CHAPTER 6

POLICY

The Government relies heavily on contractors to provide goods and services needed to support its missions. Historically, Government policy has favored contracting for goods and services rather than providing them in-house. However, only limited expressions of this policy appear in the statutes and executive branch procedures for its application have been subject to controversy.

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Bureau of the Budget (BOB) Bulletin 55-4 (January 1955) was the first executive document to state the Government policy of reliance on the private sector. With minor changes, this statement was repeated in Bulletin 57-7 (April 1957) and Bulletin 60-2 (September 1959). BOB Circular A-76 (March 1966, revised August 1967) replaced Bulletin 60-2 and is currently in force; it states that the Government should rely on the private sector for needed goods and services except when:

Use of a commercial source would delay or disrupt an agency program

• Direct performance is required for combat support, military training, or mobilization readiness

• The product or service is not available from a commercial source

The product or service is available from another Government agency

• Procurement from a commercial source will result in higher cost to the Government. From time to time Congress has shown concern over current interpretation and implementation of the policy. Businessmen charge that 1 See Part J, Appendix A.

many goods and services are provided by Government agencies in direct competition with the private sector, whereas Government employee organizations contend that work which should be done by Civil Service personnel is contracted out. These and other difficult questions arise in deciding whether to "make or buy" in specific cases.

Expression of Policy

Recommendation 22. Provide through legislation that it is national policy to rely on private enterprise for needed goods and services, to the maximum extent feasible, within the framework of procurement at reasonable prices.

For almost 40 years congressional committees have studied various aspects of Government activities that are or may be in competition with private enterprise. The first extensive study was made in 1932 by a special committee of the House of Representatives. It recommended that the House create a standing committee on Government competition with private enterprise. Later studies of various aspects of the problem have been made by the Senate and House Appropriations Committees, the House Armed Services Committee, the Senate and House Committees on Government Operations, and the Senate Select Committee on Small Business.

In the early 1950's, the Intergovernmental Relations Subcommittee of the House Committee on Governinent Operations studied various aspects of Federal supply management,

2 U.S. Congress, House, Government Competition in Private Enterprise, H. Rept. 1985, 72d Cong., 2d sess., 1933.

with particular reference to military and related activities. During the 83rd Congress, the same subcommittee made an exhaustive study of all commercial and industrial activities of the Government that compete with private business. The subcommittee reported 3 that the number of such activities conducted by Government agencies posed a real threat to private industry and imperiled the tax structure. It recommended that "a permanent, vigorous, preventive and corrective program be inaugurated," which "should start from the Executive Office of the President with criteria set for general guidance of all agencies."

In 1949, the Senate Committee on Government Operations considered a House-passed bill and a companion Senate bill to terminate, to the maximum extent compatible with national security and the public interest, Government activities that compete with private industry. After hearings on these bills, the House-passed bill was reported favorably in August 1954. However, action on the measure was postponed.

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The First Hoover Commission reported the need for a thorough study of the extent to which the Government was competing with private enterprise. Following an examination by the Senate Committee on Government Operations of such competition of various facets, the Congress established the Second Hoover Commission to study and make recommendations for "eliminating nonessential services, functions, and activities which are competitive with private enterprise. . .

The Second Hoover Commission report on "Business Enterprise," filed in 1955, presented 22 recommendations designed to eliminate or decrease Government activities competing with private enterprise and urged the use of contract services to perform various activities being conducted by Government agencies.

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In 1955, the Chairman of the Senate Committee on Government Operations introduced a bill to establish a policy on activities of the Government that compete with private enterprise. While this bill was pending before the committee, the Director of BOB advised

U.S. Congress, House, Committee on Government Operations, H. Rept. 1197, 83d Cong., 1st sess., 1953.

4U.S. Congress, Senate, Committee on Government Operations, S. Rept. 2382, 83d Cong., 1st sess., 1953.

5 U.S. Congress, Senate, Commission on Government Operations, S. Rept. 1003, 84th Cong., 1st sess., 1955.

that the executive branch had a program underway for the review of activities so the committee postponed further action.

Between 1953 and 1960 the Senate Select Committee on Small Business conducted a continuing review of Government activities that were competing with small businesses and other private enterprise. Hearings on this subject were held in 1953, 1955, 1957, and 1960.

In 1964, the Subcommittee on Manpower Utilization of the House Committee on Post Office and Civil Service held hearings on the "Control of Labor Costs in the Department of Defense." The hearings were devoted mainly to three types of contract operations: "think factories," services formerly provided by inhouse personnel, and contractor personnel working alongside and under the supervision of Government employees.

Later developments appear to have been strongly influenced by:

U.S. Congress, House, Committee on Post Office and Civil Service, report by the Subcommittee on Manpower, H. Rept. 129. 89th Cong., 1st sess., 1965.

U.S. Comptroller General, Report B-146823, Excessive Costs Incurred in Using Contractor-Furnished Personnel Instead of Government Personnel by the Pacific Region of the Ground Electronics Equipment Installation Engineering Agency, Air Force Logistics Command.

8 Letter from the U.S. Civil Service Commission, Office of the General Counsel, to the U.S. General Accounting Office, Feb. 12, 1965.

U.S. Department of Defense, Contract Support Service Project. Mar. 1965.

ment Operations held hearings on Government policy and practice with respect to contracts for technical services.10

The next hearings related to these issues held by the Special Studies Subcommittee of the House Committee on Government Operations in June 1967, focused mainly on NASA use of support service contracts." GAO and the Civil Service Commission were critical of the extent to which NASA had relied on such contracts. NASA defended its practice on grounds of the need for rapid build-up and the mandate of the National Aeronautics and Space Act to make maximum use of the scientific and engineering resources of the United States.

The questions of legality and comparative cost were major issues. Further hearings by this subcommittee in early 1968 dealt with cost comparisons for support services 12 and resulted in recommendations that Circular A76 be revised to include support services, but the recommendations were not adopted by BOB.

This lengthy history of congressional and executive branch efforts to develop and implement an effective "make-or-buy" policy is indicative of the complexities of the problem. We believe, as a first step toward its resolution, there should be a clear expression in law of the Government's policy for relying on the private sector for goods and services.

Implementation and Enforcement of Policy

Responsibility for implementation of Circular A-76 is assigned to the agencies and departments of the executive branch, most of which have issued implementing instructions. The circular also requires that all Government commercial and industrial activities 13 be inventoried and reviewed to ensure that their continued operation is in accord with the policy and guidelines provided.

"U.S. Congress, Senate, Senate Committee on Government Operations, Government Policy and Practice with Respect to Contracts for Technical Services-Status Report, 90th Cong., 2d sess., May 17, 1968.

"U.S. Congress, House, Committee on Government Operations, Support Service Contracts, hearings before a subcommittee Government Operations, 90th Cong., 1st sess., June 21, 1967.

on

U.S. Congress, House, Committee on Government Operations, A Cost Profile for Support Services, hearings before a subcommittee of the Committee on Government Operations, 90th Cong., 2d sess.. 1968.

Circular A-76 defines a "Government commercial or industrial

In 1971, the Office of Management and Budget (OMB) requested a special report from the agencies on the status of their commercial and industrial activities. Information submitted in response to this request is shown in table 1.

The reports to OMB showed that:

• 2,899 activities (16 percent) had not been reviewed, although Circular A-76 required such reviews to be completed by June 30, 1968.

• With more than 15,000 activities reviewed, only 99 were discontinued or curtailed as a result of review.

• Of the 55 new starts proposed since October 31, 1967, 44 were approved, 9 were pending, and two were disapproved.

In early 1972, GAO reported that reviews of commercial and industrial activities by the military departments had not been effective. The following specific deficiencies were cited: Except in a few cases where cost studies had been made, there were no explanations supporting local recommendations that inhouse performance of activities be continued. Recommendations often were based on the reviewer's personal knowledge, and there was no evidence of the factors that had been considered.

Although the Air Force and the Navy spent $1.7 billion for in-house, depot-level maintenance in FY '69, they did not review these activities as required by Circular A-76.

activity" as "one which is operated and managed by an executive agency and which provides for the Government's own use a product or service that is obtainable from a private source."

14 Information and educational services provided to the public by Government include: books, bulletins, and brochures on agricultural topics, boating safety, fire prevention, libraries, museums, 2008, and so on.

15 U.S. General Accounting Office, Report B-158685, Better Controls Needed in Reviewing Selection of In-house OT Contract Performance of Support Activities, Mar. 17, 1972, pp. 1-2.

1971.

Although the military departments should have completed the first three-year cycle of reviews by June 30, 1968 they were all far behind schedule. As of June 1971, many activities had not been reviewed for the first time.

The few cost studies made showed that savings could be realized by converting activities either to in-house or to contract performance. GAO believes that these studies are indicative of significant potential savings available in activities not yet reviewed.

DOD has included in its inventory and threeyear review certain activities already being performed under contract. DOD regulations strongly suggest that decisions to contract out new activities and those being performed in-house be supported by cost comparisons to ensure that the most economical source is adopted. Since the philosophy of Circular A-76 favors contracting over in-house performance, it would appear desirable for DOD to maintain records of the costs incurred in making these studies so that these costs can be compared with the benefits of the program.

GAO reviewed the program at six military installations. Because there were no definitive guidelines as to the commercial and in

dustrial activities to be included, some significant activities were omitted from the inventories of such activities. These omissions could result in failure to provide services in the best or most economical way. Individual activities which should be reviewed separately were combined in broad aggregations; such as "aircraft depot maintenance."

The Army installations visited had started new in-house activities which had not been subjected to the analysis required under Circular A-76 nor included in the inventory as required. Installation officials were not aware of the requirement for new-start approval. The military departments should have a system to ensure that new starts are submitted for approval.

Incorporation of GAO findings in this report should not be construed to mean that DOD has been less dedicated than other agencies in the implementation of the circular. We found nothing to indicate that any other agency had devoted as much time and effort as had DOD in making the required inventories of commercial and industrial activities.

We believe that a new approach and stronger implementation of the program is needed to achieve consistent and timely Governmentwide application of the policies set forth in Circular A-76. A specified method for imple