OMB Circular A-76: Oversight and Implementation Issues (Testimony,
06/04/98, GAO/T-GGD-98-146).

GAO discussed: (1) the purpose and usefulness of the Office of
Management and Budget's (OMB) Circular A-76 in the current federal
environment; (2) why A-76 is not being used extensively by civilian
agencies; (3) the effectiveness of OMB's efforts to lead the
implementation of A-76, which, in GAO's view, could be enhanced; and (4)
observations regarding the necessary elements of a more active A-76
program.

GAO noted that: (1) OMB Circular A-76 has shown itself to be an
effective management tool in increasing the efficiency of the federal
government and saving scarce funds; (2) despite its proven track record,
A-76 is seldom used in civilian agencies; (3) OMB has not consistently
sent strong messages to the agencies that A-76 is a priority management
initiative; (4) while OMB's May 12, 1998, memorandum is an encouraging
first step, thorough implementation and follow-through will be needed to
get A-76 on track; (5) in addition, agencies will need to continue their
efforts to ensure both that they have the sound program cost data needed
to make comparisons and that mechanisms are in place to monitor and
oversee contracts; and (6) agencies' development and Congress' use of
annual performance plans under the Government Performance and Results
Act provide an opportunity to consider A-76 and other competition issues
within the context of the most efficient means to achieve agency goals.

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

 REPORTNUM:  T-GGD-98-146
     TITLE:  OMB Circular A-76: Oversight and Implementation Issues
      DATE:  06/04/98
   SUBJECT:  Contract administration
             Cost control
             Cost effectiveness analysis
             Privatization
             Competitive procurement
             Reductions in force
IDENTIFIER:  OMB Circular A-76 Program
             National Performance Review
             
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Cover
================================================================ COVER


Before the Subcommittee on Oversight of Government
Management, Restructuring and the District of Columbia
Committee on Governmental Affairs
United States Senate

For Release on Delivery
Expected at
10:00 a.m.  EDT
Thursday
June 4, 1998

OMB CIRCULAR A-76 - OVERSIGHT AND
IMPLEMENTATION
ISSUES

Statement of J.  Christopher Mihm
Associate Director, Federal Management and
Workforce Issues
General Government Division

GAO/T-GGD-98-146

GAO/GGD-98-146T


(410200)


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

  OMB - Office of Management and Budget
  MEO - Most Efficient Organization
  FTE - Full Time Equivilents
  NOAA - National Oceanographic and Atmospheric Administration
  NPR - National Performance Review
  RMO - Resource Management Office
  PMC - President's Management Council
  FASAB - Federal Accounting Standards Advisory Board
  DOD - Departmant of Defense

OMB CIRCULAR A-76:  OVERSIGHT AND
IMPLEMENTATION ISSUES
==================================================== Chapter STATEMENT

Mr.  Chairman and Members of the Subcommittee: 

I am pleased to be here today to discuss the extent to which the
Office of Management and Budget's (OMB) Circular A-76 is being used
by executive branch agencies.  As you know, A-76 provides the policy
guidance and implementation procedures for government agencies to use
in deciding whether to contract out for commercial activities--a
product or service that could be obtained from a private sector
source. 

As agreed with the Subcommittee, my statement will cover three major
points.  First, I will discuss the purpose and usefulness of A-76 in
the current federal environment.  Second, I will show that A-76 is
not being used extensively by civilian agencies and then will discuss
the effectiveness of OMB's efforts to lead the implementation of
A-76, which, in our view, could be enhanced.  Finally, I will provide
some observations regarding the necessary elements of a more active
A-76 program.  My comments today are made on the basis of recent work
we have done at the request of the Subcommittee, primarily at OMB and
the Departments of Commerce and the Interior, as well as other work
we have done on competitive contracting. 


   THE A-76 PROCESS CAN BE AN
   EFFECTIVE MANAGEMENT TOOL FOR
   IMPROVING OPERATIONAL
   EFFICIENCY AND REDUCING COSTS
-------------------------------------------------- Chapter STATEMENT:1

With the agreement between Congress and the administration to balance
the federal budget and the widespread demands by the American people
for a less costly government, agencies are being challenged as never
before to ensure that their operations are as efficient as possible. 
Efforts by Congress and the administration are leading or have led to
a broader focus on results, significant reductions in the size of the
federal workforce, simplified administrative and management
procedures, and additional mechanisms to improve efficiency.  Within
this context, interest has grown over the last several years in using
contracting out as one of the central tools available to agencies to
reduce costs in a balanced budget environment. 

The executive branch's long-standing policy, spanning several
administrations, has been that, to the extent it is cost-effective,
agencies should rely on the private sector for needed goods and
services.  The federal government therefore makes extensive use of
the private sector to meet federal program goals.  This is
particularly true for agencies created in the past 2 or 3 decades,
such as the Department of Energy, the National Aeronautics and Space
Administration, the Environmental Protection Agency, and the Health
Care Financing Administration, which typically have relied from the
start on contracting out much of their work rather than performing it
directly.  Contractors also have almost completely replaced federal
employees in some functions, such as cleaning services, travel
management, and most recently personnel security investigations.  As
an indication of the degree to which the federal government uses the
private sector, total civilian personnel costs for fiscal year 1997
were about $113 billion, as compared with about $110 billion that
federal agencies spent on commercial service contracts. 

The issue of whether to contract out federal functions has always
been challenging.  In an effort to help agencies make better
decisions in this regard, OMB issued Circular A-76 in 1966 and
updated it several times, most recently in 1983.  A-76 provides
federal policy for the government's performance of commercial
activities.  OMB issued a supplemental handbook to the circular in
1979 that included detailed procedures for competitively determining
whether commercial activities should be performed in-house; by
another federal agency, through an interservice support agreement; or
by the private sector.  OMB updated this handbook in 1983 and again
in March 1996.  This latest revision was intended to streamline the
cost comparison process and reduce the A-76 administrative burden and
thereby ease the use of A-76 within the executive branch. 

According to OMB, the purpose of A-76 is not to convert work to or
from in-house, contract, or interservice support agreement
performance.  Thus, a senior OMB official stressed, OMB does not view
its role as requiring agencies to undertake A-76 cost comparisons. 
Rather, OMB encourages agencies to understand and use A-76 as one of
a series of tools federal managers can employ to make sound business
decisions and to enhance federal performance through competition and
choice. 

Circular A-76 and its supplemental guidance require agencies to
evaluate their activities to determine whether they are governmental
or commercial and complete an inventory of all commercial activities. 
A-76 requires, in certain circumstances, that agencies conduct cost
comparisons to determine the most efficient means to carry out
commercial activities.  Under A-76, agencies are to use a three-step
process to determine whether recurring commercial activities will be
performed in-house or by contractors.  The process consists of (1)
developing a performance work statement that defines the technical,
functional, and performance characteristics of the work to be
performed; (2) conducting a management study to determine
organizational structure, staffing, and operating procedures for the
most efficient and effective in-house performance of the commercial
activity, referred to as the Most Efficient Organization or MEO; and
(3) accepting formal bids and conducting a cost comparison between
the private sector and the government's Most Efficient Organization
in order to make a decision on whether an activity will be performed
by the government or the private sector. 

Agencies' experiences with A-76 suggest that competition is a key to
realizing savings, whether functions are eventually performed by
private sector sources or remain in-house.\1

We have found that savings achieved through the A-76 competitive
process were largely personnel savings, the result of closely
examining the work to be done and reengineering the activities in
order to perform them with fewer personnel, whether in-house or by
contractor.\2 OMB has reported that savings from reviewing an
agency's operations and making changes to implement the Most
Efficient Organization have averaged 20 percent from original costs. 
We have noted in past work that such reported savings must be viewed
with caution because statements about savings have often been heavily
premised on initial estimates that were not later updated to reflect
actual amounts.  However, there appears to be a clear consensus,
which we share, that savings are possible when agencies undertake a
disciplined approach, such as that called for under A-76, to review
their operations and implement the changes to become more efficient
themselves or contract with the private sector for services.  In
fact, in DOD's case, about half of the competitions were won by
federal employees. 


--------------------
\1 Base Operations:  Challenges Confronting DOD as It Renews Emphasis
on Outsourcing (GAO/NSIAD-97-86, Mar.  11, 1997); and Privatization: 
Lessons Learned by State and Local Governments (GAO/GGD-97-48, Mar. 
14, 1997). 

\2 Outsourcing DOD Logistics:  Savings Achievable But Defense Science
Board's Projections Are Overstated (GAO/NSIAD-98-48, Dec.  8, 1997);
Base Operations:  Challenges Confronting DOD as It Renews Emphasis on
Outsourcing (GAO/NSIAD-97-86, Mar.  11, 1997); and Defense
Outsourcing:  Challenges Facing DOD as It Attempts to Save Billions
in Infrastructure Costs (GAO/T-NSIAD-97-110, Mar.  12, 1997). 


   STRONGER OMB LEADERSHIP IS
   NEEDED TO INVIGORATE CIVILIAN
   AGENCIES' A-76 PROGRAMS
-------------------------------------------------- Chapter STATEMENT:2

Although the evidence suggests that the A-76 process provides the
opportunity to achieve savings, A-76 does not appear to be a high
priority within OMB or civilian agencies, and as a result, little
effort is under way to use the A-76 process.  There has been minimal
A-76 activity among many agencies since the late 1980s, with some
major civilian agencies, such as the Departments of Education,
Housing and Urban Development, and Justice, reporting that they have
not studied any positions under A-76 in the past 11 years.  Moreover,
despite OMB's intention that the March 1996 revision to the A-76
Supplemental Handbook would make A-76 a more attractive vehicle for
agencies to use, no significant increase in efforts under A-76 among
civilian agencies are readily evident.  As shown in table 1, for
fiscal year 1997, DOD was the only federal agency that reported to
OMB that it had completed any A-76 studies of federal positions.\3



                                Table 1
                
                  Reported Number of FTEs Staff Years
                 Studied Under A-76 During Each of the
                           the Past 10 Years

                                                              Civilian
                                             Total     DOD    agencies
Fiscal year                                   FTEs    FTEs        FTEs
------------------------------------------  ------  ------  ----------
1988                                        17,249  12,000       5,249
1989                                         8,469   6,100       2,369
1990                                         9,547   6,989       2,558
1991                                         2,026   1,243         783
1992                                           564     496          68
1993                                           509     441          68
1994                                         1,691   1,623          68
1995                                         2,386   2,128         258
1996                                         5,267   5,241          26
1997                                        25,255  25,255           0
----------------------------------------------------------------------
Note:  As reported by OMB, civilian agencies data for 1992-1995 are
based on annual averages for that time period.  Not all agencies are
included, but OMB stated that the number excluded is insignificant. 
We did not independently verify the accuracy of the data provided by
OMB. 

Source:  OMB

For the future, DOD projected that it can save about $6 billion by
2003 and $2.5 billion each year thereafter by subjecting more of its
business and support activities to competition using the A-76
process.  Currently, DOD plans to subject over 220,000 positions to
the A-76 process.  DOD has not fully achieved estimated savings in
the past, and we question DOD's ability to achieve all estimated
savings in the future.  However, if DOD is able to complete its
ambitious A-76 plans, significant savings are likely. 

To gain more perspective on A-76 activity within civilian agencies,
we examined the program's use at the Departments of Commerce and the
Interior.  Both departments had A-76 efforts in the 1980s.  For
example, between 1986 and 1990, Commerce estimated that it saved $8.6
million through these efforts.  Interior reported estimated savings
of about $1.9 million during that period through its A-76 efforts. 
However, since then, A-76 efforts at Commerce and Interior have
dwindled along with those at other federal agencies. 

The Department of Commerce has not done a complete update of its
inventory of commercial activities since 1983 and recently completed
what had been its only ongoing study.  That study covered the
operation and support of a National Oceanic and Atmospheric
Administration (NOAA) ship.  NOAA officials told us that the study
was done because of pressure from Congress, OMB, and the Department's
Inspector General to explore alternatives to an agency-designed,
-owned, and -operated fleet for acquiring marine data.  However, the
study did not result in any commercial offers in response to NOAA's
solicitation.  In addition, the study took almost 19 months and
required nearly 10 staff years to complete.  It would have required
even more resources if NOAA had received offers to perform the work. 

The Department of the Interior has a current inventory which it
updates periodically, and has identified over 5,000 FTEs as devoted
to commercial activities.  These activities include such functions as
administrative support services and automated data processing-related
services.  The Department reports that although it has not conducted
many formal A-76 studies in recent years, it has undertaken a number
of A-76 cost comparisons of its aircraft services, including
examinations of aircraft maintenance and decisions on whether to
lease or purchase aircraft.  However, most of these studies did not
involve any federal positions, and therefore are not reflected in
OMB's governmentwide data on FTEs studied. 

Officials at the Departments of Commerce and the Interior provided
similar explanations for the limited effort under A-76.  They said
that they perceived that the priorities in management reform
initiatives had changed and that greater emphasis was being given to
implementation of more fundamental, mission-based initiatives arising
from the National Partnership for Reinventing Government, formerly
know as the National Performance Review (NPR) and the Government
Performance and Results Act (the Results Act), among others. 
According to the officials, these shifting management priorities,
along with the significant time and money needed to do the studies
under A-76 and the need for sufficient staff with the necessary
technical skills, have all contributed to reduce A-76 efforts. 


--------------------
\3 In fiscal year 1997, the Department of the Interior completed one
A-76 cost comparison regarding the an aircraft purchase that did not
involve any full time equivalents (FTE).  According to OMB guidance,
a FTE or work year generally includes 260 compensable days or 2,080
hours.  These hours include straight-time hours only and exclude
overtime and holiday hours. 


      OMB LEADERSHIP ON A-76
      ISSUES HAS BEEN LIMITED
------------------------------------------------ Chapter STATEMENT:2.1

As I noted, OMB's March 1996 revision of the A-76 Supplemental
Handbook was intended to ease the administrative burden on agencies
in doing A-76 studies.  This supplement was issued subsequent to the
expiration of several legislative provisions that temporarily limited
agencies' A-76 efforts, particularly those of DOD.  OMB's revision of
the supplement had the potential to re-focus attention on A-76. 
However, since issuing the revision, OMB has not consistently worked
with agencies to ensure that the provisions of A-76 are being
effectively implemented.  For example, OMB made only limited efforts
to gather and use the commercial activities inventories that agencies
are to develop under A-76.  In June 1996, OMB requested that agencies
submit not later than September 13, 1996, a summary of their updated
inventory of commercial activities as required by A-76.  According to
OMB, it did not receive inventories from all agencies, and of those
that it did receive, many were based largely on previous inventory
efforts.  In June 1997, after not receiving responses from several
agencies, OMB followed up with another request for the commercial
inventory information.  Several months later, in April 1998, we found
that 6 of the 24 largest agencies still had not complied with OMB's
initial and follow-up requests to provide updated commercial
activities inventories. 

OMB also has not systematically reviewed the inventories of
commercial activities that it did receive to determine whether
agencies are missing opportunities to generate savings.  OMB
generally has not attempted to determine whether agencies have
inappropriately omitted some commercial activities.  OMB also does
not compare commercial activities among agencies to identify
inconsistent application of A-76 guidance across the federal
government.  As a result, some agencies may not be identifying
commercial activities that are similar to those included in other
agencies' commercial activities inventories, thereby missing
opportunities to use the A-76 process to achieve cost savings. 

Lastly, and most importantly, it is not clear how consistently OMB
has raised questions about agencies' implementation of A-76 during
the budget process.  OMB officials told us that the primary mechanism
for monitoring agencies' A-76 efforts is through the budget review
process.\4 They pointed to guidance requiring agencies to incorporate
A-76 considerations into their budget submissions.  However, we found
that OMB's guidance to agencies was very limited.  For example, the
over 300-page OMB Circular A-11, which governs the preparation of
agencies' budget requests to OMB, appears to contain only three
paragraphs that directly concern A-76, and these paragraphs instruct
agencies that their savings estimates should reflect the probable
results generated by cost comparisons or conversions. 

OMB officials stated that they rely primarily on program examiners in
the OMB Resource Management Offices (RMO) to review agencies' A-76
efforts in conjunction with the budget review and approval process. 
In 1996, the OMB Deputy Director for Management asked the RMOs to
examine competition initiatives, such as A-76, as part of their
continuing program management and budget reviews.  The Deputy
Director highlighted agencies' strategic plans and streamlining plans
as being especially appropriate vehicles for examining agencies'
efforts to compete their support service requirements.  However,
since then, OMB has not provided its program examiners with more
recent written requirements or guidance on the need to review
agencies' A-76 efforts.  OMB officials said that, despite the lack of
current guidance, some review has been done on an ad hoc basis in
conjunction with budget reviews.  According to these officials,
examiners were given copies of agencies' commercial activities
inventories where they existed and were instructed to keep in mind
all reinvention efforts, including A-76, as they reviewed agency
budget requests.  However, given the absence of inventory information
for several of the largest federal agencies and the absence of
ongoing studies in virtually all agencies other than DOD, the effect
of examiners' efforts, if any, is questionable. 


--------------------
\4 In 1994, OMB reorganized to integrate its budget analysis,
management review, and policy development roles, in an initiative
called "OMB 2000." This reorganization was the most recent of a
series of attempts to bolster OMB's management capacity and
influence.  See Government Management:  Observations on OMB's
Management Leadership Efforts (GAO/T-GGD/AIMD-98-148, May 12, 1998). 


      RECENT OMB PLANS, IF
      IMPLEMENTED, APPEAR
      PROMISING
------------------------------------------------ Chapter STATEMENT:2.2

OMB has very recently indicated that it intends to devote more
attention to the implementation of A-76.  In a May 12, 1998,
memorandum to the heads of executive departments and agencies, the
Director of OMB asked agencies to submit updated lists of commercial
activities by October 31, 1998.  The Director said that OMB plans to
share these lists with the President's Management Council.\5 The
Director said that OMB also plans to examine agencies' lists to seek
consistency in inventories across agencies.  The memorandum said OMB
will seek to complete this effort by November 30, 1998, and that
final lists of inventories will be made available for congressional
and public review by January 1999.  An OMB official said DOD's A-76
efforts over the last several years could provide a rich body of
experience from which to build effective A-76 programs in civilian
agencies.  The official also noted that because commercial activities
inventories can provide detailed information about an agency's
structure and functions, these inventories can be valuable not only
for A-76 purposes, but also for identifying other reinvention
opportunities. 

This plan for renewed OMB commitment, if effectively implemented, is
an important and noteworthy development that could lay the groundwork
for a reinvigorated A-76 program.  Given OMB's past experience with
requesting and using inventories of commercial activities from
agencies, it is clear that sustained OMB commitment and
follow-through will be vital to the success of the effort.  We plan
to continue to monitor OMB's and the agencies' efforts in this area. 


--------------------
\5 The President's Management Council (PMC) was established in 1993
to advise and assist the President and the Vice President in
improving overall executive branch management, coordinating
management improvement-related efforts, and ensuring adoption of
management practices in executive branch agencies.  Agencies
generally are represented on the PMC by their Deputy Secretary or
equivalent. 


   OBSERVATIONS CONCERNING THE
   NEEDED ELEMENTS FOR A MORE
   ACTIVE A-76 PROGRAM
-------------------------------------------------- Chapter STATEMENT:3

Over the last couple of years, there has been interest in Congress in
establishing a statutory basis for A-76 and for making other changes
intended to expand the degree to which agencies compete their
commercial activities.  We have been pleased that Congress has turned
to us for assistance as it has considered various legislative
proposals.\6

Irrespective of any decisions that Congress may make about the A-76
program, our work suggests that several elements are needed for a
successful A-76 effort across federal agencies.  Today, I will
highlight four elements that I believe merit special attention. 


--------------------
\6 Competitive Contracting:  Information Related to the Redrafts of
the Freedom From Government Competition Act (GAO/GGD/NSIAD-98-167R,
Apr.  27, 1998); Privatization and Competition:  Comments on H.R. 
716, the Freedom From Government Competition Act (GAO/T-GGD-97-185,
Sep.  29, 1997); Privatization and Competition:  Comments on S.  314,
the Freedom From Government Competition Act (GAO/T-GGD-97-134, June
18, 1997); and Federal Contracting:  Comments on S.  1724, the
Freedom From Government Competition Act (GAO/T-GGD-96-169, Sept.  19,
1996). 


      LEADERSHIP COMMITMENT TO USE
      A-76
------------------------------------------------ Chapter STATEMENT:3.1

The sustained commitment of agency and administration leadership is a
necessary element to ensure the success of any management improvement
effort, including A-76.  As the current level of activity suggests,
consistent and forceful leadership from OMB may be needed to create
incentives for agencies' managers to subject themselves to the rigors
of the A-76 process.  By comparison with the rest of the federal
government, DOD has maintained much larger levels of activity because
it has incentives to generate savings through A-76 to fund its
modernization efforts. 


      INTEGRATION OF A-76 WITHIN A
      PERFORMANCE-BASED APPROACH
      TO MANAGEMENT AND
      ACCOUNTABILITY
------------------------------------------------ Chapter STATEMENT:3.2

In recent years, Congress has put in place a statutory
framework--with the Results Act as its centerpiece--for performance
based management and accountability.  Under the Results Act, each
executive branch agency is to issue strategic plans that, among other
things, lay out the long-term goals the agency will pursue and the
strategies the agency will use to achieve those goals.  The first of
these strategic plans were provided to Congress last fall.  Each
agency is then to develop annual performance plans that identify the
agency's annual goals and strategies and the resources that will be
used to achieve those yearly goals.  The first of these plans, to
cover fiscal year 1999, were submitted to Congress this spring. 

An agency's efforts on its annual performance plans provides the
opportunity to consider A-76 within the broader context of what the
agency is trying to achieve and how best to achieve it.  At the
request of congressional leaders and to assist Congress in using
annual performance plans for making decisions, we issued a guide in
February 1998 for Congress to use in assessing annual performance
plans.\7 In that guide, we noted that Congress could examine the
plans from the standpoint of whether they show evidence that various
approaches, such as establishing partnerships with other
organizations and contracting, were considered in determining how
best to deliver products and services.  More directly, the annual
performance plans can provide a ready-made, annual vehicle for
Congress to use to inquire about agencies' efforts to ensure that the
most cost-effective strategies are in place to achieve agencies'
goals.  As part of this inquiry, Congress can ask agencies about the
tools the agencies are using to increase effectiveness, including the
status of A-76 programs, and the specific choices the agencies have
made about whether to keep a commercial activity in-house or contract
it out. 


--------------------
\7 Agencies' Annual Plans Under the Results Act:  An Assessment Guide
to Facilitate Congressional Decisionmaking (GAO/GGD/AIMD-10.1.18,
Version 1, Feb.  1998). 


      IMPROVED COST DATA
------------------------------------------------ Chapter STATEMENT:3.3

The government's lack of complete cost data, particularly for
indirect costs, has increased the difficulty of carrying out the A-76
competitive process, because the government is not able to accurately
determine the cost of the function or activity it plans to compete. 
The cost data needed to develop indirect costs or standard cost
factors that represent these costs, such as overhead rates, are not
readily available.  In our audit of the consolidated financial
statements of the U.S.  government for fiscal year 1997, we noted
significant financial management deficiencies.\8 We found that
financial systems weaknesses; problems with fundamental
recordkeeping; incomplete documentation; and weak internal controls,
including computer controls; prevent the government from accurately
reporting a large portion of its assets, liabilities, and costs. 
These deficiencies affect the government's ability to accurately
measure the full cost and financial performance of programs and to
efficiently manage its operations.  For example, in January 1998, we
reported that DOD has no reliable means of accumulating actual cost
data to account for and manage resources.\9 Moreover, in a February
1998 report, we noted that it will likely be many years before DOD is
capable of providing accurate and reliable cost data.\10

Efforts are under way to improve government cost data and supporting
systems, but for some agencies it could be several years before
significant improvements are made.  Continuing efforts to implement
the Chief Financial Officers Act are central to ensuring that
agencies resolve their long-standing problems in generating vital
information for decisionmakers.  In that regard, the Federal
Accounting Standards Advisory Board (FASAB) has developed a new set
of accounting concepts and standards that underpin OMB's guidance to
agencies on the form and content of their agencywide financial
statements.\11 As part of that effort, FASAB developed managerial
cost accounting standards.  These managerial cost accounting concepts
and standards require that federal agencies provide reliable and
timely information on the full cost of federal programs and on their
activities and outputs.  Specifically identified in the standards is
the need for information to help guide decisions involving economic
choices, such as whether to do a project in-house or contract it out. 
Such information would allow agencies to develop appropriate overhead
rates for specific operations.  These cost accounting standards
became effective for fiscal year 1998.  Some agencies' Chief
Financial Officers have expressed concern about their agencies'
ability to comply with the cost accounting standards this year. 


--------------------
\8 Audit of the Consolidated Financial Statements of the U.S. 
Government for Fiscal Year 1997 (GAO/AIMD-98-127, Mar.  31, 1998). 

\9 Federal Management Issues (GAO/OCG-98-1R, Jan.  9, 1998). 

\10 Defense Outsourcing:  Better Data Needed to Support Overhead
Rates for A-76 Studies (GAO/NSIAD-98-62, Feb.  27, 1998). 

\11 FASAB was created in October 1990 by the Secretary of the
Treasury, the Director of OMB, and the Comptroller General to
consider and recommend accounting principles for the federal
government.  If accepted by Treasury, OMB, and GAO, the standards are
adopted and issued by OMB and GAO. 


      CONTRACT MANAGEMENT AND
      OVERSIGHT
------------------------------------------------ Chapter STATEMENT:3.4

An effective contracting effort requires considerable contract
management capability.  An agency must have adequate capacity and
expertise to successfully carry out the solicitation process and
effectively administer and monitor contracts once they are awarded. 
We noted in our report on privatization lessons from state and local
governments that, when a government's direct role in the delivery of
services is reduced through privatization, the need for aggressive
monitoring and oversight grows.\12 Oversight was needed not only to
evaluate compliance with the terms of the privatization agreement,
but also to evaluate performance in delivering goods and services to
help ensure that the government's interests were fully protected. 
Officials from most state and local governments said that the
monitoring of contractor performance was the weakest link in their
privatization processes. 

Oversight and monitoring have been consistent weaknesses in federal
efforts as well.  In numerous past reports on governmentwide contract
management, we have identified major problem areas, such as
ineffective contract administration, insufficient oversight of
contract auditing, and lack of high-level management attention to and
accountability for contract management.  For example, long-standing
contractor oversight problems at several agencies, including DOD, the
Department of Energy, and the National Aeronautics and Space
Administration have, in our view, put these agencies at high risk for
waste, fraud, abuse, and mismanagement.\13 Although each of these
agencies have taken actions to improve their contractor oversight and
monitoring functions, these remain high-risk areas that we continue
to monitor closely. 


--------------------
\12 Privatization:  Lessons Learned by State and Local Governments
(GAO/GGD-97-48, Mar.  14, 1997). 

\13 High-Risk Series:  An Overview (GAO/HR-97-1, Feb.  1997). 


------------------------------------------------ Chapter STATEMENT:3.5

In summary, Mr.  Chairman, A-76 has shown itself to be an effective
management tool in increasing the efficiency of the federal
government and saving scarce funds.  However, despite its proven
track record, A-76 is seldom used in civilian agencies.  OMB has not
consistently sent strong messages to the agencies that A-76 is a
priority management initiative.  While OMB's May 12, 1998, memorandum
is an encouraging first step, thorough implementation and
follow-through will be needed to get A-76 on track.  In addition,
agencies will need to continue their efforts to ensure both that they
have the sound program cost data needed to make comparisons and that
mechanisms are in place to monitor and oversee contracts.  Finally,
we believe that agencies' development and Congress' use of annual
performance plans under the Results Act provide an opportunity to
consider A-76 and other competition issues within the context of the
most efficient means to achieve agency goals. 

Mr.  Chairman, this concludes my prepared statement.  I would be
pleased to respond to any questions you or other Members of the
Subcommittee may have. 


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