Georgia Tech Procurement Assistance Center

OMB announces final guidance on inherently governmental functions

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Long-anticipated final guidance on “inherently governmental functions” is set for publication on Monday and should clarify confusion over blurred lines in agencies’ understanding of which types of work should be outsourced, top officials at the Office of Management and Budget told reporters on Friday.

The final policy letter, said Chief Performance Officer Jeffrey Zients, “helps agencies do better at balancing contracting out with management by federal employees. The mix was out of balance and we think this protects the public interest. Given our fiscal situation today, it is important more than ever that taxpayer money be well spent.”

With a few exceptions, the guidance, which takes effect Oct. 12, is similar to the draft released in March 2010, said Dan Gordon, administrator of the Office of Federal Procurement Policy. “But it is a milestone” that follows up on a memorandum of understanding about reducing waste in contracting issued by President Obama in March 2009.

The document includes lengthy lists of functions that are clearly inherently governmental and separate lists of “functions closely associated with the performance of inherently governmental functions” — where agencies can use more discretion.

One difference in the new guidance is a provision intended to “clarify the confusing and controversial” policy on the contracting out of military security operations, Gordon said. If a function is part of combat or could evolve into combat, then contractors can’t be used. “We benefited on this issue from public comments from the private sector, agencies, nonprofits and the Hill,” he added.

A second departure is a provision intended to help small businesses. “It places a lower priority on in-sourcing if the function is not inherently governmental,” Gordon said. “Insourcing is not a goal, but agencies need to understand that if an inherently governmental function is improperly contracted,” they can lose control of the work.

The administration “is sensitive” to realities of the current budget crunch, Gordon acknowledged. “We need to demonstrate fiscal responsibility on both sides” of the contracting process, he said. “We don’t want to dramatically increase [full-time equivalent] levels on the federal side, but in today’s fiscal world, the solution is not massive contracting out,” nor is it massive insourcing.

Zients presented the letter in the context of the administration’s two-and-a-half-year-old effort to trim waste by curbing contracting “after its uncontrolled growth under the prior administration.” One in six federal dollars is contracted out, and the rate, mostly in services, doubled since 2008, he said. But 2010 marked the first time in a decade that the level of contracting decreased, by $80 billion.

Examples of smarter contracting, Zients said, include “strategic sourcing,” such as pooling purchases of office supplies, which can save as much as 40 percent. “Rather than buying like 100 medium-sized businesses, take advantage of the fact that the United States is the world’s largest purchaser,” he said.

Another means is cutting spending on management support, which quadrupled over the past 10 years, he added. “In information technology and acquisition, management support produces many wasteful and unnecessary consultants’ reports that sit on a shelf.” That approach will reduce expenses by 15 percent, or $7 billion in fiscal 2012, he said.

Focusing on interaction with contractors, the administration also has “strengthened suspension and debarment” processes, Zients said, stressing, however, that “contractors do valuable work and will continue to do so.”

Over the past year and a half, Gordon said, the outsourcing-insourcing issue has been reviewed most thoroughly by the Defense and Homeland Security departments, a process now largely complete. Most agencies have already been working under the principles of the final guidance, he said, so its release won’t prompt major shifts.

Critical functions differ by agency, Gordon said, but the letter provides “clear direction to managers responsible for policy on the closely associated functions to make sure that the agency can control it and that the work doesn’t expand.”

The problem, he said, though “now largely corrected,” has been that some agencies, for example, would have a contractor write a statement of work and then award the contract to that same company. In managing IT functions, he added, he’s heard federal managers say that “no one in-house understands the work and that they’re completely dependent on the contractor. It’s intolerable.” The solution, he said, might be limited insourcing, adding two to three people, or simply applying more attention.

The guidance’s definition of inherently governmental, as in the draft, is based on the 1998 Federal Activities Inventory Reform Act, and Zients said the letter’s other changes, though small, would require adjusting the Federal Acquisition Regulation to conform.

Dozens of interest groups had been following the evolution of final guidance on what is inherently governmental.    “We are pleased OFPP has retained flexibilities for agencies to determine what functions are considered closely associated with inherently governmental functions or are critical functions to agency missions and to provide for these functions in a way that best meets their needs and capabilities,” said Stan Soloway, president of the industry group the Professional Services Council. “However, we are concerned that the list of closely associated functions could be misconstrued as a ‘do not contract’ list, even though it is not the case, nor OFPP’s intent. The checklist that identifies closely associated functions must not become a barrier to contracting for work where it is appropriate to do so.”

Scott Amey, general counsel of the watchdog group the Project on Government Oversight, said he is impressed with the guidance. “The policy comes clean about the government’s over-reliance on contractors and improves the categories of activities and functions that shouldn’t be performed by contractors,” he said. “Private security in combat areas was never a good policy, and OFPP’s changes will ensure that properly trained and mission-responsible government personnel conduct such work.” He wonders, however, whether agencies will actually retain or insource work that his group believes should be performed by public servants.

Steve Amitay, federal legislative counsel of the National Association of Security Companies, said on Friday that absence of any mention of “building security” in the guidance “validates the continued successful use of contract security by federal agencies. Furthermore, given the decades of effective and efficient use of contract security by federal agencies, any agency that is considering insourcing security jobs should, as the policy states, be required to conduct an in-depth, comprehensive cost-analysis of such a move.”

— by Charles S. Clark – Government Executive – September 9, 2011 – http://www.govexec.com/dailyfed/0911/090911cc1.htm?rss=getoday&oref=rss

Deficit-cutters must also weigh cost of contractors

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When the Obama administration released figures showing that Uncle Sam spent less on outside contractors for the first time in 13 years, the data pointed to a little-publicized difference in the way Democrats and Republicans approach deficit reduction.

Spending on contractors may not be as sexy as other items, but it’s a difference that has serious implications for federal employees.

In fiscal 2010, $535 billion was spent on those services, $15 billion less than the year before, officials at the Office of Management and Budget said Thursday.

“Under the prior administration, spending on government contracts more than doubled,” said Jeffrey Zients, OMB deputy director for management and the administration’s chief performance officer.

They were blowing their own horns while taking a swipe at Republican policies, but the money they were talking about is significant.

If the Obama administration’s spending on contractors had continued at the Bush administration’s rate, the government would have spent $80 billion more in 2010, according to the OMB.

“We have reversed the trend of uncontrollable growth, and we’re saving money and making sure every taxpayer dollar is being well spent,” Zients said.

The key, added Daniel Gordon, OMB’s administrator of federal procurement policy, was “buying less and buying smarter.”

Although some cuts in contract spending had to do with such things as weapons systems and fuel, Gordon said OMB is working with agencies to reduce spending on professional and technical services, which has grown disproportionately in recent years.

“We see significant potential for savings,” he added. “The president’s budget for fiscal 2012 will call for a reduction in categories that include these services, but we need to start the savings now, in fiscal 2011, and we will be working with the agencies to do that.”

The savings OMB announced certainly won’t solve Washington’s financial problems, but every dollar counts. Yet when some deficit hawks look for places to cut, they manage to ignore contractor spending while making sure they target federal employees.

When the Republican Study Committee, for example, issued its long list of proposed cutbacks, “federal workforce reforms” were near the top. They included freezing civilian pay for five years, instead of the two years already imposed, and cutting the workforce by 15 percent through attrition.

The committee did mention contractors near the end of its list, but not as a way of cutting spending. Instead, the Republicans recommended a change in policy that would allow more of Sam’s work to flow to the private sector. While almost every other item on its long list indicated an amount that could be saved by cuts, no dollar figure was attached to the call for more “competitive sourcing of government services.”

The difference in approach between the White House and Republicans is an important one for Frankie and Flo Fed.

Federal workers have long complained that contractors too often do work that should be reserved for employees. Some of this is about turf. Federal labor unions, for example, want to keep as much federal work as possible for federal workers, because that’s who their members are.

But much of it is about the governmental imperative that “inherently governmental” work should be done by people directly on Sam’s payroll. Collecting taxes certainly is an inherently government task, but outside contractors had been doing some of that work until the Obama administration put a stop to it last year. An Internal Revenue Service statement at the time said that “IRS collection is more cost-effective than the contractors.”

Last year, the chairmen of the National Commission on Fiscal Responsibility and Reform proposed eliminating 250,000 non-defense contractors who provide services and augment the workforce. The chairmen also suggested slashing spending for contractors who assist Pentagon staff by 20 percent each year from fiscal 2011 through 2013.

The Republican committee, however, says contracting may be the frugal option.

“Our focus in allowing competition from the private sector is to reduce overall spending. If taxpayers get a better deal by having nongovernmental activities like lawn mowing performed by a contractor, it only makes sense to do that,” said Brian Straessle, a spokesman for the committee. “If having federal employees mow the lawn is cheaper, let’s do that. The point is, there should be an option.”

Although the IRS found it could conserve funds by using federal employees instead of contractors, OMB officials did not claim that the savings they announced were the result of having employees perform jobs formerly given to outsiders.

In fact, Gordon said, “we never viewed insourcing as a way of getting dramatic savings. . . . We view it as a good-overnment management initiative.”

One good-government initiative was strengthening the notoriously weak acquisition workforce – the federal employees who work with contractors to make sure they deliver, as Gordon said, “on time and on budget.”

Financing good government must include a closer look at contractors, according to one labor leader. “If Congress is serious about saving money,” said Colleen M. Kelley, president of the National Treasury Employees Union, “lawmakers should look more closely at the contracting process.”

— by Joe Davidson – Washington Post – Friday, February 4, 2011; B03

Army suspends all ongoing insourcing plans

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In an about-face, the Army has suspended all of its ongoing insourcing activities, potentially savings thousands of private sector positions.

In a Feb. 1 memorandum, Army Secretary John McHugh announced he was halting the service’s insourcing initiative immediately in favor of a scaled-back approach in which his office would have to directly approve projects.

“In an era of significantly constrained resources, the Army must approach the insourcing of functions currently performed by contract in a well-reasoned, analytically based and systemic manner, consistent with law and prevailing presidential and Department of Defense guidance,” McHugh wrote in the memo, released on Thursday by the Professional Services Council, an industry group that has opposed plans to bring contractor jobs back in-house.

The memo suspends all ongoing insourcing transitions, but does not reverse efforts that already have been completed.

Army spokeswoman Anne Edgecomb said the memo is not intended to stop insourcing altogether but to ensure that the process is conducted responsibly and deliberately. “We are trying to make sure we do everything we can to be fiscally responsible,” Edgecomb said. “We see the writing on the wall.”

Edgecomb did not have figures immediately available on the number of contractor positions the policy change would effect.

The Defense Department’s insourcing program leader said on Thursday that the Pentagon did not direct Army to change its policy.

“The department is committed to meeting its statutory obligations under Title 10 to annually review its contracted services, identifying those that are inappropriately being performed by the private sector and should be insourced to government performance,” said Thomas Hessel, a senior manpower analyst in the Office of the Undersecretary of Defense for Personnel and Readiness, in a statement to Government Executive. “This includes services that are inherently governmental or closely associated with inherently governmental in nature; provide unauthorized personal services; or may otherwise be exempted from private sector performance … While some contracted services may be identified for insourcing, some services determined to be no longer required or of low priority may be eliminated or reduced in scope while others will continue to be provided by the private sector.”

All future insourcing proposals, McHugh wrote, must include “at minimum, a manpower requirements determination, an analysis of all potential alternatives to the establishment of permanent civilian authorizations to perform the contracted work, certification of fund availability and a comprehensive legal review.”

Thomas Lamont, assistant secretary of the Army for manpower and reserve affairs, along with Mary Sally Matiella, assistant secretary of the Army for financial management and comptroller, will be responsible for developing criteria to evaluate the efficiencies generated from the policy change, McHugh said.

Contractor groups, which have long criticized the Defense Department’s insourcing plans as driven by quotas and lacking any verifiable cost savings, applauded the development.

“Secretary McHugh is taking the right approach to insourcing,” PSC President Stan Soloway said. “We have said all along that all sourcing decisions for clearly commercial work — whether insourcing or outsourcing — must be done strategically with the best interests of the government mission and American taxpayer in mind.”

John Palatiello, president of the Business Coalition for Fair Competition, a group formed to challenge the Obama administration’s insourcing plans, said the memo is proof the initiative has been poorly executed.

“BCFC renews its call for a governmentwide moratorium on insourcing until common-sense standards and metrics for assuring that any insourcing is in the taxpayers’ interests, does not increase unemployment, and is focused on statutorily defined inherently governmental activities, not commercial activities,” Palatiello said.

The memo comes only a few weeks after the Government Accountability Office reported the Army had identified more than 4,200 full-time jobs in which contractors are performing either inherently governmental or unauthorized personal services. In both the inherently governmental and the unauthorized personal services contracts, the Army typically would be required to bring those functions back in-house.

Defense Secretary Robert Gates announced in August 2010 that the Pentagon was implementing a fiscal 2011 billet freeze and halting its insourcing plans because of a lack of cost savings. But, the plan affected only civilian agencies and offices. The military services were exempt from the freeze, allowing them to continue with their insourcing plans.

Soloway called on the other military services to follow the Army’s approach. “Through such a process the Army, DoD and the taxpayer will gain vital insight into the total life-cycle costs associated with these decisions, the degree to which they address the Army’s workforce needs, and more,” he said. “We hope, as they say, the Army leads the way.”

— by Robert Brodsky – GovExec.com – February 3, 2011

GAO: Army contractors performing inherently governmental functions

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The Army has identified more than 4,200 full-time jobs in which contractors are performing either inherently governmental or unauthorized personal services, according to a new watchdog report released on Tuesday.

The Government Accountability Office report, which generally focuses on the Defense Department’s approach to counting service contractor employees and functions, includes previously unreported details on the scope of work being performed by Army contractors.

Since the start of 2009, the Army has completed at least one review of 24 of its 26 commands and headquarters organizations and identified 2,357 contractor employees performing inherently governmental functions, the report said. Examples of inherently governmental activities include awarding and administering contracts, determining budget priorities, and hiring or firing federal employees. Another 1,877 contractors were identified as providing unauthorized personal services that federal employees should be performing. Personal services contracts are contracts that make private sector personnel appear, in effect, as government employees. In both the inherently governmental and unauthorized personal services contracts, the department would typically be required to bring the functions back in-house.

An additional 45,934 Army contractors are performing activities deemed closely associated with inherently governmental functions. These jobs, which include assisting in contract management or evaluating another contractor’s performance, generally are not statutorily prohibited from outsourcing but require strict oversight and management.

Army officials indicated that the reviews help them decide which functions should be performed by military personnel. The GAO report did not provide details on the number of Army positions that have been subsequently insourced, and a Defense spokeswoman did not respond to a request for comment.

Officials at the Army’s Installation Management Command in San Antonio, Texas, told GAO that most insourcing during fiscal 2010 was a result of losing statutory authority to contract for certain security guard functions. They noted that most insourcing in fiscal 2011 will be prompted by budgetary decisions. In August 2010, Defense Secretary Robert Gates announced plans to reduce funding for service support contractors by 10 percent annually from fiscal 2011 to 2013.

Agencies across government are expected to compile an annual inventory to determine the number and type of service contract employees. The Army collected the data on its centralized Contractor Manpower Reporting Application system, which captures information companies report at the contract line item level.

The Air Force and Navy have faced bigger challenges in developing their inventory of service contractor functions. According to the GAO report, the two services have decentralized approaches that rely on their major commands to review the activities of contractors listed in their inventories and report the results to headquarters.

The Air Force completed its initial review in January 2010. But for approximately 40 percent of the contracts, reviews contained inadequate or incomplete responses that could guide a decision to insource those functions, GAO said.

The Air Force Material Command, for example, identified 152 contract actions that potentially involved inherently governmental functions. The official responsible for the command’s review process, however, was unsure of the extent to which these determinations were correct.

The Navy issued guidance to its commands in September, but the results of its initial review were not yet available. The service had previously planned to establish roughly 10,000 civilian positions by fiscal 2015 through insourcing contracted services.

“DoD has acknowledged the need to rebalance its workforce, in part by reducing its reliance on contractors,” GAO said. “To do so, however, the department needs good information on the roles and functions played by contractors, which the department currently does not have.”

Air Force and Navy contracting officials told auditors they rely on processes other than the service contract inventory — such as post-award monitoring — to avoid placing contractors in inherently governmental functions.

According to the Air Force’s fiscal 2010 insourcing plan, the majority of decisions to bring work in-house would be based on analyses of whether the work could be performed more cost-effectively by government employees. Navy officials said their commands review contracts during the pre-award and option phases to prevent the award of contracts that include inherently governmental functions or unauthorized personal services.

The Defense Department reported spending on service contracts leapt from $127 billion in fiscal 2008 to $140 billion in fiscal 2009, although the surge could have been influenced by more thorough and detailed reporting by the military services, according to GAO.

In 2009, Defense officials announced they would cut 33,000 service support contractors departmentwide by 2015. The Pentagon had planned to replace those contractors during the next five years with 39,000 new full-time government employees, many through insourcing.

As of June 30, 2010, more than 16,500 civilian positions were established across the department as a result of insourcing contracted services, Thomas Hessel, a senior analyst in the Office of the Undersecretary of Defense for Personnel and Readiness, told Government Executive in September. More than half of these positions were brought in-house because the work was determined to be inherently governmental, closely associated with inherently governmental, or otherwise exempt from private sector performance, he said.

The Defense Department has halted insourcing at its Pentagon offices and commands because of a fiscal 2011 billet freeze. But the military services are not subject to the freeze, allowing insourcing to continue.

— by Robert Brodsky – GovExec.com – January 19, 2011

New Congress could put the brakes on insourcing

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The 112th Congress is unlikely to let the Obama administration move full-speed ahead on its initiative to bring contractor jobs back in-house, a consultant and a Republican Senate staff member said on Thursday.

Jonathan Etherton, president and owner of the consultancy Etherton and Associates Inc. and a former Senate Armed Services Committee staffer, told an audience of contractors at a Coalition for Government Procurement breakfast he has heard at least three congressional panels plan to look at whether insourcing is being implemented strategically and whether agencies are focusing on critical positions.

Bill Wright, Republican staff director for the Senate Homeland Security and Governmental Affairs Ad Hoc Subcommittee on Contracting Oversight, noted insourcing is on the radar of ranking member Sen. Scott Brown, R-Mass. Brown is concerned the initiative is moving forward too quickly and without enough consideration of its effect on small businesses, Wright said during the breakfast discussion.

More generally, Brown is looking for ways to improve efficiency during times of mounting national debt, Wright said. The senator is developing an acquisition savings plan that could include expanding strategic sourcing, an approach in which agencies analyze purchasing trends and buy common commodities and services in bulk; rewarding high-performing acquisition teams; and promoting a more specialized acquisition workforce by requiring officials to obtain certifications in certain areas of expertise.

New Congress could put the brakes on insourcing  Much of the subcommittee’s oversight work to date has been bipartisan, Wright added, and Brown is working with the administration on the efficiency initiatives.

Etherton noted, however, that Congress’ overall relationship with the executive branch is likely to grow more adversarial in 2011 with Republicans in control of the House and lawmakers aggressively scheduling oversight hearings.

In addition to insourcing, Etherton said, the next Congress is likely to examine implementation of the 2009 Weapons System Acquisition Reform Act; the relationship between the Defense Contract Audit Agency and the Defense Contract Management Agency; the definition of inherently governmental work; how to best ensure adequate contractor controls against waste, fraud and abuse; and how Defense Department savings initiatives will affect the industrial base.

Wright predicted lawmakers also would focus on transparency surrounding contractor profit incentives and subcontractor performance; tracking contract-related earmarks; and enhancing competition and limiting risk through fixed-price arrangements.

— by Amelia Gruber –  Government Executive – December 16, 2010

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