Interagency Contracting: Controls Over Economy Act Orders Being
Strengthened (Letter Report, 10/95, GAO/NSIAD-96-10).

Pursuant to a congressional request, GAO examined the: (1) impact of the
Department of Defense's (DOD) policy changes for interagency orders on
the Department of Transportation's Volpe National Transportation Systems
Center; and (2) Coast Guard's recent initiatives and legislative changes
extending the statutory requirements on interagency orders to other
federal agencies.

GAO found that: (1) in February 1994, DOD increased its interagency
transaction controls by requiring that interagency orders for goods and
services be as efficient as other alternatives and approved at the
senior executive service level; (2) in November 1994, the Coast Guard
independently developed contracting reforms that resembled DOD
initiatives; (3) many of the 1995 purchases made by military services
through the Volpe Center were not documented as required by the DOD
policy; (4) DOD plans to implement a statutorily mandated monitoring
system for its interagency purchases by October 1995; (5) DOD and the
Coast Guard have steadily decreased their contracting through the Volpe
Center, possibly due to the more restrictive environment for interagency
orders; and (6) although the Federal Acquisition Streamlining Act has
extended the restrictive interagency transaction controls to other
federal agencies, the implementing draft regulation is not as stringent
as DOD or Coast Guard cost policies.

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

 REPORTNUM:  NSIAD-96-10
     TITLE:  Interagency Contracting: Controls Over Economy Act Orders 
             Being Strengthened
      DATE:  10/95
   SUBJECT:  Interagency relations
             Procurement regulation
             Federal procurement policies
             Cost control
             Service contracts
             Transportation research
             Reporting requirements
             Internal controls
             Federal procurement
             Defense procurement

             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Subcommittee on Oversight of
Government Management and the District of Columbia, Committee on
Governmental Affairs, U.S.  Senate

October 1995

INTERAGENCY CONTRACTING - CONTROLS
OVER ECONOMY ACT ORDERS BEING
STRENGTHENED

GAO/NSIAD-96-10

Interagency Contracting

(705071)


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

  DOD - Department of Defense
  D&F - Determination and Finding
  FASA - Federal Acquisition Streamlining Act of 1994

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


B-258879

October 20, 1995

The Honorable Carl Levin
Ranking Minority Member
Subcommittee on Oversight of Government Management
 and the District of Columbia
Committee on Governmental Affairs
United States Senate

Dear Senator Levin: 

This report responds to your concerns about abuses of interagency
orders for goods and services under the Economy Act.  As you
requested, we examined the early impact of the Department of
Defense's (DOD) policy changes for interagency orders on the
Department of Transportation's Volpe National Transportation Systems
Center.  We also reviewed recent Coast Guard initiatives and
legislative changes extending statutory requirements on interagency
orders to other federal agencies. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Because of past practices, the National Defense Authorization Act for
Fiscal Year 1994 required the Secretary of Defense to issue
regulations that strengthened controls over DOD's interagency orders
for goods and services.  In a February 1994 memorandum, and in
advance of the statutorily required regulations, the Secretary took
additional steps to increase DOD's interagency transaction controls
by requiring, among other things, that DOD's interagency orders be
(1) as convenient and cheap as other alternatives and (2) approved at
a level no lower than senior executive service, general officer, flag
officer, or activity commander.  In November 1994, the Coast Guard
independently developed reforms that paralleled these DOD
initiatives. 

DOD is still adjusting to the changes introduced by Congress and the
Secretary.  There is an abundance of guidance available to Air Force,
Army, and Navy contracting activities, but a sample of fiscal year
1995 Volpe Center purchases made by the services showed that not all
files contained the information required by the Secretary's
memorandum.  In addition, DOD has not yet implemented a statutorily
mandated monitoring system for its interagency purchases.  The
monitoring system is currently scheduled for implementation in
October 1995. 

DOD contracting with the Volpe Center has been declining since fiscal
year 1992.  While it is difficult to pinpoint exact causes for the
downward trend, more recent declines appear to be a result of DOD's
implementation of the more restrictive environment for interagency
orders.  Likewise, a similar recent decline in Coast Guard purchases
at the Volpe Center appears to be related to the introduction of the
Coast Guard reforms. 

The Federal Acquisition Streamlining Act of 1994 (FASA) generally
extended the restrictive interagency transaction controls applicable
to DOD to other federal agencies.  The implementing draft regulation,
while consistent with FASA, is not as stringent as the DOD or Coast
Guard cost policies. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Economy Act, as amended (31 U.S.C.  1535), authorizes the head of
an agency to place an order with another agency for goods or services
if, among other requirements, a decision is made that the items or
services cannot be obtained by contract as conveniently or cheaply
from a commercial enterprise.  The interagency ordering practice
authorized by the Economy Act, sometimes referred to as "contract
off-loading," can save the government duplicative effort and costs
when appropriately used.  Examples of appropriate use may include
circumstances of one agency already having a contract for goods and
services similar to those needed by another agency, or an agency
having unique capabilities or expertise that qualify it to enter into
or administer a contract. 

In July 1993, the Subcommittee on Oversight of Government Management,
Senate Governmental Affairs Committee, held a hearing to examine the
practice of off-loading at federal agencies and the abuses of this
practice.  Its hearing record,\1 which included testimony from the
Inspectors General of DOD, the Department of Energy, and the
Tennessee Valley Authority, was critical of DOD's and other agencies'
off-loading practices.  Subsequently, the National Defense
Authorization Act for Fiscal Year 1994 required the Secretary of
Defense to prescribe regulations governing DOD's use of the Economy
Act that included specific statutory limitations intended to rectify
identified abuses. 


--------------------
\1 Off-loading:  The Multimillion Dollar Loophole in Government
Contracting, Hearing Before the Subcommittee on Oversight of
Government Management, Committee on Governmental Affairs, U.S. 
Senate, July 30, 1993. 


      THE VOLPE CENTER
---------------------------------------------------------- Letter :2.1

The Volpe Center is a federally owned and operated facility located
in Cambridge, Massachusetts, and was established in 1970 to fulfill
the need of the newly formed Department of Transportation for an
in-house systems research capability.  Since then, the center's
research, analysis, and project management expertise has been applied
to a wide variety of transportation and logistics problems.  Its only
funding is through formal reimbursable agreements negotiated with
individual agencies for specific tasks. 

Initially, the center's services were provided almost exclusively to
the Office of the Secretary of Transportation and the operating
administrations within the Department of Transportation.  As its
capabilities evolved and its systems approach became better known,
demand grew within non-Department of Transportation agencies. 
Through a formal memorandum of understanding with DOD, the Secretary
broadened the center's mission in 1985 to include work on
transportation and logistics problems facing other agencies,
including the Joint Chiefs of Staff and the U.S.  Transportation
Command.  Similar arrangements were made with civilian agencies. 

The Volpe Center's current labor pool consists of about 1,500
personnel evenly divided among 3 labor categories:  federal
employees, on-site contractor employees, and off-site contractor
employees.  On-site contractors provide services in computer
analysis, technical information support, and documentation support. 
The off-site contractor employees comprise a "multiple contractor
resource base," which allows quick, competitive access to a broad
range of high technology capabilities and skills needed to meet the
Volpe Center's programmatic requirements.  Volpe Center contracting
is regulated by the Federal Acquisition Regulation. 

In response to an audit conducted by the Department of
Transportation's Inspector General, the Volpe Center issued formal
work acceptance criteria in February 1995.  According to Volpe Center
management, the criteria are designed to assure that the center will
not accept projects unless it can make substantive contributions
derived from its status as part of the federal government.  Examples
of substantive contributions include project definition and planning
in cooperation with the requesting agency, and support of contracts
awarded and administered by the Volpe Center. 


   DOD COST INITIATIVE EXPANDED
   STATUTORY REQUIREMENTS
------------------------------------------------------------ Letter :3

In advance of promulgating regulations, the Secretary issued a policy
memorandum in February 1994 that imposed limitations on the use of
Economy Act orders by DOD activities.  The Secretary's policy, which
addressed Economy Act orders released outside of DOD for contract
action, was, however, more stringent than either the National Defense
Authorization Act for Fiscal Year 1994 or the Economy Act in the area
of cost considerations by requiring a determination that the supplies
or services cannot be provided "as conveniently and cheaply" by
contracting directly with a private source.  The Authorization Act
did not address this cost issue and the Economy Act uses the phrase
"as conveniently or cheaply." The Secretary's use of the "and" rather
than the "or" introduces more cost analysis into the decision-making
process. 

The Secretary also changed the level of approval authority for
Economy Act purchases.  Instead of having contracting officers or
other officials designated by the agency head approve Economy Act
transactions, the Secretary's memorandum placed the approval level no
lower than a senior executive service official, a general or flag
officer, or an activity commander. 


   COAST GUARD HAS INITIATED COST
   REFORMS SIMILAR TO DOD
------------------------------------------------------------ Letter :4

The Coast Guard, which is a component of the Department of
Transportation, has acquired services from the Volpe Center.  In
November 1994, the Coast Guard issued an instruction providing
guidance on its use of the center.  The instruction established a
review, justification, and approval process to ensure that
acquisition of Volpe Center services are in the Coast Guard's best
economic interest.  The instruction designates the Director of
Finance and Procurement, a senior executive service position within
the Office of the Chief of Staff, as the approving official for all
Coast Guard work performed through the center. 

The guidance requires a demonstration that the cost to use the Volpe
Center is at least roughly comparable to commercial cost.  To
document this comparability, Coast Guard sponsors must develop an
independent estimate of expected project costs using recognized
techniques such as engineering analysis, market research, or
application of actual cost data from prior projects. 

While the Coast Guard instruction acknowledges that the Volpe Center
offers convenience, it is the Coast Guard policy that the center
shall be used when there are clear economic, technical, and
mission-essential reasons for doing so.  For example, officials
informed us that in one area of the country the Coast Guard is now
completing 5 years of environmental compliance and restoration work
with the Volpe Center.  They explained that the center's support was
critical in the early years of this work for the Coast Guard to gain
an understanding of the various technologies involved in restoring
areas at Coast Guard installations that were contaminated.  Coast
Guard officials said it has acquired the technical expertise and it
is now ready, at least in that area of the country, to transition
away from the center for this work and contract directly with private
companies. 


   DOD IS STILL ADJUSTING TO
   CONTRACTING CHANGES
------------------------------------------------------------ Letter :5

The Air Force, Army, and Navy have each taken a different approach to
implementing the Secretary's policy memorandum.  Collectively,
however, they are producing similar mixed results.  While there is
considerable up-to-date guidance available to contracting officials
on interagency purchases, not all DOD files on Volpe Center projects
we reviewed contained required information.  In addition, DOD has not
yet implemented a statutorily mandated monitoring system for
interagency purchases; the monitoring system is currently scheduled
for implementation in October 1995. 


      SERVICE GUIDANCE IS ABUNDANT
---------------------------------------------------------- Letter :5.1

The Air Force introduced the Secretary of Defense's policy changes in
June 1994 through a revision to its Federal Acquisition Regulation
Supplement.  The supplement states that the Air Force shall not place
an order with another agency unless adequate supporting
documentation, including a Determination and Finding (D&F)\2 , is
prepared.  The D&F must be approved at a level no lower than senior
executive service, flag or general officer, or activity commander. 
The activity's contracting office is required to retain a record copy
of each D&F in a central file.  The supplement offers a model format
for the D&F, which requires that 12 specific findings be listed,
including 1 that states "the supplies or services cannot be provided
as conveniently and more economically by private contractors under an
Air Force contract."

The Army implemented the Secretary's policy changes in an August 1994
policy letter from the Office of the Assistant Secretary, Army
Contracting Support Agency.  The letter states that before an Economy
Act order for supplies or services is released outside DOD for
contracting action, a written determination prepared by the requiring
activity that addresses the elements in the Defense Secretary's
memorandum shall be approved by the head of the requesting agency or
their designee.  The D&Fs are required to be prepared in the same
format required by the Air Force, to include that "the supplies or
services cannot be provided at the time required and more
economically by contractors under an Army contract."

In contrast to the Air Force and Army's delegation of approval
authority, the Navy initially did not delegate approval authority
below the Assistant Secretary of the Navy for Research, Development,
and Acquisition.  Toward the end of 1994, the Assistant Secretary
delegated approval authority to the Deputy for Acquisition and
Business Management.\3 In January 1995, as permitted by the Secretary
of Defense's memorandum, the Deputy redelegated authority to approve
D&Fs to eight activities with contracting authority.  However,
approval authority for Economy Act orders placed with the Volpe
Center and with agencies not subject to the Federal Acquisition
Regulation was retained by the Deputy for Acquisition and Business
Management. 


--------------------
\2 A D&F documents the findings and conclusion of the approving
official and generally addresses the following issues:  legal
authority, adequacy of funds, convenience, cost, expertise of the
servicing agency, contract administration compliance, and bona-fide
need.  Other supporting documentation, such as an independent
government estimate, is used in the preparation of the D&F. 

\3 The Deputy for Acquisition and Business Management was formerly
known as the Deputy for Acquisition Policy, Integrity, and
Accountability. 


      SOME PROJECT FILES LACKED
      REQUIRED DOCUMENTATION
---------------------------------------------------------- Letter :5.2

Despite efforts by the services to strengthen controls over Economy
Act purchases, our review of fiscal year 1995 Air Force, Army, and
Navy projects with the Volpe Center indicated that the controls were
not fully implemented.  Of the 13 purchase requests we reviewed, 7
lacked approved D&Fs.  The results of our review are summarized in
table 1. 



                                Table 1
                
                 Summary of Fiscal Year 1995 Air Force,
                  Army, and Navy Project File Reviews

                            Air Force       Army       Navy      Total
--------------------------  ---------  ---------  ---------  =========
Dollar value of purchases   $1,770,29   $597,890  $3,211,90  $5,580,08
                                    1                     0          1
Number of purchases                 6          2          5         13
 reviewed
Number with approved D&Fs           3          1          2          6
Number without approved             3          1          3          7
 D&Fs
----------------------------------------------------------------------
In two of the three Air Force cases where a D&F was not prepared, the
project managers were not aware of the requirement to prepare a D&F
in the other case, a draft D&F was prepared by the requiring
activity, reviewed by a contracting officer, but never completed or
signed.  In the Army case where a D&F was not prepared, Army
officials had no excuse other than they "just missed it." One
official suggested that some Army activities may not have understood
the August 1994 policy letter.  In one of the Navy cases without an
approved D&F, ordering officials justified the transfer of 1995 funds
on the basis of a D&F that covered 1993 and 1994 funding; subsequent
to the transfer of funds, reviewing officials rejected this
justification.  The other two Navy cases involved purchases by a
Marine Corps ordering activity.  Similar to the Army case, Marine
Corps officials explained that, regarding the preparation of D&Fs,
the purchases "just fell through the cracks."

The documentation for services' projects with approved D&Fs showed
different approaches to meeting the Defense Secretary's requirement
to elevate the consideration of cost.  The Air Force D&Fs mainly
emphasized that the estimated general and administrative expense rate
of 9 percent charged by the Volpe Center appeared reasonable and did
not exceed the actual cost of entering into and administering the
interagency agreement under which the order is filled.  The Air Force
documentation also showed that business reviews were performed by the
contracting officers; the business reviews indicated that independent
government cost estimates had been completed. 

The documentation for the approved Army project computed the dollar
value of the administrative fee and included an "information paper"
prepared for the general officer who signed the D&F.  The information
paper indicated that the project would be transitioning from Volpe
Center support to the Army's on-site contractor support in about 4
months. 

The approval for the two Navy cases involved purchases by a Marine
Corps ordering activity different from the one above, which did not
have approved D&Fs.  These purchases were covered by a D&F prepared
shortly after the Secretary's memorandum, but approved under the
criteria in effect before the memorandum.  Thus, the D&F did not
contain a finding on the cost comparison cited in the Secretary's
memorandum.  However, Navy officials said that they concurred with
approvals such as these because, at that time, no new detailed
implementing guidance was available to ordering activities. 


      DOD MONITORING SYSTEM NOT
      YET ESTABLISHED
---------------------------------------------------------- Letter :5.3

The National Defense Authorization Act for Fiscal Year 1994 directed
that DOD establish a monitoring system for Economy Act purchases not
later than 1 year after the November 30, 1993, enactment of the act. 
That monitoring system has not yet been implemented.  An official
from the Office of the Under Secretary of Defense for Acquisition and
Technology informed us, however, that the monitoring system has been
developed and is now awaiting approval.  The monitoring system is
currently scheduled for implementation on October 1995. 


   DOLLAR VALUE OF DOD AND COAST
   GUARD ORDERS AT VOLPE CENTER
   HAS DECREASED
------------------------------------------------------------ Letter :6

DOD Economy Act orders placed with the Volpe Center peaked in fiscal
year 1991 at $93.2 million, which accounted for about 39 percent of
the center's budget.  By fiscal year 1994, DOD funding dropped to
$26.5 million, which accounted for about only 13 percent of the
center's budget.  Funding transfers for the first 8 months of fiscal
year 1995 indicate that DOD funding will only be one-half of fiscal
year 1994 funding.  The funding data are summarized in figure 1. 

   Figure 1:  Comparison of DOD
   New Obligation Authority
   Transferred to Volpe Center,
   Fiscal Years 1990-95 (as of May
   31, 1995)

   (See figure in printed
   edition.)

It is difficult to pinpoint exact causes for the downward trend. 
However, the more recent declines may be a result of the 1993
Subcommittee hearing, resulting legislation, and the 1994
implementation of a more restrictive contracting environment by the
Secretary of Defense. 


      DOLLAR VALUE OF COAST GUARD
      ORDERS AT VOLPE CENTER HAS
      ALSO DECREASED
---------------------------------------------------------- Letter :6.1

Coast Guard orders placed with the Volpe Center reached their highest
levels in fiscal years 1992 and 1993 when over $21 million in new
obligation authority was transferred each year.  Funding dropped by
almost half in fiscal year 1994.  Fiscal year 1995 new obligation
authority may be about half of the fiscal year 1994 total.  The
funding data are summarized in figure 2. 

   Figure 2:  Comparison of Coast
   Guard New Obligation Authority
   Transferred to Volpe Center,
   Fiscal Years 1990-95 (as of May
   31, 1995)

   (See figure in printed
   edition.)

As with the DOD data, it is difficult to identify exact causes for
the downward trend.  However, the November 1994 instruction with its
cost and approval requirements may have been a contributing factor. 


   FASA EXTENDS REFORMS TO NON-DOD
   AGENCIES
------------------------------------------------------------ Letter :7

FASA required that the Federal Acquisition Regulation be revised to
include statutory requirements governing the exercise of Economy Act
authority.  The requirement is virtually identical to that required
of DOD by the National Defense Authorization Act for Fiscal Year
1994.  In March 1995, a proposed draft regulation was published in
the Federal Register.  The proposed regulation requires a
determination that the ordered goods or services cannot be provided
by contract as conveniently or cheaply by the requesting agency from
a commercial enterprise.  FASA did not require the more stringent
"and" language applicable within DOD. 

The regulation authorizes determination approval authority to reside
with the contracting officer or another official designated by agency
regulation, except that if the servicing agency is not covered by the
Federal Acquisition Regulation, approval authority may not be
delegated below the senior procurement executive of the requesting
agency.  Such procedures are consistent with FASA. 

FASA also requires that by mid-October 1995 the Administrator for
Federal Procurement Policy establish a monitoring system for Economy
Act purchases for Federal civilian agencies, similar to the
requirement for DOD. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :8

In commenting on a draft of this report, both the Departments of
Defense and Transportation concurred with the report.  Both suggested
some technical changes to the draft, and we have incorporated them,
where appropriate.  DOD's comments are presented in appendix I.  The
Department of Transportation's comments were provided orally. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :9

We interviewed management officials and examined project management
and budget documents, statements of work, cost summaries, military
interdepartmental purchase requests, project plan agreements, and
other program documentation.  We performed work at the Department of
Transportation's Volpe National Transportation Systems Center,
Cambridge, Massachusetts, and Headquarters, United States Coast
Guard, Washington, D.C.  We also contacted policy representatives
within the Office of the Assistant Secretary of the Air Force for
Acquisition; the Office of the Assistant Secretary of the Army for
Research, Development, and Acquisition; and the Office of the
Assistant Secretary of the Navy for Research, Development, and
Acquisition.  Our review was performed in accordance with generally
accepted government auditing standards and includes information
obtained through May 1995. 


---------------------------------------------------------- Letter :9.1

We are sending copies of this report to the Chairman, Subcommittee on
Oversight of Government Management and the District of Columbia,
Senate Committee on Governmental Affairs; other interested
congressional committees; and the Secretaries of Defense and
Transportation.  Copies will also be available to others on request. 

Please contact me at (202) 512-4587 if you or your staff have any
questions concerning this report.  Major contributors to this report
were Charles W.  Thompson, Paul M.  Greeley, and Paul G.  Williams. 

Sincerely yours,

David E.  Cooper
Director, Acquisition Policy, Technology,
 and Competitiveness Issues




(See figure in printed edition.)Appendix I
COMMENT FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter