Government Contractors: Measuring Costs of Service Contractors Versus
Federal Employees (Letter Report, 03/10/94, GAO/GGD-94-95).

The federal government spent nearly $12 billion in fiscal year 1992 on
advisory and service contracts. An analysis of studies done by GAO, the
Energy Department, and the Defense Department suggests that cost
comparisons can be useful in deciding how to acquire needed services in
the most cost effective way. Federal agencies are not now required to do
such cost comparisons in deciding whether to contract for advisory and
assistance services. Although the nine studies GAO reviewed indicate
that it may be less expensive in some cases if services were done by
federal workers rather than by contractors, all of the studies had
limitations. The studies also varied in the extent to which they
incorporated all possible cost factors. In addition to cost, GAO
believes that agencies should consider other factors in deciding whether
to contract out for advisory services, including quality, timeliness,
the technical skills of federal employees, and the duration of the work
to be done. GAO notes that a potential conflict exists between the
administration's objectives of (1) giving federal managers the
flexibility to obtain needed services from the best possible source and
(2) downsizing the federal workforce.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-95
     TITLE:  Government Contractors: Measuring Costs of Service 
             Contractors Versus Federal Employees
      DATE:  03/10/94
   SUBJECT:  Contract costs
             Cost effectiveness analysis
             Federal procurement policies
             Procurement regulation
             Cost control
             Proposed procurement
             Procurement evaluation
             Public administration
             Competitive procurement
             Service contracts
IDENTIFIER:  National Performance Review
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Federal Services, Post Office
and Civil Service, Committee on Governmental Affairs, U.S.  Senate

March 1994

GOVERNMENT CONTRACTORS - MEASURING
COSTS OF SERVICE CONTRACTORS
VERSUS FEDERAL EMPLOYEES

GAO/GGD-94-95

Service Contractors vs.  Federal Employees


Abbreviations
=============================================================== ABBREV

  AFGE - American Federation of Government Employees
  CRS - Congressional Research Service
  DOD - Department of Defense
  DOE - Department of Energy
  EPA - Environmental Protection Agency
  IG - Inspector General
  NAPA - National Academy of Public Administration
  NPR - National Performance Review
  OMB - Office of Management and Budget

Letter
=============================================================== LETTER


B-256459

March 10, 1994

The Honorable David H.  Pryor
Chairman, Subcommittee on Federal Services,
 Post Office and Civil Service
Committee on Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

This report responds to your request that we review various reports
and testimonies\1 that have been made over the past few years
comparing the cost of using contractors versus federal employees to
perform services.  Your request identified several of these reports
and testimonies and asked us to determine whether any others existed. 
As agreed, we commented on the methodologies used in these documents
and identified many of their strengths and weaknesses, and summarized
the results. 


--------------------
\1 Throughout this letter we refer to the identified reports and
testimonies generically as "studies."


   BACKGROUND
------------------------------------------------------------ Letter :1

The federal government spent almost $12 billion in fiscal year 1992
for advisory and assistance service contracts.  These contracts
include professional, administrative, and management support services
and special studies and analyses.  The contractors who provide these
services can play a valuable role in government, supplying expertise
that agencies may not have in-house or may not need on a permanent
basis.  In addition, these contractors can enable agencies to obtain
up-to-date expertise in rapidly changing fields and explore a wide
range of knowledgeable viewpoints on controversial issues.  Agencies
may also find using contractors to be more economical than using
federal employees to perform certain services. 

Until December 1993, advisory and assistance services were subject to
Office of Management and Budget (OMB) guidance under Circular A-120,
Guidelines for the Use of Advisory and Assistance Services.  This
circular established policy, assigned responsibilities, and set
guidelines to be followed for determining and controlling the
appropriate use of advisory and assistance services.  In November
1993, OMB issued Policy Letter No.  93-1, which rescinded Circular
A-120.  The requirements of A-120 were incorporated into the new
policy letter and other policy documents.  The policy letter became
effective 30 days after issuance. 

The new policy letter provides more detailed guidance on managing and
controlling the use of service contracts including advisory and
assistance contracts.  The guidance includes issues for responsible
management officials to address in analyzing contract requirements. 
For example, agency officials must ensure that agency requirements
are met in the most cost effective manner, considering quality and
other relevant factors.  While the policy letter emphasizes the cost
effectiveness of service contracts, it does not require agencies to
develop a cost comparison between contractor and in-house
performance. 

Federal policy regarding the performance of commercial activities--as
opposed to advisory and assistance activities--was established by
Circular A-76.  This circular requires that cost comparisons be made
to determine whether agencies should use contractors or government
employees to perform commercial activities, such as automatic data
processing, guard and protection services, and maintenance and repair
services.  An A-76 cost study involves comparing estimated contract
and in-house costs for the specific work to be performed to determine
the more cost effective approach. 

OMB's Cost Comparison Handbook, a supplement to the circular,
furnishes the guidance for computing cost comparison amounts.  The
agency is to prepare a document containing the government's estimate
of the lowest number and types of employees required to do the work
described.  From these data and other estimated costs, the agency is
to prepare a total estimated cost for in-house performance.  To
estimate contractor performance costs, the selected bid or offer is
added to other estimated costs, such as contract administration, to
develop a total projected cost for contracting out.  The circular
requires comparisons of the two estimates for the agency to determine
which alternative is more cost effective. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

In contrast to the A-76 requirements covering commercial activities,
which require cost comparisons, agencies are not currently required
to conduct cost comparisons in determining whether to contract for
advisory and assistance services.  However, our analysis of studies
made by GAO, the Department of Energy (DOE), and the Department of
Defense (DOD) suggest that cost comparisons can be a useful
management tool for assisting government agencies in deciding how to
acquire needed services in the most cost effective manner. 

In addition to the five studies identified in the Chairman's request,
we identified four more.  We reviewed all nine.  Although the nine
studies indicated that savings may be available in certain situations
if services were performed by federal employees rather than by
contractors, all of the studies had limitations.  For example, none
were sufficiently large or comprehensive to permit generalization to
other situations in the government as a whole, or even within the
agencies in question. 

The studies also varied in the extent to which they incorporated all
possible cost factors.  Because Circular A-76 contains an extensive
list of items to consider--most of which, we believe, would be
equally applicable to advisory and assistance services--we believe it
could serve as a useful source of criteria for studies such as these. 
One study of seven headquarters' administrative, management, and
technical support contracts used substantially all of the extensive
cost elements contained in OMB Circular A-76.  Four additional
studies used some, but not all, of these cost elements.  The
remaining four studies limited their methodologies to determining or
estimating direct labor costs and comparing them to contract labor
costs. 

In addition to cost, we believe agencies would also need to consider
other factors in deciding whether to contract out for advisory
services.  For example, if the advisory services sought were
short-term and nonrecurring in nature, it might make sense for an
agency to contract out even if it might be less expensive to hire
staff to do the work in-house.  An agency would also need to consider
quality and timeliness of the services required.  This would involve
determining whether available federal employees had the necessary
technical skills or knowledge. 

OMB is considering revising its A-76 guidance.  This could include
extending the cost comparison requirement to include advisory and
assistance services.  In this regard, we believe OMB should also
consider the additional noncost factors discussed in this report. 

OMB should also consider the proposals of the National Performance
Review (NPR) to encourage competition between the public and private
sector in obtaining needed services for the government.  However, as
it considers revisions to its cost comparison guidance, OMB will need
to resolve a potential conflict between the NPR's objective of
providing agencies greater flexibility in accomplishing their
missions and the current efforts to downsize the government.  On one
hand, the NPR has advocated (1) giving managers the flexibility to
obtain needed services from the best possible source and (2)
eliminating personnel ceilings and permitting managers to manage to
budget.  On the other hand, the administration has also stated its
commitment to reducing the federal workforce by 252,000 employees. 
Such downsizing could, in effect, create new personnel ceilings
rather than eliminate them, with agencies finding themselves in a
position of having to contract out to meet the downsizing goal
regardless of what cost comparison studies show.  The administration
and Congress will need to address this apparent contradiction to
avoid sending conflicting messages to federal agencies. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To identify the universe of recent cost comparison studies, we
conducted an extensive literature search covering the period from
fiscal years 1988 to 1993 and made inquiries of OMB, Congressional
Research Service (CRS), National Academy of Public Administration
(NAPA), DOD, DOE, American Federation of Government Employees (AFGE),
a service contractor, Dan Gutman (author of The Shadow Government),
and the Professional Services Council (an organization representing
the interests of advisory and assistance service contractors).  We
identified nine reports and testimonies--one report prepared by the
DOE's Inspector General (IG), three prepared by the DOD's IG, and two
we prepared; two testimonies presented by DOE and DOD officials; and
one review we made of our own use of contractors.  The reports and
testimonies identified are listed in appendix I. 

To review the studies' methodologies, we used OMB's A-76 cost
elements plus other noncost factors we deemed critical, such as
quality and timeliness of services, the availability of federal
employees, and whether the work was short-term and nonrecurring or
longer term and recurring.  We chose the A-76 cost factors because
they are comprehensive, reflect the fully allocated cost to the
government, and generally include a broad range of cost factors, such
as personnel costs, materials and supplies, overhead, contract price,
and contract administration.  Our study did not include a
determination of the accuracy of the agency cost data used.  We were
concerned primarily with the extent to which the studies'
methodologies incorporated the cost elements suggested by OMB. 

To review the status of current efforts to improve the way federal
agencies obtain needed services, we (1) held discussions with
congressional staff with responsibilities related to government
contracting activities and OMB officials and (2) reviewed OMB
documentation, White House news releases, and newspaper articles.  In
addition, we reviewed the NPR report, since it addressed how federal
agencies obtain needed services to accomplish their missions. 

As requested by the Subcommittee, we did not obtain official agency
comments.  However, we discussed the results of our work with
knowledgeable officials from OMB, DOE, and DOD.  Their comments are
summarized on pages 12 and 13.  We did our review in Washington,
D.C., between April 1993 and January 1994 in accordance with
generally accepted government auditing standards. 


   SEVERAL STUDIES FOLLOWED A-76
   COST COMPARISON PRINCIPLES
------------------------------------------------------------ Letter :4

Circular A-76 and its Cost Comparison Handbook provide instructions
for agencies to consider in developing fair and equitable costs of
both government and contract performance.  Five of the studies
included some of the relevant cost elements in A-76 (see app.  III). 

The other four studies limited their methodologies to determining or
estimating direct agency labor costs and comparing them to contract
labor costs.  In our view, the five studies that included some of the
A-76 cost elements represent a more comprehensive cost comparison
methodology.  Although the studies illustrate that the A-76
methodology can be used and serve as a useful management tool in
deciding how best to obtain needed services, it should be noted that
all of the studies have limitations.  For example, none was designed
to be sufficiently large or comprehensive to permit generalizing to
other situations in the government as a whole, or even to the
agencies in question. 

Appendix II lists the suggested A-76 elements for agencies to
consider in developing these costs.  For government performance, such
costs include direct labor costs, indirect labor costs (such as
health and retirement benefits), supplies, and overhead.  Contract
costs include the contract price and the cost to the government for
contract administration. 

To illustrate how a study could incorporate such cost elements, we
have summarized the study done by DOE's IG.  Discussions of each of
the nine studies we reviewed are included in appendix IV. 

The DOE IG looked at seven headquarters support service contracts
that were active as of November 1989, each with an annual cost of
over $1 million or required the services of at least 10 full-time
equivalents.  The seven contracts selected for detailed review were
taken from a universe of 54 contracts with an average cost of over $1
million each.  The IG considered all of the cost elements suggested
by OMB and used actual contract costs.  The IG used the contractor's
organizational structure in developing an in-house labor cost
estimate.  Specifically, with the assistance of a personnel
classifier, the IG identified comparable federal positions requiring
the same personnel skill levels as the contractor staff.  Other
in-house expenditures were based on costs stipulated in OMB Circular
A-76 or actual agency cost experience. 

In addition to personnel costs, the IG's report considered other
in-house performance costs suggested by OMB.  It included material
and supply costs, overhead costs, and one-time costs such as employee
recruitment and/or relocation expenses necessary to convert a
contract function to government performance.  For contract
performance, the IG report considered contract costs suggested by
OMB, such as the contract price and the cost of contract
administration by the government.  The contract costs were reduced by
the estimated amount of federal income tax the contractors would pay
since that amount would be returned to the federal Treasury. 

Before approving a conversion from contract to in-house performance
on the basis of costs, OMB Circular No.  A-76 has established cost
margins that must be exceeded.  The cost margin is equal to 10
percent of the government personnel-related cost and 25 percent of
the acquisition cost of new capital assets--i.e., assets not
currently owned by the government and used solely by the in-house
operation.  DOE's study included this requirement and added these
costs to the cost of in-house performance.  (See p.  19). 

In our view, the DOE IG report illustrates that the A-76 guidance can
be applied to support service contracts such as advisory and
assistance services and that such a cost comparison can serve as a
useful management tool to assist agencies in deciding how to acquire
needed services.  Among other things, the cost elements contained in
A-76 are extensive; by considering all those relevant to support
service contracts, agencies should be able to develop comprehensive
cost estimates. 

With one exception, we have not noted major concerns or criticism of
the cost elements contained in A-76.  The one concern was raised by
the Professional Services Council, which represents the interests of
advisory and assistance service contractors.  It believes the A-76
guidance is defective in that it does not include all possible costs
in the agency overhead cost category. 

Currently, OMB Circular A-76 considers overhead to include two major
categories of cost--operations overhead and general and
administrative overhead.  Operations overhead is defined in the
Circular as those costs incurred by the first supervisory work center
one element above and in support of the function under study. 
General and administrative overhead is defined as all support costs,
other than operations overhead, incurred in support of the function
under study. 

According to the Circular, a portion of the support costs incurred
above the installation level would be theoretically attributable to
the function under study.  However, for purposes of a cost
comparison, the Circular requires the inclusion of only those
government support costs that would be eliminated in the event that
the function is contracted.  This decision is based on the conclusion
that costs involved in funding, policymaking, long-range planning and
direction would continue and be equally applicable to both in-house
or contractor performance. 

We agree with OMB's conclusion, and we question (1) the practicality
of allocating all possible overhead costs to specific support
services under consideration and (2) whether the inclusion of these
costs would markedly affect the outcome of a cost comparison
analysis.  However, we recognize that differences of opinion can
occur.  As we discuss on page 9, OMB is considering revisions of A-76
and extending the cost comparison requirement to advisory and
assistance services.  When it proceeds, OMB, in accordance with its
normal practice, will likely provide an opportunity for public
comment on its intentions, which would provide the Professional
Services Council and others an opportunity to voice any concerns they
might have. 


   NONCOST FACTORS THAT ALSO NEED
   TO BE CONSIDERED
------------------------------------------------------------ Letter :5

For a cost comparison of contracting out versus using federal
employees to be a useful management tool for agency decisionmakers,
OMB also needs to consider other noncost factors.  These include the
difference between the quality of services offered by federal versus
contractor employees; the timeliness of services available; the
availability of federal employees to do the work; the value of
flexibility in responding to variable work requirements; and whether
the services needed are short-term, nonrecurring in nature, or of a
longer term and recurring. 

Of the nine cost comparison studies we reviewed, only one addressed
noncost factors in the actual analysis.  Some of the other studies
referred to the factors, but did not include them in the analysis. 
In the former case, the agency evaluated the quality and the
timeliness of services provided by the contractor on a short-term,
"test" contract to determine the feasibility of future reliance on
contracting out for certain tasks.  The agency used three methods to
evaluate the quality of contractor work--peer review of contracted
work; external expert ratings of comparable tasks done by agency and
contracted staff; and in the case of one type of work, the correction
of control errors by the contractor.  The contractor's performance
was considered to be acceptable in terms of quality.  However, in
terms of timeliness, the contractor was not able to deliver the
needed services as quickly as agency personnel. 

In commenting on the DOE IG's study, a DOE official also raised the
issue that noncost factors need to be considered.  The Director of
DOE's Office of Administration and Human Resource Management pointed
out management's belief that a process for review and approval of
agency requests for support services should also document, as
appropriate, factors other than cost that create mitigating
circumstances for permitting contracting when a cost comparison shows
savings projected for in-house operation.  Such factors included the
mix of technical skills of required employees, the duration of the
work to be done, and the availability of funding.  The Director
pointed out that without considering these factors, the agency may
not be able to contract out work even when it is in its best
interests to do so. 

An OMB official held similar views.  He suggested that under certain
circumstances, such as where the work requirements were short-term
and nonrecurring, the results of a cost comparison may be a secondary
issue.  He believed that under these conditions a cost comparison may
not be needed. 

We agree that such noncost factors should enter into the
decisionmaking process.  For example, unlike many commercial services
currently subject to A-76 guidance that are generally long-term and
recurring in nature, advisory and assistance service needs can also
be time-critical, nonrecurring, or intermittent in nature.  If an
agency were faced with such circumstances and did not have federal
employees with the necessary technical knowledge and skills, the
relative cost of contracting out or hiring additional employees might
not be of overriding importance.  In our view, however, such
decisions would need to be made on a case-by-case basis and properly
justified and documented. 


   OMB IS CONSIDERING REQUIRING
   COST COMPARISONS FOR ADVISORY
   SERVICES
------------------------------------------------------------ Letter :6

OMB recognizes the importance of obtaining needed federal services at
the most reasonable cost to the taxpayers and has emphasized this
need in its November 19, 1993, Policy Letter No.  93-1, Management
Oversight of Service Contracting.  In addition, OMB is considering
expanding A-76 cost comparison requirements to include advisory and
assistance services as part of an ongoing effort to revise its
governmentwide cost comparison guidance and consider the
recommendations of the NPR. 

OMB's reconsideration of its A-76 guidance is due in part to past
criticisms of the program.  For example, in December 1989 we
testified that in more than 100 reviews, we and other agencies had
found that managers generally agreed with the A-76 concept of
government/private sector competition, but said that the program was
time-consuming, difficult to implement, disruptive, and perceived as
threatening to the jobs of federal managers and employees.\2 In
revising its A-76 guidance, OMB is considering addressing these
issues.  It will also consider the results of a comprehensive
governmentwide study of contracting policies it conducted.  The
resulting report entitled Summary Report of Agencies Contracting
Practices was issued in January 1994. 

Although OMB's observations did not specifically address the issue of
performing cost comparisons between in-house and contractor
performance, it addressed some related issues.  For example, the
report said that many agencies do not routinely perform independent
cost analyses of the market reasonableness of contractor bids before
the renewal, extension, or re-competition of existing contracts.  In
some cases, cost analyses are not prepared before entering into new
contracts. 

The report concluded that agencies often assume that additional
government personnel will not be authorized and, therefore, the only
alternative is to contract for needed services.  The report indicated
that several agencies requested that they be given more budget
flexibility with respect to determining whether work should be
performed by agency or contractor staff. 

OMB's intention to address these problems when reconsidering its
guidance is timely in that it is in accord with many of the concepts
advocated in the NPR.  Among other things, the NPR has advocated the
following: 

  Individual agencies should compete with other agencies and private
     companies to provide support services. 

  Agency managers should have flexibility to obtain services from the
     best possible source. 

  Personnel ceilings should be eliminated and federal managers should
     be permitted to manage to budget using ceilings on operating
     costs to control spending.  The report recognized that personnel
     ceilings could cause agencies to contract out work that could be
     done better and cheaper in-house. 

The NPR findings corresponded with our previous observations that
federal managers should have the authority and flexibility to obtain
services for the government in the most cost effective manner.  For
example, in our Transition Series Report, The Public Service
(GAO/OCG-93-7TR, Dec.  1992), we reported that federal managers have
often not had sufficient flexibility to choose between hiring
employees or contractors because of restrictive personnel ceilings
imposed by OMB or Congress.  As a result, agencies frequently used
contractors even when they believed it might be more appropriate to
use federal employees because of the nature of the work involved or
because it would be less costly. 

Providing agencies with the needed flexibility to choose between
using employees or contractors, however, will be a particularly
sensitive issue in light of the administration's overall goal of
downsizing the federal workforce by approximately 252,000 positions. 
Unless agencies are specifically authorized to hire needed federal
employees in circumstances where a meaningful cost comparison
indicates that in-house performance is desirable, agencies could be
in a position of having to contract for services regardless of what a
cost comparison study shows.  OMB and Congress will need to reconcile
this potential conflict as they implement the NPR recommendations. 


--------------------
\2 A-76 Program Issues (GAO/T-GGD-90-12)


   CONCLUSIONS
------------------------------------------------------------ Letter :7

Although agencies have not been required to make cost comparisons for
advisory and assistance services, studies made by us, DOD's IG, and
DOE's IG have indicated that cost comparisons can be a useful
management tool. 

OMB is considering revising its A-76 guidance to address many of the
procedural problems and concerns we and other agencies have
identified over the past several years.  It also plans to consider
extending the cost comparison requirement to include advisory and
assistance services.  OMB's consideration of extending Circular A-76
requirements to include advisory and assistance services is both
timely and in harmony with the objectives of the administration's NPR
to provide quality service to the public at the most reasonable cost. 
Applying a cost comparison requirement to advisory and assistance
service would be another step forward in a disciplined approach to
ensuring that the government gets the most for its money. 

OMB will need to be sensitive to, and allow for, such noncost factors
as quality, timeliness, the technical skills of federal employees,
and the duration of the work to be done.  In addition, OMB and
Congress need to be aware that a potential conflict exists between
the administration's objectives of (1) giving federal managers the
flexibility to obtain needed services from the best possible source
and (2) downsizing the federal workforce. 


   MATTER FOR CONSIDERATION BY
   CONGRESS
------------------------------------------------------------ Letter :8

Congress may want to explore with OMB the best way to reconcile the
administration's objective of downsizing the government with the
objective of providing federal agencies the flexibility to accomplish
the government's work in the most cost effective manner including,
where needed, increased competition between the public and private
sectors. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

We recommend that the Director, OMB, take the following actions: 

  As part of its overall effort to improve the procurement of
     services, OMB should extend a cost comparison requirement to
     advisory and assistance services.  As part of its guidance to
     agencies in preparing cost comparisons for advisory and
     assistance services, OMB should recognize that noncost factors
     also need to be considered and specify any circumstances that
     might exempt an agency from the cost comparison requirement. 
     However, if a decision is made not to conduct a cost comparison,
     such a decision should be adequately justified and documented. 

  OMB should work with Congress to explore ways to meet the
     administration's workforce reduction objective and provide
     agencies with sufficient authority and flexibility to accomplish
     the government's work in the most efficient and effective
     manner--either by using government employees or by contract, or
     some combination of both. 


   AGENCY COMMENTS
----------------------------------------------------------- Letter :10

As requested by the Subcommittee, we did not obtain official agency
comments.  However, we discussed the results of our work with
knowledgeable officials from DOE, DOD, and OMB.\3

DOE and DOD officials commented on our summaries of their respective
agency's cost comparison studies.  They generally agreed with our
presentation of the studies and provided several suggestions for
greater clarity.  We have incorporated their suggestions where
appropriate. 

OMB officials commented on and were in general agreement with the
preliminary findings and conclusions in the draft report.  They
reiterated their intent to consider extending the cost comparison
requirement to include advisory and assistance services. 

The officials noted that it may not be necessary or practicable to
require cost comparisons for all types of advisory and assistance
services.  In particular, they suggested that in certain
circumstances, such as those involving activities where the work
requirements are of a short-term and nonrecurring nature, cost
comparisons would not be necessary.  They suggested that these and
other noncost factors be considered before a decision is made to
conduct a cost comparison. 

We agree that it would be reasonable to first require consideration
of noncost factors before making a cost comparison for advisory and
assistance services.  As we stated earlier in this report, such
noncost factors need to be considered and specifically included in
OMB guidance.  We believe, however, that OMB should require agencies
to adequately justify and document decisions not to conduct cost
comparisons and not allow agencies to use these factors solely as a
basis for avoiding the comparisons. 

OMB officials offered the opinion that consideration of the
comparative costs of contracting versus in-house performance should
relate not only to those activities that may be performed by
contractors but to those activities already being performed by the
government as well.  The officials also expressed concern that to be
fully reliable, contractor cost estimates should reflect the best
prices available in the market place--obtainable through the
competitive process.  They said that existing advisory and assistance
contracts may not have always incorporated the most efficient
practices and, as a result, may not reflect the best price of
contract services available to the government.  We believe OMB's
comments have merit and expect that OMB will consider these matters
as part of its reconsideration of the A-76 process. 

The OMB officials provided other comments of a technical nature that
have been incorporated where appropriate. 


--------------------
\3 We discussed the draft with the Director, Management Systems, DOE,
and two other DOE officials.  We met with a Procurement Analyst from
the Office of the Secretary of Defense, DOD, and twelve other DOD
officials.  We also met with an OMB Policy Analyst from the Federal
Services Branch and two other OMB officials.  The Analyst said that
although the matters discussed in the draft report were under the
Analyst's area of responsibility, the Analyst was not able to speak
officially for OMB without having the draft report submitted to the
agency for formal comment. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to the Director of the Office of
Management and Budget and the Secretaries of the Departments of
Defense and Energy.  We are also providing copies to the ranking
minority member of the Subcommittee on Federal Services, Post Office
and Civil Service, Committee on Governmental Affairs, and other
appropriate congressional committees.  Copies will be made available
to other interested parties upon request. 

The major contributors to this report are listed in appendix V.  If
you have any questions about this report, please call me on (202)
512-5074. 

Sincerely yours,

Nancy Kingsbury
Director
Federal Human Resource Management
 Issues


REPORTS AND TESTIMONIES REVIEWED
BY GAO
=========================================================== Appendix I

1.  Department of Energy Office of Inspector General:  Audit of the
Cost-Effectiveness of Contracting for Headquarters Support Services
(DOE/IG-0297, Aug.  30, 1991). 

2.  Department of Defense Office of the Inspector General:  Audit
Report on Contracted Advisory and Assistance Services Contracts (No. 
91-041, Feb.  1, 1991). 

3.  GAO:  Energy Management:  Using DOE Employees Can Reduce Costs
for Some Support Services (GAO/RCED-91-186, Aug.  16, 1991). 

4.  Testimony of Donna R.  Fitzpatrick, Assistant Secretary for
Management and Administration, DOE, before the Subcommittee on
Federal Services, Post Office and Civil Service, Senate Committee on
Governmental Affairs, September 6, 1989. 

5.  Testimony of Ambassador Henry F.  Cooper, Director, Strategic
Defense Initiative Organization, DOD, before the Senate Committee on
Governmental Affairs, July 24, 1992. 

6.  GAO:  Letter from the Comptroller General to the Chairman,
Legislative Subcommittee, House Committee on Appropriations, on the
expanded use of contractors to help with GAO's audit and evaluation
work, February 28, 1991. 

7.  GAO:  Government Contractors:  Are Service Contractors Performing
Inherently Governmental Functions?  (GAO/GGD-92-11, Nov.  18, 1991). 

8.  Department of Defense Office of the Inspector General:  Audit
Report on Consulting Services Contracts for Operational Test and
Evaluation (No.  91-115, Aug.  22, 1991). 

9.  Department of Defense Office of the Inspector General:  Audit
Report on Selected Services Contracts at Wright-Patterson Air Force
Base (No.  92-128, Aug.  17, 1992). 


OMB CIRCULAR NO.  A-76 COST
COMPARISON CRITERIA
========================================================== Appendix II

OMB's Circular No.  A-76, Cost Comparison Handbook provides detailed
instructions for developing a comprehensive comparison of the
estimated cost to the government of acquiring a service by contract
and of providing the service with in-house government resources.  The
specific cost elements that agencies need to consider are illustrated
in table II.1. 



                          Table II.1
           
              OMB Circular A-76 Cost Comparison
           Criteria--Expansions, New Requirements,
           and Conversions to In-House Performance

In-house performance costs
------------------------------------------------------------
Personnel costs\a

Material & supply cost

Other specifically attributable costs\b

Overhead cost\c

Cost of capital\d

One-time conversion cost\e

Additional costs\f

Total in-house costs

Contract performance costs

Contract price

Contract administration\g

Additional costs\h

One-time contract conversion costs\i

Gain or loss on disposal/transfer of assets\j

Federal income tax deduction\k

Total contract costs

Decision

Conversion differential\l

Total

Cost comparison

Cost comparison decision (check block)
//Accomplish in-house
//Accomplish by contract
------------------------------------------------------------
GAO Notes: 

\a Personnel costs include 29.55 percent for retirement, life
insurance, health insurance, and miscellaneous benefits. 

\b Include depreciation, rent, maintenance and repair, utilities, and
insurance (the government is self-insured and must pay for each loss
incurred). 

\c Operations overhead and general and administrative overhead. 

\d New investment in facilities and equipment. 

\e Office and plant rearrangements; employee recruitment, training,
and relocation; and expenses resulting from discontinuing an existing
contract or expanding the in-house operations. 

\f Any government costs not classified by other cost elements
resulting from unusual or special circumstances. 

\g Costs incurred by government to ensure execution of contract. 

\h Costs for unusual or special circumstances such as transportation
or purchased services. 

\i Based on government discontinuing an existing activity and
obtaining a service by contracting. 

\j Based on reduction in government assets. 

\k Revenue from contractor that reduces net contract costs. 

\l Total in-house costs must be increased by certain differential
costs for personnel and overhead before they are compared to the
total contract costs. 

Source:  OMB Circular No.  A-76, Cost Comparison Handbook


EXTENT TO WHICH DOE IG, DOD IG,
AND GAO STUDIES USED OMB CIRCULAR
A-76 COST COMPARISON CRITERIA\A
========================================================= Appendix III

                            DOD/              DOD/    DOD/
                    DOE/    IG-     GAO/      IG-     IG-
                    IG-     91-     RCED-     91-     91-
OMB A-76            0297    041     91-186    115     128
------------------  ------  ------  --------  ------  ------
In-house performance costs
------------------------------------------------------------
Personnel costs     x       x       x         x\e     x\g

Material & supply   x

Other specifically  x                         x\e
attributable costs

Overhead costs      x

Cost of capital     x

One time            x               x
conversion cost

Additional costs    x               x

Total in-house      x               x         x\e
costs


Contract performance costs
------------------------------------------------------------
Contract price      x\b     x\c     x\b\d     x\f     x\c

Contract            x
administration

Additional costs    x

One-time contract   x
conversion costs

Gain or loss on     x
disposal/
transfer of assets

Federal income      x
tax
deduction

Total contract      x
costs


Decision
------------------------------------------------------------
Conversion          x
differential

Total               x       x       x         x       x

Cost comparison     x       x       x         x       x
------------------------------------------------------------
Legend

x equals the criteria that were met

Notes: 

\a This analysis is based on the five studies that used all or some
of the A-76 cost elements. 

\b Based on actual expenditures for contractor's work. 

\c Based on contract labor rates and hours. 

\d Certain items, such as federal income tax, were considered but not
included. 

\e Based on hourly costs, including salary, fringe benefits, office
space, and miscellaneous costs. 

\f Based on hourly costs, including labor, overhead, general and
administrative expenses, and profit. 

\g Based on hourly costs, consisting of hours times the rate per
hour. 


SUMMARY OF REPORTS AND TESTIMONIES
REVIEWED
========================================================== Appendix IV

We reviewed nine reports and testimonies that compared costs of
performing advisory and assistance type support services with
contractor and in-house resources.  Five used some of the cost
elements suggested in OMB's Circular No.  A-76.  The remaining four
limited their discussion to actual or estimated labor costs.  We have
summarized all nine. 

The five studies that most closely followed the A-76 cost comparison
criteria were done by the Inspectors General at DOE and DOD, and by
us. 

Audit of the Cost Effectiveness of Contracting for Headquarters
Support Services (DOE/IG-0297)

This report to the Secretary of Energy contained the results of an
audit of contractor costs for support services at DOE Headquarters by
the Department IG.  It most closely followed OMB's A-76 criteria and
used all of the prescribed OMB cost comparison elements. 

The study was based on cost comparisons for seven headquarters'
support service contracts dealing with management, technical, and
administrative assistance that were active in November 1989. 
Overall, it cited estimated average savings of 40 percent through
government performance of these activities, ranging from 26 to 53
percent. 

An example of the cost comparison made for one of the contracts in
the study is shown in Table IV.1. 



                          Table IV.1
           
            Example of Cost Comparison Used in DOE
                   IG Report (DOE/IG-0297)

In-house performance costs
----------------------------------------------  ------------
Personnel costs                                  $231,045.51
Material & supply                                   2,062.50
Other specifically attributable costs              10,463.09
Overhead costs
 Personnel                                         45,515.96
 Operations                                             0.00
Cost of capital                                        21.00
One-time conversion cost                            6,875.00
Additional costs                                        0.00
============================================================
Total in-house costs                             $295,983.06

Contract performance costs
------------------------------------------------------------
Contract price                                   $460,200.30
Contract administration                            26,608.30
Additional costs                                        0.00
One-time contract conversion costs                      0.00
Gain or loss on disposal of assets (expansion)          0.00
Federal income tax (deduct)                       (8,283.60)
============================================================
Total contract costs                             $478,525.00

Decision
------------------------------------------------------------
Conversion differential                          $ 27,661.40
============================================================
Total                                            $323,644.46
Cost comparison                                  $154,880.54
                                                     32.366%
Cost comparison decision (check block)
 /x/Accomplish In-House
 //Accomplish by Contract
------------------------------------------------------------
Source:  DOE IG workpapers for audit report, DOE/IG 0297. 


      AUDIT REPORT:  CONTRACTED
      ADVISORY AND ASSISTANCE
      SERVICE CONTRACTS, DOD IG
      REPORT, (NO.  91-041)
------------------------------------------------------ Appendix IV:0.1

This report to DOD officials contained the results of an audit of
contracted advisory and assistance services.  The primary objective
of the audit was to determine the adequacy of management controls. 
The IG also considered, however, the cost effectiveness of
contracting for services. 

This study was based partially on OMB A-76 criteria and examined four
long-term work requirements for contract obligations in fiscal year
1987.  Work performed under each contract had continued for more than
5 years.  According to the IG, the cost comparisons did not include
facilities and additional administrative costs that might be required
if the services were performed in-house. 

Contract costs consisted of actual contract labor, travel, and
miscellaneous costs.  Other OMB-specified costs, such as government
contract administration, conversion costs, and gain or loss on
disposal of assets, were not included.  Also, a deduction for federal
income tax was not made.  The government costs were limited to labor
plus fringe benefits and did not include material and supply costs,
other specifically attributable costs, overhead, capital costs, and
one-time conversion costs.  The work did not require specialized
skills and, as a result, the IG said it was possible to identify the
Civil Service equivalent of the contractor employees. 

The IG cited a range of 37 percent to 51 percent in estimated savings
for the four work requirements reviewed through in-house performance. 

An example of the cost comparison for one of the contracts involving
administrative and technical support services is shown in table IV.2. 



                                    Table IV.2
                     
                      Example of Cost Comparison Used in DOD
                              IG Report (NO. 91-041)

Governme
nt GS/
contract
or            GS-9/5     GS-10/5     GS-12/5     GS-13/5
equivale    Engineer      Junior      Senior     Project
nts        Assistant    Engineer    Engineer    Engineer
--------  ----------  ----------  ----------  ----------  ----------  ----------
Governme  $25,454.00  $28,028.00  $36,911.00  $43,891.00
 nt GS
 base
 salary
 (1987)
Hourly        $14.60      $16.07      $21.16      $25.17
 rate

OMB A-76 benefit cost factors
--------------------------------------------------------------------------------
Retireme        3.17        3.49        4.59        5.46
 nt at
 21.70
 percent
Medicare         .21         .23         .31         .36
 at 1.45
 percent
Life &           .69         .76         .99        1.18
 health
 insuran
 ce
 at 4.70
 percent
Miscella         .26         .28         .38         .45
 neous
 fringe
 at 1.80
 percent
Governme      $18.93      $20.83      $27.43      $32.62
 nt
 rates
 with
 benefit
 costs
                                        Government
 Contrac                               Total     rates x  Government   Savings -
 t labor    Contract    Contract    contract    contract        cost    in-house
 categor        rate       hours       costs       hours
 ies
Project       $48.44       3,180  $154,039.2     32.62 x  $103,731.6           $
 engineer                                  0       3,180           0   50,307.60
Senior         41.75      17,810  743,567.50     27.43 x  488,528.30  255,039.20
 engineer                                         17,810
Junior         35.68      19,995  713,421.60     20.83 x  416,495.85  296.925.75
 engineer                                         19,995
Engineer       30.50      14,410  439,505.00     18.93 x  272,781.30  166,723.70
 assista                                          14,410
 nt
Travel,                            24,711.54               22,824.00    1,887.70
 miscell
 aneous
================================================================================
Total                             $2,075,244              $1,304,361  $770,883.7
 cost                                    .84                     .05         9\a
--------------------------------------------------------------------------------
\a Percentage of savings if performed in-house is 37 percent. 


      ENERGY MANAGEMENT:  USING
      DOE EMPLOYEES CAN REDUCE
      COSTS FOR SOME SUPPORT
      SERVICES (GAO/RCED-91-186,
      AUG.  1991)
------------------------------------------------------ Appendix IV:0.2

This report to Senator David H.  Pryor contained the results of cost
comparisons made at his request of twelve support service contracts. 

The study was based partially on OMB A-76 criteria and considered
twelve contracts that were active in fiscal year 1990.  Overall, our
methodology tended to overstate the cost of federal performance so
the comparison would not be biased in favor of the federal sector. 

We compared contract performance costs to in-house performance costs
that consisted of labor costs, fringe benefits, one-time costs to
convert activities to in-house performance, and training costs.  For
the most part, contractors were using government space and equipment. 
Therefore, these costs were not added to either side of the equation. 

In the interest of conservatism, in estimating labor costs for
in-house performance, we used the top salary level for each position,
rather than the middle level specified in the OMB guidance.  We also
did not add the cost of DOE's contract administration to the contract
costs.  This tended to understate the cost of contractor performance
so there would not be a bias in favor of the government. 

We did not subtract the contractor's potential income tax payment
from the contractor's cost because we believed the amount would be
minimal for the contracts reviewed. 

Overall, we estimated that DOE could have achieved savings for 11 of
the contracts we reviewed, ranging from 3.1 to 55.4 percent, with an
average of 25.4 percent if the work were done in-house. 

The study results were not generalizable because the selection
methodology favored contracts that agency officials suggested could
be performed less expensively by federal personnel. 

For one of the contracts we reviewed, the in-house performance costs
were estimated to be 9 percent higher than the contract performance
costs.  An example of our analysis for one contract we reviewed is
shown in table IV.3. 



                          Table IV.3
           
            Example of Cost Comparison Used in GAO
                   Report (GAO/RCED-91-186)

----------------------------------------------  ------------
Contract performance costs                        $5,398,000

In-house performance costs
------------------------------------------------------------
Labor costs                                       $3,000,449
Fringe benefits                                      886,633
One-time costs to convert to in-house                231,200
 performance
Training costs                                        32,500
Total in-house performance costs                  $4,150,782
Difference                                      $1,247,218\a
------------------------------------------------------------
\a Estimated percentage of difference to in-house performance costs
is 30 percent. 


      AUDIT REPORT:  CONSULTING
      SERVICES CONTRACTS FOR
      OPERATIONAL TEST AND
      EVALUATION, DOD IG REPORT,
      (NO.  91-115)
------------------------------------------------------ Appendix IV:0.3

This report to DOD officials summarized the results of an audit
requested by Congresswoman Barbara Boxer.  The report addressed
advisory and assistance services contractors that participated in the
development, production, testing, and evaluation of major defense
systems.  One objective of the study was to determine whether using
services contractors to provide support for operational tests was
more cost effective than developing a capability to perform the work
in-house. 

The report stated that the military departments' operational test
agencies used repeated and extended service contracts that were not
as cost effective as developing an in-house capability to perform the
work.  The report estimated that the agencies could save about $26
million from fiscal years 1992 to 1996, by gradually reducing their
service contracts by 60 percent.  The report further estimated that
contracting costs were between 21 and 40 percent higher than in-house
performance. 

The report compared contractor total hourly costs with estimated
hourly costs for various levels of civilian government personnel. 
Total contractor hourly costs included such factors as hourly labor
costs, overhead, general and administrative expenses, and profit. 
Government hourly costs included salary, retirement, medicare, life
and health insurance, fringe benefits, office space, and other
miscellaneous costs. 

An example of the cost comparison for one of the contracts is shown
in table IV.4. 



                                    Table IV.4
                     
                      Example of Cost Comparison Used in DOD
                              IG Report (No. 91-115)

                                                          Percentage
                                              Difference  difference
                                                 between     between
              Hourly                  Hourly    in-house    in-house
             cost of  Equivalent     cost of   costs and   costs and
Labor     contractor  government  government  contracted  contracted
category    services       grade   employees    services    services
--------  ----------  ----------  ----------  ----------  ----------  ----------
Manageme     $ 82.19     GM-15/5     $ 51.01      $31.18       37.94
 nt
Research       62.63     GS-14/5       42.77       19.86       31.71
 staff
 member
Editors        39.50     GS-13/5       35.88        3.62        9.16
 and
 miscell
 aneous
Graduate       34.62     GS-09/5       21.61       13.01       37.58
 student
 s,
 researc
 h
 assista
 nts,
 and
 program
 analyst
Support        22.78     GS-05/5       14.91        7.87       34.55
 staff
================================================================================
Total        $241.72                 $166.18      $75.54       31.25

Calculation of hourly costs for contractor services
--------------------------------------------------------------------------------
================================================================================
                        Overhead      Fringe     General
                         rate at    benefits         and   Profit at       Total
 Labor        Hourly  48 percent          of  administra        4.25      hourly
 categor        rate              42 percent     tive at     percent        cost
 y                                                   6.8
                                                 percent
Manageme      $38.85      $18.65      $16.32       $5.02       $3.35      $82.19
 nt
Research       29.61       14.21       12.43        3.83        2.55       62.63
 staff
 member
Editors        18.68        8.96        7.84        2.41        1.61       39.50
 and
 miscell
 aneous
Graduate       16.37        7.86        6.87        2.11        1.41       34.62
 student
 s,
 researc
 h
 assista
 nts,
 and
 program
 analyst
 s
Support       $10.77       $5.17       $4.52       $1.39       $0.93      $22.78
 staff
--------------------------------------------------------------------------------

      AUDIT REPORT:  SELECTED
      SERVICE CONTRACTS AT
      WRIGHT-PATTERSON AIR FORCE
      BASE, DOD IG REPORT (NO. 
      92-128)
------------------------------------------------------ Appendix IV:0.4

This report to DOD officials, concerning eight specific support
service contracts at Wright-Patterson Air Force Base valued at about
$132 million that were active during fiscal years 1986 to 1991,
summarized the results of an audit requested by Senator David H. 
Pryor.  One issue covered in the audit was to determine whether the
cost of contracting was greater than the cost of in-house
performance. 

The report concluded that the Air Force paid $4.7 million in
additional costs for certain contractor work in fiscal year 1990 and
could save up to $6.2 million if the work to be performed under the
optional years of the contracts reviewed were performed in-house. 
The report recommended that the Air Force eliminate personnel
ceilings, require managers to justify the most cost-effective mix of
in-house or contractor personnel, evaluate support service contracts
for cost effectiveness, and make budget adjustments to shift funds
from contracts to civilian manpower. 

The audit report identified Air Force civilian job categories that
were comparable to the skill and experience levels of contract
employees.  The study compared the contractor amounts billed with the
total hourly costs for government civilian employees. 

An example of the comparison made for one of the contracts is shown
in table IV.5. 



                                              Table IV.5
                               
                                Example of Cost Comparison Used in DOD
                                        IG Report (No. 92-128)

                                                                                  GS total
                                                    GS            GS  GS total      hourly
                                  Amount    equivalent    equivalent  rate per      annual    Excess
Labor category   Hours    Rate    billed   grade level      category      hour      cost\a    cost\b
--------------  ------  ------  --------  ------------  ------------  --------  ----------  --------
A                   50  $19.79     $ 990         04/03           A-1    $11.48    $ 574.00  $ 416.00
B                  247   25.43     6,281         04/10           B-1     15.24    3,764.28  2,516.72
C                  162   37.05     6,002         06/10           C-1     18.53    3,001.86  3,000.14
D                  140   73.33    10,266         13/10           D-1     40.88    5,723.20  4,542.80
E                   50   60.25     3,013         13/10           E-1     39.52    1,976.00  1,037.00
F                  320   64.46    20,627         12/10           F-1     34.68   11,097.60  9,529.40
G                  725   54.59    39,578         12/10           G-1     33.32   24,157.00  15,421.0
                                                                                                   0
H                  315   49.18    15,492         12/03           H-1     28.80    9,072.00  6,420.00
I                  295   53.46    15,771         13/03           I-1     33.88    9,994.60  5,776.40
J                  200   34.88     6,976         07/01           J-1     16.11    3,222.00  3,754.00
K                   73   55.59     4,058         07/10           K-1     20.38    1,487.74  2,570.26
L                  450   70.88    31,896         13/10           L-1     40.88   18,396.00  13,500.0
                                                                                                   0
====================================================================================================
Total\c                         $160,950       Total\d                          $92,466.28  $68,483.
                                                                                                  72
----------------------------------------------------------------------------------------------------
\a GS total hourly annual cost equals hours times the GS total rate
per hour. 

\b Excess cost equals amount billed minus GS total hourly annual
cost. 

\c Labor dollars per contractor. 

\d GS cost comparison and cost differential. 

OTHER TESTIMONIES AND REPORTS

The following four testimonies and studies also addressed contractor
versus in-house costs, but in a less detailed manner. 


      DOE TESTIMONY:  USE OF
      CONSULTANTS AND CONTRACTORS
      BY THE ENVIRONMENTAL
      PROTECTION AGENCY AND THE
      DEPARTMENT OF ENERGY
------------------------------------------------------ Appendix IV:0.5

In testimony on September 6, 1989, before the Subcommittee on Federal
Services, Post Office and Civil Service, Senate Committee on
Governmental Affairs, the Assistant Secretary for Management and
Administration, DOE, cited estimated savings through in-house
performance versus contractor performance of 20 to 25 percent for
support services. 

According to DOE officials, no specific study was conducted to
support this estimate.  The Assistant Secretary was responding to a
question raised at the hearing.  The Assistant Secretary also said,
however, in responding to questions that were based solely on direct
salary costs, excluding benefits and overhead, DOE would pay a GS-15
government employee about $67,000.  The comparable private sector
employee would be paid between $77,000 and $100,000.  (The mid-point
between these amounts would be about $89,000.  The difference between
$89,000 and $67,000 is $22,000, equal to about 33 percent higher than
the federal salary.)


      DOD TESTIMONY:  THE STAR
      WARS PROGRAM AND THE ROLE OF
      CONTRACTORS
------------------------------------------------------ Appendix IV:0.6

In testimony on July 24, 1992, before the Senate Committee on
Governmental Affairs, the Director of the Strategic Defense
Initiative Organization, in discussing the role of contractors, cited
estimated savings through in-house performance versus contractor
performance for certain agency work of about 33 percent or $15
million. 

We were advised by an official of the Ballistic Missile Defense
Organization (the organization that replaced the Strategic Defense
Initiative Organization) that the Director's testimony was based on
information being developed for a study on the agency's manpower
requirements. 

The study, Strategic Defense Initiative Organization:  Manpower
Requirements Proposal for FY 93-95 was issued in October 1992.  The
study did not discuss specific savings estimates for in-house
performance, however, the study discussed the reallocation of funded
resources from contractor support services to government personnel. 
The study stated that additional government personnel would result in
a more efficient and effective management program and ensure that
inherently governmental functions and suitable program oversight were
always performed by government personnel.  The study proposed
increasing government staff by 453 positions from fiscal year 1993 to
1995.  We were advised by responsible agency officials that 100
additional positions were authorized for fiscal year 1994, and that
100 additional positions were being requested in the President's
Budget for fiscal year 1995. 


      GAO LETTER FROM THE
      COMPTROLLER GENERAL TO THE
      CHAIRMAN, LEGISLATIVE
      SUBCOMMITTEE, HOUSE
      COMMITTEE ON APPROPRIATIONS
      (FEBRUARY 28, 1991)
------------------------------------------------------ Appendix IV:0.7

In response to a request from the Chairman, Legislative Subcommittee,
House Committee on Appropriations, we reported on February 28, 1991,
on the expanded use of contractors to help with our audit and
evaluation work.  We discussed the results of a study of 78 tasks, of
which 56 were contracted out and 22 were done in-house.  In addition
to cost, our study also considered the timeliness and quality of the
work in question. 

We did not make full cost analyses, but we did compare negotiated
contract labor charges with estimated in-house labor costs, including
fringe benefits, for seven specific tasks.  We estimated the average
hourly cost to accomplish each type of work.  The cost of in-house
performance was estimated to be close for four and lower for three of
the seven types of work considered--such as mailing, telephone
surveys, individual or group interviews, data collection instrument
design, statistical analysis, and referencing (checking facts in GAO
products).  Costs were the same for the seventh type of work
considered--database management.  We found that contractor costs were
estimated to be higher because in virtually all cases, the contractor
either assigned more senior staff to the task than GAO did or the
contractor paid comparable staff higher salaries. 

We also noted that with some variation across the different kinds of
work we contracted, contractors' products typically were not
delivered at the specified time, and GAO staff reported doing similar
work somewhat faster internally.  We noted, however, that the quality
of contractors' work was generally acceptable, with simpler tasks
completed more successfully than more complex tasks. 


      GAO REPORT:  GOVERNMENT
      CONTRACTORS:  ARE SERVICE
      CONTRACTORS PERFORMING
      INHERENTLY GOVERNMENTAL
      FUNCTIONS?  (GAO/GGD-92-11)
------------------------------------------------------ Appendix IV:0.8

We discussed, among other things, a DOE effort to replace certain
contract personnel with government personnel.  One DOE component--the
Western Area Power Administration--estimated it could save about $4.5
million annually through the conversion of 105 positions that were
then held by contractors to federal positions.  The services involved
included such work as construction inspections, engineering surveys,
environmental support, and design and system studies.  This work did
not involve inherently governmental functions or work so intimately
related to the public interest that it must be administered by
government employees. 

These estimated savings were based on a comparison of the cost of
converting the higher cost contract personnel to lower cost federal
staff.  The federal costs were based on an estimate that the cost of
federal employees at the GS-12 level, plus their applicable fringe
benefits, would be substantially less than the cost of a comparable
number of contractor personnel.  These calculations were made for
seven contracts. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Richard W.  Caradine, Assistant Director
William Bosher, Assignment Manager
Carolyn L.  Samuels, Evaluator-in-Charge

