[Federal Register Volume 61, Number 63 (Monday, April 1, 1996)]
[Notices]
[Pages 14338-14346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7868]
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OFFICE OF MANAGEMENT AND BUDGET
Performance of Commercial Activities, OMB Circular No. A-76
AGENCY: Office of Management and Budget, Executive Office of The
President.
ACTION: Notice of Transmittal Memorandum No. 15, to the OMB Circular
No. A-76, ``Performance of Commercial Activities,'' ``Revised
Supplemental Handbook.''
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SUMMARY: The Office of Management and Budget (OMB) publishes its
revisions to the Supplemental Handbook issued as a part of its August
4, 1983, OMB Circular No. A-76, ``Performance of Commercial
Activities.'' Circular No. A-76 was
[[Page 14339]]
originally published in the August 16, 1983, Federal Register, at pages
37110-37116.
The Revised Supplemental Handbook seeks the most cost-effective
means of obtaining commercial support services and provides new
administrative flexibility in the Government's make or buy decision
process. The revision modifies and, in some cases, eliminates cost
comparison requirements for recurring commercial activities and the
establishment of new or expanded interservice support agreements;
reduces reporting and other administrative burdens; provides for
enhanced employee participation; eases transition requirements to
facilitate employee placement; maintains a level playing field for cost
comparisons between Federal, interservice support agreement and private
sector offers, and seeks to improve accountability and oversight to
ensure that the most cost effective decision is implemented. The
proposed revision improves upon existing guidance by clarifying
provisions that may have made the cost comparison process unnecessarily
difficult or lead to less than optimal outcomes.
DATES: The provisions of the Revised Supplemental Handbook are
effective March 27, 1996 and shall apply to all cost comparisons in
progress that have not yet undergone bid opening or where the in-house
bid has not yet otherwise been revealed.
AVAILABILITY: Copies of the Revised Supplemental Handbook may be
obtained by contacting The Executive Office of the President, Office of
Administration, Publications Office, Washington, DC 20503, at (202)
395-7332. This document is also accessible on the OMB Home Page. The
on-line OMB Home Page address (URL) is http://www.whitehouse.gov/WH/
EOP/omb
FOR FURTHER INFORMATION CONTACT: The Budget Analysis and Systems
Division, NEOB Room 6104, Office of Management and Budget, 725 17th
Street, NW., Washington, DC 20503, Telephone Number: (202) 395-6104,
Fax Number (202) 395-7230.
SUPPLEMENTARY INFORMATION: OMB received 26 comments in response to its
request for comments on proposed revisions to the Supplemental
Handbook, published in the October 23, 1995, Federal Register, page
54394: fifteen from Federal agencies; ten from industry or trade groups
and one from an employee organization. A summary of the substantive
agency and public comments and changes made to the Supplemental
Handbook is attached.
Alice M. Rivlin,
Director.
Attachment--Summary of Agency and Public Comments and Changes Made to
the OMB Circular A-76 Supplemental Handbook
Introduction
1. Americans want to ``get their money's worth'' and want a
Government that is more businesslike and better managed. The
reinvention of Government begins by focusing on core mission
competencies and service requirements. Managers must begin by asking
some fundamental questions, like: why are we in this business; has
industry changed so that our involvement or level of involvement is no
longer required; is our approach cost effective and, finally, assuming
the Government has a legitimate continuing role to play, what is the
proper mix of in-house, contract and interservice support agreement
resources.
2. The OMB Circular A-76 Revised Supplemental Handbook is designed
to enhance Federal performance through competition and choice. It seeks
the most cost effective means of obtaining commercial products and
support services and provides new administrative flexibility in the
Government's make or buy decision process. The revisions modify and in
some cases eliminate cost comparison requirements for recurring
commercial and interservice support agreement services; reduce
reporting and other administrative burdens; provide for enhanced
employee participation; ease transition requirements; provide a level
playing field, while recognizing the differences between Government and
private sector accounting and performance measurement systems, and seek
to improve accountability and oversight to ensure that the most cost
effective decision is, in fact, implemented.
3. The purpose of Circular A-76 is not to convert work to or from
in-house, contract or interservice support agreement performance.
Rather, it is designed to: (1) Balance the interests of the parties
involved, (2) provide a level playing field between public and private
sector offerors, and (3) encourage competition and choice in the
management and performance of recurring commercial activities. In
establishing common ground rules for public-public and public-private
competitions, the Revised Supplement protects the procurement process,
establishes a common baseline for cost and quality assessments, creates
certain ``good employer'' relationships for affected Federal and
contract employees and determines competitively who is best prepared to
do the work. It is designed to empower Federal managers to make sound
business decisions related to the provision of recurring product or
support service requirements.
Summary of Comments and Changes
1. Inherently Governmental Functions
Inherently governmental functions, as defined in the Office of
Federal Procurement Policy (OFPP) Policy Letter 92-1, ``Inherently
Governmental Functions'' (Federal Register, September 30, 1992, page
45096 and the Federal Register, January 26, 1996, page 2627
implementing the Policy Letter through the Federal Acquisition
Regulations at Sections 7.103, 7.105 and 7.500) are not subject to
performance by contract. Therefore, management decisions that involve
the transfer of inherently governmental work between agencies,
including interservice support agreements (ISSAs), are not subject to
the Circular or the Revised Supplemental Handbook. Likewise, decisions
involving business management practices, the development of joint
ventures, asset sales, the devolution of activities to State and local
governments, the termination of obsolete services or the decision to
exit an entire business line are not subject to the cost comparison
requirements of the Circular.
Agency and Public Comments: Several commenters suggested that
individual functions should be defined as either inherently
governmental or commercial. One commenter suggested that the revision
modifies the definition of what is inherently governmental by including
exemptions for certain activities from the cost comparison requirements
of the Circular. Although the draft proposed to update and expand the
list of commercial activities attached to the August 1983 Circular A-
76, the listing remains unchanged. OMB is not considering revisions to
the Circular itself nor is OMB revising OFPP Policy Letter 92-1. The
Circular's listing of commercial activities is illustrative. It is not
meant to be all-encompassing. Activities at a greater or lesser degree
of specificity may be considered commercial activities. Questions
regarding whether a function is or is not commercial or inherently
governmental may be forwarded to OMB for review.
The Supplement clarifies that certain commercial activities are
exempt from the cost comparison requirements of the
[[Page 14340]]
Circular and may be converted to or from in-house, contract or
interservice support agreements without cost comparison, for reasons
other than cost. Inherently governmental activities are not commercial
in nature, are not subject to the Circular and cannot be converted to
contract performance.
2. Reliance on the Private Sector
The Revised Supplement delegates to agency management additional
authority to determine the proper mix of in-house, contract and
interservice support agreement resources. While the Revision retains
the 1983 Supplement's requirements to contract new or expanded work,
unless a cost comparison is conducted to support conversion to in-house
or interservice support agreement performance, it also requires
conversion to contract only when it is cost effective. The decision to
conduct a cost comparison is itself within the agency's discretion.
Agency and Public Comments: Industry and trade group commenters,
generally, sought a ``reinvigorated'' policy statement of strict
reliance on the private sector. In their view, the Revision should
require or, at a minimum, permit the direct conversion of all
commercial activities to contract performance, without cost comparison.
Objections were made to the proposal to permit agencies to continue
their existing interservice support agreements for commercial
activities, without cost comparison.
OMB is not, at this time, considering changes to the Circular A-76
itself. The Circular requires reliance on the private sector when shown
to be economically justified. It does not require the conversion of in-
house work to contract, as a matter of policy, unless a cost
comparison, conducted in accordance with its Supplement, demonstrates
it to be in the best interests of the taxpayer.
3. Exemptions From Cost Comparison
The Circular itself exempts certain recurring commercial activities
from cost comparison, including: Mobilization requirements within the
Department of Defense, the conduct of research and development (R&D),
and direct patient care activities in Government hospitals or other
health facilities.
The Revision clarifies this policy to permit activities that are
exempt from cost comparison requirements of the Circular to be retained
in-house or converted to or from in-house, contract or interservice
support agreement performance, without cost comparison. The list of
functions exempted from cost comparison is expanded to include:
national security activities, mission critical core activities, and
temporary emergency requirements.
Agency and Public Comments: There was a general level of agreement
among all commenters that the addition of these functions to the list
of those exempt from cost comparison was needed and appropriate.
Several commenters took exception to the proposed 10 percent of total
FTE limit for ``core activities.'' The Revision removes this limitation
and, thereby, provides a significantly expanded level of administrative
flexibility to identify functions as ``core'' and exempt them from cost
comparison. In place of the 10 percent core limit, one commenter
requested the right to appeal agency determinations of their core
requirements and decision to convert from in-house to contract
performance on the basis of a core designation. This change has not
been made. The determination of a ``core'' function is, fundamentally,
a management decision.
4. Annual Inventory and Reporting Requirements
The revision eliminates required study schedules and quarterly
study status reporting, as unnecessary and administratively burdensome.
Agencies are, however, required to maintain an inventory of commercial
activities with information on completed cost comparisons.
Agency and Public Comments: There was general agreement that the
existing OMB inventory and reporting system was unnecessary and
administratively burdensome. In accordance with one commenter's
suggestion, all inventory requirements are now identified in Appendix
3. These requirements are consistent with the Department of Defense
Commercial Activity Inventory and Reporting System, to permit
Government wide aggregations of data by function and reason code. At
their discretion, civilian agencies should be able to duplicate the DOD
inventory and reporting system without significant time or expense.
5. Waivers
The 1983 Supplement permitted agencies to issue cost comparison
waivers, if effective price competition is available and a
determination is made that an in-house Most Efficient Organization
(MEO) has no reasonable chance of winning a competition with the
private sector. Agencies were not permitted to waive cost comparison
requirements to convert from contract to in-house performance and there
is no mention of waivers with respect to interservice support agreement
competitions.
The Revision broadens an agency's authority to waive cost
comparisons to convert to or from in-house, contract or interservice
support agreement, without cost comparison, if it is found that: (1)
The conversion will result in a significant financial or service
quality improvement and that the conversion will not serve to reduce
significantly the level or quality of competition in the future award
or performance of work or (2) there is a finding that the in-house or
contract (in the case of a possible conversion from contract to in-
house performance) offers have no reasonable expectation of winning a
competition. In general, if an agency undertakes a major independently
conducted business analysis and determines that significant savings--in
excess of the minimum differential--can be achieved by conversion or,
if significant performance improvements are likely, beyond what could
be reasonably expected from a reorganization of the current approach,
the agency may be justified in waiving the A-76 cost comparison. The
Revision clarifies that agency waivers, with supporting documentation,
are subject to public review and the A-76 administrative appeal
process. Finally, the Revision also formalizes OMB's waiver guidance on
DOD Base Closures and expands it to include commercial activities at
civilian agency locations that have announced a date-certain closure.
Agency and Public Comments: There was a general level of agreement
among all commenters that the authority to issue waivers needed to be
broadened to include the conversion of work to or from in-house,
contract or interservice support agreement. There was also a general
level of agreement that the waiver requirements of the 1983 Supplement
were too narrow--only one waiver having been issued in over 12 years.
Concern was expressed, however, for the organizational level authorized
to issue such waivers. Originally, the comment draft limited the waiver
decision to the Secretary. In response to a number of comments, the
authority to issue a cost comparison waiver may now be delegated to the
Assistant Secretary level. Within DOD, this authority may be further
delegated to the Assistant Service Secretaries. This delegation
facilitates the appeal of waiver decisions, which has also been
clarified in the Revision over the comment draft.
6. Employee Participation
The Revision provides additional guidance regarding the development
of
[[Page 14341]]
the Performance Work Statement, in-house management plan and cost
estimate. The Revision encourages agencies to consult with employees
and involve them at the earliest possible stages of the competition
process, subject to the restrictions of the procurement process and
conflict of interest statutes. Agencies are requested to afford
employees and private sector interests an opportunity to comment on
solicitations prior to the opening of bids. This will ensure that the
solicitation is complete and that all parties are treated fairly. The
Revision also affords additional time to interested parties to submit
cost comparison appeals.
Agency and Public Comments: There was very little comment or
disagreement on this issue. One commenter felt that it was particularly
important that the Revision clarify employee participation
opportunities. The 1983 Supplement was silent on this issue.
7. Performance Standards
The 1983 Supplement did not permit conversion decisions to be based
upon the comparison of performance measures or standards. The Revision
authorizes conversion to or from in-house, contract or interservice
support agreement performance, if an agency determines that performance
meets or exceeds generally recognized performance and cost standards.
Performance standard-based competitions must reflect the agency's fully
allocated costs of performance and must be certified as being in full
compliance with the Managerial Cost Accounting Concepts and Standards
for the Federal Government, Statement of Recommended Accounting
Standards Number 4, or subsequent guidance. The cost comparability
procedures described in the Revision, such as those related to fringe
benefit factors, will also be used in assessing performance against
these standards.
Agency and Public Comments: There was very little comment or
disagreement on this issue, although one commenter suggested that the
use of existing manuals to establish performance standards for Federal
employees is too new an idea. Performance measures and cost standards
are becoming more widely used to assess performance in government and
in the private sector. Indeed their development is required by the
Government Performance Results Act (GPRA). As noted by several
commenters, the difficulty lies in assuring that historical performance
measures are accurate and comparable. The Revision establishes required
levels of oversight and certification to ensure that a high degree of
comparability is reached. The question was raised whether performance
standard-based cost comparisons could be used in interservice support
agreement comparisons. The Revision clarifies the paragraph to note
that the answer is yes, but only when those standards are consistent
with the comparative costing rules of the Revision. This may require
some detailed analysis of industry standards and adjustments to
internal agency performance measures.
8. Conversions With Federal Employee Placement
The Revision authorizes the conversion of functions involving 11 or
more FTE to contract performance, without cost comparison, if fair and
reasonable prices can be obtained from qualified commercial sources and
all directly affected Federal employees serving on permanent
appointments are reassigned to other comparable Federal positions for
which they are qualified.
Agency and Public Comments: There was strong support and strong
opposition to this provision. One commenter suggested that no
conversions should be authorized without a cost comparison--even if all
Federal employees are placed in other comparable Federal positions. It
was suggested that this new administrative flexibility denies taxpayers
the benefits of a cost comparison and fails to accommodate public
employee interests. Short of eliminating this provision, OMB was asked
to assure the right to appeal such decisions and that placement be
limited to the commuting area. In contrast, another commenter objected
to the idea that failure to place a single employee could require a
cost comparison or otherwise delay a direct conversion to contract.
The provision has been modified to clarify that in addition to
assuring placement in ``comparable Federal positions,'' the conversion
to contract with placement and without cost comparison is limited to
competitive awards. These direct conversions to contract must retain
the benefits of full and open competition. In the absence of adverse
actions to Federal employees and similar to the policy of reliance on
the private sector for new starts and expansions, Federal managers
should be permitted to rely on the competitive dynamics of the private
sector.
The request to limit Federal employee placements to the commuting
area has been rejected. The request is too limiting and not in the
long-term best interests of either the Government, who has an interest
in redirecting important resources, or individual employees.
The comment draft admonished Federal managers not to modify,
reorganize or divide functions for the purpose of circumventing the
requirements of the Revised Supplement. One commenter further requested
the ability to appeal individual organizational changes. While the
Revision expands the appeal process to permit interested parties to
appeal not only costing questions, as permitted under the 1983
Supplement, but also general compliance issues, it does not permit
appeals of basic organizational decisions. The A-76 appeal process is
not a surrogate to resolve management-union complaints.
9. The 10 FTE or Less Rule
The 1983 Supplement's 10 FTE or less rule that permits the
conversion of a function to contract performance without cost
comparison--even with adverse employee impacts--is extended by the
Revision to the conversion of similarly sized activities to in-house or
interservice support agreement performance, without cost comparison.
Agency and Public Comments: One commenter suggested that the 10 FTE
or less threshold be raised to 50 FTE. This change would permit the
conversion of activities to or from in-house, contract or interservice
support agreement, without cost comparison and without placement
(adverse action would be authorized). This recommendation was not
accepted.
The 10 FTE or Less Rule is a recognition that there is a break-even
point where the cost of conducting the comparison is not likely to
outweigh the expected benefits. The 10 FTE or Less Rule has long been
accepted as a reasonable approximation of this point. The Revision does
not change this requirement. Based upon agency experience, we believe
that cost comparisons at the 11-50 FTE levels do result in significant
MEO and competition savings.
10. MEO Implementation
The Revision eliminates the 1983 Supplement's 180-day MEO
implementation requirement. The Revision requires agencies to develop a
transition plan for each competitive solicitation. This approach should
permit agencies to plan for employee placements and facilitate a more
orderly transition of work to or from in-house, contract or
interservice support agreement.
The Revision permits agencies to assume that current organizational
structures and wage grade systems reflect their MEO. A signed
certification is required and may be based upon an
[[Page 14342]]
number of reinvention initiatives. Certified MEO decisions are not
subject to appeal.
Agency and Public Comments: There was very little comment or
disagreement on the MEO implementation change. Taken in combination
with the Revision's new requirement to conduct Post-MEO Performance
Reviews, the provision permits for better employee and workload
transition planning.
Several commenters, however, asked for permission to consider
existing interservice support agreement reimbursable rates as fully
competitive costs, under the Circular, for purposes of comparisons with
the private sector. This change has not been made. In general, these
rates do not currently reflect the requirements of the CFO Act, GPRA or
the FASB, nor do they reflect the fringe benefits, liability, overhead,
depreciation, capital, contract administration, or other cost
adjustments necessary for a level playing field to exist, such as
Federal taxes. They are also often structured to permit the cross-
subsidization of one service to another within the agency's revolving
fund.
11. Cost Comparison Completion
The 1983 Supplement makes no mention of study completion time
frames. However, because functions could not be converted to contract
or in-house performance without a cost comparison, there has been an
incentive to never complete the cost comparison, if the desired outcome
is to maintain the status quo. The Revision requires agencies to report
to OMB on any study not completed within 18 months for single function
studies and 36 months for multi-function studies and the corrective
actions taken.
Agency and Public Comments: Several commenters objected to the
suggestion that A-76 cost comparisons (including the development of the
PWS and Management Plan) can or should be completed within 18 to 36
months. Other commenters objected that the time frames were too long
and did not reflect the 45-90 day average solicitation response times
required by most Government service support solicitations.
The required report is to OMB. It is not a requirement to complete
a study. However, where a study has not been completed, the agency must
explain what the problem is and what the agency is doing to assure that
study completion times will be reasonable. The analogy to the private
sector's solicitation response requirement is inappropriate, as the
Government is also developing historical workload and minimum
performance standard data. It is not expected that cost comparisons
conducted for possible conversion from contract to in-house performance
will require these longer time frames, as the workload and performance
measures are, generally, well developed.
12. Post-MEO Performance Reviews
Contracts are regularly inspected for performance and subjected to
financial audit. As a matter of accountability, the Revision requires
agencies to conduct Post-MEO Performance Reviews on not less than 20
percent of all functions retained or converted to in-house performance
as a result of a cost comparison. These reviews will confirm that the
MEO was properly estimated and implemented and that work is being
performed in accordance with the terms, quality standards and costs
specified in the PWS.
Agency and Public Comments: This proposal was found to be
insufficient by several commenters, while it was strenuously objected
to by several others. One commenter asked that the requirement be
eliminated as an additional and unnecessary administrative burden. The
name was changed from Post-MEO Performance Audit to Post-MEO
Performance Review to assuage concerns over the level of detail
required.
OMB is committed to ensuring that the cost comparison process is
fair and equitable. A major private sector complaint has been that
Government agencies ``buy-in.'' The problem is that the private sector
undergoes extensive contract performance inspections, evaluations, and
financial audits, while the in-house organization is currently subject
to none of these oversight reviews. It was urged that 100 percent of
all in-house cost comparison ``wins'' be subjected to Post-MEO Review.
There is, however, concern for the administrative burdens being imposed
by the Circular. Therefore, the Revision retains a 20 percent
requirement.
Several commenters suggested that if the MEO is found to be in
default, it should not be allowed to compete under a new solicitation.
This recommendation has not been accepted. The Revision calls for the
contracting officer to retreat first to the next low offeror, if
feasible. If retreat to the next low offeror (contract bid) is not
feasible, a new cost comparison is required. In retreating to the next
low offeror, a conversion to contract without additional cost
comparison is possible.
One commenter suggested that Post-MEO Reviews be announced in the
Commerce Business Daily. This recommendation has not been accepted
because it would be burdensome. To ensure compliance over time, the A-
76 inventory and reporting system will require agencies to prepare an
annual list of completed cost comparisons retained in-house or by
contract and the number of Post-MEO Reviews completed. This listings
will be made available to the public upon request.
One commenter asked whether failure to comply with the Transition
Plan implementing the MEO would be construed as a default. Changes have
been made to clarify that a significant failure to implement the
Transition Plan, such that it would invalidate the cost comparison,
would be considered a default. Another commenter suggested making the
review due one year after implementation of the MEO. The 180-day MEO
implementation requirement no longer exists and since the MEO may be
implemented via the transition plan establishing a hard date to conduct
the review is difficult. It must be completed within the cost
comparison period. The time frame for completing Post-MEO Performance
Reviews is left to the discretion of the agency, but must be within the
contract or cost comparison period.
13. The Streamlined Cost Comparison Alternative
In addition to the generic cost comparison methodology, a
streamlined cost comparison process has been developed for activities
involving 65 FTE or less. This approach avoids the cost comparison's
current reliance on the procurement process, until a final decision to
contract has been made. Within the policies and procedures laid out by
the Revision, existing contracts can be used to determine competitive
private sector costs.
Agency and Public Comments: The streamlined cost comparison
methodology was generally accepted and even widely acclaimed. The only
real disagreement centered on the size of functions that could be cost
compared using the approach, which was established in the comment draft
at not more than 50 FTE.
Several commenters asked that the threshold be unlimited or raised
significantly. OMB did not expect that either the private sector or the
unions would accept an unlimited streamlined approach, as it could be
applied to convert to or from in-house, contract or interservice
support agreement. One commenter, believing that most A-76 cost
comparisons to date have involved less than 50 FTE, suggested that all
such functions be required to use the Streamlined cost comparison
approach provided by the draft. This
[[Page 14343]]
recommendation was not accepted for the reasons noted above. Under the
streamlined approach and as a matter of equity, there is no opportunity
for the development of an in-house MEO, nor is there an opportunity for
the private sector to sharpen its competitive bid. The process relies
on current in-house and contract costs.
One commenter was concerned that contracting officers, as Federal
employees, might be inclined to select the more costly comparable
contracts, in order to give Federal employees a competitive advantage.
To mitigate against this possibility, it was suggested that industry
``input'' in the selection of comparable contracts is necessary. We
disagree. We are not prepared to make such an assumption nor is OMB
prepared to impose the additional administrative burdens implied by
such a process on the agencies. The contracting officer's selection of
comparable contracts--adjusted for scope and quality, are not subject
to appeal.
Two other important comments were received on this issue. First,
there was a request that a policy statement be included that it is the
policy of the Government to consolidate mutually supporting functions
to the extent possible, to achieve economies of scale. This
recommendation has not been accepted, because A-76 is not the place for
such a policy determination and should rather be left to agency
managers. It was also recommended that the section include a
prohibition on breaking functions down to permit the use of the
streamlined approach. Like the prohibition against modifications and
reorganizations to permit direct conversion to contract, the comment
draft has been revised to prohibit agencies from reorganizing
specifically to permit the use of a streamlined cost comparison.
14. Sector-Specific Cost Comparison Methodologies
The Revision provides sector-specific cost comparison methodologies
for aircraft and aviation services and for motor vehicle fleet
management services. Additional sector- specific cost comparison
methodologies are expected and interested parties are encouraged to
work with OMB on their development.
Agency and Public Comments: While comments were received in
response to the two industry cost comparison methodologies outlined in
the draft, there were no objections to the concept of sector-specific
cost comparisons or their development.
Initially, the General Services Administration (GSA) raised
concerns about the proposed cost comparison requirements for comparing
interservice support agreement performance of motor vehicle fleet
services. GSA was concerned that the requirement might conflict with
the GSA Administrator's statutory authorities regarding motor vehicles.
After further discussion, OMB and GSA agreed to jointly issue the
guidance in Appendix 7 on the conduct of these comparisons. Changes
were also made to the aircraft and aviation cost comparison methodology
to reflect cost accounting improvements suggested by industry and made
through the Interagency Committee for Aviation Policy (ICAP).
15. Costing Changes
a. Labor. Based upon the Air Force Management Engineering Agency
(AFMEA) man-hour availability report, the Revision increases the annual
available productive hours per Federal employee from 1744 hours to
1776. Fringe benefit factors are updated and expanded to include the
projected costs of retirement health benefits to the Government. The
standard retirement cost factor for the Federal Government's complete
share of the weighted CSRS/FERS retirement cost to the Government,
based upon the full dynamic normal cost of the retirement systems; the
normal cost of accruing retiree health benefits based on average
participation rates; Social Security; and Thrift Savings Plan (TSP)
contributions has been increased from 21.7 percent to the current
(1996) rate of 23.7 percent of base payroll for all agencies.
Agency and Public Comments: There was very little comment or
disagreement on the cost of labor or fringe. One commenter noted that
the number of productive military hours in a given year are not cited
and suggested that a 30 percent cost penalty be added to in-house bids
that assume continued or mixed military operations. The Revision has
been changed to require the Service's Comptroller to establish the
number of military productive hours in a year.
b. Material Costs. The escalation rates for supplies received from
GSA and DLA are removed. The escalation issues reflected in the 1983
Supplement are now reflected in the reimbursable rates used by these
agencies.
Agency and Public Comments: There was very little comment or
disagreement on the cost of materials.
c. Overhead. The inclusion of direct and indirect operations and
general and administrative overhead has long been an area that has led
to difficulty and controversy. This controversy has been aggravated by
the fact that the Supplemental Handbook requires, generally, the
calculation of the competitive costs of in-house MEO performance, not
the fully allocated cost of in-house (or contract) performance. In an
effort to resolve this problem and improve the integrity of the cost
comparison process, the Revision requires a standard overhead cost
factor of 12 percent of direct labor costs.
Agency and Public Comments: Industry and trade groups strongly
supported the standard overhead cost factor concept. It has been their
sense that agencies have significantly understated overhead in A-76
cost comparisons, generally. One commenter, recognizing the difference
between fully allocated costs and the comparative cost approach
utilized by the Supplement, suggested a rate of 15 percent instead of
the 12 percent in the comment draft. Agencies were either silent on the
issue, agreed, or agreed in principle but recommended a range of
alternative factors (ranging from 5 percent to 12 percent).
The Revision continues to require a 12 percent standard overhead
cost rate in each cost comparison. Within DOD, however, the Revision
distinguishes civilian from military overhead. DOD military overhead
will be established by the Service Comptroller. It should also be
reemphasized that the Revision permits any agency to submit data to
justify any one of a series of alternative agency-wide standard cost
factors to OMB for approval.
d. Cost of Capital. The 1983 Supplement did not require agencies to
consider the cost of capital in the development of their in-house cost
estimate, though such costs were effectively included in competitive
contract offers. The Revision requires that agencies include the cost
of capital for those assets purchased two years before or during the
cost comparison performance period and not provided to the contractor
as Government Owned and Contract Operated (GOCO) equipment or
facilities. Neither capital nor depreciation costs of GOCO facilities
and equipment are included in the cost comparison. This change is
designed to remove current incentives to delay cost comparisons while
new, more efficient equipment is acquired and to reflect the real costs
of new assets to the taxpayer.
Agency and Public Comments: There was very little comment or
disagreement on the limited inclusion of the cost of capital.
e. Severance Pay. The 1983 Supplement permitted agencies to
calculate severance at 2% of direct labor or as determined by a Mock
RIF. Based
[[Page 14344]]
upon the low actual severance rates incurred to date and to avoid the
significant administrative costs and delays attendant with conducting a
detailed Mock RIF, the comment draft would have restricted severance
costs added to the contract bid to 2% of labor costs.
Agency and Public Comments: Upon review, several commenters
suggested that the 2 percent severance factor is too low given current
downsizing efforts. Placement is getting more and more difficult and a
wider range of services are now being considered for conversion. It was
also noted that recent emphasis on interservice support agreements and
franchising will result in the elimination of additional placement
opportunities.
To accommodate these concerns, the Revision now uses a factor of 4
percent. Agencies may also develop agency-wide severance pay factors,
with associated documentation, for approval by OMB.
f. Contract Administration. The 1983 Supplement permitted agencies
to use a contract administration factor (Table 3-1) or more accurate
data. Again, in an effort to improve upon the integrity of the cost
comparison process and reduce the administrative burdens of conducting
a cost comparison, the Revision requires the use of Table 3-1, but the
factors have been increased for most studies. This approach balances
recent changes in Federal procurement regulations, that make contract
administration easier, with concern that proper oversight is achieved.
Agency and Public Comments: There was very little comment or
disagreement on the cost factor for contract administration.
g. Gain or loss on Assets. The 1983 Supplement permitted agencies
to add to the contract price the loss taken on any asset excessed, even
if the asset is used by the in-house MEO and not made available to the
contractor. The Revision does not permit any losses to be calculated on
any asset not included in the MEO. Assets used by the MEO and not made
available to the contractor can only be calculated as gains and
subtracted from the contractor's bid.
Agency and Public Comments: There was very little comment or
disagreement on this issue.
h. The minimum Differential. The minimum differential represents
three costs; (1) costs not specifically included in the in-house cost
estimate; (2) unknown morale and other disruption costs caused by a
conversion decision; and (3) a minimum level of estimated savings to
the taxpayer. The differential also applies to conversion to in-house
performance.
Agency and Public Comments: There was very little comment or
disagreement on the minimum differential, although one commenter
recommended its elimination. Initially, the draft provided for the
minimum differential to be set at 10 percent of the labor costs in line
1 of the cost comparison form. It was noted, however, that this
differential can become more and more burdensome as studies involve
larger groups of employees. For this reason the minimum differential is
capped for conversions to or from in-house, contract or interservice
support agreement performance at the lesser of 10 percent of in-house
personnel-related costs (Line 1) or 10 million over the performance
period. Whenever a cost comparison involves a mix of existing in-house,
contract, new or expanded requirements, or assumes full or partial
conversions to in-house performance, each portion is addressed
individually and the total minimum differential is calculated
accordingly.
I. Prorating of Asset Costs. The Revision provides that assets made
available to the contractor are eliminated from consideration in the
cost comparison. Only the remaining competitive costs of operations or
maintenance are included. Assets not made available to the contractor
are included at their depreciation values.
Agency and Public Comments: One commenter suggested that assets
used by more than one in-house activity should also be treated as a
common cost and not included in the Government's in-house estimate. The
problem is that conversion to contract or interservice support
agreement will change that asset's consumption rate. Equity requires
that all assets used by the MEO and not provided to the contractor be
treated as having value, particularly when the contractor must replace
those assets at a direct cost to that contractor's competitive offer.
16. Other Changes
Other changes in the Revised Supplement are designed to address
specific problems that have been raised over the years. These include
the following:
a. Interservice Support Agreements
The 1983 Supplement required agencies to conduct cost comparisons
with the private sector prior to entering into an interservice support
agreement (ISSA). The 1983 Supplement also required all existing
interservice support providers to cost compare their current operations
not later than September 30, 1987, or all related work would be
converted directly to contract performance.
The Revision clarifies policies regarding the use of interservice
support agreements and establishes revised cost comparison
requirements. ISSAs may offer agencies the opportunity to reduce costs
through economies of scale. As a result and to encourage agency
consideration of ISSAs, the Revision permits agencies to consolidate
existing, new or expanded work requirements to ISSAs, without cost
comparison, if that work is transferred prior to October 1, 1997, and
the consolidation does not result in a conversion of work to or from
contract performance and the conversion is not otherwise authorized by
the Revision. Effective October 1, 1997, the Revision will permit
agencies to continue and to renew existing ISSA agreements without cost
comparison. Agency heads may also consolidate support services into
new, intra-service revolving or franchise funds without cost
comparison--assuming that such a consolidation does not involve the
conversion of work to or from in-house or contract performance.
Effective October 1, 1997, and unless otherwise exempt from the cost
comparison requirements of the Circular, new or expanded interservice
support requests must be justified by a cost comparison. ISSAs that
have themselves, however, conducted a cost comparison with the private
sector may, at the customer agency's discretion, accept new or expanded
work without further cost comparison on the customer or provider
agency's part, until the provider agency's workload increases by 30
percent or 65 FTE, at which time another provider cost comparison is
required.
Agency and Public Comments: Reaction to proposed interservice
support agreement cost comparison requirements was as mixed as it was
strong. The industry and trade group commenters were opposed to the
cost comparison process outlined in the Revision, as weakening the
provisions of the 1983 Supplement, though it is recognized that the
1983 provisions were not complied with in practice. The Revision,
generally, only restricts the growth of these activities and then only
as determined by a cost comparison.
In contrast and with only one exception, Federal agencies were
equally opposed to any requirement to compete even new or expanded work
with the private sector, prior to initiating an interservice support
agreement. Agencies are concerned that requiring A-76 cost comparisons
for interservice support agreements will have a chilling effect upon
the efficient
[[Page 14345]]
use of such agreements. In the view of the several commenters, the
under-utilization of existing Government capacity is already cause for
concern. The agencies were also opposed to the inclusion of
depreciation, capital, contract administration costs and the minimum
differential, when comparing interservice support agreement costs with
agency or contract offers. More importantly, these commenters expressed
concern that the administrative flexibilities made available by ISSAs
will be lost if subject to A-76 administrative appeal.
To further full and open competition, OMB has, in large part, not
adopted these agency recommendations. Interservice support agreements
are designed to provide commercial activities, under contract and under
an agreed upon reimbursable rate. Existing ISSAs will continue at the
customers option. The Revision relies on competition to determine their
growth. It is inappropriate to simply displace a private sector offeror
by resorting to internal agreements. Concerns for administrative
flexibility are met by the Revision's use of exemptions, waiver
opportunities and the incentives created to encourage existing ISSAs to
compete directly with the private sector. Nevertheless, in an effort to
encourage agencies to consider ISSAs, the draft was changed to permit
agencies to consolidate work to ISSAs prior to October 1, 1997, without
a cost comparison.
One commenter that strongly agreed with the draft's outline and
requirements, also sought to have the Revision clarify what a proposing
agency needed to submit in response to a requesting agency's
solicitation and to clarify the requesting agency's right to reject an
ISSA proposal. These changes have been made. The requirement was also
clarified to permit Federal and State governments to provide and
receive services without cost comparison to meet emergency disaster
relief requirements.
Finally, several commenters suggested that a specific exception be
granted to inherently governmental activities, particularly interagency
contract administration services. As previously noted, inherently
governmental functions are not subject to the cost comparison
requirements of the Circular or this Supplement. The Revision
clarifies, however, that inherently governmental levels of contract
administration are not subject to the cost comparison requirements of
the Supplement.
b. Military Personnel
The 1983 Supplement provided that commercial activities performed
by military personnel were to be converted to civilian performance.
This resulted in a reluctance to cost compare certain activities. The
Revision permits the military Services to cost military personnel at
the composite rate issued by the DOD Comptroller and, if retained in-
house, would permit these activities to continue to be performed by
military personnel. This change does not, however, authorize the
conversion from in-house civilian to military personnel.
Agency and Public Comments: There was very little comment or
disagreement on this issue.
c. Source Selection
There have been complaints that the 1983 Supplement was too cost
determinative and that it relied too heavily on the low bid offeror.
The benefits of competition should be expressed in terms of the quality
of services and in terms of cost to the taxpayer. The problem has been
how the Government's quality of services will be evaluated and by whom,
when: (a) A Government agency itself has a vested interest in the
competition and (b) the best overall private sector offeror chosen from
among qualified and responsive offerors is not the low contract
offeror. Guidance is provided on the use of competitive negotiation or
source selection techniques in A-76 cost comparisons. The Revision
permits agencies to conduct cost comparisons and award to other than
the low private sector offeror.
Agency and Public Comments: The private sector, generally, raised
concerns regarding the use of ``best value'' contracts and the
inclusion of ``past performance'' in the selection process. While
recognizing that the Revision includes needed guidance on the use of
source selection and negotiated procurement in a cost comparison with a
vested Government interest, these commenters sought assurances that the
Government's in-house bid would also undergo a ``best value'' and a
``past performance'' evaluation. The problem, of course, is that the A-
76 process assumes that the selected private sector offeror will
compete with a duly authorized Government cost estimate. A costing
penalty that would assume that the in- house bid was not a good past
performer was suggested, but not quantified, or accepted.
A-76 has long assumed that in-house performance is acceptable and,
thus, the in-house bid has always been treated as a responsive,
responsible offer. This is not unlike what is done in the private
sector when a true make or buy decision is being analyzed. While it is
true that as much as 25 percent of a contractor's technical proposal
may be weighted for evaluation purposes for past performance, the
contractor's bid does not directly include past performance in
competition with the Government's cost estimate. The recommendation has
not, therefore, been accepted.
d. Appeals
Following a tentative waiver or cost comparison decision, the A-76
Administrative Appeals process is invoked. The procedure does not
authorize an appeal outside the agency or judicial review, nor does it
authorize sequential appeals.
The Revision extends the time frame that appeals may be submitted
from 15 working days to 20. The agency may extend the appeal period to
a maximum of 30 work days if the cost study is particularly complex.
Agency and Public Comments: One commenter placed great emphasis on
the appeals process and was generally supportive of the process
outlined by the Revision. Greater latitude in the range of issues that
are subject to appeal, clarification as to the right to appeal agency
waiver decisions, and for the right to appeal to an authority outside
of the agency was requested. The Revision was changed to clarify that
appeals may be made, based upon the factual information contained in
agency waiver justifications. Changes were also made to modify the
scope of eligible appeals to include: formal information denials,
instances of clear A-76 policy violations, and to clarify that
streamlined and sector specific cost comparisons were subject to
appeal.
Not accepted was a recommendation to permit appeals of agency
reorganizational decisions. The issue here is the establishment of an
agency's reorganization for the alleged ``purpose'' of violating the
Circular. The recommendation could potentially subject all
modifications and organizational changes to an A-76 appeal. Also not
accepted was a recommendation that appeals be decided by another
agency. The request to appeal to an outside agency was not accepted,
because it would be administratively burdensome and because experience
with the Circular has not shown intra-agency appeals to be flawed. We
should note, however, that the Revision raises the level of the appeal
authority above that provided in the 1983 Supplement. Finally, one
commenter requested authority to
[[Page 14346]]
appeal agency ``core'' determinations. This recommendation was not
accepted; these are non-appealable management decisions.
One commenter noted that the appeals procedures did not
specifically address the use of performance measures as permitted by
Part I, Chapter 1.C.7. An additional paragraph clarifying this point
has been included in the Revision.
Another commenter suggested that the private sector should be able
to initiate a cost comparison requirement and, further, appeal any
agency decision to dismiss private proposals to contract out or conduct
a cost comparison. This recommendation was not accepted. The decision
to conduct a cost comparison, like other management decisions, is left
to the agency's discretion without appeal. While vendors may make
proposals to agency mangers to contract out and may identify ways to
reduce cost or overhead and improve services, there is no
administrative recourse provided by this Supplement, if the agency opts
not to conduct a study.
e. Right of First Refusal
The concept of the Right-of-First-Refusal was first established by
the 1979 Supplemental Handbook. This concept holds that, as a condition
of contract award, the contractor in an A-76 decision to convert from
in-house to contract performance shall provide adversely affected
Federal employees the ``Right-of-First-Refusal'' for jobs created in
the contractor's organization as a result of the award of the contract.
The Revision reaffirms this as a superior requirement, while
incorporating E.O. 12933, ``Non- Displacement of Qualified Workers
Under Certain Contracts,'' dated October 20, 1994, which extends the
Right-of-First-Refusal to existing and to subsequent contract employees
in this or follow-on contracts.
Agency and Public Comments: There was no comment on this issue.
[FR Doc. 96-7868 Filed 3-29-96; 8:45 am]
BILLING CODE 3110-01-P
