Defense Acquisitions: Improved Management and Oversight Needed to
Better Control DOD's Acquisition of Services (10-MAY-07,	 
GAO-07-832T).							 
                                                                 
The Department of Defense (DOD) is relying more and more on	 
contractors to provide billions of dollars in services. Congress 
has pushed DOD to employ sound business practices when using the 
private sector for services. This testimony discusses DOD's (1)  
increasing reliance on contractors; (2) efforts to follow sound  
business practices when acquiring services; and (3) actions to	 
improve its management and oversight of services. This testimony 
is based on GAO's work spanning several years as well as recent  
reports issued by the Inspectors General.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-832T					        
    ACCNO:   A69447						        
  TITLE:     Defense Acquisitions: Improved Management and Oversight  
Needed to Better Control DOD's Acquisition of Services		 
     DATE:   05/10/2007 
  SUBJECT:   Accountability					 
	     Best practices					 
	     Contract administration				 
	     Contract oversight 				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Procurement planning				 
	     Procurement practices				 
	     Internal controls					 
	     Service contracts					 

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GAO-07-832T

   

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

          * [4]Poorly Defined Requirements
          * [5]Inadequate Competition
          * [6]Insufficient Guidance and Leadership to Manage Contractors S
          * [7]Inadequate Management and Assessment of Contractor Performan
          * [8]Inappropriate Use of Interagency Contracts

     * [9]DOD Needs a Management Structure to Oversee Service Acquisit
     * [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 Defense, Committee on Appropriations, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, May 10, 2007

DEFENSE ACQUISITIONS

Improved Management and Oversight Needed to Better Control DOD's
Acquisition of Services

Statement of John P. Hutton, Director
Acquisition and Sourcing Management

GAO-07-832T

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 2006, DOD obligated more than $151
billion on service contracts, a 78 percent real 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.

The challenges faced by DOD in acquiring services are not new, but rather
are emblematic of a range of systemic and long-standing issues. In this
regard, we identified DOD contract management to be high risk because of
its vulnerability to fraud, waste, abuse, and mismanagement 15 years ago^1
and have reported on DOD's long-standing problems with management and
oversight of support contractors since 1997. In January 2005, we added the
management of interagency contracting to our high-risk list. DOD is the
largest user of interagency contracts. In a report issued in July 2006, we
concluded that with awards to contractors large and growing, DOD will
continue to be vulnerable to contracting fraud, waste, or misuse of
taxpayer dollars, and abuse.^2 While DOD has acknowledged its
vulnerabilities and taken some actions to address them, many of the
initiatives are still in their early stages, and it is too soon to tell
what impact they may have.

Today, I would like to discuss DOD's (1) increasing reliance on
contractors, (2) efforts to follow sound business practices when acquiring
services, and (3) actions to improve its management and oversight 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 the General Services
Administration (GSA) Inspector General.

^1GAO, High-Risk Series: An Update, [17]GAO-07-310 (Washington, D.C.:
January 2007).

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

Summary

Numerous persistent problems have resulted in reduced effectiveness and
have exposed DOD to unnecessary risks when acquiring services. The growth
in obligations on service contracts--from $85.1 billion in fiscal year
1996 to more than $151 billion in fiscal year 2006--reflects a growing
reliance on contractors to provide a range of mission-critical services.
At the same time, DOD's civilian workforce was downsized without
sufficient attention to requisite skills and competencies.

Within this environment, our work, as well as that of some agency
Inspectors General, have identified numerous instances of weak business
practices--poorly defined requirements, inadequate competition,
insufficient guidance and leadership, inadequate monitoring of contractor
performance, and inappropriate uses of other agencies' contracts and
contracting services. Collectively, these problems expose DOD to
unnecessary risk, complicate efforts to hold DOD and contractors
accountable for poor acquisition outcomes, and increase the potential for
fraud, waste, or abuse of taxpayer dollars.

DOD's structure and processes for managing services do not position the
department to make service acquisitions a managed outcome. DOD has taken
some actions to improve its management of services, including developing a
competency model for its contracting workforce; issuing policies and
guidance to improve DOD's management of contractors supporting deployed
forces and its use of interagency contracts; and developing an integrated
assessment of how best to acquire services. DOD leadership will be
critical for translating this assessment and other actions into effective
frontline practices. At this point, however, DOD does not know how well
its services acquisition processes are working and whether it is obtaining
the services it needs while protecting DOD's and the taxpayer's interests.

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, expressed in constant fiscal year 2006
dollars, rose from $85.1 billion in fiscal year 1996 to more than $151
billion in fiscal year 2006, a 78 percent increase. More than $32
billion--or 21 percent--of DOD's obligations on services in fiscal year
2006 were 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.

Several factors have contributed to the growth in service contracts. For
example, 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. Growth was
also caused by changes in the way DOD acquired certain capabilities. 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.^3 Overall, however, our work found that to a large degree, this
growth simply happened and was not a managed outcome.

As the amount and complexity of contracting for services have increased,
the size of the civilian workforce has decreased. More significantly, DOD
carried out this downsizing without ensuring that it had the requisite
skills and competencies needed to manage and oversee service acquisitions.
Consequently, DOD is challenged in its ability to maintain a workforce
with the requisite knowledge of market conditions, industry trends, and
the technical details about the services they procure; the ability to
prepare clear statements of work; and the capacity to manage and oversee
contractors.

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. For example, DOD's Director of Defense Procurement
and Acquisition Policy testified in January 2007 that DOD has been
developing a model that will address the skills and competencies necessary
for DOD's contracting workforce. That model will be deployed this year.
The Director stated that this effort would allow DOD to assess the
workforce in terms of size, capability, and skill mix, and to develop a
comprehensive recruiting, training, and deployment plan to meet the
identified capability gaps.

^3Various funds can be used to acquire services, depending on the nature
of the service.

A report we issued in November 2006 on DOD space acquisition provides an
example of downsizing in a critical area--cost estimating.^4 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.

Turning to Iraq, DOD has relied extensively on contractors to undertake
major reconstruction projects and provide 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, as well as 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 contracts. Further, these
contracts often contain award fee provisions, which are intended to
incentivize more efficient and effective contractor performance.^5 If
contracts are not effectively managed and given sufficient oversight, the
government's risk is likely to increase. For example, we have reported
that DOD needs to conduct periodic reviews of services provided under
cost-reimbursement contracts to ensure that services are being provided
and at an appropriate level and quality. Without such a review, the
government is at risk to pay for services it no longer needs.

^4GAO, 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).

DOD Does Not Consistently Use Sound Business Practices to Acquire Services

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. Further, DOD's management and use of contractors
supporting deployed forces suffers from the lack of clear and
comprehensive guidance, among other shortfalls. Similarly, DOD does not
always oversee and manage contractor performance, in part due to capacity
issues, once a contract is in place. Many of these problems show up in the
department's use of other agencies' contracts. Collectively, these
problems expose DOD to unnecessary risk, complicate efforts to hold DOD
and contractors accountable for poor acquisition outcomes, and increase
the potential for fraud, waste, or abuse of taxpayer dollars.

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. Contracts,
especially service contracts, often do not have definitive or realistic
requirements at the outset needed to control costs and facilitate
accountability. This situation is illustrated in the following examples:

^5In December 2005, we reported that DOD programs engage in award fee
practices that undermine efforts to motivate contractor performance and
that do not hold contractors accountable for achieving desired acquisition
outcomes. See GAO, Defense Acquisitions: DOD Has Paid Billions in Award
and Incentive Fees Regardless of Acquisition Outcomes,  [20]GAO-06-66
(Washington, D.C.: Dec. 19, 2005).

           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. We reported that DOD often
           authorized contractors to begin work before key terms and
           conditions, such as 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. We will issue a
           report later this year on DOD's use of undefinitized contract
           actions.

           o In July 2004, we noted that personnel using the Army's Logistics
           Civil Augmentation Program (LOGCAP) contract in Iraq, including
           those who 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.^7 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 do
           so. Further, we have reported that contract customers need to
           conduct periodic reviews of services provided under
           cost-reimbursable contracts to ensure that services provided are
           supplied at an appropriate level. Without such a review, the
           government is at risk of paying for services it no longer needs.
           For example, the command in Iraq lowered the cost of the LOGCAP
           contract by $108 million by reducing services and eliminating
           unneeded dining facilities and laundries.

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

^7GAO, 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.^8 The sole-source contracts were awarded by
DOD despite recognizing it was paying about 25 percent more than
previously paid for contracts awarded competitively. In this case, we
recommended that the Army reassess its acquisition strategy for contract
security guards, using competitive procedures for future contracts and
task orders. DOD agreed and is in the process of revising its acquisition
strategy.

In Iraq, the need to award contracts and begin reconstruction efforts
quickly contributed to DOD's using other than full and open competition
during the initial stages of reconstruction. While full and open
competition can be a tool to mitigate acquisition risks, DOD procurement
officials had only a relatively short time--often only weeks--to award the
first major reconstruction contracts. As a result, these contracts were
generally awarded using other than full and open competition. We recently
reported that DOD competed the vast majority of its contract obligations
between October 1, 2003, through March 31, 2006.^9 We were able to obtain
data on $7 billion, or 82 percent, of DOD's total contract obligations
during this period. Our ability to obtain complete information, however,
on DOD reconstruction contract actions was limited because not all DOD
components consistently tracked or fully reported this information.

^8GAO, Contract Security Guards: Army's Guard Program Requires Greater
Oversight and Reassessment of Acquisition Approach, [24]GAO-06-284
(Washington, D.C.: Apr. 3, 2006).

^9GAO, Rebuilding Iraq: Status of Competition for Iraq Reconstruction
Contracts, [25]GAO-07-40 (Washington, D.C.: Oct. 6, 2006).

Insufficient Guidance and Leadership to Manage Contractors Supporting Deployed
Forces

Since the mid-1990s, our reports have highlighted the need for clear and
comprehensive guidance for managing and overseeing the use of contractors
that support deployed forces. As we reported in December 2006, DOD has not
yet fully addressed this long-standing problem.^10

Such problems are not new. In assessing LOGCAP implementation during the
Bosnian peacekeeping mission in 1997, we identified weaknesses in the
available doctrine on how to manage contractor resources, including how to
integrate contractors with military units and what type of management and
oversight structure to establish.^11 We identified similar weaknesses when
we began reviewing DOD's use of contractors in Iraq. For example, in 2003
we reported that guidance and other oversight mechanisms varied widely at
the DOD, combatant command, and service levels, making it difficult to
manage contractors effectively. Similarly, in our 2005 report on private
security contractors in Iraq, we noted that DOD had not issued any
guidance to units deploying to Iraq on how to work with or coordinate
efforts with private security contractors.^12 Further, we noted that the
military may not have a clear understanding of the role of contractors,
including private security providers, in Iraq and of the implications of
having private security providers in the battle space.

In our view, establishing baseline policies for managing and overseeing
contractors would help ensure the efficient use of contractors in places
such as Iraq. DOD addressed some of these issues when it issued new
guidance in October 2005 on the use of contractors who support deployed
forces.^13 However, as our December 2006 report made clear, DOD's guidance
does not address a number of problems we have repeatedly raised--such as
the need to provide adequate contract oversight personnel, to collect and
share lessons learned on the use of contractors supporting deployed
forces, and to provide DOD commanders and contract oversight personnel
with training on the use of contractors overseas before deployment. Since
our December 2006 report was issued, DOD officials indicated that DOD was
developing a joint publication entitled Contracting and Contractor
Management in Joint Operations, which is expected to be distributed in May
2007.

^10GAO, Military Operations: High-Level DOD Action Needed to Address
Long-standing Problems with Management and Oversight of Contractors
Supporting Deployed Forces, [26]GAO-07-145 (Washington, D.C.: Dec. 18,
2006).

^11GAO, Contingency Operations: Opportunities to Improve the Logistics
Civil Augmentation Program, [27]GAO/NSIAD-97-63 (Washington, D.C.: Feb.
11, 1997).

^12GAO, Rebuilding Iraq: Actions Needed to Improve Use of Private Security
Providers, [28]GAO-05-737 (Washington, D.C.: July 28, 2005).

^13Department of Defense Instruction 3020.41, Contractor Personnel
Authorized to Accompany the U.S. Armed Forces (Oct. 3, 2005).

Our work has also highlighted the need for DOD components to comply with
departmental guidance on the use of contractors. For example, in our June
2003 report we noted that DOD components were not complying with a
long-standing requirement to identify essential services provided by
contractors and develop backup plans to ensure the continuation of those
services during contingency operations should contractors become
unavailable to provide those services. Other reports highlighted our
concerns over DOD's planning for the use of contractor support in Iraq,
including the need to comply with guidance to identify operational
requirements early in the planning process. When contractors are involved
in planning efforts early and given adequate time to plan and prepare to
accomplish their assigned tasks, the quality of the contractor's services
improves and contract costs may be lowered.

DOD's October 2005 guidance on the use of contractor support to deployed
forces went a long way to consolidate existing policy and provide guidance
on a wide range of contractor issues. However, as of December 2006, we
found little evidence that DOD components were implementing that guidance,
in part because no individual within DOD was responsible for reviewing
DOD's and the services' efforts to ensure the guidance was being
consistently implemented. In our 2005 report on LOGCAP we recommended DOD
designate a LOGCAP coordinator with the authority to participate in
deliberations and advocate the most effective and efficient use of the
LOGCAP contract. Similarly, in 2006 we recommended that DOD appoint a
focal point within the Office of the Under Secretary of Defense for
Acquisition, Technology, and Logistics--at a sufficiently senior level and
with the appropriate resources--dedicated to leading DOD's efforts to
improve its contract management and oversight. DOD agreed with these
recommendations. In October 2006, DOD established the office of the
Assistant Deputy Under Secretary of Defense for Program Support to serve
as the office of primary responsibility for contractor support issues, but
the office's specific roles and responsibilities have not yet been clearly
defined.

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 the 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.

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.^14 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.^15 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 contract requirements.

^14GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, [29]GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

^15 [30]GAO-07-145 .

The lack of visibility on the extent of services provided by contractors
to deployed forces contributes to this condition. Without such visibility,
senior leaders and military commanders cannot develop a complete picture
of the extent to which they rely on contractors to support their
operations. We first reported the need for better visibility in 2002
during a review of the costs associated with U.S. operations in the
Balkans.^16 At that time, we reported that DOD was unaware of (1) the
number of contractors operating in the Balkans, (2) the tasks those
contractors were contracted to do, and (3) the government's obligations to
those contractors under the contracts. We noted a similar situation in
2003 in our report on DOD's use of contractors to support deployed forces
in Southwest Asia and Kosovo.^17 Our December 2006 review of DOD's use of
contractors in Iraq found continuing problems with visibility over
contractors. For example, when senior military leaders began to develop a
base consolidation plan, officials were unable to determine how many
contractors were deployed and therefore ran the risk of over- or
under-building the capacity of the consolidated bases.

DOD's October 2005 guidance on contractor support to deployed forces
included a requirement that the department develop or designate a joint
database to maintain by-name accountability of contractors deploying with
the force and a summary of the services or capabilities contractors
provide. The Army has taken the lead in this effort, and recently DOD
designated a database intended to provide improved visibility over
contractors deployed to support the military in Iraq, Afghanistan, and
elsewhere. According to DOD, in January 2007, the department designated
the Army's Synchronized Predeployment & Operational Tracker (SPOT) as the
departmentwide database to maintain by-name accountability of all
contractors deploying with the force. According to DOD, the SPOT database
includes approximately 50,000 contractor names. Additionally, in December
2006, the Defense Federal Acquisition Regulation Supplement was amended to
require the use of the SPOT database by contractors supporting deployed
forces.

^16GAO, Defense Budget: Need to Strengthen Guidance and Oversight of
Contingency Operations Costs, [31]GAO-02-450 (Washington, D.C.: May 21,
2002).

^17GAO, Military Operations: Contractors Provide Vital Services to
Deployed Forces but Are Not Adequately Addressed in DOD Plans,
[32]GAO-03-695 (Washington, D.C. June 24, 2003).

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. For example, under an interagency
arrangement, the number of parties in the contracting process increases,
and 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. However, the problems I
discussed previously regarding defining requirements, ensuring
competition, and monitoring contractor performance are frequently evident
in interagency contracting. Additionally, DOD pays a fee to other agencies
when using their contracts or contracting services, which could
potentially increase DOD costs.

Our work, as well as that of the Inspectors General, found
competition-related issues on DOD's use of interagency contracting
vehicles. DOD is required to foster competition and provide all
contractors a fair opportunity to be considered for each order placed on
GSA's multiple-award schedules, unless certain exceptions apply.^18 DOD
officials, however, have on numerous occasions avoided the time and effort
necessary to award individual orders competitively and instead awarded all
the work to be performed to a single contractor. We found that this
practice resulted in the noncompetitive award of many orders that have not
always been adequately justified.

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.^19 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.

^1810 U.S.C. 2304c.

^19GAO, Interagency Contracting: Problems with DOD's and Interior's Orders
to Support Military Operations, [33]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.

In July 2005, we reported on various issues associated with DOD's use of
franchise funds at the departments of the Interior and the
Treasury--GovWorks and FedSource--that acquired a range of services for
DOD.^20 For example, GovWorks did not receive competing proposals for work
and 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 were specified in the contracts, with no
justification in the contract files. At both funds, we found that the
files we reviewed lacked clear descriptions of requirements the contractor
was supposed to meet. For its part, DOD did not analyze contracting
alternatives and lacked information about purchases made through these
arrangements. We also found DOD and franchise fund officials were not
monitoring contracts and lacked criteria against which contractor
performance could be measured to ensure that contractors provided quality
services in a timely manner.

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. 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.

^20GAO, Interagency Contracting: Franchise Funds Provide Convenience, but
Value to DOD Is Not Demonstrated, [34]GAO-05-456 (Washington, D.C.: July
29, 2005).

Similarly, the DOD Inspector General recently reported on issues with
DOD's use of contracts awarded by the departments of the Interior and the
Treasury, GSA, and the National Aeronautics and Space Administration
(NASA). For example, in November 2006, the Inspector General reported that
DOD contracting and program personnel did not comply with acquisition
rules and regulations when using contracts awarded by NASA, such as not
always complying with fair opportunity requirements or not adequately
justifying the use of a non-DOD contracting vehicle. As a result, the
Inspector General concluded that funds were not used as intended by
Congress, competition was limited, and DOD had no assurance that it
received the best value.^21 Additionally, the Inspector General found that
DOD used Interior and GSA to "park" funds that were expiring. The agencies
then subsequently placed contracts for DOD using the expired funds,
thereby circumventing appropriations law. The Inspector General concluded
that these problems were driven by a desire to hire a particular
contractor, the desire to obligate expiring funds, and the inability of
the DOD contracting workforce to respond to its customers in a timely
manner.

DOD and other agencies have taken steps to address some of these issues,
including issuing an October 2006 memorandum intended to strengthen
internal controls over the use of interagency contracts and signing a
December 2006 memorandum of understanding with GSA to work together on 22
basic contracting management controls, including ensuring that sole-source
justifications are adequate, that statements of work are complete, and
that interagency agreements describe the work to be performed. Similarly,
GSA has worked with DOD to identify unused and expired DOD funds
maintained in GSA accounts. Further, according to the Inspector General,
Interior has withdrawn numerous warrants in response to these findings.

^21Department of Defense, Office of the Inspector General. Acquisition: FY
2005 DOD Purchases Made Through the National Aeronautics and Space
Administration. Report No. D-2007-023. (Arlington, Va. Nov. 13, 2006).

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. Responsibility for acquiring services was spread among
individual military commands, weapon system program offices, or functional
units on military bases, and 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 with 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.^22 Last year, Congress amended requirements
pertaining to DOD's service contracting management structure, workforce,
and oversight processes, among others.^23

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.^24 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.^25

22Pub. L. No. 107-107, SS 801, 802 (2001)(section 801 added new sections
2330 and 2330a to title 10, U.S. Code).

^23Pub. L. No. 109-163, S 812 (2006)(section 812 amended 10 U.S.C. S
2330).

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.^26 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 the acquisition of services tended to
be reactive and did not fully addressed the key factors for success at
either the strategic or the transactional level. At the strategic level,
DOD had not developed a normative position for gauging whether ongoing and
planned efforts can best achieve intended results. Further, DOD lacked
good information on the volume and composition of services, perpetuating
the circumstance in which the acquisition of services tended to happen to
DOD, rather than being proactively managed. For example, despite
implementing a review structure aimed at increasing insight into service
transactions, DOD was not able to determine which or how many transactions
had been reviewed.^27 The military departments had 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.

^24GAO, Best Practices: Taking A Strategic Approach Could Improve DOD's
Acquisition of Services, [35]GAO-02-230 (Washington, D.C.: Jan. 18, 2002).

^25GAO, Contract Management: High-Level Attention Needed to Transform DOD
Services Acquisition, [36]GAO-03-935 (Washington, D.C.: Sept. 10, 2003).

^26GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service
Acquisition Outcomes, [37]GAO-07-20 (Washington, D.C.: Nov. 9, 2006).

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, officials 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 was 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, as the following examples show:

^27The 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.

           o DOD and military department officials consistently identified
           poor communication and the lack of timely interaction between
           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.

                                    - - - -

In closing, I would like to emphasize that DOD has taken, or is in the
process of taking, action to address the issues we identified. These
actions, much like the assessment I just mentioned, however, will have
little meaning unless DOD's leadership can translate its vision into
changes in frontline 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 balanced 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.

In preparing this testimony, we relied principally on previously issued
GAO and Inspectors General reports. We conducted our work in May 2007 in
accordance with generally accepted government auditing standards.

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, Timothy DiNapoli, Kathryn Edelman, and John Krump.

(120661)

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Highlights of [45]GAO-07-832T , a testimony before the Subcommittee on
Defense, Committee on Appropriations, House of Representatives

May 10, 2007

DEFENSE ACQUISITIONS

Improved Management and Oversight Needed to Better Control DOD's
Acquisition of Services

The Department of Defense (DOD) is relying more and more on contractors to
provide billions of dollars in services. Congress has pushed DOD to employ
sound business practices when using the private sector for services.

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

This testimony is based on GAO's work spanning several years as well as
recent reports issued by the Inspectors General.

[46]What GAO Recommends

While GAO is making no recommendations in this testimony, 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.

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, expressed in constant fiscal year 2006
dollars, rose from $85.1 billion in fiscal year 1996 to more than $151
billion in fiscal year 2006, a 78 percent increase. While obligations
increased, the size of the civilian workforce decreased. Moreover, DOD
carried out this downsizing without ensuring that it had the requisite
skills and competencies needed to manage and oversee service acquisitions.
Overall, our work found that to a large degree, this growth in spending on
services simply happened and was not a managed outcome.

The lack of sound business practices--poorly defined requirements,
inadequate competition, the lack of comprehensive guidance and visibility
on contractors supporting deployed forces, inadequate monitoring of
contractor performance, and inappropriate use of other agencies' contracts
and contracting services--expose DOD to unnecessary risk, waste resources,
and complicate efforts to hold contractors accountable for poor service
acquisition outcomes. For example, DOD awarded contracts for security
guard services supporting 57 domestic bases, 46 of which were done on an
authorized, sole-source basis. The sole-source contracts were awarded by
DOD despite recognizing it was paying about 25 percent more than
previously paid for contracts awarded competitively. Further, the lack of
sufficient surveillance on service contracts placed DOD 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.
Overall, DOD's management structure and processes overseeing service
acquisitions lacked key elements at the strategic and transactional
levels.

DOD has taken some steps to improve its management of services
acquisition, including developing a competency model for its contracting
workforce; issuing policies and guidance to improve its management of
contractors supporting deployed forces and its use of interagency
contracts; and 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, 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-07-310
  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-06-66
  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-06-284
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-07-40
  26. http://www.gao.gov/cgi-bin/getrpt?GAO-07-145
  27. http://www.gao.gov/cgi-bin/getrpt?GAO/NSIAD-97-63
  28. http://www.gao.gov/cgi-bin/getrpt?GAO-07-145
  29. http://www.gao.gov/cgi-bin/getrpt?GAO-05-274
  30. http://www.gao.gov/cgi-bin/getrpt?GAO-07-145
  31. http://www.gao.gov/cgi-bin/getrpt?GAO-02-450
  32. http://www.gao.gov/cgi-bin/getrpt?GAO-03-695
  33. http://www.gao.gov/cgi-bin/getrpt?GAO-05-201
  34. http://www.gao.gov/cgi-bin/getrpt?GAO-05-456
  35. http://www.gao.gov/cgi-bin/getrpt?GAO-02-230
  36. http://www.gao.gov/cgi-bin/getrpt?GAO-03-935
  37. http://www.gao.gov/cgi-bin/getrpt?GAO-07-20
  45. http://www.gao.gov/cgi-bin/getrpt?GAO-07-832T
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