government develop an
accountable and capable workforce, because the workforce is ultimately
responsible for strategic planning and management of individual programs
and contracts. Yet much of the acquisition workforce's workload and
complexity of responsibilities have been increasing without adequate
attention to the workforce's size, skills and knowledge, and succession
planning. Sustained high-level leadership is needed to set the right tone
at the top in order to address acquisition challenges and ultimately,
prevent fraud, waste, and abuse.

References

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  66. http://www.gao.gov/cgi-bin/getrpt?GAO-07-1098T
*** End of document. ***