United Stat es Government Accountability Office Washington , DC 20548 January 29, 2010 Congressional Committees Subject: Defense Acquisitions: Observations on the Department of Defense Service Contract Inventories for Fiscal Year 2008 The Department of Defense (DOD) is the federal government’s largest purchaser of contractor-provided services and relies on contractors to support its varied missions. DOD’s contractors provide a range of services, such as consulting and administrative support, information technology services, and weapon system and base operations support. However, DOD contract management has been on our high-risk list since 1992,1 and our recent work continues to identify weaknesses in DOD’s management and oversight of services contracts. In particular, we have reported on the need for reliable data on how service acquisition dollars are spent to make informed contract management decisions and achieve positive acquisition outcomes.2 Congress has enacted legislation in recent years to increase the availability of information on services acquisitions to improve DOD’s ability to manage these purchases. As part of those efforts, the National Defense Authorization Act for Fiscal Year 2008 amended 10 U.S.C. § 2330a to require DOD to submit an annual inventory of the activities performed pursuant to contracts for services for or on behalf of DOD during the preceding fiscal year.3 These inventories are to contain a number of different elements for the service contracts listed, including information on the functions and missions performed by the contractor, the funding source for the contract, and the number of contractor full-time equivalents (FTE) working under the contract. Once compiled, the inventories are to be reviewed by senior DOD officials and used to inform a variety of acquisition and workforce decisions. House Armed Services Committee Report 111-116, which accompanied the National Defense Authorization Act for Fiscal Year 2010, directed us to assess the methodology used by the Departments of the Army, Navy,4 and Air Force to compile the service contract inventories for fiscal year 2008. In December 2009, we provided your staff with a briefing on the results of our assessment of the methodologies used. This letter summarizes that briefing, which is contained in enclosure I. To assess the methodologies used by each of the military departments in compiling their fiscal year 2008 inventories, we obtained and reviewed each of the inventories 1 GAO, High-Risk Series: An Update, GAO-09-271 (Washington, D.C.: January 2009). 2 GAO, Defense Acquisitions: Tailored Approach Needed to Improve Service Acquisition Outcomes, GAO-07-20 (Washington, D.C.: Nov. 9, 2006). 3 10 U.S.C. § 2330a (c). 4 Throughout this letter and the enclosed briefing, we use the term Navy to refer to the Department of the Navy, which includes both the Navy and the United States Marine Corps. Report Documentation Page Form Approved OMB No. 0704-0188 Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington VA 22202-4302. Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to a penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. 1. REPORT DATE 3. DATES COVERED 29 JAN 2010 2. REPORT TYPE 00-00-2010 to 00-00-2010 4. TITLE AND SUBTITLE 5a. CONTRACT NUMBER Defense Acquisitions: Observations on the Department of Defense Service 5b. GRANT NUMBER Contract Inventories for Fiscal Year 2008 5c. PROGRAM ELEMENT NUMBER 6. AUTHOR(S) 5d. PROJECT NUMBER 5e. TASK NUMBER 5f. WORK UNIT NUMBER 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING ORGANIZATION U.S. Government Accountability Office,441 G Street REPORT NUMBER NW,Washington,DC,20548 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSOR/MONITOR’S ACRONYM(S) 11. SPONSOR/MONITOR’S REPORT NUMBER(S) 12. DISTRIBUTION/AVAILABILITY STATEMENT Approved for public release; distribution unlimited 13. SUPPLEMENTARY NOTES 14. ABSTRACT 15. SUBJECT TERMS 16. SECURITY CLASSIFICATION OF: 17. LIMITATION OF 18. NUMBER 19a. NAME OF ABSTRACT OF PAGES RESPONSIBLE PERSON a. REPORT b. ABSTRACT c. THIS PAGE Same as 52 unclassified unclassified unclassified Report (SAR) Standard Form 298 (Rev. 8-98) Prescribed by ANSI Std Z39-18 and descriptions of the methodologies used. In addition, we interviewed officials from the Office of Acquisition, Technology and Logistics, Defense Procurement and Acquisition Policy, and the Army, Navy, and Air Force to identify the data sources used and discuss the compilation methodologies. We also analyzed data from the Federal Procurement Data System-Next Generation (FPDS-NG)5 on service contracts active in fiscal year 2008 for each military department to assess the methodologies used and the completeness of the data contained in the inventories. We have previously reported on issues with the reliability of data contained in FPDS-NG; however, for the purposes of this review, we used FPDS-NG data to identify potential inconsistencies in the military departments’ methodologies and their implementation, rather than to assess the completeness or accuracy of FPDS-NG data. Additional information regarding our scope and methodology appears in appendix I of the briefing. We conducted this performance audit from October 2009 to November 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Summary In July 2009, DOD transmitted a report to Congress containing the inventories for fiscal year 2008, in which the Departments of the Army, Navy, and Air Force identified $96 billion spent to acquire contractor services and 596,219 contractor FTEs providing services.6 In compiling their respective inventories, the military departments used different methodologies, relying on a mixture of existing data systems, contractor-entered data, manual compilation of some data elements, or estimates. Key differences between the departments’ methodologies include how they identified service contracts, the categories of services included in each inventory, and how they determined the number of contractor FTEs. Furthermore, the data reported in each of the inventories were not complete. DOD has acknowledged limitations associated with the methodologies used and currently has an effort under way to develop a new, more consistent approach for compiling future inventories. 5 FPDS-NG is the primary governmentwide contracting database, providing information on government contracting actions, procurement trends, and achievement of socioeconomic goals, such as small business participation. 6 According to FPDS-NG, DOD obligated approximately $200 billion on service contracts in fiscal year 2008. DOD has since indicated that the fiscal year 2008 total was overstated by $13.9 billion and has corrected this administrative error in its fiscal year 2009 data. The difference between the obligations identified in FPDS-NG and the amount identified in the military departments’ inventories is attributable, in part, to service contracting activities by defense agencies other than the military departments, which were not included in our review, and the fact that the Army inventory dollar total was based on invoiced contract costs rather than obligations. 2 GAO-10-350R Service Contract Inventories Methodologies Used by the Army, Navy, and Air Force Differed in Key Ways One key difference in the methodologies relates to how the Army, Navy, and Air Force identified contracts for services. Specifically, the Army’s methodology included services purchased under contracts for both goods and services, while the Navy and Air Force methodologies did not. This occurred because the Army inventory was based in part on information entered by contractors into its Contractor Manpower Reporting Application (CMRA) system, which was set up to obtain better visibility of the contractor service workforce. According to Army policy, Army contracts must contain a clause requiring contractors to enter data, including the invoiced amount and the direct labor hours for services purchased, regardless of whether the contract is primarily for services or goods. In contrast, the Navy and Air Force identified service contracts based on whether the contracts were coded for services in FPDS- NG. However, since services can also be purchased under contracts coded for goods in FPDS-NG, services purchased under such contracts were not included in the Navy and Air Force inventories.7 Another key difference among the methodologies is that each military department defined what constituted a service differently and excluded different categories of services and contract actions from each inventory based on their interpretations of the requirements. In some instances, the effect of these exclusions was significant. Most notably, the Air Force excluded contracts categorized as providing research and development services whereas the Navy and Army inventories contain such contracts. The effect of this exclusion reduced the obligations reported in the Air Force’s inventory by about $13 billion. Additionally, the Navy excluded contract actions below $100,000, which totaled $1.8 billion, and contract actions with de-obligations, which totaled $1.2 billion. The military departments also differed in how they determined the number of contractor FTEs performing services. The Army used data entered into CMRA by contractors regarding the number of direct labor hours worked for contract services during fiscal year 2008, which were then converted to FTEs.8 Army officials explained that contractor data should but may not always be validated by government personnel overseeing the contractors. However, Army officials indicated that because the reported data are consistent with other data obtained through internal reviews, they are confident in the reported data’s accuracy. Army officials also stated that on a limited basis, when the alternative would have been receiving no labor hour data, contractors have been given permission to enter estimates in lieu of actual labor hours. In contrast, the Navy and Air Force both used the amount obligated for a particular type of service divided by the estimated cost of a contractor employee to perform that type of service to estimate the number of contractor FTEs. However, the Navy and Air Force differed in how they identified the cost of a contractor performing each type of service. The Navy reviewed a sample of 510 Navy contracts and based on this sample calculated the average hourly labor rate for each type of 7 Guidance for entering data into FPDS-NG indicates that only one product service code is to be used for each contract action, and this code should reflect the predominant good or service purchased, even if other types of goods or services are also being purchased under the same contract. 8 One FTE equals 2087 labor hours performed in a year. 3 GAO-10-350R Service Contract Inventories service. The Air Force, for the majority of its contracts, adjusted the average annual cost of a contractor FTE identified in DOD’s Performance of Commercial Activities Report9 and used this adjusted number as its estimated contractor cost. For example, using its methodology, the Navy determined the cost of a contractor providing professional services to be $179,252 per year, whereas the Air Force determined the cost for the same type of service to be $160,000 per year. When using an estimate to calculate FTEs, the results can be highly sensitive to the numbers that are used for the cost of a contractor FTE. For instance, when the Air Force adjusted the factor contained in the DOD commercial activities report, its FTE calculation was reduced by almost half. Inventory Data Were Not Complete The data reported in each of the military departments’ inventories are not complete. For example, the military departments noted challenges in their ability to obtain and report data on services purchased through interagency contracting. Using FPDS-NG, we identified $1.4 billion in obligations where the military departments provided funding to non-DOD agencies to contract for services on DOD’s behalf, which indicates a large scope of service contracting activities not fully reflected in the inventories. In addition, for those contracts that were included in the inventories, the Army, Navy, and Air Force were missing some data they were required to report. For example, the Navy inadvertently omitted $4 billion in service contracting activity because of an error made in manually compiling its inventory. Additionally, all three military departments did not identify the funding source for a significant portion of the contracts in their inventories—in the case of the Air Force, the funding source was provided for less than 1 percent of the contracts. In the case of the Army, our analysis showed that for 88 percent of the contracts in the Army’s inventory, data were not provided on the number of contractor FTEs or the function performed by the contractor. Army officials told us that this occurred because contractors did not enter data into the CMRA system for all contracts that the Army listed in its inventory. We found that the Army had more complete data for a small subset of contracts for which contractors entered labor hour data into CMRA. For this subset, the number of contractor FTEs and the function performed by the contractor were provided for close to 100 percent of these contracts.10 The Navy and Air Force were able to provide more complete data on the number of contractor FTEs and the function performed for almost all contracts listed in their inventories because each populated the contractor FTE field with estimates using a formula and took the function performed by the contractor from existing data systems. Plans for Fiscal Year 2009 Inventories and Future GAO Reviews DOD has acknowledged the presence of inconsistencies across the military departments’ fiscal year 2008 inventories. The Office of Acquisition, Technology, and Logistics, Defense Procurement and Acquisition Policy is developing a new, more 9 DOD submits this report to Congress pursuant to requirements contained in 10 U.S.C. § 2462(b). 10 According to the Army, this small subset of contracts provides the sole basis for the 213,133 contractor FTEs and the $34 billion spent to acquire services that the Army identified in the July 2009 report to Congress. 4 GAO-10-350R Service Contract Inventories consistent methodology for compiling the fiscal year 2009 inventories to address these inconsistencies, which includes consideration of options for standardizing the calculation of contractor FTEs. In addition, section 803 of the National Defense Authorization Act for Fiscal Year 2010 directs GAO to continue to report on DOD’s inventories in 2010, 2011, and 2012.11 Concluding Observations The service contract inventories are to be used to inform a variety of acquisition and workforce decisions within DOD. The limitations that both we and DOD have identified in the methodologies used to compile the inventories for fiscal year 2008 indicate a need to exercise caution when using them as a basis for such decisions. First, the differences inherent in each of the methodologies, in particular the differences in the categories of services excluded and in the way in which the number of contractor FTEs was identified, make comparisons across the military departments difficult. Furthermore, all three methodologies had limitations in the extent to which each captured the universe of service contracting activity, and for those contracts that were included, the extent to which complete data were reported. DOD efforts to develop a new, more consistent approach for compiling the inventories may address such limitations and better meet the varying information needs of those responsible for making acquisition and workforce decisions. Agency Comments We provided a draft of this report to DOD for its review and comment. DOD provided oral comments in which Mr. Shay Assad, Director, Defense Procurement and Acquisition Policy, stated that DOD concurs with the GAO’s concluding observations and will continue working with the military departments and other defense agencies to establish a unified methodology for completion of all data required by 10 U.S.C. § 2330a. 11 Pub. L. No. 111-84 § 803, 123 Stat. 2190 (2009). 5 GAO-10-350R Service Contract Inventories We are sending a copy of this report to the Secretary of Defense. In addition, this document will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions, please contact us at (202) 512-4841 or [email protected] or (202) 512-8365 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made contributions to this correspondence are listed in enclosure II. John P. Hutton Director, Acquisition and Sourcing Management William Solis Director, Defense Capabilities and Management Enclosures - 2 6 GAO-10-350R Service Contract Inventories List of Committees The Honorable Carl Levin Chairman The Honorable John McCain Ranking Member Committee on Armed Services United States Senate The Honorable Daniel Inouye Chairman The Honorable Thad Cochran Ranking Member Subcommittee on Defense Committee on Appropriations United States Senate The Honorable Ike Skelton Chairman The Honorable Howard P. McKeon Ranking Member Committee on Armed Services House of Representatives The Honorable John Murtha Chairman The Honorable C.W. Bill Young Ranking Member Subcommittee on Defense Committee on Appropriations House of Representatives 7 GAO-10-350R Service Contract Inventories Enclosure I: Briefing Slides Observations on the Department of Defense Service Contract Inventories for Fiscal Year 2008 Briefing for Congressional Staff December 10, 2009 8 GAO-10-350R Service Contract Inventories Enclosure I: Briefing Slides Contents • Introduction (cid:129) Objective, Scope, and Methodology (cid:129) Results in Brief (cid:129) Background (cid:129) Methodologies Used by Military Departments Differed (cid:129) Inventory Data Are Not Complete (cid:129) Concluding Observations (cid:129) Plans for Fiscal Year 2009 Inventories and Future GAO Reviews (cid:129) Agency Views (cid:129) Appendix I: Scope and Methodology (cid:129) Points of Contact 2 9 GAO-10-350R Service Contract Inventories