Defense Acquisitions: DOD Needs to Exert Management and Oversight
to Better Control Acquisition of Services (17-JAN-07,		 
GAO-07-359T).							 
                                                                 
The Department of Defense (DOD) is relying more and more on	 
contractors to provide billions of dollars in services. Congress 
has been concerned about DOD's ability to prudently manage these 
funds, and this subcommittee in particular has pushed DOD to	 
employ sound business practices when using the private sector for
services. Nevertheless, DOD may not have always obtained good	 
value while spending billions of dollars on services at a time	 
when serious budget pressures are facing the nation. This	 
testimony discusses DOD's (1) increasing reliance on contractors;
(2) failure to consistently follow sound business practices when 
acquiring services; and (3) opportunities for DOD to improve its 
management of services. The testimony is based on GAO's work from
the past decade as well as recent reports issued by the 	 
Inspectors General.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-359T					        
    ACCNO:   A64917						        
  TITLE:     Defense Acquisitions: DOD Needs to Exert Management and  
Oversight to Better Control Acquisition of Services		 
     DATE:   01/17/2007 
  SUBJECT:   Accountability					 
	     Competition					 
	     Contract administration				 
	     Contract oversight 				 
	     Contracts						 
	     Defense cost control				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Financial management				 
	     Procurement practices				 
	     Requirements definition				 
	     Service contracts					 
	     Strategic planning 				 
	     Contract mismanagement				 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-07-359T

   

     * [1]Summary

          * [2]DOD Increasingly Relies on Contractor-Provided Services
          * [3]DOD Does Not Consistently Use Sound Business Practices

               * [4]Poorly Defined Requirements
               * [5]Inadequate Competition
               * [6]Inadequate Management and Assessment of Contractor
                 Performan
               * [7]Inappropriate Use of Interagency Contracts

          * [8]DOD Needs a Management Structure to Oversee Service Acquisit

     * [9]Scope and Methodology
     * [10]Contact and Staff Acknowledgments
     * [11]GAO's Mission
     * [12]Obtaining Copies of GAO Reports and Testimony

          * [13]Order by Mail or Phone

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

Testimony

Before the Subcommittee on Readiness and Management Support, Committee on
Armed Services, U.S. Senate

United States Government Accountability Office

GAO

For Release on Delivery Expected at 2:30 p.m. EST

January 17, 2007

DEFENSEACQUISITIONS

DOD Needs to Exert Management and Oversight to Better Control Acquisition
of Services

Statement of Katherine V. Schinasi, Managing Director Acquisition and
Sourcing Management

GAO-07-359T

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss challenges the Department of
Defense (DOD) faces in acquiring services to support its operations.
Although many of these challenges are long-standing, they have become more
apparent in recent years as the department's reliance on contractors has
grown in size and scope. In fiscal year 2005, DOD obligated more than $141
billion on service contracts, a 72-percent increase since fiscal year
1996. As you know, however, DOD does not always use sound contracting
practices when acquiring these services and the department is operating
with a deficit of people with the right skills to support its
acquisitions. Consequently, DOD may not have always obtained good value
when buying billions of dollars of services at a time when serious budget
pressures face the nation.

This subcommittee has explored new approaches and supported legislation to
improve DOD's acquisition of services. It has emphasized the use of sound
business practices and competition to obtain services at reasonable prices
for DOD and ultimately the taxpayer. In addition, it has encouraged DOD to
establish a structure to better manage its acquisition of services.
Despite these efforts, many improvements are still needed. The recurring
nature of DOD's problems is evidenced by the fact that DOD contract
management has been on GAO's list of high-risk areas since 1992.^1 In
January 2005, we added the management of interagency contracting to the
list. In July 2006, we reported on DOD's vulnerabilities to contracting
fraud, waste, and abuse.^2

Today, I would like to discuss DOD's (1) increasing reliance on
contractors, (2) failure to consistently follow sound business practices
when acquiring services, and (3) opportunities for DOD to improve its
management of services. My statement is based on work that GAO has
completed over the past decade, which was conducted in accordance with
generally accepted government auditing standards. Additionally, my
statement draws on recent reports issued by the DOD Inspector General and
General Services Administration Inspector General.

^1GAO, High-Risk Series: An Update, [17]GAO-05-207 (Washington, D.C.:
January 2005).

^2GAO, Contract Management: DOD Vulnerabilities to Contracting Fraud,
Waste, and Abuse, [18]GAO-06-838R (Washington, D.C.: July 7, 2006).

Summary

Negative outcomes should be no surprise given the convergence of DOD's
growing reliance on contractors to provide services and long-standing
problems with contract management. These problems--ill-defined
requirements, inadequate competition, ineffective management and
surveillance of contractor performance, and inappropriate uses of other
agencies' contracts--have resulted in outcomes that have cost the
department valuable resources. These problems are not new and, if they
remain unresolved, will only continue to waste DOD's resources. However,
the department is not in a good position to address these long-standing
problems. DOD does not know where it wants service acquisitions to be in
the next few years or how to get there. DOD is taking some steps to
address these problems but much remains to be done.

DOD Increasingly Relies on Contractor-Provided Services

Over the past decade, DOD has increasingly relied on contractors to
provide a range of mission-critical services from operating information
technology systems to providing logistical support on the battlefield. The
growth in spending on services clearly illustrates this point. DOD's
obligations on service contracts rose from $82.3 billion in fiscal year
1996 to $141.2 billion in fiscal year 2005 (see table 1). DOD committed 20
percent of its obligations on services in fiscal year 2005 for
professional, administrative, and management support contracts. Overall,
according to DOD, the amount obligated on service contracts exceeded the
amount the department spent on supplies and equipment, including major
weapon systems. To a large degree, this growth simply happened and was not
a managed outcome.

Table 1: Changes in DOD's Use of Service Contracts, Fiscal Years 1996 to
2005 (fiscal year 2005 dollars in billions)

                              Service                              Percentage 
                            obligations  Percentage of service change, fiscal 
                            Fiscal year    obligations, fiscal  years 1996 to 
Service category          1996   2005             year 2005           2005 
Professional,            $10.8  $28.3                  20.0            161 
administrative, and                                                        
management support                                                         
Construction of            7.3   11.7                   8.3             62 
facilities                                                                 
Maintenance and repair     6.6   11.4                   8.1             74 
of equipment                                                               
Information technology     4.9   10.3                   7.3            110 
Medical services           1.6    8.0                   5.6            412 
Transportation, travel,    2.4    6.2                   4.4            154 
and relocation                                                             
Housekeeping services      2.4    4.8                   3.4             98 
All other services,       22.7   23.6                  16.7              4 
excluding research and                                                     
development^a                                                              
Research and development  23.7   37.0                  26.2             56 
Total, all service       $82.3 $141.2                 100.0             72 
contracts                                                                  

Source: DOD's DD350 database for all actions exceeding $25,000 (data); GAO
(analysis).

aOther services include photographic, mapping, and printing; education and
training; and social services, among others.

As service acquisition spending has grown, the size of the civilian
workforce has decreased. More significantly, DOD carried out this
downsizing without ensuring that it had the specific skills and
competencies needed to accomplish DOD's mission. For example, the amount,
nature, and complexity of contracting for services have increased, which
has challenged DOD's ability to maintain a workforce with the requisite
knowledge of market conditions and industry trends, the ability to prepare
clear statements of work, the technical details about the services they
procure, and the capacity to manage and oversee contractors. In addition,
new skills have been required to use alternative contracting approaches
introduced by acquisition reform initiatives.

Participants in an October 2005 GAO forum on Managing the Supplier Base
for the 21st Century commented that the current federal acquisition
workforce significantly lacks the new business skills needed to act as
contract managers. In June 2006, DOD issued a human capital strategy that
acknowledged that DOD's civilian workforce is not balanced by age or
experience. DOD's strategy identified a number of steps planned over the
next 2 years to more fully develop a long-term approach to managing its
acquisition workforce. Many personnel, however, are involved in acquiring
services. In the broadest sense, these personnel include not only the
contracting officers who award contracts, but also those personnel who
define the requirements, receive or benefit from the services obtained,
monitor contractor performance, and pay for the services.

A report we issued in November 2006 on DOD space acquisition provides an
example of downsizing in a critical area--cost estimating.^3 In this case,
there was a belief within the government that cost savings could be
achieved under acquisition reform initiatives by reducing technical staff,
including cost estimators, since the government would be relying more on
commercial-based solutions to achieve desired capabilities. According to
one Air Force cost-estimating official we spoke with, this led to a
decline in the number of Air Force cost estimators from 680 to 280.
According to this official, many military and civilian cost-estimating
personnel left the cost-estimating field, and the Air Force lost some of
its best and brightest cost estimators. In turn, because of the decline in
in-house resources, space program offices and Air Force cost-estimating
organizations are now more dependent on support from contractors. For
example, at 11 space program offices, contractors accounted for 64 percent
of cost-estimating personnel. The contractor personnel now generally
prepare cost estimates while government personnel provide oversight,
guidance, and review of the cost-estimating work. Reliance on support
contractors raises questions from the cost-estimating community about
whether numbers and qualifications of government personnel are sufficient
to provide oversight of and insight into contractor cost estimates.

DOD also relies extensively on contractors to undertake major
reconstruction projects and provide logistical support to troops in Iraq.
DOD is responsible for a significant portion of the more than $30 billion
in appropriated reconstruction funds and has awarded and managed many of
the large reconstruction contracts, such as the contracts to rebuild
Iraq's oil, water, and electrical infrastructure, and to train and equip
Iraqi security forces. Further, U.S. military operations in Iraq have used
contractors to a far greater extent than in prior operations to provide
interpreters and intelligence analysts, as well as more traditional
services such as weapons systems maintenance and base operations support.
These services are often provided under cost-reimbursement type contracts,
which allow the contractor to be reimbursed for reasonable, allowable, and
allocable costs to the extent prescribed in the contract. Additionally,
after the September 2001 terrorist attacks, increased security
requirements and the deployment of active duty and reserve personnel
resulted in DOD having fewer military personnel to protect domestic
installations. For example, the U.S. Army awarded contracts worth nearly
$733 million to acquire contract guards at 57 installations.

^3GAO, Space Acquisitions: DOD Needs to Take More Action to Address
Unrealistic Initial Cost Estimates of Space Systems, [19]GAO-07-96
(Washington, D.C.: Nov. 17, 2006).

Other factors have contributed to the growth in service contracts. For
example, DOD historically bought space launch vehicles, such as the Delta
and Titan rockets as products. Now, under the Evolved Expendable Launch
Vehicle program, the Air Force purchases launch services using
contractor-owned launch vehicles. Similarly, the Air Force and Army turned
to service contracts for simulator training primarily because efforts to
modernize existing simulator hardware and software had lost out in the
competition for procurement funds. Buying training as a service meant that
operation and maintenance funds could be used instead of procurement
funds.^4

DOD Does Not Consistently Use Sound Business Practices

Our work, along with that of the Inspectors General, has repeatedly found
problems with the practices DOD uses to acquire services. Too often, the
department obtains services based on poorly defined requirements and
inadequate competition. Similarly, it does not always oversee and manage
contractor performance once a contract is in place. All of these problems
show up in the department's use of other agencies' contracts.
Collectively, these problems expose DOD to unnecessary risk and poor
outcomes.

  Poorly Defined Requirements

Poorly defined or broadly described requirements have contributed to
undesired service acquisition outcomes. To produce desired outcomes within
available funding and required time frames, DOD and its contractors need
to clearly understand acquisition objectives and how they translate into
the contract's terms and conditions. The absence of well-defined
requirements and clearly understood objectives complicates efforts to hold
DOD and contractors accountable for poor acquisition outcomes. For
example,

           o In June 2004, we found that during Iraqi reconstruction efforts,
           when requirements were not clear, DOD often entered into contract
           arrangements that introduced risks.^5 We reported that DOD often
           authorized contractors to begin work before key terms and
           conditions and the work to be performed and its projected costs
           were fully defined. In September 2006, we reported that, under
           this approach, DOD contracting officials were less likely to
           remove costs questioned by auditors if the contractor had incurred
           these costs before reaching agreement on the work's scope and
           price.^6 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.

           o The DOD Inspector General found similar problems with DOD's use
           of letter contracts. While this type of contract may be necessary
           to initiate work quickly to meet urgent operational needs, costs
           on letter contracts are more difficult to control because the
           requirements and costs are undefined. In August 2004, the
           Inspector General reported that contracting officials did not
           adequately definitize the acquisition requirements within the
           required time frames. Further, the Inspector General noted
           officials did not document the reasonableness of the profit rates
           charged by the contractors.^7 We are continuing to do work in this
           area.

           o In July 2004, we noted that personnel using the Army's Logistics
           Civil Augmentation Program (LOGCAP) contract in Iraq, including
           those that may be called upon to write statements of work and
           prepare independent government cost estimates, had not always
           received the training needed to accomplish their missions.^8 We
           noted, for example, the statement of work required the contractor
           to provide water for units within 100 kilometers of designated
           points but did not indicate how much water needed to be delivered
           to each unit or how many units needed water. Without such
           information, the contractor may not be able to determine how to
           meet the needs of the Army and may take unnecessary steps to meet
           the customer's needs.
           o In July 2005, we reported that other agencies that DOD relied on
           to provide contracting services did not define desired outcomes or
           requirements.^9 We found that required outcomes were not
           well-defined in the cases we reviewed at franchise funds at the
           Departments of the Interior and the Treasury--GovWorks and
           FedSource--that acquired a range of services for DOD. The GovWorks
           and FedSource files we reviewed lacked clear descriptions of
           requirements the contractor was supposed to meet. Orders generally
           described work in broad terms and documentation sometimes
           specifically indicated that work would be defined more fully after
           an order was placed.

^4Various funds can be used to acquire services, depending on the nature
of service.

^5GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and
Management Challenges, [20]GAO-04-605 (Washington, D.C.: June 1, 2004).

^6GAO, Rebuilding Iraq: Continued Progress Requires Overcoming Contract
Management Challenges, [21]GAO-06-1130T (Washington, D.C.: Sept. 28,
2006); see also Iraq Contract Costs: DOD Consideration of Defense Contract
Audit Agency's Findings, [22]GAO-06-1132 (Washington, D.C.: Sept. 25,
2006).

^7Department of Defense, Office of the Inspector General, Audit Report:
Undefinitized Contractual Actions. Report Number D-2004-112 (Arlington,
VA.: Aug. 30, 2004).

^8GAO, Military Operations: DOD's Extensive Use of Logistics Support
Contracts Requires Strengthened Oversight, [23]GAO-04-854 (Washington,
D.C.: July 19, 2004).

  Inadequate Competition

Competition is a fundamental principle underlying the federal acquisition
process. Nevertheless, we have reported on the lack of competition in
DOD's acquisition of services since 1998. We have reported that DOD has,
at times, sacrificed the benefits of competition for expediency. For
example, we noted in April 2006 that DOD awarded contracts for security
guard services supporting 57 domestic bases, 46 of which were done on an
authorized, sole-source basis.^10 The sole-source contracts were awarded
by DOD despite recognizing it was paying about 25 percent more than
previously paid for contracts awarded competitively.

DOD has also misused the contracts available on the General Services
Administration's multiple-award schedules. Although DOD is required to
foster competition and provide all contractors a fair opportunity to be
considered for each order placed on the schedules, unless certain
exceptions apply,^11 DOD officials have on numerous occasions avoided the
time and effort necessary to compete individual orders and instead awarded
all the work to be performed to a single contractor. GAO work shows that
this practice resulted in the noncompetitive award of many orders that
have not always been adequately justified.

  Inadequate Management and Assessment of Contractor Performance

GAO has reported on numerous occasions that DOD did not adequately manage
and assess contractor performance to ensure that the business arrangement
was properly executed. Managing and assessing post-award performance
entails various activities to ensure that the delivery of services meets
the terms of contract and requires adequate surveillance resources, proper
incentives, and a capable workforce for overseeing contracting activities.
If surveillance is not conducted, not sufficient, or not well documented,
DOD is at risk of being unable to identify and correct poor contractor
performance in a timely manner and potentially paying too much for the
services it receives.

^9GAO, Interagency Contracting: Franchise Funds Provide Convenience, but
Value to DOD Is Not Demonstrated, [24]GAO-05-456 (Washington, D.C.: July
29, 2005).

^10GAO, Contract Security Guards: Army's Guard Program Requires Greater
Oversight and Reassessment of Acquisition Approach, [25]GAO-06-284
(Washington, D.C.: Apr. 3, 2006).

^1110 U.S.C. 2304c.

Our work has found, however, that DOD is often at risk. In March 2005, for
example, we reported instances of inadequate surveillance on 26 of 90 DOD
service contracts we reviewed.^12 In each instance, at least one of the
key factors to ensure adequate surveillance did not take place. These
factors are (1) training personnel in how to conduct surveillance, (2)
assigning personnel at or prior to contract award, (3) holding personnel
accountable for their surveillance duties, and (4) performing and
documenting surveillance throughout the period of the contract. Officials
we met with during our review expressed concerns about support for
surveillance. The comments included those of Navy officials who told us
that surveillance remains a part-time duty they did not have enough time
to undertake and, consequently, was a low-priority task.

More recently, in December 2006 we reported that DOD does not have
sufficient numbers of contractor oversight personnel at deployed
locations, which limits its ability to obtain reasonable assurance that
contractors are meeting contract requirements efficiently and
effectively.^13 For example, an Army official acknowledged that the Army
is struggling to find the capacity and expertise to provide the
contracting support needed in Iraq. A LOGCAP program official noted that,
if adequate staffing had been in place, the Army could have realized
substantial savings on the LOGCAP contract through more effective reviews
of new requirements. A Defense Contract Management Agency official
responsible for overseeing the LOGCAP contractor's performance at 27
locations noted that he was unable to visit all of those locations during
his 6-month tour to determine the extent to which the contractor was
meeting the contract's requirements.

^12GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, [26]GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

^13GAO, Military Operations: High-Level DOD Action Needed to Address
Long-standing Problems with Management and Oversight of Contractors
Supporting Deployed Forces, [27]GAO-07-145 (Washington, D.C.: Dec. 18,
2006).

Our review of GovWorks and FedSource also found that both DOD and
franchise fund officials were not monitoring contracts. Further, these
organizations lacked criteria against which contractor performance could
be measured to ensure that contractors provided quality services in a
timely manner.^14 Similarly, in 2004, the General Services Administration
Inspector General reported on problems with surveillance when DOD used the
General Services Administration's Federal Technology Service (FTS). For
example, in reviewing task orders DOD placed through FTS, the Inspector
General found that payments were made for substandard work or for work
that was incomplete or never delivered, for bills that contained incorrect
labor rates or did not adhere to contract pricing terms, and for bills
that included unsubstantiated costs.

  Inappropriate Use of Interagency Contracts

In January 2005, we identified management of interagency contracts as a
high-risk area because of their rapid growth, limited expertise of users
and administrators, and unclear lines of accountability. Since DOD is the
largest user of interagency contracts in the government, it can ill-afford
to expose itself to such risks. Relying on other agencies for contracting
support requires sound practices. The problems in clearly defining
requirements, inadequate competition, and monitoring contractor
performance to ensure that the government is getting good value are also
evident in interagency contracting, as I have previously discussed.
However, under an interagency arrangement, the number of parties in the
contracting process increases and so too does the need to ensure
accountability. Ensuring the proper use of these contracting arrangements
must be viewed as a shared responsibility that requires agencies to define
clearly who does what in the contracting process. Additionally, DOD pays a
fee to other agencies when using their contracts or contracting services,
which could potentially increase DOD costs.

In April 2005, we reported that a lack of effective management
controls--in particular insufficient management oversight and a lack of
adequate training--led to breakdowns in the issuance and administration of
task orders for interrogation and other services in Iraq by the Department
of the Interior on behalf of DOD.^15 These breakdowns included

           o issuing 10 out of 11 task orders that were beyond the scope of
           underlying contracts, in violation of competition rules;
           o not complying with additional DOD competition requirements when
           issuing task orders for services on existing contracts;
           o not properly justifying the decision to use interagency
           contracting;
           o not complying with ordering procedures meant to ensure best
           value for the government; and
           o not adequately monitoring contractor performance.

^14 [28]GAO-05-456 .

^15GAO,  Interagency Contracting:  Problems  with  DOD's  and  Interior's 
Orders  to  Support  Military  Operations, [29]GAO-05-201 (Washington,
D.C.: Apr. 29, 2005).

Because officials at Interior and the Army responsible for the orders did
not fully carry out their responsibilities, the contractor was allowed to
play a role in the procurement process normally performed by government
officials. Further, the Army officials responsible for overseeing the
contractor, for the most part, lacked knowledge of contracting issues and
were not aware of their basic duties and responsibilities.

Similarly, our work on DOD's use of franchise funds managed by the
Departments of the Treasury and the Interior found that sound management
practices for ensuring competition, analyzing contracting alternatives,
and defining outcomes were not in place. For example, GovWorks did not
receive competing proposals for work. GovWorks also added substantial work
to the orders without determining that prices were fair and reasonable.
FedSource generally did not ensure competition for work, did not conduct
price analyses, and sometimes paid contractors higher prices for services
than established in contracts with no justification in the contract files.
DOD also did not analyze contracting alternatives and lacked information
about purchases made through these arrangements.

We identified several causes for the lack of sound practices. In some
cases, there was a lack of clear guidance and contracting personnel were
insufficiently trained on the use of interagency contracting arrangements.
In many cases, DOD users chose the speed and convenience of an interagency
contracting arrangement to respond and meet needs quickly. Contracting
service providers, under a fee-for-service arrangement, sometimes
inappropriately emphasized customer satisfaction and revenue generation
over compliance with sound contracting policies and procedures
requirements. These practices put DOD at risk of not getting required
services at reasonable prices and unnecessarily wasting resources.
Further, DOD does not have useful information about purchases made through
other agencies' contracts, making it difficult to assess the costs and
benefits and make informed choices about the alternatives methods
available.

DOD Needs a Management Structure to Oversee Service Acquisition Processes and
Outcomes

Congress and GAO have identified the need to improve DOD's overall
approach to acquiring services for several years. In 2002, we noted that
DOD's approach to buying services was largely fragmented and
uncoordinated, with responsibility for acquiring services spread among
individual military commands, weapon system program offices, or functional
units on military bases, with little visibility or control at the DOD or
military department level. Despite taking action to address the
deficiencies and implement legislative requirements, DOD's actions to date
have not equated to progress. DOD's current approach to acquiring services
suffers from the absence of key elements at the strategic and
transactional levels and does not position the department to make service
acquisitions a managed outcome.

Considerable congressional effort has been made to improve DOD's approach
to acquiring services. For example, in 2001, Congress passed legislation
to ensure that DOD acquires services by means that are in the best
interest of the government and managed in compliance with applicable
statutory requirements. In this regard, sections 801 and 802 of the
National Defense Authorization Act for Fiscal Year 2002 required DOD to
establish a service acquisition management approach, including developing
a structure for reviewing individual service transactions based on dollar
thresholds and other criteria.^16 Last year, Congress amended requirements
pertaining to DOD's service contracting management structure, workforce,
and oversight processes, among others.^17

We have issued several reports that identified shortcomings in DOD's
approaches and its implementation of legislative requirements. For
example, we issued a report in January 2002 that identified how leading
commercial companies took a strategic approach to buying services and
recommended that DOD evaluate how a strategic reengineering approach, such
as that employed by leading companies, could be used as a framework to
guide DOD's reengineering efforts.^18 In September 2003, we reported that
DOD's actions to implement the service acquisition management structure
required under Sections 801 and 802 did not provide a departmentwide
assessment of how spending for services could be more effective and
recommended that DOD give greater attention to promoting a strategic
orientation by setting performance goals for improvements and ensuring
accountability for achieving those results.^19

16Pub. L. No. 107-107, SS 801, 802 (2001)(section 801 added new sections
2330 and 2330a to title 10, U.S. Code).

^17Pub. L. No. 109-163, S 812 (2006)(section 812 amended 10 U.S.C. S
2330).

^18GAO, Best Practices: Taking A Strategic Approach Could Improve DOD's
Acquisition of Services, [30]GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

Most recently, in November 2006, we issued a report that identified a
number of actions that DOD could take to improve its acquisition of
services.^20 We noted that DOD's overall approach to managing services
acquisitions suffered from the absence of several key elements at both a
strategic and transactional level. The strategic level is where the
enterprise, DOD in this case, sets the direction or vision for what it
needs, captures the knowledge to enable more informed management
decisions, ensures departmentwide goals and objectives are achieved,
determines how to go about meeting those needs, and assesses the resources
it has to achieve desired outcomes. The strategic level also sets the
context for the transactional level, where the focus is on making sound
decisions on individual service acquisitions. Factors for good outcomes at
the transactional level include valid and well-defined requirements,
appropriate business arrangements, and adequate management of contractor
performance.

DOD's current approach to managing services acquisition has tended to be
reactive and has not fully addressed the key factors for success at either
the strategic or the transactional level. At the strategic level, DOD has
not developed a normative position for gauging whether ongoing and planned
efforts can best achieve intended results. Further, good information on
the volume and composition of services is still wanting, perpetuating the
circumstance in which the acquisition of services tends to happen to DOD,
rather than being proactively managed. For example, despite implementing a
review structure aimed at increasing insight into service transactions,
DOD is not able to determine which or how many transactions have been
reviewed.^21 The military departments have only slightly better
visibility, having reviewed proposed acquisitions accounting for less than
3 percent of dollars obligated for services in fiscal year 2005.
Additionally, most of the service acquisitions the military services
review involved indefinite delivery/indefinite quantity contracts. DOD's
policy for managing service acquisitions had no requirement, however, to
review individual task orders that were subsequently issued even if the
value of the task order exceeded the review threshold.

^19GAO, Contract Management: High-Level Attention Needed to Transform DOD
Services Acquisition, [31]GAO-03-935 (Washington, D.C.: Sept. 10, 2003).

^20GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service
Acquisition Outcomes, [32]GAO-07-20 (Washington, D.C.: Nov. 9, 2006).

^21The management structure has three review levels: (1) review by the
Under Secretary of Defense (Acquisition, Technology, and Logistics) for
services acquisitions valued over $2 billion; (2) review by the component
or designated acquisition executive for service acquisitions valued
between $500 million and $2 billion; and (3) review by a
component-designated official for the acquisition of services valued at
less than $500 million. The Air Force, Army, and Navy each developed
review processes and authorities to support the DOD review requirements.

Further, the reviews tended to focus more on ensuring compliance with
applicable statutes, regulations, and other requirements, rather than on
imparting a vision or tailored method for strategically managing service
acquisitions. Our discussions with officials at buying activities that had
proposed service acquisitions reviewed under this process revealed that,
for the most part, they did not believe the review significantly improved
those acquisitions. These officials indicated that the timing of the
review process--which generally occurred well into the planning cycle--was
too late to provide opportunities to influence the acquisition strategy.
These officials told us that the reviews would be more beneficial if they
were conducted earlier in the process, in conjunction with the program
office or customer, and in the context of a more strategic approach to
meeting the requirement, rather than simply from a secondary or tertiary
review of the contract.

At the transactional level, DOD tended to focus primarily on those
elements associated with awarding contracts, with much less attention paid
to formulation of service acquisition requirements and to assessment of
the actual delivery of contracted services. Moreover, the results of
individual acquisitions were generally not used to inform or adjust
strategic direction. As a result, DOD is not in a position to determine
whether investments in services are achieving their desired outcomes.
Further, DOD and military department officials identified many of the same
problems in defining requirements, establishing sound business
arrangements, and providing effective oversight that I discussed
previously. For example,

           o DOD and military department officials consistently identified
           poor communication and the lack of timely interaction between the
           acquisition and contracting personnel as key challenges to
           developing good requirements.

           o An Army contracting officer issued a task order for a product
           that the contracting officer knew was outside the scope of the
           service contract. The contracting officer noted in an e-mail to
           the requestor that this deviation was allowed only because the
           customer needed the product quickly and cautioned that no such
           allowances would be granted in the future.

           o Few of the commands or activities could provide us reliable or
           current information on the number of service acquisitions they
           managed, and others had not developed a means to consistently
           monitor or assess, at a command level, whether such acquisitions
           were meeting the performance objectives established in the
           contracts.

To address these issues, we made several recommendations to the Secretary
of Defense. DOD concurred with our recommendations and identified actions
it has taken, or plans to take to address them. In particular, DOD noted
that it is reassessing its strategic approach to acquiring services,
including examining the types and kinds of services it acquires and
developing an integrated assessment of how best to acquire such services.
DOD expects this assessment will result in a comprehensive, departmentwide
architecture for acquiring services that will, among other improvements,
help refine the process to develop requirements, ensure that individual
transactions are consistent with DOD's strategic goals and initiatives,
and provide a capability to assess whether service acquisitions are
meeting their cost, schedule, and performance objectives. DOD expects its
assessment will be completed in early 2007.

That assessment, however, will have little meaning unless DOD's leadership
can translate its vision into changes in front line practices. In our July
2006 report on vulnerabilities to fraud, waste, and abuse, we noted that
leadership positions are sometimes vacant, that the culture to streamline
acquisitions for purposes of speed may have not been in balance with good
business practices, and that even in newly formed government-industry
partnerships, the government needs to maintain its oversight
responsibility. Understanding the myriad causes of the challenges
confronting DOD in acquiring services is essential to developing effective
solutions and translating policies into practices. While DOD has generally
agreed with our recommendations intended to improve contract management,
much remains to be done. At this point, DOD does not know how well its
services acquisition processes are working, which part of its mission can
best be met through buying services, and whether it is obtaining the
services it needs while protecting DOD's and the taxpayer's interests.

                                    - - - -

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

Scope and Methodology

In preparing this testimony, we relied principally on previously issued
GAO and Inspectors General reports. We conducted our work in January 2007
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 [33][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 Lily Chin, David E. Cooper, Timothy DiNapoli, James E. Fuquay,
Matthew Lea, Sara Margraf, Kenneth Patton, Sylvia Schatz, and Amelia
Shachoy.

(120621)

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

GAO's Mission

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

Obtaining Copies of GAO Reports and Testimony

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site ( www.gao.gov ). Each weekday, GAO posts
newly released reports, testimony, and correspondence on its Web site. To
have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone

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

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

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

To Report Fraud, Waste, and Abuse in Federal Programs

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
[email protected] Automated answering system: (800) 424-5454 or (202)
512-7470

Congressional Relations

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

Public Affairs

Paul Anderson, Managing Director, [email protected] (202) 512-4800
U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548

www.gao.gov/cgi-bin/getrpt?GAO-07-359T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Katherine V. Schinasi at (202) 512-4841 or
[email protected].

Highlights of [41]GAO-07-359T , a testimony before the Subcommittee on
Readiness and Management Support, Committee on Armed Services, U.S. Senate

January 17, 2007

DEFENSE ACQUISITIONS

DOD Needs to Exert Management and Oversight to Better Control Acquisition

of Services

The Department of Defense (DOD) is relying more and more on contractors to
provide billions of dollars in services. Congress has been concerned about
DOD's ability to prudently manage these funds, and this subcommittee in
particular has pushed DOD to employ sound business practices when using
the private sector for services. Nevertheless, DOD may not have always
obtained good value while spending billions of dollars on services at a
time when serious budget pressures are facing the nation.

This testimony discusses DOD's (1) increasing reliance on contractors; (2)
failure to consistently follow sound business practices when acquiring
services; and (3) opportunities for DOD to improve its management of
services.

The testimony is based on GAO's work from the past decade as well as
recent reports issued by the Inspectors General.

[42]What GAO Recommends

GAO is making no recommendations in this testimony. However, GAO has made
numerous recommendations through the years to help improve DOD's contract
management. DOD has generally concurred with these recommendations and is
taking or plans to take action to improve the acquisition of services, but
much remains to be done.

Numerous persistent problems have resulted in reduced efficiencies and
effectiveness and have exposed DOD to unnecessary risks when acquiring
services. Knowing the defense acquisition landscape helps put the
magnitude of these problems in perspective--

           o DOD's obligations on service contracts have jumped from $82.3
           billion in fiscal year 1996 to $141.2 billion in fiscal year 2005.
           o DOD's acquisition workforce has been downsized during this time
           frame without sufficient attention to requisite skills and
           competencies.

These events have occurred as DOD has become more reliant on contractors
to provide services for DOD's operations and as longstanding problems with
contract management continue to adversely impact service acquisition
outcomes. The lack of sound business practices--poorly defined
requirements, inadequate competition, inadequate monitoring of contractor
performance, and inappropriate uses of other agencies' contracts and
contracting services--exposes DOD to unnecessary risk and wastes
resources. Moreover, DOD's current management structure to oversee service
acquisition outcomes has tended to be reactive and its processes suffer
from the absence of several key elements at both a strategic and
transactional level.

To produce desired outcomes, DOD and its contractors need to clearly
understand acquisition objectives and how they translate into a contract's
terms and conditions. GAO has found cases in which the absence of
well-defined requirements and clearly understood objectives complicates
efforts to hold DOD and contractors accountable for poor service
acquisition outcomes. Likewise, obtaining reasonable prices depends on the
benefits of a competitive environment, but we have continually reported on
cases in which DOD sacrificed competition for the sake of expediency.
Monitoring contractor performance to ensure DOD receives and pays for
required services is another control we have found lacking. Many of these
problems show up in DOD's use of other agencies' contracts or contracting
services, which adds complexity as the number of parties in the
contracting process increases.

DOD has taken some steps to improve its management of services
acquisition, and it is developing an integrated assessment of how best to
acquire services. DOD leadership will be critical for translating this
assessment into policy and, most importantly, effective frontline
practices. At this point, however, DOD does not know how well its services
acquisition processes are working, which part of its mission can best be
met through buying services, and whether it is obtaining the services it
needs while protecting DOD's and the taxpayer's interests.

References

Visible links
  17. http://www.gao.gov/cgi-bin/getrpt?GAO-05-207
  18. http://www.gao.gov/cgi-bin/getrpt?GAO-06-838R
  19. http://www.gao.gov/cgi-bin/getrpt?GAO-07-96
  20. http://www.gao.gov/cgi-bin/getrpt?GAO-04-605
  21. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1130T
  22. http://www.gao.gov/cgi-bin/getrpt?GAO-06-1132
  23. http://www.gao.gov/cgi-bin/getrpt?GAO-04-854
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-05-456
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-06-284
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-05-274
  27. http://www.gao.gov/cgi-bin/getrpt?GAO-07-145
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-05-456
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-201
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-02-230
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-03-935
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-03-935
  33. file:///home/webmaster/infomgt/d07359t.htm#mailto:[email protected]
  34. http://www.gao.gov/
  35. http://www.gao.gov/
  36. http://www.gao.gov/fraudnet/fraudnet.htm
  37. file:///home/webmaster/infomgt/d07359t.htm#mailto:[email protected]
  38. file:///home/webmaster/infomgt/d07359t.htm#mailto:[email protected]
  39. file:///home/webmaster/infomgt/d07359t.htm#mailto:[email protected]
  40. http://www.gao.gov/cgi-bin/getrpt?GAO-07-359T
  41. http://www.gao.gov/cgi-bin/getrpt?GAO-07-359T
*** End of document. ***