Defense Acquisitions: DOD's Increased Reliance on Service	 
Contractors Exacerbates Long-standing Challenges (23-JAN-08,	 
GAO-08-621T).							 
                                                                 
The Department of Defense's (DOD) spending on goods and services 
has grown significantly since fiscal year 2000, to well over $314
billion annually. GAO has identified DOD contract management as a
high-risk area for more than decade. With awards to contractors  
large and growing, DOD will continue to be vulnerable to	 
contracting fraud, waste, or misuse of taxpayer dollars, and	 
abuse. Prudence with taxpayer funds, widening deficits, and	 
growing long-range fiscal challenges demand that DOD maximize its
return on investment, while providing warfighters with the needed
capabilities at the best value for the taxpayer. This statement  
discusses (1) the implications of DOD's increasing reliance on	 
contractors to fill roles previously held by government 	 
employees, (2) the importance of the acquisition workforce in	 
DOD's mission and the need to strengthen its capabilities and	 
accountability, and (3) assumptions about cost savings related to
the use of contractors versus federal employees. This statement  
is based on work GAO has ongoing or has completed over the past  
several years covering a range of DOD contracting issues.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-621T					        
    ACCNO:   A81556						        
  TITLE:     Defense Acquisitions: DOD's Increased Reliance on Service
Contractors Exacerbates Long-standing Challenges		 
     DATE:   01/23/2008 
  SUBJECT:   Accountability					 
	     Budget controllability				 
	     Contract administration				 
	     Contract costs					 
	     Contractor payments				 
	     Contractor personnel				 
	     Contractor violations				 
	     Cost accounting					 
	     Cost overruns					 
	     Defense budgets					 
	     Defense cost control				 
	     Defense economic analysis				 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Federal employees					 
	     Professional ethics				 
	     Risk management					 
	     Service contracts					 
	     Waste, fraud, and abuse				 
	     GAO High Risk Series				 

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GAO-08-621T

   

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Testimony: 

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

United States Government Accountability Office: 

GAO: 

Expected at 3:30 p.m. EST: 

Wednesday, January 23, 2008: 

Defense Acquisitions: 

DOD's Increased Reliance on Service Contractors Exacerbates Long- 
standing Challenges: 

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

GAO-08-621T: 

GAO Highlights: 

Highlights of GAO-08-621T, a testimony before the Subcommittee on 
Defense, Committee on Appropriations, House of Representatives. 

Why GAO Did This Study: 

The Department of Defenseâs (DOD) spending on goods and services has 
grown significantly since fiscal year 2000, to well over $314 billion 
annually. GAO has identified DOD contract management as a high-risk 
area for more than decade. With awards to contractors large and 
growing, DOD will continue to be vulnerable to contracting fraud, 
waste, or misuse of taxpayer dollars, and abuse. Prudence with taxpayer 
funds, widening deficits, and growing long-range fiscal challenges 
demand that DOD maximize its return on investment, while providing 
warfighters with the needed capabilities at the best value for the 
taxpayer. This statement discusses (1) the implications of DODâs 
increasing reliance on contractors to fill roles previously held by 
government employees, (2) the importance of the acquisition workforce 
in DODâs mission and the need to strengthen its capabilities and 
accountability, and (3) assumptions about cost savings related to the 
use of contractors versus federal employees. This statement is based on 
work GAO has ongoing or has completed over the past several years 
covering a range of DOD contracting issues. 

What GAO Found: 

DOD has increasingly turned to contractors to fill roles previously 
held by government employees and to perform many functions that closely 
support inherently governmental functions, such as contracting support, 
intelligence analysis, program management, and engineering and 
technical support for program offices. This trend has raised concerns 
about what the proper balance is between public and private employees 
in performing agency missions and the potential risk of contractors 
influencing the governmentâs control over and accountability for 
decisions that may be based, in part, on contractor work. Further, when 
the decision is made to use contractors in roles closely supporting 
inherently governmental functions, additional risks are present. 
Contractors are not subject to the same ethics rules as government even 
when doing the same job, and the government risks entering into an 
improper personal services contract if an employer/employee 
relationship exists between the government and the contractor employee. 

DODâs increasing reliance on contractors exacerbates long-standing 
problems with its acquisition workforce. GAO has long reported that 
DODâs acquisition workforce needs to have the right skills to 
effectively implement best practices and properly manage the 
acquisition of goods and services. Weaknesses in this area have been 
revealed in recent contingency situations, but they are present in 
nonemergency circumstances as well, with the potential to expose DOD to 
fraud, waste, and abuse. It is important to note that the role of the 
acquisition function does not end with the award of a contract. 
Continued involvement of the workforce throughout contract 
implementation and closeout is needed to ensure that contracted 
services are delivered according to the schedule, cost, quality, and 
quantity specified in the contract. GAO has in the past several years 
reported wide discrepancies in the rigor with which contracting 
officerâs representatives perform these duties, particularly in 
unstable environments such as the conflict in Iraq and the aftermath of 
Hurricane Katrina. 

A key assumption of many of the federal management reforms of the 1990s 
was that the cost-efficiency of government operations could be improved 
through the use of contractors. GAO recently reported that sufficient 
data are not available to determine whether increased service 
contracting has caused DODâs costs to be higher than they would have 
been had the contracted activities been performed by uniformed or DOD 
civilian personnel. GAO recently probed, in-depth, the cost of 
contractor versus government contract specialists at the Armyâs 
Contracting Center for Excellence and found that the Army is paying up 
to 26 percent more for the contractors as compared to their government 
counterparts. 

What GAO Recommends: 

This testimony contains no recommendations. 

[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-621T]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact John Needham at (202) 512-
4841 or [email protected]. 

[End of section] 

This testimony was delivered on January 23, 2008; we are publicly 
releasing it on April 3, 2008. 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss challenging issues relating to 
the Department of Defense's (DOD) increasing reliance on contractors 
for services to support its mission. Over the past decade, DOD has 
experienced dramatic changes in its mission, accompanied by a 
significant infusion of funds, with fiscal year 2008 base 
appropriations of $449 billion. The President has also requested $189 
billion for fiscal year 2008 war costs. Much of this money is spent 
buying goods and, increasingly, services from the private sector. 
Enhancing governmentwide acquisition and contracting capability is one 
of the major areas that we have identified as necessary for improving 
the government's capacity to address 21st century challenges and 
deliver real and sustainable results.[Footnote 1] In examining our 
defense work, we have observed 15 systemic acquisition challenges 
facing DOD, which I have included in appendix I. These challenges have 
been long-standing and are becoming more apparent in recent years as 
the department's reliance on contractors has grown in both size and 
scope. Overall trends indicate that DOD's spending continues to 
increase. We reported to you in 2006 that, in fiscal year 2005, DOD's 
reported contracting obligations totaled $270 billion. This amount 
increased to $314 billion in 2007, representing a 136 percent increase 
over fiscal year 2000 spending. 

The acquisition of services differs from that of products in several 
key respects and can be particularly challenging in terms of defining 
requirements and assessing contractor performance. DOD's service 
acquisitions range from basic services such as landscaping and 
janitorial services to those that are more complex, like intelligence 
analysis, acquisition support, security services, and program office 
support. We have reported that the department needs to do a much better 
job managing its service acquisitions, and last year made a number of 
recommendations to put the department in a position to proactively do 
so.[Footnote 2] Congress, too, has imposed requirements over the past 
several years intended to improve DOD's service acquisition practices. 
For example, in January 2006, Congress required DOD to take a number of 
actions, including identifying the critical skills and competencies 
needed to procure services.[Footnote 3] 

I will address three important points today: 

* DOD's increasing reliance on contractors to fill roles previously 
held by government employees: This trend has raised issues as to what 
the proper balance is between public and private employees in 
performing agency missions, as well the need for greater attention 
given to decisions to contract for services and the risks associated 
with these decisions on work that closely supports inherently 
government functions. DOD has three different options in terms of who 
will perform its functions, namely military, civilian, or contractor. 
Today I will focus on the role of contractors at the department. 

* The importance of the acquisition workforce to DOD's mission and the 
need to strengthen its capabilities and accountability: Weaknesses in 
this area have been revealed in recent contingency situations, but they 
are present in non-emergency circumstances as well, with the potential 
to expose DOD to significant fraud, waste, and abuse. There may also be 
opportunities to provide additional authorities to strengthen the 
acquisition workforce, such as the use of term appointments. 

* Assumptions about cost savings related to the use of contractors 
versus federal employees: The savings may not be realized in actual 
practice, as some of our current work begins to indicate. 

My comments today are based on work that GAO has completed over the 
past several years and, in some cases, on ongoing work. All of our 
related performance audits were conducted in accordance with generally 
accepted government auditing standards. Those standards require that we 
plan and perform the audit to obtain sufficient, appropriate evidence 
to provide a reasonable basis for our findings and conclusions based on 
our audit objectives. We believe that the evidence obtained provides a 
reasonable basis for our findings and conclusions based on our audit 
objectives. 

DOD's Growing Reliance On Contractors: 

Contractors have an important role to play in the discharge of the 
government's responsibilities, and in some cases the use of contractors 
can result in improved economy, efficiency, and effectiveness. However, 
in many cases contractors are used because the government lacks its own 
personnel to do the job. Long-standing problems with the lack of 
oversight and management of contractors are compounded by the growing 
reliance on them to perform functions previously carried out by 
government personnel. 

The government is relying on contractors to perform many tasks that 
closely support inherently governmental functions, such as contracting 
support, intelligence analysis, security services, program management, 
and engineering and technical support for program offices. We recently 
surveyed officials from 52 of DOD's major weapons programs, who 
reported that over 45 percent of the program office staff was composed 
of individuals outside of DOD. Some program officials expressed 
concerns about having inadequate personnel to conduct their program 
office roles. In a prior review of space acquisition programs, we found 
that 8 of 13 cost estimating organizations and program officials 
believed the number of government cost estimators was inadequate and 
that 10 of those offices had more contractor personnel preparing cost 
estimates than government personnel.[Footnote 4] 

In general, I believe there is a need to focus greater attention on 
what type of functions and activities should be contracted out and 
which ones should not. Inherently governmental functions include 
activities that require either the exercise of discretion in applying 
government authority, or the making of value judgments in making 
decisions for the government; as such, they are required to be 
performed by government employees, not private contractors. The closer 
contractor services come to supporting inherently governmental 
functions, the greater the risk of contractors influencing the 
government's control over and accountability for decisions that may be 
based, in part, on the contractor's work. This situation may result in 
decisions that are not in the best interest of the government and 
American taxpayer, while also increasing overall vulnerability to 
waste, fraud, or abuse. The Federal Acquisition Regulation provides 19 
examples of services and actions that may approach the category of 
inherently governmental because of the nature of the function, the 
manner in which the contractor performs the contracted services, or the 
manner in which the government administers contractor performance. 
These include acquisition support, budget preparation, engineering and 
technical services, and policy development. 

One way in which DOD has expanded the role of contractors is its use of 
a lead systems integrator for major-weapons development. This approach 
allows one or more contractors to define a weapon system's architecture 
and then manage both the acquisition and the integration of subsystems 
into the architecture. In such cases, the government relies on 
contractors to fill roles and handle responsibilities that differ from 
the more traditional prime contractor relationship, a scenario that can 
blur the oversight responsibilities between the contractor and federal 
program management officials. For example, the Army's Future Combat 
Systems program is managed by a lead systems integrator that assumes to 
some extent the responsibilities of developing requirements, selecting 
major system and subsystem contractors, and making trade-off decisions 
among costs, schedules, and capabilities. While this management 
approach has some advantages for DOD, we found that the extent of 
contractor responsibility in many aspects of the Future Combat Systems 
program management process is a potential risk.[Footnote 5] Moreover, 
if DOD uses a lead systems integrator but does not provide effective 
oversight, DOD is vulnerable to the risk that the integrator may not 
make its decisions in a manner consistent with the government's and 
taxpayers' best interests, especially when faced with potential 
organizational conflicts of interest. 

Potential Risks Associated with Use of Contractors: 

When the decision is made to use contractors in roles closely 
supporting inherently governmental functions, additional risks are 
present. Defense contractor employees are not subject to the same laws 
and regulations that are designed to prevent personal conflicts of 
interests among federal employees. Moreover, there is not a 
departmentwide requirement for DOD offices to employ personal conflict 
of interest safeguards for contractor employees, although new 
governmentwide policy implemented in November 2007 requires that 
certain contractors receiving awards worth more than $5,000,000 and 4 
months of work have an ethics program.[Footnote 6] A separate proposed 
rule was recently published at the request of the Justice Department to 
amend the regulation to require that companies holding certain types of 
contracts disclose suspected violations of federal criminal law in 
connection with the award or performance of contracts, or face 
suspension or debarment. Public comments are due in January 
2008.[Footnote 7] We will be issuing a report on personal conflicts of 
interest, as they pertain to defense contractor employees, 
shortly.[Footnote 8] 

In addition, personal services contracts are prohibited, unless 
authorized by statute.[Footnote 9] The government is normally required 
to obtain its employees by direct hire under competitive appointment or 
other procedures required by the civil service laws. GAO bid protest 
decisions also have determined that a personal services contract is one 
that, by its express terms or as administered, makes the contractor 
personnel appear to be, in effect, government employees.[Footnote 10] 
Whether a solicitation would result in a personal services contract 
must be judged in the light of its particular circumstances, with the 
key question being whether the government will exercise relatively 
continuous supervision and control over the contractor personnel 
performing the requirement. 

The Federal Acquisition Regulation lists six elements to be used as a 
guide in determining the existence of a personal services contract, 
which are shown in table 1. 

Table 1: Elements to Be Used as a Guide in Determining the Existence of 
Personal Services: 

1. Performance on site. 

2. Principal tools and equipment furnished by the government. 

3. Services are applied directly to the integral effort of the agency 
or an organizational subpart in the furtherance of its assigned 
function or mission. 

4. Comparable services, meeting comparable needs, are performed in the 
same or similar agencies using civil service personnel. 

5. The need for the type of service provided can reasonably be expected 
to last beyond one year. 

6. The inherent nature of the service, or the manner in which it is 
provided, reasonably requires, directly or indirectly, government 
direction or supervision of contractor employees in order to - (i) 
adequately protect the government's interest (ii) retain control of the 
function involved; or (iii) retain full personal responsibility for the 
function supported in a duly authorized Federal officer or employee. 

[End of table] 

Source: FAR Subpart 37.104(d). 

When contractors work side by side with government employees and 
perform the same mission-related duties, the risk associated with such 
contracts can be increased. 

Contingency Situations Reveal Acquisition Workforce Shortfalls: 

In July 2006, we reported[Footnote 11] that DOD's acquisition workforce 
is subject to certain conditions that increase DOD's vulnerabilities to 
contracting fraud, waste, and abuse, including: 

* growth in overall contracting workload, 

* pending retirement of experienced government contracting personnel, 
and: 

* a greater demand for contract surveillance because of DOD's 
increasing reliance on contractors for services. 

Fraud is any intentional deception taken for the purpose of inducing 
DOD action or reliance on that deception. Fraud can be perpetrated by 
DOD personnel--whether civilian or military--or by contractors and 
their employees. Trust and access to funds and assets that come with 
senior leadership and tenure can become a vulnerability if the control 
environment in an organization is weak. We also need to target waste in 
government spending. Government waste is growing and far exceeds the 
cost of fraud and abuse. Several of my colleagues in the accountability 
community and I have developed a definition of waste, which is 
contained in appendix II. Although waste does not normally involve a 
violation of law, its effects can be just as profound. In response to 
our July 2006 report, DOD's Panel on Contracting Integrity reported 
this month that it has identified 21 initial actions for implementation 
in 2008 that it expects will address areas of vulnerability in the 
defense contracting system that allow fraud, waste, and abuse to occur. 

Some amount of vulnerability to mismanagement, fraud, waste, or abuse 
will always be present in contracting relationships, even with rules 
and regulations in place to help prevent it. These vulnerabilities are 
more dramatically revealed in contingency situations, such as the 
conflicts in Iraq and the aftermath of Hurricane Katrina, when large 
amounts of money are quickly made available and actions are hurried. 
One very significant weakness is the condition of the government's 
acquisition workforce. We and others have reported for a number of 
years on the risks posed by a workforce that has not kept pace with the 
government's spending trends. The Acquisition Advisory Panel, for 
example, recently noted the significant mismatch between the demands 
placed on the acquisition workforce and the personnel and skills 
available within that workforce to meet those demands.[Footnote 12] To 
put it another way, at the same time that procurement spending has 
skyrocketed, fewer acquisition professionals are available to award 
and--just as importantly--administer contracts. Two important aspects 
of this issue are the numbers and skills of contracting personnel and 
DOD's ability to effectively oversee contractor performance. 

Acquisition Workforce Shortfalls: 

In its January 2007 report, the Acquisition Advisory Panel stated that 
the government's contracting workforce was reduced in size in the 
1990s, with DOD's declining by nearly 50 percent due to personnel 
reductions during that time. Despite recent efforts to hire acquisition 
personnel, there remains an acute shortage of federal procurement 
professionals with between 5 and 15 years of experience. This shortage 
will become more pronounced in the near term because roughly half of 
the current workforce is eligible to retire in the next 4 years. We 
have long noted that DOD's acquisition workforce needs to be made a 
priority. We have reported that DOD needs to have the right skills in 
its acquisition workforce to effectively implement best practices and 
properly manage the acquisition of goods and services. We have also 
observed that the acquisition workforce continues to face the challenge 
of maintaining and improving skill levels to use alternative 
contracting approaches introduced by acquisition reform initiatives of 
the past few decades. 

Recent developments indicate that the tide may be turning, with actions 
underway to address what is generally agreed to be a problematic state 
of the acquisition workforce. For example, DOD's Panel on Contracting 
Integrity, in its 2007 report to Congress, identified the following 
focus areas for planned actions, all of which focus on acquisition 
workforce issues: 

* reinforce the functional independence of contracting personnel, 

* fill contracting leadership positions with qualified leaders, 

* determine the appropriate size of the contracting workforce and 
ensure that it has the appropriate skills, and: 

* improve planning and training for contracting in combat and 
contingency environments. 

Also, the Commission on Army Acquisition and Program Management in 
Expeditionary Operations issued a report in November 2007, entitled 
"Urgent Reform Required: Army Expeditionary Contracting."[Footnote 13] 
The commission found that the acquisition failures in expeditionary 
operations require a systemic fix of the Army acquisition system and 
cited the lack of Army leadership and personnel (military and civilian) 
to provide sufficient contracting support to either expeditionary or 
peacetime operations. It noted that only 3 percent of Army contracting 
personnel are active duty military and there are no longer any Army 
contracting career general officer positions. It found that what should 
be a core competence--contracting--is treated as an operational and 
institutional side issue. One general officer told the commission that 
"this problem is pervasive DOD-wide, because workload continues to go 
up while contracting and acquisition assets go down-there is a cost to 
these trends that is paid in risk, and we don't realize how big the 
bill is until there's a scandal." The commission recommended increasing 
the stature, quantity, and career development of military and civilian 
contracting personnel. In response to the commission's report, the Army 
approved the creation of an Army Contracting Command, which will fall 
under the Army Materiel Command and be led by a two-star general. The 
Army also plans to increase its contracting workforce by approximately 
400 military personnel and 1,000 civilian personnel. 

We believe that, while there is no way to completely prevent fraud, 
waste, abuse, or poor decision making, increasing the numbers and 
skills of the acquisition workforce is critical to lessening the 
likelihood of future problems and affecting positive change. We must 
address this soon in order to prevent additional waste and increased 
risk. 

Monitoring Contractor Performance: 

The role of the acquisition function does not end with the award of a 
contract. It requires continued involvement throughout contract 
implementation and closeout to ensure that contracted services are 
delivered according to the schedule, cost, quality, and quantity 
specified in the contract. In DOD, oversight--including ensuring that 
the contract performance is consistent with the description and scope 
of the contract--is provided by both contracting officers and the 
contracting officers representative (COR), typically a government 
employee with technical knowledge of the particular program. 

We have reported wide discrepancies in the rigor with which CORs 
perform their duties, particularly in unstable environments. For 
example, in the aftermath of Hurricanes Katrina and Rita, the number of 
government personnel monitoring contracts was not always sufficient or 
effectively deployed to provide adequate oversight.[Footnote 14] 
Instability--such as when wants, needs, and contract requirements are 
in a state of flux--requires greater attention to oversight, which in 
turn relies on a capable government workforce. Unfortunately, attention 
to oversight and a capable government workforce have not always been 
evident in a number of instances, including during the Iraq 
reconstruction effort. We have reported that, particularly in the early 
phases of the conflict, the Army lacked an adequate acquisition 
workforce in Iraq to oversee the billions of dollars for which it was 
responsible.[Footnote 15] Further, Army personnel who were responsible 
for overseeing the performance of contractors providing interrogation 
and other services were not adequately trained to properly exercise 
their responsibilities.[Footnote 16] Contractor employees were 
stationed in various locations around Iraq, with no COR or assigned 
representative on site to monitor their work. An Army investigative 
report concluded that the lack of training for the CORs assigned to 
monitor contractor performance at Abu Ghraib prison, as well as an 
inadequate number of assigned CORs, put the Army at risk of being 
unable to control poor performance or become aware of possible 
misconduct by contractor personnel. 

DOD's Panel on Contracting Integrity raised similar concerns, noting 
that contracting personnel in a combat/contingent environment do not 
always have functional independence. Contracting personnel, including 
CORs, are sometimes placed in positions where their direct supervisor 
is not in the contracting chain of command, thus possibly injecting 
risk into the integrity of the contracting process. The report found 
that CORs are not sufficiently trained and prepared, and sometimes lack 
support from their operational chain of command, to perform 
effectively. The Commission on Army Acquisition and Program Management 
in Expeditionary Operations also expressed concern about this issue, 
stating that after contract award there are "no resources trained" to 
monitor and ensure that the contractor is performing and providing the 
services needed by the warfighter. It stated that the inability to 
monitor contractor performance and enforce contracts are critical 
problems in an expeditionary environment and cited an example: "When 
the critical need is to get a power station running, and there are no 
resources to monitor contractor performance, only the contractor knows 
whether the completed work is being sabotaged nightly." 

In December 2006, we reported that while DOD has taken some steps to 
improve its guidance on the use of contractors to support deployed 
forces, addressing some of the problems we have raised since the mid- 
1990s, it continues to face long-standing problems that hinder its 
management and oversight of contractors at deployed locations. DOD has 
not allocated the organizational resources to review and oversee issues 
regarding contractor support to deployed forces. While DOD's new 
guidance is a noteworthy step, a number of problems we have previously 
reported on continue to pose difficulties for military personnel in 
deployed locations.[Footnote 17] 

* Lack of visibility by senior leaders into the number and location of 
contractors and services provided at deployed locations. 

* Inadequate number of oversight personnel at deployed locations. 

* No systematic collection and sharing of DOD's institutional knowledge 
on using contractors to support deployed forces. 

* Limited or no training for military personnel on the use of 
contractors as part of their pre-deployment training or professional 
military education. 

Cost of Contractors: 

A key assumption of many of the federal management reforms of the 1990s 
was that the cost-efficiency of government operations would be 
improved. In addition to a desire for cost savings, the need to meet 
mission requirements while contending with limitations on government 
full-time equivalent positions and a desire to use contractors' 
capabilities and skills in particular situations were factors in 
increasing the use of contractors. We recently reported that sufficient 
data are not available to determine whether increased service 
contracting has caused DOD's costs to be higher than they would have 
been had the contracted activities been performed by uniformed or DOD 
civilian personnel.[Footnote 18] 

To learn more about the role and cost of contractors providing 
contracting support services, we have recently undertaken new work to 
look at contractors providing contract specialist services to the Army 
Contracting Agency's Contracting Center for Excellence (CCE).[Footnote 
19] This agency currently provides contracting support to 125 DOD 
customers in the National Capitol Region, including the Joint Chiefs of 
Staff, Tricare Management Activity, Defense Information Systems Agency, 
DOD Inspector General, Pentagon Renovation Office, and Office of the 
Judge Advocate General. During fiscal year 2007, the agency awarded 
about 5,800 contract actions and obligated almost $1.8 billion. CCE is 
one of many government agencies that have turned to contractors to 
support its contracting functions. 

As a part of our review, we examined how the costs of CCE's contractor 
contract specialists compared to those of its government contract 
specialists. Our analysis indicates that the government is paying more 
for the contractors. At CCE, the contractors are performing the same 
duties as their government counterparts and have been used in this role 
since 2003. We compared the costs of the government employees at the GS-
12 and GS-13 levels to their equivalent contractor counterparts 
(referred to as contract specialists II and III) and found that, on 
average, the Army is paying up to 26 percent more for the contractors, 
as depicted in table 2. 

Table 2: Comparison of the Average Cost of CCE's Government and 
Contractor Contract Specialists: 

GS equivalent: GS-12 equivalent; Average hourly cost of a government 
contract specialist: $59.21; Average hourly cost of a contractor 
contract specialist: $74.99; Percentage difference between the hourly 
cost of a government employee and a contract employee: 26.65. 

GS equivalent: GS-13 equivalent; Average hourly cost of a government 
contract specialist: $72.15; Average hourly cost of a contractor 
contract specialist: $84.38; Percentage difference between the hourly 
cost of a government employee and a contract employee: 16.95. 

[End of table] 

Source: GAO analysis based on government information and contract 
files. 

Key elements of our analysis were: 

* The loaded hourly cost of a government employee includes their 
salary, costs of the government's contributions to the employee's 
benefits, the costs to train the employee, the employee's travel 
expenses, and the costs of operations overhead--which are the costs of 
the government employees that provide support services, such as budget 
analysts or human capital staff. 

* Government employee salaries and benefits were based on actual data 
from one pay period. These data were then compared to the hourly cost 
of contractors ordered during the month of that pay period. The cost of 
a contractor employee is the fully loaded hourly rate the government 
pays for these services. We reported the weighted average of those 
hourly rates because the agency used two contractors at two different 
rates during the pay period. 

* We excluded the costs that the government incurs for both government 
and contractor-provided specialists. These include the costs of 
supplies, facilities, utilities, information technology, and 
communications costs. 

This example is one illustrative case. In another example, officials at 
the Missile Defense Agency told us last year that, according to their 
calculations, the average cost of their government employees was 
$140,000, compared with an average cost of $175,000 for their 
contractors--who accounted for 57 percent of their 8,186 personnel 
positions.[Footnote 20] We will continue to do work in this area. 

Concluding Points: 

In closing, I believe that we must engage in a fundamental re- 
examination of when and under what circumstances we should use 
contractors versus civil servants or military personnel. This is a 
major and growing concern that needs immediate attention. Once the 
decision to contract has been made, we must address challenges we have 
observed in ensuring proper oversight of these arrangements--especially 
considering the evolving and enlarging role of contractors in federal 
acquisitions. 

And we must elevate the acquisition function within the department. I 
would like to emphasize the critical need for actions to be taken to 
improve the acquisition workforce. The acquisition workforce's workload 
and complexity of responsibilities have been increasing without 
adequate agency attention to the workforce's size, skills and 
knowledge, and succession planning. DOD is experiencing a critical 
shortage of certain acquisition professionals with technical skills 
related to systems engineering, program management, and cost 
estimation. Without adequate oversight by and training of federal 
employees overseeing contracting activities, reliance on contractors to 
perform functions that once would have been performed by members of the 
federal workforce carries risk. As a final note, we are continuing to 
explore acquisition workforce issues in ongoing work and we hope to be 
making recommendations on these issues. 

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

[End of section] 

Appendix I Systemic Acquisition Challenges at the Department of 
Defense: 

1. Service budgets are allocated largely according to top-line 
historical percentages rather than Defense-wide strategic assessments 
and current and likely resource limitations. 

2. Capabilities and requirements are based primarily on individual 
service wants versus collective Defense needs (i.e., based on current 
and expected future threats) that are both affordable and sustainable 
over time. 

3. Defense consistently overpromises and underdelivers in connection 
with major weapons, information, and other systems (i.e., capabilities, 
costs, quantities, schedule). 

4. Defense often employs a "plug and pray approach" when costs escalate 
(i.e., divide total funding dollars by cost per copy, plug in the 
number that can be purchased, then pray that Congress will provide more 
funding to buy more quantities). 

5. Congress sometimes forces the department to buy items (e.g., weapon 
systems) and provide services (e.g., additional health care for non- 
active beneficiaries, such as active duty members' dependents and 
military retirees and their dependents) that the department does not 
want and we cannot afford. 

6. DOD tries to develop high-risk technologies after programs start 
instead of setting up funding, organizations, and processes to conduct 
high-risk technology development activities in low-cost environments 
(i.e., technology development is not separated from product 
development). Program decisions to move into design and production are 
made without adequate standards or knowledge. 

7. Program requirements are often set at unrealistic levels, then 
changed frequently as recognition sets in that they cannot be achieved. 
As a result, too much time passes, threats may change, or members of 
the user and acquisition communities may simply change their mind. The 
resulting program instability causes cost escalation, schedule delays, 
smaller quantities, and reduced contractor accountability. 

8. Contracts, especially service contracts, often do not have 
definitive or realistic requirements at the outset in order to control 
costs and facilitate accountability. 

9. Contracts typically do not accurately reflect the complexity of 
projects or appropriately allocate risk between the contractors and the 
taxpayers (e.g., cost plus, cancellation charges). 

10. Key program staff rotate too frequently, thus promoting myopia and 
reducing accountability (i.e., tours based on time versus key 
milestones). Additionally, the revolving door between industry and the 
department presents potential conflicts of interest. 

11. The acquisition workforce faces serious challenges (e.g., size, 
skills, knowledge, succession planning). 

12. Incentive and award fees are often paid based on contractor 
attitudes and efforts versus positive results (i.e., cost, quality, 
schedule). 

13. Inadequate oversight is being conducted by both the department and 
Congress, which results in little to no accountability for recurring 
and systemic problems. 

14. Some individual program and funding decisions made within the 
department and by Congress serve to undercut sound policies. 

15. Lack of a professional, term-based chief management officer at the 
department serves to slow progress on defense transformation and reduce 
the chance of success in the acquisitions/contracting and other key 
business areas. 

[End of section] 

Appendix II Definition of Waste: 

Several of my colleagues in the accountability community and I have 
developed a definition of waste. As we see it, waste involves the 
taxpayers in the aggregate not receiving reasonable value for money in 
connection with any government-funded activities due to an 
inappropriate act or omission by players with control over or access to 
government resources (e.g., executive, judicial or legislative branch 
employees; contractors; grantees; or other recipients). Importantly, 
waste involves a transgression that is less than fraud and abuse. 
Further, most waste does not involve a violation of law, but rather 
relates primarily to mismanagement, inappropriate actions, or 
inadequate oversight. Illustrative examples of waste could include the 
following: 

* unreasonable, unrealistic, inadequate, or frequently changing 
requirements; 

* proceeding with development or production of systems without 
achieving an adequate maturity of related technologies in situations 
where there is no compelling national security interest to do so; 

* the failure to use competitive bidding in appropriate circumstances; 

* an over-reliance on cost-plus contracting arrangements where 
reasonable alternatives are available; 

* the payment of incentive and award fees in circumstances where the 
contractor's performance, in terms of costs, schedule, and quality 
outcomes, does not justify such fees; 

* the failure to engage in selected pre-contracting activities for 
contingent events; and: 

* congressional directions (e.g., earmarks) and agency spending actions 
where the action would not otherwise be taken based on an objective 
value and risk assessment and considering available resources. 

[End of section] 

Footnotes: 

[1] GAO, A Call for Stewardship: Enhancing the Federal Government's 
Ability to address Key Fiscal and Other 21st Century Challenges, GAO-08-
93SP (Washington, D.C.: December 2007). 

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

[3] National Defense Authorization Act for Fiscal Year 2006, Pub. L. 
No. 109-163 Â§ 812, 119 Stat. 3136, 3376-3379 (2006). 

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

[5] GAO, Defense Acquisitions: Role of Lead Systems Integrator on 
Future Combat Systems Program Poses Oversight Challenges, GAO-07-380 
(Washington, D.C.: June 6, 2007). 

[6] 72 Fed. Reg. 65873 - 82 (Nov. 23, 2007), effective date Dec. 24, 
2007. 

[7] 72 Fed. Reg. 64019 - 23 (Nov. 14, 2007). 

[8] GAO, Defense Contracting: Additional Personal Conflict of Interest 
Safeguards Needed for Certain DOD Contractor Employees, GAO-08-169 
(Washington, D.C.: Mar. 7, 2008). In addition, the National Defense 
Authorization Act for Fiscal Year 2008 requires us to report on the 
ethics programs of major defense contractors. National Defense 
Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, Â§ 848. 

[9] Federal Acquisition Regulation 37.104. 

[10] Encore Management, Inc., B-278903.2, Feb. 12, 1999, 99-1 CPD Â¶ 33 
at 3. 

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

[12] The Acquisition Advisory Panel was authorized by Section 1423 of 
the Services Acquisition Reform Act of 2003, which was enacted as part 
of the National Defense Authorization Act for Fiscal Year 2004. The 
panel was tasked with reviewing laws, regulations, and governmentwide 
acquisition policies. Pub. L. No. 108-136, 117 Stat. 1663 (2003). 

[13] The report uses the term expeditionary to include operations 
outside of the U.S. as well as domestic emergency operations. 

[14] GAO, Hurricane Katrina: Improving Federal Contracting Practices in 
Disaster Recovery Operations, GAO-06-714T (Washington, D.C.: May 4, 
2006). 

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

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

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

[18] DOD does maintain data from its competitive sourcing, or A-76, 
program. However, the number of A-76 public/private competition 
contracts is relatively small and the results from this program may not 
be representative of the results from all services contracts for new or 
expanded operations and maintenance work. See GAO, DOD Budget: Trends 
in Operation and Maintenance Costs and Support Services Contracting, 
GAO-07-631 (Washington, D.C.: May 18, 2007). 

[19] GAO, Defense Contracting: Army Case Study Delineates Concerns with 
Use of Contractors as Contract Specialists, GAO-08-360 (Washington, 
D.C.: Mar. 26, 2008). 

[20] Government employees accounted for 33 percent of the personnel 
positions, with the remainder filled by employees of federally funded 
research and development centers and university and affiliated research 
centers that were under contract or other types of agreements to 
perform missile defense tasks. 

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