DOD Inventory of Contracted Services: Actions Needed to Help Ensure Inventory Data Are Complete and Accurate

DOD is the government's largest purchaser of contractor-provided services. In 2008, Congress required DOD to compile and review an annual inventory of its contracted services to identify the number of contractors and the functions contractors performed. In 2011, Congress required DOD to use that inventory to inform certain decision-making processes. GAO has previously reported on the challenges DOD faces in compiling, reviewing, and using the inventory.

Congress included a provision in statute for GAO to report on the required DOD reviews and plans to use these inventories. For this report, GAO assessed the extent to which DOD components (1) reviewed contracts and activities in the fiscal year 2013 inventory of contracted services and (2) developed plans to use the inventory for decision-making. GAO reviewed relevant laws and guidance; 35 component inventory certification letters and 28 contract actions for services categorized as often supporting inherently governmental functions; and interviewed DOD acquisition, manpower, and programming officials.

The Department of Defense (DOD) continues to face challenges in ensuring that it fully reviews its inventory of contracted services. As of September 2015, 35 of 37 components certified they had done so and generally addressed more of the review elements required by DOD guidance than in prior years. For the second consecutive year, however, the Air Force did not submit a certification letter. Further, components may be inaccurately reporting on the extent to which contractors were providing services that are closely associated with inherently governmental functions, a key review objective to help ensure that DOD has proper oversight in place. The Office of Federal Procurement Policy indicates that certain contracted services—such as professional and management support—are more likely to include such functions. In fiscal year 2013, the Army reported that nearly 80 percent of the $9.7 billion it obligated for these types of services included closely associated with inherently governmental functions. In contrast, the Navy and other DOD agencies reported about 13 percent of the $10.7 billion obligated for similar contracted services included such functions.

GAO's review found that the lack of documentation on whether a proposed contract included such functions may result in inventory review processes incorrectly reporting these contracts. At least 12 of the 28 contract actions GAO reviewed appear to include these functions, but—of those 12—DOD components identified only one prior to contract award and only two during the review process as such. Without accurate identification of the functions contractors are performing, DOD cannot be assured that proper oversight is in place or provide data on the activities and functions contractors are performing.

Military departments have not developed plans to facilitate the use of the inventory for workforce planning or budgetary decisions nor have they appointed an accountable official to help do so, as DOD previously stated they intended to do. Further, DOD has not outlined the relationships between a management support office, military departments, and other stakeholders to facilitate the collection and use of inventory data in decision-making processes. Internal control standards state that management should define key areas of authority and responsibility to achieve management objectives and to comply with laws.

GAO recommends that DOD focus increased attention on contracts more likely to include services closely associated with inherently governmental functions during the review process, document whether proposed contracts include such functions, and clarify the relationships between the support office and key stakeholders. DOD concurred with GAO's recommendations.

The Department of Defense (DOD) is the federal government’s largest  purchaser of contractor-provided services, with $161 billion in obligations  for service contracts reported for fiscal year 2013 and $156 billion  reported in fiscal year 2014. DOD relies on contractors to perform various  functions, such as professional and management support, information  technology support, and weapon system support. Contractor personnel  constitute a key component of DOD’s total workforce, which includes  DOD active and reserve forces and DOD civilian employees, and are vital  to helping DOD meet its mission. While there are benefits to using  contractors to perform services for the government, the government can  risk becoming overly reliant on contractors to support core missions,  including providing services that are closely associated with inherently  governmental functions, or creating circumstances in which contractors  inappropriately perform functions deemed inherently governmental.

In recent years, Congress enacted legislation to improve DOD’s ability to  manage its acquisitions of contracted services, to make more strategic  decisions about the appropriate workforce mix, and to better align  resource needs through the budget process to achieve that mix. As part  of these efforts, Section 2330a of title 10 of the U.S. Code requires DOD  to annually compile, and the military departments and defense agencies  to review, an inventory of services contracted for or on behalf of DOD  during the preceding fiscal year. This inventory is intended, in part, to help  provide better insight into the number of contractor full-time equivalents  (FTEs) providing services to the department and the functions they are  performing, and determine whether any of these functions warrant  conversion to DOD civilian performance. Further, this section also  requires DOD to undertake certain actions using these inventories.  Specifically, subsections (e) and (f), respectively, direct the secretaries of  the military departments or heads of the defense agencies to, among  other things:  review the inventory to ensure that personal services contracts on the  list are performed under applicable statutes and regulations and  identify contracted functions that DOD should consider for conversion;  and develop a plan, including an enforcement mechanism and approval  process, to use the inventory for strategic workforce planning,  workforce mix, and budgeting decisions.

More recently, the Joint Explanatory Statement accompanying the  National Defense Authorization Act for Fiscal Year 2015 directed the  Under Secretary of Defense for Acquisition, Technology, and Logistics  (USD(AT&L)) and the senior acquisition executive for the Navy and Air  Force, respectively, to issue policies implementing a standard pre- solicitation checklist similar to the Army’s Request for Service Contract  Approval form. This Army form provides a justification for the planned  contract and basic cost information as well as several checklists to help  identify whether the functions the contractor will perform meet the  definition of inherently governmental, closely associated with inherently  governmental, or personal services, among others.

Section 951(a) of the National Defense Authorization Act for Fiscal Year  2014 included a provision for GAO to report on DOD’s implementation of  title 10 section 2330a subsections (e) and (f). Further, the Joint  Explanatory Statement referenced above included a provision requiring  GAO to report on the defense agencies’ and military departments’  implementation of a standard pre-solicitation checklist.

This report assesses DOD’s efforts to implement various subsections of  section 2330 of title 10, specifically (1) subsection (e) to review contracts  and activities in the inventory of contracted services for the fiscal year  2013 inventory and (2) subsection (f) to develop plans and processes to  use the inventory for strategic workforce planning, workforce mix, and  budget decisions. This report also provides information on DOD’s efforts  to implement a standard pre-solicitation checklist.

To assess the extent to which DOD components—which include the three  military departments and the defense agencies—complied with the  requirements to review applicable contracts and activities in its inventory  of contracted services pursuant to subsection (e), we focused on DOD’s  fiscal year 2013 inventory and associated review, which was the latest  inventory and review available when we initiated our work. We reviewed  DOD’s fiscal year 2013 inventory submission and review guidance,  issued on March 18, 2014 by USD(AT&L) and the Acting Under Secretary  of Defense for Personnel and Readiness (USD(P&R)). This guidance  required the military departments and defense agencies to certify— through submission of a certification letter to the USD(P&R)—that their  review was conducted in accordance with subsection (e). The guidance  required components to report on seven elements, including the contract  selection criteria and methodologies used to conduct the reviews, the  extent to which contractors were found to be performing inherently  governmental functions and those closely associated with inherently  governmental functions, and, to the extent necessary, a plan to realign  the work to government performance, among other elements. We  assessed all unclassified fiscal year 2013 inventory review certification  letters submitted by 35 DOD components by September 2015 to  determine if components addressed the seven elements specified in  DOD’s inventory guidance. Further, to gauge the extent to which DOD  components identified instances in which contractors may be performing  activities closely associated with inherently governmental functions, we  identified total obligations for contracts in the inventory that where  categorized under one of the 17 product service codes that the Office of  Federal Procurement Policy (OFPP) and GAO identified as likely to be  closely associated with inherently governmental functions. We then  compared these obligations to total obligations certified by DOD  components as being for contractors performing closely associated with  inherently governmental functions in the fiscal year 2013 certification  letters. We compared the inventory submission data to the Federal  Procurement Data System-Next Generation (FPDS-NG) data for fiscal  year 2013 and determined the data were sufficiently reliable for this  purpose.

In addition, we selected 28 non-generalizable contract actions across the  major command at each military department with the highest obligations  for knowledge based services in fiscal year 2013. These commands  included the Army Materiel Command, the Air Force Materiel Command,  and the Naval Sea Systems Command. We selected the contract actions  based on the fiscal year 2013 inventory submission data and, in part,  because of their high dollar value and categorization under product  service codes that OFPP and GAO identified as often including closely  associated with inherently governmental functions. We reviewed the  documents in the file for each contract action, including the statements of  work and pre-award documentation, to identify any planned contractor  activities that appeared to be closely associated with inherently  governmental functions. For the purposes of this report, we considered a  contract action to include such functions if any activity described in the  statement of work appeared to be closely associated with inherently  governmental functions as defined under section 7.503(d) of the Federal  Acquisition Regulation (FAR) and appendix B of OFPP Policy Letter 11- 01. To inform the file review, we interviewed officials at the commands  responsible for compiling and reviewing the inventory as well as  contracting, program and resource management officials for the selected  contract actions. In addition, we interviewed officials from USD(P&R) and  USD(AT&L). We also interviewed command and department-level  officials to determine plans to implement a standard pre-solicitation form  similar to the Army’s.

To assess the extent to which DOD components have developed plans  and processes to use the inventory to inform management decisions  pursuant to subsection (f), we used the data we collected for our  November 2014 report on this issue to establish the extent to which each  military department’s strategic workforce planning, manpower mix, and  budgeting guidance and documentation required or cited the use of the  inventory of contracted services. We then interviewed officials from each  military department and collected any updated policies to determine what  updates, if any, had been made to those policies and procedures. We  also interviewed acquisition and manpower officials at the three military  departments to assess the status of the military department’s plans to  appoint an accountable official to facilitate efforts to develop a plan,  including an enforcement mechanism, pursuant to subsection (f). We also  assessed DOD’s efforts to develop a common contractor manpower data  system by interviewing officials from USD(P&R) and the Defense  Manpower Data Center (DMDC) and reviewing briefing slides resulting  from the December 2014 strategic review of options. To assess the  completeness of the data from DOD’s four Contractor Manpower  Reporting Application (CMRA) systems, we reviewed policy and guidance  and interviewed contractor and government officials responsible for  inputting and verifying the data. We also compared data from the FPDS- NG for the 30 service contracts with the highest obligations from October  2012 through July 2013 at the Army, Navy, and Air Force to determine  the extent to which the contractors reported direct labor hours and invoice  amounts for these contracts in these CMRA systems. We did not  independently assess the data provided by contractors. A detailed  description of our scope and methodology is included in appendix I.

We conducted this performance audit from December 2014 to November  2015 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 audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on audit objectives.

In part to improve the information available and management of DOD’s  acquisition of services, in fiscal year 2002 Congress enacted section  2330a of title 10 of the U.S. Code, which required the Secretary of  Defense to establish a data collection system to provide management  information on each purchase of services by a military department or  defense agency. The information DOD is to collect includes, among  other things, the services purchased, the total dollar amount of the  purchase, the form of contracting action used to make the purchase, and  the extent of competition provided in making the purchase. In 2008,  Congress amended section 2330a to add a requirement for the Secretary  of Defense to submit an annual inventory of the activities performed  pursuant to contracts for services on behalf of DOD during the preceding  fiscal year.

The inventory is to include a number of specific data elements for each  identified activity, including  the function and missions performed by the contractor; the contracting organization, the component of DOD administering the  contract, and the organization whose requirements are being met  through contractor performance of the function;  the funding source for the contract by appropriation and operating  agency; the fiscal year the activity first appeared on an inventory;  the number of contractor employees (expressed as full FTEs) for  direct labor, using direct labor hours and associated cost data  collected from contractors; a determination of whether the contract pursuant to which the activity  is performed is a personal services contract; and a summary of the information required by section 2330a(a) of title 10  of the U.S. Code.

Within DOD, USD(AT&L), USD(P&R), and the Office of the Under  Secretary of Defense (Comptroller) have shared responsibility for issuing  guidance for compiling and reviewing the inventory. USD(P&R) compiles  the inventories prepared by the components, and USD(AT&L) submits a  consolidated DOD inventory to Congress no later than June 30 of each  fiscal year. DOD has submitted annual, department-wide inventories for  fiscal years 2008 through 2014, the most recent submitted on August 31,  2015 (see table 1).

Since DOD implemented the department-wide inventory of contracted  services, the primary source used by most DOD components to compile  their inventories, with the exception of the Army, has been FPDS-NG.  The Army developed its CMRA system in 2005 to collect information on  labor-hour expenditures by function, funding source, and mission  supported on contracted efforts, and has used its CMRA as the basis for  its inventory. The Army’s CMRA is intended to capture data directly  reported by contractors on services performed at the contract line item  level, including information on the direct labor dollars, direct labor hours,  total invoiced dollars, the functions performed, and the organizational unit  for which the services are being performed. In instances where  contractors are providing different services under the same order, or are  providing services at multiple locations, contractors can enter additional  records in CMRA to capture information associated with each type of  service or location. It also allows for the identification of services provided  under contracts for goods.

Section 2330a(e) of title 10 of the U.S. Code requires the secretaries of  the military departments or heads of the defense agencies to complete a  review of the contracts and activities in the inventory for which they are  responsible within 90 days after an inventory is submitted to Congress.  USD(P&R), as supported by the Comptroller, is responsible for, among  other things, developing guidance for the conduct and completion of this  review. As part of this review, the military departments and defense  agencies are to ensure that any personal services contracts on the inventory were properly  entered into and performed appropriately;  the activities on the list do not include any inherently governmental  functions; and  to the maximum extent practicable, the activities on the inventory do  not include any functions closely associated with inherently  governmental functions.

This review also requires the secretaries of the military departments and  heads of defense agencies to identify activities that should be considered  for conversion to government performance, or insourced, pursuant to  section 2463 of title 10 of the U.S. Code, or to a more advantageous  acquisition approach. Section 2463 specifically requires the Secretary of  Defense to make use of the inventory to identify critical functions,  acquisition workforce functions, and closely associated with inherently  governmental functions performed by contractors—and to give special  consideration to converting those functions to DOD civilian performance.

Further, section 808 of the National Defense Authorization Act for Fiscal  Year 2012 required DOD to issue guidance requiring the components to  eliminate contractor positons identified as being responsible for  performing inherently governmental functions and reduce by 10 percent  the funding for contracts for the performance of functions closely  associated with inherently governmental in fiscal years 2012 and 2013.  DOD issued guidance in June 2012 instructing components to rely on the  annual inventory review to demonstrate compliance with these  requirements, using the fiscal year 2011 inventory review as the baseline  for reductions. However, we found in December 2014 that the annual  inventory review did not include the obligation data necessary to establish  a baseline for reductions and recommended that DOD identify additional  data sources to corroborate data reported in the annual inventory  review. DOD concurred with our recommendation. In September 2015,  we found the Comptroller intended to measure these reductions based on  the advisory and assistance service obligations in the fiscal year 2017  budget submission. Our analysis found that using these revised  measures, the military departments achieved the required funding  reductions.

In addition, section 2330a(f) of title 10 of the U.S. Code requires the  secretaries of the military departments or heads of the defense agencies  responsible for contracted services in the inventory to develop a plan,  including an enforcement mechanism and approval process for using the  inventory to inform management decisions (see figure 1).

Collectively, these statutory requirements mandate the use of the  inventory and the associated review process to enhance the ability of  DOD to identify and track services provided by contractors, achieve  accountability for the contractor sector of DOD’s total workforce, help  identify contracted services for possible conversion from contractor  performance to DOD civilian performance, support DOD’s determination  of the appropriate workforce mix, and project and justify the number of  contractor FTEs included in DOD’s annual budget justification materials.

We have issued several reports on DOD’s efforts to compile and review  its inventory of contracted services, including initiatives to standardize  contractor manpower data collection across the department. For example,  in April 2012 we found that DOD issued a plan in November 2011 to  develop a common technology solution that would allow the department  to collectively meet the inventory requirements and planned to have the  system available to help inform the 2013 inventory of contracted services  with full reporting by the fiscal year 2016 inventory. To achieve a  uniform approach to collecting contractor manpower data, USD(P&R) and  USD(AT&L) issued a joint memorandum in November 2012 that  reiterated its goal for all components to report contractor manpower data  using a common system, which it termed the Enterprise-wide Contractor  Manpower Reporting Application (ECMRA). In May 2013, we reported  that the Navy and Air Force had each taken steps to develop their own  interim system to collect and store contractor manpower data based on  the Army’s existing CMRA system. In May 2014, we reported that DOD  fielded the last of the four CMRA systems for the defense agencies in  September 2013.

Most recently, in November 2014, we found DOD continued to lack a plan  with timeframes and milestones to implement a common contractor  manpower reporting system and faced continued delays in doing so.  Additionally, we reported that USD(P&R) initiated a strategic review to  assess all data collection options, raising the question of whether DOD  would continue to establish a common data system, ECMRA, as it  indicated it intended to do in a November 2012 memorandum. Noting that  continued delays in developing an implementation plan for a common  data system increased the risk that DOD would be unable to collect the  statutorily required data needed to serve as the basis for DOD’s inventory  process, we recommended that USD(P&R) approve a plan of action, with  timeframes and milestones, for rolling out and supporting a department- wide data collection system as soon as practicable following the strategic  review. Further, should a decision be made to use or develop a system  other than ECMRA, we recommended that USD(P&R) provide a  documented rationale for doing so and assure that the new approach will  provide statutorily required data. DOD concurred with these  recommendations. Additionally, we found that the military departments  had not developed plans with enforcement and approval mechanisms to  facilitate the use of the inventory in management decisions, including  workforce planning and budgeting and that the responsibility for  developing such plans was not clearly assigned. Consequently, to help  ensure the inventory is integrated into key management decisions, as  statutorily required, we recommended that the military departments  appoint an accountable official within their departments with responsibility  for leading and coordinating efforts across manpower, budgeting, and  acquisition functional communities and, as appropriate, revise guidance,  develop plans and enforcement mechanisms, and establish processes.  DOD concurred, but had not done so at the time we began our current  work. We discuss the status of DOD’s efforts in this report. A listing of  GAO’s prior work on DOD’s inventory of contracted services may be  found in appendix IV.

DOD Components’ Certification Letters Included More Required Information, but Reviews May Understate Contractors Performing Closely Associated with Inherently Governmental Functions

We found that DOD components’ 2013 inventory review certifications  better addressed required reporting elements than in prior years;  however, for the second consecutive year, the Air Force, which accounts  for about 20 percent of DOD’s obligations for contracted services, did not  submit a certification letter. Further, DOD may be understating the  number of contractors performing closely associated with inherently  governmental functions. For example, the Army identified nearly 80  percent of its contracts for certain types of services as including such  functions. The Navy and other defense components identified 13 percent  of their contracts as doing so for similar categories of services. Further,  our review of 28 selected contract actions found that commands’ pre- contract award reviews of the proposed contract did not consistently  identify or document whether contractors would potentially perform  closely associated with inherently governmental functions, which may  contribute to inaccurate reporting of the functions contractors performed  during the inventory review process. Overall, our analysis found that at  least 12 of the 28 contract actions we reviewed appeared to include  closely associated with inherently governmental functions, but—of those  12—DOD identified only one prior to contract award and only two during  the inventory review process as including such functions.

More Components Submitted Certification Letters Addressing All Required Elements than in Prior Years

USD(AT&L) and USD(P&R)’s March 18, 2014 guidance governing the  fiscal year 2013 inventory of contracted services instructed components  to address seven elements in their certification letters, the same seven  elements contained in DOD’s guidance for the fiscal year 2012 inventory.  The elements include discussions of the inventory review methodology,  the identification of inherently governmental and closely associated with  inherently governmental functions, and the role of the inventory review in  budget formulation (see table 2).

DOD components continued to make progress in addressing more of the  required elements in their fiscal year 2013 certification letters compared  to prior years. For example, 15 of the 35 components reporting for 2013  addressed all required elements compared to none of the 31 components  reporting for fiscal year 2011. Further, 32 of the 35 components  submitting fiscal year 2013 certification letters addressed at least four of  the required reporting elements and 28 components addressed at least  five of the required reporting elements. The Air Force, which represented  about 20 percent of DOD’s obligations for contracted services in fiscal  year 2013, did not submit a certification letter for the second consecutive  year (see table 3).

While more components are addressing more of the elements in their  certification letters, DOD’s guidance on how to conduct the reviews is not  clear. In November 2014, we recommended, in part, that DOD’s guidance  for the inventory compilation and review clearly identify the basis for  selecting contracts to review and provide approaches the components  may use to conduct the reviews. DOD concurred with this  recommendation and stated that it intended to have components review  100 percent of the services reported in their respective inventories. We  found that 12 of the 35 components we reviewed specifically stated the  percentage of the contract actions reviewed. Of those 12 components,  11, including the Navy, stated they reviewed 100 percent of contract  actions, while the Army stated it reviewed 85 percent of its contracts. The  other 23 components, including the Air Force, did not identify the  percentage of contracts they reviewed and whether any of these  components used a risk based approach. More recently, a USD(P&R)  official stated that, while the intention was to have all components review  100 percent of the contracts in their inventory, the nature and level of the  review may vary. For example, this official noted a larger component may,  based on its knowledge of its contracting activities, prioritize its review on  selected areas or types of contracting activities, and then based on its  review of those areas, certify it has reviewed its inventory of contracted  services. DOD’s March 2014 guidance for the fiscal year 2013 inventory,  however, did not provide clarification on the appropriate criteria for such  an approach. DOD’s December 29, 2014 guidance for the fiscal year  2014 inventory—the first issued after our November 2014  recommendation— also did not provide a specific percentage of contracts  to be reviewed or the basis for selecting the contracts to review or any  additional clarity on approaches. Without such clarification, components  may miss opportunities to properly identify contractors performing closely  associated with inherently governmental functions.

DOD May Be Underreporting Contractors Performing Closely Associated with Inherently Governmental Functions during the Inventory Review

We found that DOD obligated about $25.5 billion for contracts in the 17  product service codes that OFPP and GAO identified as often including  services that are closely associated with inherently governmental  functions. After excluding the contracts awarded by the Air Force, DOD  obligated $20.4 billion for contracts in these product service codes.  Overall, 17 components reported about $8.9 billion—or 44 percent—of  these obligations as being on contracts actually including work identified  as closely associated with inherently governmental functions. Appendix II  provides detailed data reported by the components. There was significant  disparity, however, among the components. For example, the Army  identified nearly 80 percent of its $9.7 billion in contract actions in these  17 product service codes, by obligation value, as including work that is  closely associated with inherently governmental functions. In contrast, the  Navy and other defense agencies identified less than $1.4 billion of the  $10.7 billion—or about 13 percent—of their contracts in these same 17  codes, by obligation value, as having such work (see figure 2).

Our analysis of the obligations in fiscal year 2013 by the three major  commands we reviewed found similar results. For example, the Army  Materiel Command identified $1.6 billion, or nearly 70 percent of its  contracts in the 17 product service codes, by obligation value, as  including work that is closely associated with inherently governmental  functions. In contrast, the Naval Sea Systems Command identified about  two percent of their contracts in these codes, by obligation value, as  having such work. While the Air Force did not submit a certification letter,  the Air Force Materiel Command reported that none of the $2.7 billion  obligated for contracts categorized under these product service codes  included work that was closely associated with inherently governmental  functions in two reviews of its fiscal year 2013 contract actions. According  to Air Force officials, neither the Air Force’s Annual Execution Review of  contracts for programs over $100 million or the Air Force Materiel  Command’s Health of Services assessment of all contracts over  $150,000 identified contracts with contractors performing such functions  in fiscal year 2013.

Inconsistent Processes May Contribute to Inaccurate Identification of Contractor Functions

Each military department and major command we reviewed took different  approaches to reviewing contracts prior to award and during the inventory  review process (see table 4).

We identified several factors that may contribute to incorrectly identifying  contracts that may include closely associated with inherently  governmental functions during the pre-contract award process. Overall,  we identified at least 12 of the 28 contract actions we reviewed that  appeared to include such functions, but—of those 12—commands only  identified one prior to contract award. For example:

Office of the Secretary of Defense and military department officials  indicated that a lack of understanding of the definition of closely  associated with inherently governmental functions remains and may  have led components to incorrectly identify the potential for  contractors to perform these types of functions.

The lack of a requirement for acquisition officials to document, during  the pre-award process, whether a proposed contract may include  closely associated with inherently governmental functions hinders  DOD’s ability to consistently identify contractors that perform such  functions. There is no requirement in statute, the FAR, DOD Federal  Acquisition Regulation Supplement (DFARS), or OFPP Policy Letter  11-01 to document a pre-award determination regarding closely  associated with inherently governmental functions; however, there are  requirements for agencies, and DOD specifically, to take certain steps  to mitigate the risk of using contractors for such functions. For  example, section 2383 of title 10, U.S. Code, provides that DOD may  only enter into such a contract if the contracting officer ensures that  DOD personnel cannot reasonably be made available to perform the  function; that appropriate DOD personnel supervise contractor  performance and perform all inherently governmental functions under  the contract; and that the agency addresses any potential  organizational conflict of interest of the contractor in performance of  these functions. We found the Army’s pre-award process, specifically  the Service Contract Approval checklist, documents the determination  of closely associated with inherently governmental functions and other  determinations of planned contractor functions. By contrast, the Air  Force and Navy do not have department-wide requirements to  document this determination in its contract files. Acquisition officials  documented their pre-award determinations in eight of the 28 contract  actions. In one case involving a Navy contract, the command clearly  identified that the proposed contract included closely associated with  inherently governmental functions. In another case involving an Army  contract, the pre-award documentation identified closely associated  with inherently governmental functions, but our review did not identify  such functions in the statement of work. The remaining 20 contract  actions in our review did not include documentation of a pre-award  determination. Our analysis of the statements of work and other pre- award documentation found 11 of these 20 contract actions potentially  included these functions.

All three military departments are required to follow DOD guidance  that required, effective March 1, 2013, contracting officers to identify  whether or not contractors were performing such functions in an  FPDS-NG narrative data field. None of the 17 contracts we reviewed  awarded after this date included the required information.

In several cases, command officials used one determination to cover  more than one contract action. For example, the Army identified one  contract action in our review as including closely associated with  inherently governmental functions based on a blanket Service  Contract Approval form for contracts within the Software Engineering  Center. We found, however, that the activities described in the form  were not consistent with the activities outlined in the statement of  work, which did not appear to include closely associated with  inherently governmental functions. We also found that the Navy and  Air Force commands used a blanket or class determination and  finding document to cover multiple contract actions under which  contractors would perform evaluations and analyses of proposals or  advisory and assistance services, as permitted by the FAR. For  example, for six of the Air Force contract actions, the contract files  included blanket approvals to use non-government personnel in  source selection and sole source evaluations. However, these  services are clearly identified in FAR § 7.503(d)(8) and OFPP Policy  Letter 11-01, appendix B, paragraph (1)(e)(ii) as closely associated  with inherently governmental functions, but there was not  documentation in the contract files identifying these activities as being  closely associated with inherently governmental functions.

Having contractors perform closely associated with inherently  governmental functions is often necessary to support an agencies’  mission. However, using contractors for these functions poses several  risks to an agency, including the inappropriate transfer of inherently  governmental functions to the contractor. To mitigate these risks, the FAR  and OFPP Policy Letter 11-01 requires agencies to ensure appropriate  oversight of contractors performing closely associated with inherently  governmental functions. Further, section 2383 of title 10 of the U.S.  Code and the DFARS require that DOD take certain steps before entering  into a contract for such functions, such as ensuring that appropriate DOD  military or civilian personnel will oversee contractor performance and will  perform all inherently governmental functions associated with the  contract. To carry out these steps, it is critical for DOD to identify  contracts that may include closely associated with inherently  governmental functions during the pre-contract award process. Both the  OFPP guidance and the FAR offer descriptions of tasks that are closely  associated with inherently governmental functions (see figure 3).

As the inventory review process at the Army and Navy relies, in part, on  pre-award determinations and documentation, inaccurate identification of  contractors performing closely associated with inherently governmental  functions prior to contract award may hinder the review process at these  departments. Our review of inventory review processes at the three  commands we reviewed found that the commands may not have  accurately identified contract activities that included closely associated  with inherently governmental functions during the review process. In our  review of the 28 contract actions, we did not assess whether the  contractor actually performed closely associated with inherently  governmental functions, which could potentially account for some  differences between our pre-award assessment and assessments  commands made for the inventory review. In some cases, however, it is  unclear whether the major commands adequately considered planned  activities in their inventory reviews. The following examples illustrate  these issues.

Our analysis found all nine Air Force Materiel Command contract  actions included closely associated with inherently governmental  functions in the statements of work. These functions included  assisting, preparing, developing, and delivering compliant documents  in support of planning, programming, budgeting, and execution; and  developing documents such as the acquisition strategy, performance  work statements, requests for proposal, technical evaluations, and  evaluation notices. The Air Force Materiel Command, however, did  not identify these contracts as having closely associated with  inherently governmental functions in its reviews for the fiscal year  2013 inventory. In response to our review, Air Force officials re- examined the contract actions and agreed with our determination that  all nine included closely associated with inherently governmental  functions.

The Naval Sea Systems Command (NAVSEA) identified four of the  nine selected contract actions as including closely associated with  inherently governmental functions in its inventory review letter. In two  of these cases, our review of the statements of work matched  NAVSEA’s determination, but in the third case we found the statement  of work did not include closely associated with inherently  governmental functions. In the fourth case, it was unclear whether the  contract activities would include these functions. Of the selected Navy  contract actions, we also identified one where the statement of work  included requirements for contractors to perform closely associated  with inherently governmental functions that was not identified by  NAVSEA.

At the Army, it is unclear whether eight of the 10 contract activities  were included in the Army’s inventory review results. Army’s PDC  tool, used to inform the inventory review, tracks by location and  functional requirement—such as administrative or logistics support.

Officials who input data into this system noted that there is no data  field specifically for contract number but stated they can include this  information in the description field if they choose to do so. For the two  contracts we could confirm were included in the inventory review  results we agreed with the Army determination that the contractor  activities did not include closely associated with inherently  governmental functions based on our review of the statements of  work.

Initiatives Underway to Better Identify Contracts that Include Closely Associated with Inherently Governmental Functions Prior to Contract Award

The Joint Explanatory Statement accompanying the National Defense  Authorization Act for Fiscal Year 2015 directed the senior acquisition  executives from the Navy and Air Force, along with the USD(AT&L) for  the defense agencies, to issue policies implementing a standard checklist  to be completed before awarding a contract for services, similar to the  Army’s current process that identifies whether contractors are performing  closely associated with inherently governmental functions, among other  things. Neither USD(AT&L) nor the two military departments met the  March 30, 2015 deadline. USD(AT&L) delegated the requirement to the  Office of Defense Procurement and Acquisition Policy (DPAP)—the office  within USD(AT&L) responsible for contracting and acquisition policy. In  lieu of developing a standard checklist, representatives from DPAP and  the two military departments indicated they intended to address the issue  in a different manner. Specifically,

DPAP officials stated that the forthcoming DOD Instruction on service  acquisitions will include direction to consider the planned activities  under a contract during the service requirement review boards. DPAP  officials plan to issue supplemental guidance on the service  requirement review boards, including direction for components to  identify and document plans to have contractors perform closely  associated with inherently governmental functions. DPAP officials  stated that this supplemental guidance would apply to all military  departments and defense components.

According to Navy officials, an upcoming revision to the Navy’s  instruction governing services acquisitions will include a service  contract approval form requirement. Navy officials stated that the  service contract approval form will address the mission needs,  requirements, and consideration of inherently governmental and  closely associated with inherently governmental functions.  Requirements owners completing the form will need to certify that  closely associated with inherently governmental functions were  considered, but not necessarily document a determination that  contractors will or will not be performing such functions.

According to an Air Force official, the Air Force is developing a  Service Management Tool that will require documentation that closely  associated with inherently governmental functions were considered  prior to contract award. It is not certain whether contracting officers  would be required to document this determination in the contract files.

Until DPAP, Air Force, and Navy take action to develop and implement  these pre-award processes, we cannot determine the extent to which they  will address challenges we found with identifying contract activities that  may include closely associated with inherently governmental functions. In  turn, without accurate identification of the number of contractors  performing these functions, DOD cannot be assured that proper oversight  is in place or provide data to ensure that it is meeting statutory  requirements to reduce, to the maximum extent practicable, the number  of contractors performing closely associated with inherently governmental  functions. Federal internal control standards state that documentation is a  necessary part of an effective control system. In particular, management  should have the information necessary to identify the risks related to its  objectives and design appropriate control activities.

Military Departments Have Not Developed Statutorily Required Plans or Addressed Challenges to Compiling and Using the Inventory

The military departments generally have not developed statutorily- required plans or enforcement mechanisms to use the inventory to inform  workforce mix, strategic workforce planning, or budget decision-making  processes. At the same time, DOD components and contractors are  increasing their use of CMRA for reporting purposes, and the 28 contract  actions we reviewed generally included requirements for contractors to  report manpower data, such as direct labor hours, into the system. DOD  is in the process of defining the roles and responsibilities of a support  office that is intended to help manage the inventory of contracted services  reporting processes and continues to explore options for an enhanced  reporting system that may better meet user needs. Until DOD identifies  these roles and responsibilities for collecting and validating the data, it is  unclear how the information may be used for decision making.

Military Departments Have Not Developed Plans to Facilitate Use of the Inventory

The military departments generally have not developed plans or  enforcement mechanisms as required by title 10 U.S.C. § 2330a(f), to use  the inventory of contracted services to inform workforce mix, strategic  workforce planning, and budget decision-making processes. In November  2014, we found that the military departments lacked plans and processes  to incorporate the inventory in decision making, with the exception of  workforce mix and insourcing decisions at the Army. We did not identify  any updates to guidance, policy, or processes that incorporated the use  or consideration of the inventory of contracted services since our  November 2014 report. Appendix III provides details on policies and  processes identified in that report.

Further, we previously found that the responsibility for developing such  plans was not clearly assigned and was divided across multiple offices.  We recommended that the secretaries of the military departments identify  an accountable official to lead and coordinate efforts across the functional  communities to develop plans and establish processes for using the  inventory for decision making. DOD concurred with this recommendation,  but the military departments have not appointed an accountable official  responsible for coordinating these efforts as of September 2015.

DOD Components and Contractors Are Beginning to Use CMRA Data for Reporting Purposes

Our review found that, in addition to the Army, some DOD components  used data captured in their CMRA systems to support the fiscal year 2013  inventory. DOD’s March 18, 2014 guidance for the fiscal year 2013  inventory required components to include the percentage of their total  contracts that were reported by contractors in their CMRA in fiscal year  2013 and the extent to which reported data were used to support their  inventory submission. A USD(P&R) official noted that this was the best  metric given the difficulty of determining the number of contracts that  include the reporting requirement. Contractors are required to report labor  hour data for labor executed during the period of performance during  each government fiscal year, no later than October 31. We found that  nine out of the 37 components reported using CMRA data for the fiscal  year 2013 inventory submissions, comprising about 40 percent of total  FTEs reported in the DOD inventory, while other components continued  to rely on FPDS-NG. Specifically,

The Army reported relying 100 percent on its CMRA data to compile  its inventory in fiscal years 2013 and 2014. Army officials noted that  CMRA is prepopulated with data from its Army Contracting Business  Information System and FPDS-NG. The Army estimated its CMRA  data accounted for the labor and associated costs of at least 78  percent of the fiscal year 2013 contract service obligations recorded in  various accounting systems, including the General Fund Business  Enterprise System. In its inventory submission letter, the Army  attributes the differences to an over reporting of obligations for  contract services and under reporting of invoices for overseas  contingency operation services where limited network access  prevents complete reporting in CMRA by vendors. Our analysis also  found that contractors input data on direct labor hours and invoices for  26 of the 30 largest services contract actions based on FPDS-NG  obligations in fiscal year 2013. In the four remaining cases, one  contract action was for foreign military sales, which the Army does not  include in its CMRA data, one contract action included contractor  reported invoice information, and contractors did not enter invoice or  direct labor hours for the two remaining contract actions.

The Air Force reported that 31 percent of the contractor FTEs in its  fiscal year 2013 submission and 28 percent in its fiscal year 2014  submission were based on direct labor hours reported by contractors  in the Air Force CMRA. Our analysis found that contractors provided  data for nine of the 30 largest services contract actions based on  FPDS-NG obligations in fiscal year 2013 to the Air Force CMRA. Four  of the remaining 21 contract actions were for foreign military sales.  Similar to the Army, the Air Force also excludes these from its CMRA.

The Navy did not use CMRA data to compile its inventory submission  for fiscal year 2013 and reported that less than one percent of its  calculated FTEs were reported directly by contractors into the Navy  CMRA. As such, Navy officials stated that they relied on FPDS-NG  rather than its CMRA to compile its inventory for fiscal year 2013. The  Navy reported that about 15 percent of the reported contractor FTEs  in its fiscal year 2014 inventory submission were based on data  reported in its CMRA. Our analysis found that contractors provided  data for 15 of the 30 largest services contract actions based on  FPDS-NG obligations in fiscal year 2013.

DOD’s November 2012 memorandum directed all DOD components to  include the reporting requirement in new contracts and modifications to  existing contracts, except contracted services for construction and  utilities. At the contract level, we found that 24 of the 28 contract actions  we reviewed included the reporting requirement in the statement of work.  Four Navy contract actions did not include the reporting requirement,  including two that were awarded after the November 2012 memorandum.  DOD is in the process of finalizing a DFARS rule that will require the use  of a new contract clause requiring contractors to report data into ECMRA  for all new contracts. DOD officials estimated that the rule will be  finalized in October 2015.

DOD Has Not Identified the Longer Term Relationships Between Its Planned Management Support Office and DOD Stakeholders Needed to Integrate Inventory Data into Decision-Making Processes

DOD provided funding to establish an office to implement and support a  common enterprise-wide contractor manpower data system in March  2014, but this effort has encountered a number of challenges and  continues to lack a formal agreement, including clearly defined roles and  responsibilities for the office. DOD officials noted that it planned to finalize  a memorandum of agreement identifying the roles and responsibilities for  the support office, which they termed the Total Force Management  Support Office, to be agreed upon by the offices with primary  responsibility—the Assistant Secretary of Defense for Manpower and  Reserve Affairs and the Director of the Defense Human Resource  Activity—by September 2015. The two offices have not yet finalized this  agreement but expect to do so in the near term. The responsibilities that  DOD officials indicated would need clarification include:

Establishing common business rules for compiling the inventory data,  developing related policies and procedures, performing quality control  audits of the data, and potentially assessing the data for management  review.

Identifying the need for guidance and training. In this regard, our  current work found that in several cases, contractors had not received  any training or guidance on how to access and accurately input data  into the CMRA systems. Additionally, several contracting officer’s  representatives we interviewed said they were unclear as to how to  ensure that contractors enter the appropriate data and verify the  accuracy of contractor entered data.

Exploring options for a longer-term solution to potentially replace the  current CMRA systems. In September 2014, DOD initiated a strategic  review to consider all options–in the short and long-term–for  developing an enterprise data collection solution to collect the  necessary contractor manpower data for the review of contracted  services and for use in management decisions. The review concluded  in December 2014 and found that the current CMRA systems did not  address data needs across the planning, programming, and budgeting  communities. For example, the budgeting and financial management  communities use the object class codes, while the acquisition  community uses the product service codes to distinguish between  types of services. Further, the strategic workforce planning community  expressed more interest in data on contractor FTEs than the other  user communities because FTE data are useful in comparing military,  civilian, and contractor workforces.

DOD officials stated that the memorandum of agreement between the  Assistant Secretary of Defense for Manpower and Reserve Affairs and  the Director of the Defense Human Resource Activity will be issued  shortly and will address the near-term responsibilities of the support  office. Currently, DOD is in the process of hiring of six federal employees  with the goal for the office to be fully operational by March 2016. As part  of DOD’s current efforts, DMDC awarded a contract in September 2015  that tasked the contractor with migrating the four CMRA systems to a  single DMDC server and with conducting an analysis to recommend  options for the next generation of ECMRA or an alternative solution. DOD  officials stressed that no decision has been made to implement an  alternative to ECMRA. As we noted in November 2014, should a decision  be made to use or develop a system other than the ECMRA system  currently being fielded, the USD(P&R) should document the rationale for  doing so and ensure that the new approach will provide data that satisfies  the statutory requirements for the inventory.

DOD officials indicated that the memorandum of agreement will not  address the roles to be played by the support office, military departments,  and other stakeholders in exploring the longer-term solution to collect  contractor manpower data and integrating inventory data within the  military departments’ decision-making processes. DOD hopes to  formalize these relationships between the support office, DMDC, and  other stakeholders within the military departments and other defense  agencies after finalizing the memorandum of agreement. Federal internal  control standards call for management and employees to establish and  maintain an environment that supports a positive control environment. A  good internal control environment requires, in part, that an agency’s  organizational structure to clearly define key areas of authority and  responsibility and establish appropriate lines of reporting. Clearly  identifying the relationships between the support office and other  stakeholders would help ensure that efforts to implement an enterprise- wide data collection system and integrate the data into decision-making  processes will meet user needs and expectations.

In the seven years since DOD first submitted its initial department-wide  inventory of contracted services and conducted the associated reviews, it  has continued to lack the means to reliably identify functions performed  by contractors. Currently, there is no DOD-wide requirement for  acquisition officials to document their determination as to whether the  expected activities may include contractors performing closely associated  with inherently governmental functions prior to contract award. Having  contractors perform closely associated with inherently governmental  functions is necessary to support an agencies’ mission, but statutory law,  the FAR, DFARS, and OFPP guidance require that DOD provide  sufficient oversight to mitigate the risks when contractors perform such  work. DOD intends to require its services requirement review boards to  identify contractor functions prior to awarding a contract and is expected  to issue supplemental guidance to implement this requirement. Additional  actions are planned by the Air Force and Navy. Until such time that the  new instruction and supplemental guidance is issued, however, the  military departments and defense agencies may be missing opportunities  to improve their capability to identify and mitigate the risks of contractors  performing closely associated with inherently governmental functions.

Overall, while components are addressing more of the required elements  in DOD’s inventory review guidance, the results of DOD’s fiscal year 2013  inventory review raises questions about the accuracy and completeness  of the reviews. In this case, the Army identified nearly 80 percent of its  contracts in the 17 product service codes OFPP and GAO identified as  often including closely associated with inherently governmental functions,  as including such work. In contrast, the Navy and other defense agencies  identified about 13 percent of their contracts as doing so in these same  codes. Additionally, the Air Force did not submit a letter certifying they  had completed the review for the second consecutive year, without  explanation. The lack of documentation on whether a proposed contract  includes closely associated with inherently governmental functions may  result in inventory review processes incorrectly reporting these contracts.  At least 12 of the 28 contract actions we reviewed appeared to include  these activities, but—of those 12—the DOD components identified one  prior to contract award and two during the inventory review process as  including such activities. More recently, DOD officials noted that it may be  unrealistic for components to review all contracts in their inventory and  added that a risk-based approach to select which contracts to review may  be appropriate. Neither DOD’s March 2014 guidance nor its December  2014 guidance for fiscal years 2013 and 2014 inventories, respectively,  provided a specific percentage of contracts to be reviewed or the basis for  selecting the contracts to review. At a minimum, DOD components should  review the contracts that are more likely to include closely associated with  inherently governmental functions. Without clear guidance outlining an  appropriate risk-based approach, DOD components may continue to  misreport contactors performing closely associated with inherently  governmental functions.

The military departments have not updated or revised the guidance for  budgeting, manpower, and workforce planning to incorporate the use of  the inventory of contracted services data, nor have they appointed an  accountable official to help determine how best to use inventory data  when it becomes available. We continue to believe that implementing the  recommendations we previously made to do so would facilitate the use of  the inventory for decision-making purposes. Critical to making sure that  the data are useable and consistent is clearly defining the roles and  responsibilities of the management support office and formalizing  relationships between this office and DOD stakeholders. This office is  expected to provide a wide range of support activities for the inventory of  contracted services, including exploring options for an alternative to the  current ECMRA system. DOD officials noted that an agreement on the  short-term roles and responsibilities of the office is imminent. We  encourage the department to work expeditiously to do so. However, until  such time as DOD clearly outlines the longer term relationships between  the support office, military departments, and other stakeholders, the  department faces increased risk that efforts to implement an enterprise- wide data collection system and integrate the data into decision-making  processes will not meet user needs and expectations.

To ensure proposed contract activities, as reflected in the statement of  work and other contract documents, are assessed against the criteria  provided by the FAR and OFPP policy, we recommend that the Under  Secretary for Defense for Acquisition, Technology, and Logistics ensure  that the Director of the Office of Defense Procurement and Acquisition  Policy provide clear instructions, in a timely manner, on how the service  requirement review boards are to identify whether contract activities  include closely associated with inherently governmental functions; and require acquisition officials to document, prior to contract award,  whether the proposed contract action includes activities that are  closely associated with inherently governmental functions.

To assist components in appropriately identifying contracts that include  closely associated with inherently governmental functions in the inventory  review more generally, we recommend that the Under Secretary of  Defense for Acquisition, Technology, and Logistics and the Under  Secretary of Defense for Personnel and Readiness work jointly to ensure  that military departments and defense agencies review, at a minimum,  those contracts within the product service codes identified as requiring  heightened management attention and as more likely to include closely  associated with inherently governmental functions.

To help facilitate the collection and use of inventory data in decision- making processes, we recommend that the Under Secretary of Defense  for Personnel and Readiness clearly identify the longer term relationships  between the support office, military departments, and other stakeholders.

We provided a draft of this report to DOD for comment. In its written  comments, which are reprinted in appendix V, DOD concurred with our  recommendations and described the actions it plans to take. DOD,  however, generally did not provide timeframes for completing such  actions. Given the magnitude, significance, and risk associated with  contracted services, we encourage the department to move out  expeditiously and set appropriate timeframes for completing these  actions. DOD also provided technical comments, which we incorporated  in the report as appropriate.

In response to our recommendation that DPAP provide clear instructions,  in a timely manner, on how the service requirement review boards are to  identify whether contract activities include closely associated with  inherently governmental functions, the department noted that the pending  DOD instruction for service acquisitions will provide such guidance. The  department also noted it will provide supplemental direction to acquisition  officials in response to our recommendation that the Director, Defense  Procurement and Acquisition Policy, require acquisition officials to  document, prior to contract award, whether the proposed contract action  includes activities that are closely associated with inherently  governmental functions.

In response to our recommendation that Under Secretary of Defense for  Acquisition, Technology, and Logistics and the Under Secretary of  Defense for Personnel and Readiness work jointly to ensure that military  departments and defense agencies, at a minimum, review contracts  within the product service codes identified as requiring heightened  management attention and as more likely to include closely associated  with inherently governmental functions, the department stated it will  update its inventory of contracted services guidance.

In response to our recommendation that the Under Secretary of Defense  for Personnel and Readiness clearly identify the longer term relationships  between the support office, military departments, and other stakeholders,  the department noted that it will implement, as appropriate, a  memorandum of agreement or service level agreements to clearly identify  relationships and roles of the various stakeholders.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Defense; the Under Secretary of Defense  for Acquisition, Technology, and Logistics; the Under Secretary of  Defense for Personnel and Readiness; the Secretaries of the Army, Navy,  and Air Force; and other interested parties. In addition, the report is  available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact  me at (202) 512-4841 or dinapolit@gao.gov. 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 key contributions to this  report are listed in appendix VI.

Appendix I: Objectives, Scope, and Methodology

Section 951(a) of the National Defense Authorization Act for Fiscal Year  2014 directs GAO to report, for fiscal years 2014, 2015, and 2016, on  DOD’s implementation of title 10 U.S. Code section 2330a subsections  (e) and (f). To satisfy the mandate for 2015, we assessed DOD’s efforts  to (1) implement subsection (e) to review contracts and functions in the  inventory of contracted services for the fiscal year 2013 inventory and (2)  implement subsection (f) to develop plans and processes to use the  inventory for strategic workforce planning, workforce mix, and budget  decisions. We used data from the fiscal year 2013 inventory as it was the  most recent inventory at the time of our review. Further, the Joint  Explanatory Statement accompanying the National Defense Authorization  Act for Fiscal Year 2015 mandated GAO to report on the defense  agencies’ and military services’ implementation of a standard pre- solicitation checklist.

To assess the extent to which DOD components—which include the three  military departments and the defense agencies—complied with the  requirements to review applicable contracts and activities in the inventory  of contracted services pursuant to subsection (e), we focused on DOD’s  fiscal year 2013 inventory and associated review, which was the latest  inventory and review available when we initiated our work. We reviewed  DOD’s fiscal year 2013 inventory submission and review guidance,  issued by Office of the Under Secretary of Defense for Acquisition,  Technology, and Logistics (USD(AT&L)) and the Acting Under Secretary  of Defense for Personnel and Readiness (USD(P&R)) issued on March  18, 2014. The March 2014 guidance requires military departments and  defense agencies to certify—through submission of a certification letter to  USD(P&R)—that their review was conducted in accordance with  subsection (e). The guidance required components to report on seven  elements including the contract selection criteria and methodologies used  to conduct the reviews; the extent to which contactors were found to be  performing certain functions, to include inherently governmental and  closely associated with inherently governmental; and to the extent  necessary, a plan to realign performance of such functions to government  performance. We analyzed all unclassified fiscal year 2013 certification  letters submitted by 35 of 37 components to USD(P&R) as of September  2015 to determine if components reported on all seven required  elements. The Air Force and the Test Resource Management Center did  not submit a certification letter in fiscal year 2013. We did not analyze any  classified certification letters submitted, such as that by the Defense  Intelligence Agency.

We also reviewed the Office of Federal Procurement Policy’s (OFPP)  November 5, 2010 guidance for civilian agencies’ service contract  inventories. This guidance directs agencies to give priority consideration  to reviewing certain categories on contracted services that the guidance  and GAO’s prior work have indicated often include closely associated with  inherently governmental functions. The guidance and GAO’s work  identifies 17 product service codes describing these categories of  contracted services. We identified total obligations for contracts  categorized under the product service codes identified in the OFPP  guidance and two additional product services codes identified in GAO’s  prior work and compared these obligations to total obligations certified by  DOD components as being for contractors performing closely associated  with inherently governmental functions in the fiscal year 2013 certification  letters. We did not independently assess the accuracy or reliability of the  underlying data supporting the components’ inventories of contracted  services and associated reviews.

In performing our work to assess the extent to which DOD implemented  subsection (e) to review contracts and activities in the inventory of  contracted services for the fiscal year 2013 inventory, we selected a  major command from each of the military departments—Army Materiel  Command, Air Force Materiel Command, and Naval Sea Systems  Command. The commands were selected because they had the highest  obligations in knowledge based services for fiscal year 2013, based on  data from the Federal Procurement Data System-Next Generation  (FPDS-NG). At each command, we reviewed a selection of 28 non- generalizable contract actions. These contract actions were selected, in  part, because of their high dollar value and categorization under the  product service codes OFPP and we have identified as often including  closely associated with inherently governmental functions. We compared  the inventory submission data to the Federal Procurement Data System- Next Generation (FPDS-NG) data for fiscal year 2013 and determined the  data were sufficiently reliable for these purposes. We reviewed each  contract action and supporting documentation in the contract file to  identify any planned contractor activities that appeared to be closely  associated with inherently governmental functions. For the purposes of  this report, we considered a contract action to include such functions if  any activity described in the statement of work appeared to be closely  associated with inherently governmental functions as defined under  section 7.503(d) of the Federal Acquisition Regulation (FAR) and  appendix B of OFPP Policy Letter 11-01. We then compared our  assessment with the determination made by contracting and program  officials at the time the contract was awarded and when the contract was  reviewed as part of the fiscal year 2013 inventory of contracted services  review and certification process. Our results are not intended to be  generalizable and as such, results from non-generalizable samples  cannot be used to make inferences about all service contracts.

Naval Surface Warfare Center–Carderock Division  Finally, to better understand how, if at all, DOD guidance has improved  over time and the challenges, if any, components have with the inventory  review process, we selected seven defense agencies based on  completeness of the certification letters over the last three years and the  percent of total obligations identified for contracts including closely  associated with inherently governmental functions. The defense agencies  were Defense Advanced Research Projects Agency; Defense Contract  Audit Agency; Defense Finance and Accounting Services; Defense  Human Resource Activity; DOD Educational Activity; US Northern  Command; and US Southern Command. In addition, we interviewed  officials from USD(P&R) and USD(AT&L).

To assess the extent to which the Defense agencies’ and military services  have implemented a standard pre-solicitation checklist pursuant to the  Joint Explanatory Statement accompanying of the National Defense  Authorization Act for Fiscal Year 2015, we met with officials from  USD(AT&L) Office for Defense Procurement and Acquisition Policy  (DPAP) and the Departments of the Air Force and Navy.

To assess the extent to which DOD components have developed plans  and processes to use the inventory to inform management decisions  pursuant to subsection (f), we used the data we collected for our  November 2014 report on this issue to establish the extent to which each  military department’s strategic workforce planning, manpower mix, and  budgeting guidance and documentation required or cited the use of the  inventory of contracted services. We then interviewed officials from each  military department to determine what updates, if any, had been made to  those policies and procedures. We also interviewed acquisition and  manpower officials at the three military departments to assess the status  of the military departments’ plans to appoint an accountable official to  facilitate efforts to develop a plan and enforcement mechanisms pursuant  to subsection (f).

We also assessed DOD’s efforts to develop a common contractor  manpower reporting application by interviewing officials from USD(P&R)  and the Defense Manpower Data Center (DMDC), reviewing briefing  slides resulting from the December 2014 strategic review of options, and  reviewing meeting minutes from a work group charged with developing  such a system.

To assess the completeness of the data from the Contractor Manpower  Reporting Application (CMRA) systems, we reviewed policy and guidance  for the system. In addition, we identified officials responsible for verifying  CMRA data based on our selected contract actions. We also selected six  contractors associated with the contracts in our sample—three large  businesses and three small businesses—to discuss the data entry and  data verification processes. In addition, we compared data from FPDS- NG for the 30 service contracts with the highest obligations from October  2012 through July 2013 at the Army, Navy, and Air Force to determine  the extent to which contractors reported direct labor hours and invoice  amounts for these contracts into CMRA. We did not independently assess  the data provided by contractors.

We conducted this performance audit from December 2014 to November  2015 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 audit objectives. We believe that  the evidence obtained provides a reasonable basis for our finding and  conclusions based on audit objectives.

Appendix II: Comparison of Components’ Identification of Contractors Providing Services Closely Associated With Inherently Governmental Functions in their Fiscal Year 2011, 2012, and 2013 Certification Letters

The Navy did not identify the number  of FTEs, but noted they had 25  contracts that contained these  functions.

The agency did not identify the number  of FTEs, but noted they had contracts  that contained these functions.

The agency did not identify the number  of FTEs, but noted that they had  contractors performing these functions.

The agency did not identify the  number of FTEs in current contracts,  but noted they had one contract that  contained these functions.

The agency did not identify the number  of FTEs, but noted that 4.5 percent of  their sample of more than 50 percent  of contract actions contained these  functions.

The agency did not identify the  number of FTEs in current contracts,  but noted they have one contract that  contained these functions.

Did not report  Did not report  84  2011  The agency did not identify the number  of FTEs, but noted that several  contracts contained these functions.

The agency did not identify whether  they had any contract actions that  contained these functions.

The components did not identify the  number of FTEs, but reported that 24  out of 950 contracts consolidated from  the three components had contractors  performing these functions.

The activity did not identify the number  of FTEs, but stated that some  contracts contained these functions  The commands did not identify the  number of FTEs, but noted that “some  requirements” contained these  functions.

Did not report  Did not report  As of September 2015, the Test Resource Management Center has yet to provide a certification  letter for the fiscal year 2013 inventory.

Appendix III: Summary of Prior Findings on the Military Departments’ Implementation of Plans to Facilitate Use of the Inventory

Strategic Workforce Planning, Workforce Mix, and Insourcing Guidance Decisions Generally Did Not Require the Use of the Inventory

The Under Secretary of Defense for Personnel and Readiness  (USD(P&R)) has overall responsibility for developing and implementing  DOD’s strategic workforce plan to shape and improve DOD’s civilian  workforce, including an assessment of the appropriate total force mix.  USD(P&R) issued guidance that designated responsibility for the  development of the strategic workforce plan to the Deputy Assistant  Secretary of Defense for Civilian Personnel Policy, but did not require use  of the inventory. This guidance pre-dates the statutory requirement to use  the inventory to inform strategic workforce planning. For example, the  Fiscal Years 2013-2018 Strategic Workforce Plan, the most recent plan  available at the time of our November 2014 review, stated that DOD’s  plans for identifying and assessing workforce mix will leverage the  inventory of contracted services, but it did not provide any additional  details on using the inventory.

None of the three military departments had developed a statutorily  required plan or enforcement mechanism to use the inventory of  contracted services and generally they had not developed guidance or  processes for these purposes (see table 5).

DOD had two department-wide policies for determining workforce mix— DOD directive 1100.4 and DOD instruction 1100.22—but neither required  the use of the inventory to inform workforce mix planning. DOD Directive  1100.4, dated February 2005, provided general guidance concerning  determination of manpower requirements, managing resources, and  manpower affordability. According to USD(P&R) officials, revisions to this  directive, which were under review during our November 2014 review,  would explicitly require use of the inventory to inform budgeting and total  force management decisions. DOD Instruction 1100.22, dated April 2010,  provides manpower mix criteria and guidance for determining how  individual positions should be designated based on the work performed.  This instruction did not direct the military departments to develop a plan to  use the inventory to inform management decisions, as DOD issued it  before the enactment of the requirement for developing such plans.

DOD’s primary insourcing guidance was reflected in April 4, 2008 and  May 28, 2009 memoranda. These memoranda reiterated statutory  requirements by calling for DOD components and the military  departments to use the inventory of contracted services to identify  functions for possible insourcing and to develop a plan for converting  these functions within a reasonable amount of time. Among the military  departments, however, only the Army had guidance and a process that  requires use of the inventory of contracted services for insourcing.  However, the military departments had not issued guidance for managing  workforce mix that requires the use of the inventory of contracted services  (see table 6).

Programming and Budget Decisions Generally Did Not Require the Use of the Inventory, Though Data on Estimated Contractor FTEs Are Included in the Budget

DOD’s Financial Management Regulation provided, among other things,  guidance to the military departments on budget formulation and  presentation; however, these regulations did not require the military  departments to use the inventory in formulating and presenting their  budgets. At the military department level, the Air Force had issued  additional instructions in terms of budget formulation and presentation.  However, the Air Force’s guidance did not require the use of the  inventory.

The Comptroller issued supplemental guidance requiring, among other  things, that the military departments and defense components provide  information on the number of FTEs as required under 10 U.S.C. § 235,  but this guidance did not require reporting the amount of funding  requested for contracted services. The Comptroller guidance for budget  submissions from all components had remained similar for the past three  fiscal years, instructing DOD components to ensure that contractor FTEs  reported in the budget exhibit were consistent with those in the DOD’s  inventory of contracted services. Both Navy and Air Force officials  reported that they used the inventory of contracted services to estimate  the number of contractor FTEs for inclusion in their budget request. The  Army budget office did not have a process to use the inventory to inform  budgeting and could not identify how the Army estimated FTEs in the  Army’s budget submission (see table 7).

DOD’s Inventory of Contracted Services  GAO, Defense Contractors: Additional Actions Needed to Facilitate the  Use of DOD’s Inventory of Contracted Services, GAO-15-88  (Washington, D.C.: November 19, 2014).

GAO, Defense Acquisitions: Update on DOD’s Efforts to Implement a  Common Contractor Manpower Data System, GAO-14-491R  (Washington, D.C.: May 19, 2014).

GAO, Defense Acquisitions: Continued Management Attention Needed to  Enhance Use and Review of DOD’s Inventory of Contracted Services,  GAO-13-491 (Washington, D.C.: May 23, 2013).

GAO, Defense Acquisitions: Further Actions Needed to Improve  Accountability for DOD’s Inventory of Contracted Services, GAO-12-357  (Washington, D.C.: April 6, 2012).

GAO, Defense Acquisitions: Further Action Needed to Better Implement  Requirements for Conducting Inventory of Service Contract Activities,  GAO-11-192 (Washington, D.C.: January 14, 2011).

GAO, Defense Acquisitions: Observations on the Department of Defense  Service Contract Inventories for Fiscal Year 2008, GAO-10-350R  (Washington, D.C.: January 29, 2010).

DOD Service Contracting and Workforce  GAO, DOD Contract Services: Improvements Made to Planning and  Implementation of Fiscal Controls, GAO-15-780 (Washington, D.C.:  September 30, 2015).

GAO, DOD Contract Services: Improved Planning and Implementation of  Fiscal Controls Needed, GAO-15-115 (Washington, D.C.: December 11,  2014).

GAO, Human Capital: DOD Should Fully Develop Its Civilian Strategic  workforce Plan to Aid Decision Makers, GAO-14-565 (Washington, D.C.:  July 9, 2014).

GAO, Human Capital: Opportunities Exist to Further Improve DOD’s  Methodology for Estimating the Costs of its Workforces, GAO-13-792  (Washington, D.C.: September 25, 2013).

GAO, Human Capital: Additional Steps Needed to Help Determine the  Right Size and Composition of DOD’s Total Workforce, GAO-13-470  (Washington, D.C.: May 29, 2013).

GAO, Managing Service Contracts: Recent Efforts to Address Associated  Risks Can Be Further Enhanced, GAO-12-87 (Washington, D.C.:  December 7, 2011).

GAO, Defense Acquisitions: Further Actions Needed to Address  Weaknesses in DOD’s Management of Professional and Management  Support Contracts, GAO-10-39 (Washington, D.C.: November 20, 2009).

GAO, Department of Defense: Additional Actions and Data Are Needed to  Effectively Manage and Oversee DOD’s Acquisition Workforce,  GAO-09-342 (Washington, D.C.: March 25, 2009).

Appendix V: Comments from the Department of Defense

Appendix VI: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Penny Berrier, Assistant Director;  Saquib Ahsan, Andrea C. Evans, Laura Greifner, Kristine Hassinger, Julia  Kennon, Caryn E. Kuebler, Jean McSween, Brian Smith, and Oziel  Trevino.

Question: What challenges does DOD face regarding its inventory of contracting services?

Answer: The Department of Defense (DOD) continues to face challenges in ensuring that it fully reviews its inventory of contracted services.

Question: What is the status of DOD's effort to impove this process?

Answer: As of September 2015, 35 of 37 components certified they had done so and generally addressed more of the review elements required by DOD guidance than in prior years. For the second consecutive year, however, the Air Force did not submit a certification letter.

Question: Why may component certification not mean that the problem is solved?

Answer: Further, components may be inaccurately reporting on the extent to which contractors were providing services that are closely associated with inherently governmental functions, a key review objective to help ensure that DOD has proper oversight in place.

Question: What did the Office of Federal Procurement Policy indicate regarding this issue?

Answer: The Office of Federal Procurement Policy indicates that certain contracted services—such as professional and management support—are more likely to include such functions.

Question: How do different military entities vary in the percentage of money obligated for these types of services?

Answer: In fiscal year 2013, the Army reported that nearly 80 percent of the $9.7 billion it obligated for these types of services included closely associated with inherently governmental functions. In contrast, the Navy and other DOD agencies reported about 13 percent of the $10.7 billion obligated for similar contracted services included such functions.

DOD Components’ Certification Letters Included More Required Information, but Reviews May Understate Contractors Performing Closely Associated with Inherently Governmental Functions

More Components Submitted Certification Letters Addressing All Required Elements than in Prior Years

DOD May Be Underreporting Contractors Performing Closely Associated with Inherently Governmental Functions during the Inventory Review

Appendix I: Objectives, Scope, and Methodology

Question: What may be causing inventory review processes to incorrectly report contracts?

Answer: GAO's review found that the lack of documentation on whether a proposed contract included such functions may result in inventory review processes incorrectly reporting these contracts.

Question: What led the GAO to this hypothesis?

Answer: At least 12 of the 28 contract actions GAO reviewed appear to include these functions, but—of those 12—DOD components identified only one prior to contract award and only two during the review process as such.

Question: Why is it important for DOD to correctly identify the status of the functions contractors?

Answer: Without accurate identification of the functions contractors are performing, DOD cannot be assured that proper oversight is in place or provide data on the activities and functions contractors are performing.

Initiatives Underway to Better Identify Contracts that Include Closely Associated with Inherently Governmental Functions Prior to Contract Award

Question: To what extent has DOD fulfilled its commitment to improve workfroce planning?

Answer: Military departments have not developed plans to facilitate the use of the inventory for workforce planning or budgetary decisions nor have they appointed an accountable official to help do so, as DOD previously stated they intended to do.

Question: What other problems have arisen within DOD?

Answer: Further, DOD has not outlined the relationships between a management support office, military departments, and other stakeholders to facilitate the collection and use of inventory data in decision-making processes.

Question: What do internal control standards suggest regarding what DOD  should do?

Answer: Internal control standards state that management should define key areas of authority and responsibility to achieve management objectives and to comply with laws.

Military Departments Have Not Developed Statutorily Required Plans or Addressed Challenges to Compiling and Using the Inventory

DOD Has Not Identified the Longer Term Relationships Between Its Planned Management Support Office and DOD Stakeholders Needed to Integrate Inventory Data into Decision-Making Processes

Question: Why is the DOD so important in the realm of contractor-provided services?

Answer: DOD is the government's largest purchaser of contractor-provided services.

Question: How is DOD required to assess its contractor functions?

Answer: In 2008, Congress required DOD to compile and review an annual inventory of its contracted services to identify the number of contractors and the functions contractors performed. In 2011, Congress required DOD to use that inventory to inform certain decision-making processes.

Question: What role has GAO played in this issue?

Answer: GAO has previously reported on the challenges DOD faces in compiling, reviewing, and using the inventory.

Background
Inventory Compilation Requirements

Question: What provision did Congress include for GAO?

Answer: Congress included a provision in statute for GAO to report on the required DOD reviews and plans to use these inventories.

Question: What were the two main aspects GAO report assessed within the DOD?

Answer: For this report, GAO assessed the extent to which DOD components (1) reviewed contracts and activities in the fiscal year 2013 inventory of contracted services and (2) developed plans to use the inventory for decision-making.

Question: In the creation of this report, what data did GAO analyze?

Answer: GAO reviewed relevant laws and guidance; 35 component inventory certification letters and 28 contract actions for services categorized as often supporting inherently governmental functions; and interviewed DOD acquisition, manpower, and programming officials.