GOVERNMENT-OWNED, CONTRACTOR

OPERATED FACILITIES

The Government sometimes contracts for a product or for management and technological skills (usually from industry) while owning the facilities used to produce the product or service. Such facilities are known as Governmentowned, contractor-operated (GOCO) facilities and are neither pure in-house nor pure private sector activities. GOCOs are specifically excluded from Circular A-76, but are subject to BOB Circular A-49, "Use of Management and Operating Contracts," February 25, 1959.

GOCO facilities existed prior to World War II and DOD is still one of the largest owners of this type of resource. 26 GOCO facilities were established either to produce items that lacked commercial demand (for example, ammunition), or to provide services or facilities (for example, specialized testing facilities) too expensive for a single company to offer. DOD currently has 84 GOCO facilities, all operated by industrial firms.27

AEC is the other large user of GOCO facilities. The Atomic Energy Act provides for Government ownership of facilities for the production of nuclear materials and authorizes AEC to make contracts for the operation of such facilities.28 AEC has a different view of its GOCO operations than DOD and calls them "management contractors." The use of "management contractors" to operate AEC facilities is expressly authorized.29 This concept began with the World War II project of the Manhattan Engineer District of the War Department, which combined the resources of industry and the academic community to successfully develop nuclear weapons. The participating organizations operated under flexible cost-plus-a-fixedfee (CPFF) contracts and the spirit of cooperation achieved is not the ordinary buyerseller relationship.

The same spirit of cooperation and mutual interest exists today between the AEC and its 40 management contractors. They operate 63 facilities employing 90,464 persons.30 Major

28 Commission Studies Program.

27 From annual reports of the military services in compliance with DOD Instruction 4155.5, Inspection of Departmental Industrial and National Industrial Reserve Plants.

28 42 U.S.C. 2061 (1970).

29 S. Rept. 1211, 79th Cong., 2d sess., 1946.

30 Annual Report to the Congress of the Atomic Energy Commission for 1971, Jan. 1972, p. 193.

AEC GOCO plants represent a capital investment of $9.3 billion 31 and annual operating costs of $2.5 billion.32 They operate, for example, the uranium enrichment complex under the Oak Ridge Office; the production reactors and separation facilities at Richland, Washington, and in South Carolina; the AEC National Laboratories and other AEC-owned research facilities; and the AEC weapons production and test facilities. They provide miscellaneous construction services and operate many supporting facilities required for primary programs. An AEC management contract differs from other GOCO activities in that the AEC approach is oriented toward a long-term relationship and the accomplishment of an agency mission.33

Commercial firms that have developed goods or services that compete with GOCO goods or services point out that while the original need was generally legitimate, there is no mechanism to discontinue their operations when the private sector can fulfill the need. They feel that a GOCO is more of an in-house activity than an industry operation since the contractor has virtually no risk or investment. These critics claim that a GOCO has a significant cost advantage over a competing industrial firm. To correct this situation, the Office of Federal Procurement Policy should consider strengthening Circular A-49 by supplying guidelines on the make-or-buy decision. The information presented at the hearings that established the Commission 34 and a recent GAO study 35 supply pertinent background data.

Some GOCOS could be useful to agencies other than the sponsoring agency. For example, the GOCO test complex of the Arnold Engineering Development Center (AEDC) has been made available to all potential users. Other facilities of this type should be industrially funded and made available to all potential users.

31 Ibid., p. 234.

32 Ibid., p. 227.

33 O. S. Hiestand, Jr., and M. J. Florsheim, "The AEC Management Contract Concept," Federal Bar Journal, vol. 29, no. 2, spring 1969.

34 U.S. Congress, House, Committee on Government Operations, Government Procurement and Contracting, hearings before a subcommittee of the Committee on Government Operations, on H.R. 474, "To Establish a Commission on Government Procurement," 91st Cong., 1st sess., 1969, part 2, p. 445 ff.

35 U.S. Comptroller General, Report B-164105, Procurement of Certain Products from Private Industry by the Atomic Energy Commission, Oct. 22, 1969.

ecutive branch proposes some viable alternative. Finally, in an area that so intimately involves the interrelationships between the legislative and executive branches and so greatly affects the operational capability of the executive branch, Congress seldom legislates entirely on its own initiative. The problem of late appropriations extends beyond Federal operations; through grant programs, it also extends to State and local government operations, including most school districts. As summarized by the late Senator Ellender:

I think this to be a very important subject and one worthy of attention by Congress and the executive branch. Over the last 20 years, it seems that a trend or pattern of procedure gradually developed whereby long delays in the approval of appropriation acts became the accepted order of the day. The pattern was marked by an increasing number of appropriation acts which, in each session of Congress, were not approved at the beginning of the fiscal year. The trend became more pronounced during the 1960's. Many Federal agencies have been forced to operate on continuing resolutions for long periods of time during each fiscal year of the last 10 or 12.

There is no question that this procedure is not in the interest of good government under our present system of financing. There can be little doubt that the question marks raised by long and unpredictable delays in the appropriations process are answered by considerable waste and inefficiency in the Government's operation.2

Although late appropriations have tended to become the rule rather than the exception, there is no easy way to adjust to them. Invariably, a certain number of appropriations are passed long after the beginning of the fiscal year, but since it cannot be predicted which appropriations will be late and how late they will be, there is no basis for effectively adjusting planning to meet the problem.

An ongoing function that remains unfunded at the beginning of a fiscal year is supported by a series of "continuing resolutions" that keep the function alive until the appropriation

2 Congressional Record, Apr. 13, 1972, p. S6116.

is finally passed. The continuing resolutions permit the agencies to expend funds at one of three rates based on the legislative status at the time the resolution is enacted:

• Where neither chamber has yet acted on the appropriation request, the current rate (i.e., the rate for the prior year to that for which the budget applies) or the level of the new budget, whichever is lower.

• Where both chambers have passed different versions of the bill, the lower of the two rates approved.

• Where one chamber only has acted, the rate approved by that chamber or the current rate, whichever is lower.

Once a continuing resolution has been passed, later action by either one or both chambers does not constitute permission to change the rate of expenditure unless a new continuing resolution is passed by both chambers subsequent to such action.

Although continuing resolutions permit agencies to continue their ongoing functions, they do not accommodate evolving programs nor do they reflect reduced requirements that may result from unplanned curtailments in an appropriation act. Finally, continuing resolutions do not support any new operations.

The use of continuing resolutions tends to reduce the ability of Congress to expand, contract, or eliminate programs, since a substantial portion of the fiscal year elapses before final congressional action is taken. In a statement before the Joint Committee on Congressional Operations, the Assistant Secretary of Defense (Comptroller) discussed the impact of late appropriations on changing programs:

In addition to the Department's problems, we believe that present arrangements pose serious problems for the Congress. One result of the extensive delays in Defense bills is that, when Congressional decision points are reached, the ability to change Defense programs has been sharply diminished by the passage of time. The regular bills, enacted in the middle of the fiscal year, are subject to timing considerations. By that time, the Department has been operating for six months based on the continuing resolutions. Plans and work schedules are in being covering at least the next several months-this

involves deployments, combat operations, training rates, rebuild and transportation schedules, manpower programs, ship and aircraft operations, and so forth. At the same time contractors are at work producing goods and services for Defense. Industry manpower is engaged, parts orders and subcontracts have been let, and work is proceeding. Large parts of the Defense program are not subject to orderly change if decisions are delayed until the middle of the fiscal year."

EXAMPLES OF INEFFICIENCIES CAUSED BY LATE FUNDING

Even the most routine procurements depend on ordering points that, in turn, depend on the rate of use and the delivery time. A delay in ordering frequently results in added expense for accelerated delivery, substitution of a more expensive or less efficient item, or the wasted expense incurred in stopping the work and restarting later.

Results for nonroutine procurements can be disastrously out of proportion to the item being procured. In one case, a six-month delay in fund availability delayed an atomic weapons test program for another three months because, when the funds did become available, it was too cold at the test site to pour concrete.*

The Department of the Army cited several problems that occur when delayed funding prevents the scheduled delivery of new equipment; such delays required old equipment to be kept longer than had been expected. The old equipment required repairs or even reconditioning to keep it going-an added expense that otherwise would have been avoided. Further expense resulted from the cost of transporting old equipment to depots for repairs and from paying overtime to shorten turnaround time at the repair depot."

An example of an entire program delayed by a late appropriation was given in hearings before the House Appropriations Committee concerning Department of Defense (DOD) ap

U.S. Congress, Joint Committee on Congressional Operations, hearings on The Federal Fiscal Year as It Relates to the Congressional Budget Process, June 1971, p. 225.

⚫ Study Group 2, Final Report, Nov. 1971, p. 101. Ibid., pp. 97-98.

propriations for fiscal 1972. The delivery of missiles under the research and development phase of the procurement had been scheduled for completion by November 1, 1970. DOD planned to enter into a production contract on that date, well after the beginning of the fiscal year. However, the appropriation was not enacted until January 11, 1971, and the production contract could not be signed until January 18, 1971. To ensure continuity in the program and to prevent a break between the research and development and production phases of the program, the delivery of the missiles was stretched out. Had a break occurred, there would have been a loss of skilled personnel and a lack of continuity in the various support services (for example, utilities, guard, and custodial services). These actions, according to the testimony presented, increased the cost of the research and development and the production phases by more than four million dollars, but this was considered prudent in order to avoid even more costly alternatives.

The Bonneville Power Administration (BPA) representatives stated that operating under a continuing resolution hinders efficient program implementation because their activities are such that full advantage must be taken of favorable weather to assure availability of power. BPA finds that during the favorable construction season, delays in appropriations result in delays in awarding contracts."

Contractors advised that late passage of appropriations forces them to work with short leadtimes, perform under difficult delivery schedules, reduce or curtail operations, and incur startup costs when the full operation is reinstated. On occasion, contractors spend their own money in order to meet contract delivery schedules. In this regard, one company representative advised that the impact of late appropriations was felt in three ways: "

1. We have been forced to work with extremely short leadtimes for bid and proposal preparation in many cases, and to perform tight, difficult and sometimes impossible delivery schedules.

2. Funding delays cause layoffs followed by

U.S. Congress, House, hearings before a subcommittee of the Committee on Appropriations, 92d Cong., 1st sess., part V, May 12, 1971, p. 200.

Study Group 2, Final Report, Nov. 1971, p. 100. * Ibid., pp. 104-105.

associated startup problems and excessive administrative costs.

3. [Our company] has found it necessary to take excessive risks by spending its own monies in advance of contract receipt in order to assure meeting contract delivery schedule requirements.

The continuing resolutions passed by Congress only partially alleviate the impact. When, as often happens, the previous fiscal year's budget contains funds for only the initiation of a project or for an ascending rate of activity, the rate attained at the end of the fiscal year cannot be maintained while adhering to the previous year's overall funding level. The result is a stretchout or a complete stoppage of the project.

Continuing resolutions are interim actions, frequently on a month-to-month basis. Like any method of piecemeal or incremental funding, they are costly to administer. They require a repetitive expenditure of time and effort to process the limited funding actions and additionally, and perhaps more importantly, are completed only by expending efforts that should be devoted to other activities (for example, monitoring and directing the work itself). A DOD study describes some of the costly administrative workload resulting from incremental funding as a "paper mill," involving preparation and execution of multiple supplemental agreements or change orders for each contract in a program. In the office studied, the investigators found programs with as many as 60 contracts and cited examples of single contracts having to be modified six or more times. The investigating team concluded:

.. the Air Force pays dearly for this method of contracting, not only is procurement effort diverted from its primary mission, but also in the intangibles of increased risk and program uncertainty, higher prices for long leadtime items, and other contract and overhead costs... These funding problems make the acquisition process most difficult. . . Furthermore, Furthermore, funding prob

lems that lead to stretchouts (as evidenced in the Titan III CPIF contracts) vitiate and destroy the original and meaningful premises upon which the contract incentives were based. Subsequent attempts to preserve contract incentives in an environment of

stretchouts, incremental funding and resultant change orders, become exercises in futility."

These examples cover only some of the adverse effects of delayed funding. Other effects include:

• Costly temporary expedients; for example, using higher-priced rentals (all kinds of equipment or space) because money to buy or execute long-term leases is temporarily delayed.

• Purchasing routine supplies more frequently and in smaller quantities (with added costs resulting from loss of quantity discounts and higher transportation costs). • Inability to exercise options or complete award procedures on a procurement prior to the expiration date of the option or bid (necessitating readvertising and analysis of new proposals).

• Compressing time periods allowed for preparation of bids and proposals and leadtimes to start work or make deliveries in an effort to recoup part of the time lost because of the funding delay.

All of these practices are expensive and wasteful when considered in the light of the hundred of thousands of actions 10 to which they apply. The cumulative effect of even a small added cost on each would bring the dollar total to a very high level.

For the same reasons given by the Director of the Office of Management and Budget and the Legislative Reference Service," we cannot accurately estimate the total impact of late appropriations on the procurement process: there are too many variables and their effect is spread over hundreds of thousands of individual procurements. It is impractical and too costly to design a reporting system that would enable one to add them up and obtain a total. Despite this inability to estimate the total ac

9U.S. Department of Defense, Procurement Management Review Program, A Review of Procurement Operations in the Space and Missile Systems Organization (SAMSO), Dec. 1968.

10 There are nearly 16 million separate procurement transactions annually; since appropriation delays averaged approximately 90 days per year per appropriation bill (see Congressional Record, Apr. 13, 1972, pp. S6118-S6119), the number of transactions on which funding restrictions might produce waste and inefficiency could run as high as 4 million per year.

11 See Congressional Record, Apr. 13, 1971, pp. S6116-S6117. Both of these agencies had been asked to provide estimates of the total cost of late appropriations, but neither was able to do so. Some of their examples indicate clearly the impact on other aspects of Government activity Federal, State, and local.