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II.

ISSUE AND RECOMMENDATION SUMMARY (CONT'D)

A. LOGISTICS (CONT'D)

OSD 7: DOD IMPLEMENTATION OF OMB CIRCULAR A-76

Summary Recommendation

The Department of Defense (DOD) should seek legislation that will terminate existing constraints on DOD implementation of the Office of Management and Budget (OMB) Circular A-76. A-76 is a Government-wide cost reduction incentive program which encourages Government agencies to contract out when the private sector can provide certain goods and services more economically. In recent years, DOD efforts to implement OMB Circular A-76 have been restricted by various legislative requirements. DOD should be permitted to aggressively pursue cost savings opportunities which are available through A-76 programs.

Financial Impact

$337 million

annually

Potential Savings: DOD should be allowed to proceed with an optimum strategy for contracting out and streamlining in-house work. If our recommendations are implemented over a five-year period, annual savings of $337 million will be realized.

Background

OMB Circular A-76 implements the general policy that the Government should rely on the private sector to provide goods and services when it is economical to do so. More specifically, OMB Circular A-76 defines the policies and procedures to be followed in determining whether a certain commercial activity should be carried out by the Government or by private enterprise.

Circular A-76 does not apply to major systems acquisition or agency administrative and management functions. It does apply to commercial and industrial activities currently performed by Government employees, such as food service, maintenance, security, firefighting, laundry and drycleaning, automatic data processing, health services, audiovisual support, etc. The exceptions under which the Government may operate these commercial activities are: (1) there is no satisfactory commercial source available; (2) use of a private source would threaten national security; or (3) use of a private source would result in higher costs. When A-76 contracts expire, they are reviewed to determine whether they should be brought back in-house.

If a DOD activity is contracted out, military employees are reassigned. Civilian employees must be provided with the first right of refusal for employment on the contract, with at least the wages and fringe benefits prevailing for similar work in the locality. Displaced employees are also given priority consideration and training for other Government positions.

Methodology

The Task Force findings are based on interviews with numerous Government officials and a comprehensive analysis of reports, studies and audits performed by Government and non-Government groups on contracting out under OMB Circular A-76. Interviews were conducted with officials from the Office of the Secretary of Defense (OSD), the services, and the Office of Federal Procurement Policy.

This issue and issues relating to it were reviewed by other President's Private Sector Survey task forces. For further information, refer to the reports of:

Procurement/Contracts/Inventory Management Task

Force,

Real Property Management Task Force,

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Air Force Task Force,

Army Task Force, and

Personnel Task Force.

Findings

DOD has led other agencies in the implementation of the A-76 program. Since 1979, DOD has performed cost comparison studies of commercial activities involving 17,600 personnel spaces. These studies resulted in a determination that it was more economical to contract out approximately two-thirds of the commercial activities to the private sector. This resulted in the conversion of 11,700 spaces from DOD to private contractors, with an annual savings of approximately $70 million. Even if an activity remains in-house after a cost comparison study, there appear to be substantial cost savings as a result of improved efficiencies (or streamlining) in operations which are identified in the cost comparison studies.

However, DOD has been subject to Congressional restrictions and requirements not imposed on civilian agencies. For example, Congress passed a moratorium on DOD A-76 reviews for fiscal year 1978, which essentially halted A-76 planned conversions for a year. Also, DOD is required to follow certain lengthy study procedures which do not apply to civilian agencies. Before an activity can be contracted out, DOD must perform a cost comparison study in which it must be demonstrated that contracting out to the private sector should yield a savings equal to at least 10 percent of the in-house personnel costs. Completion of such studies, in some cases, takes from 12 to 24 months. By contrast, civilian agencies need no cost studies to contract out activities with annual operating costs under $100,000. In addition, Congress requires that DOD report activities which are scheduled for contracting out and also requires details of cost study results after completion. DOD must also provide annual reports to Congress on its contracting out efforts.

In August 1982, language was included in the DOD Authorization Act for FY 1983, 97-252, which prohibits any DOD expenditures on new A-76 cost comparison studies through March 31, 1983. DOD is also prohibited in FY 1983 from entering into any new contracts for firefighting or security guard duties on any military installation.

The Administration has encouraged OMB to give more emphasis to contracting out programs. The President affirmed his support for this program in his March 1982 budget message. It is our understanding that OMB is currently working on a simplification of A-76 cost comparison procedures.

Conclusions

DOD efforts to aggressively pursue savings opportunities under the A-76 program have been constrained by legislatively imposed restrictions and requirements. Continual intervention in DOD's management of the program disrupts the contracting process and discourages support for active participation in the A-76 program within the services.

Recommendations

OSD 7-1: Current restrictions on DOD's use of A-76 procedures should be removed. DOD should be permitted to program optimum savings under A-76 procedures without the constraints which destabilize the A-76 effort. DOD is currently subject to additional requirements which have the net effect of reducing potential savings. To the extent that restrictions on DOD's implementation of A-76 have become permanent through their inclusion in appropriation or other legislation, DOD should seek further legislation to repeal these restrictions.

Savings and Impact Analysis

The OSD Task Force understands that DOD objectives for FY 1982 to 1987 were for conversions of approximately 78,400 personnel spaces to private contracts and streamlining of 2,500 additional spaces. Projected savings were $766 million per year. Operating under existing legislative restrictions, DOD expects that actual conversions and streamlining during the period will effect a total of approximately 45,000 personnel spaces for annual savings of $429 million. If these restrictions on DOD's use of A-76 procedures were removed, DOD would save an additional $337 million. This would bring total savings from A-76 to the originally planned $766 million.

Exhibit II-3, at the end of this issue, provides details on expected A-76 conversions versus actual conversions and in-house streamlining. The incremental

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savings attributable to full implementation of expected A-76 conversions is approximately $337 million by FY 1987 (five years).

The estimated savings for the first five years from implementation of the recommendations would be:

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DOD should seek legislation that will permit it to implement OMB Circular A-76 as discussed above.

DOD should then proceed to convert or streamline 20 percent of the shortfall noted above during each of the fiscal years 1983 to 1987.

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