	DOD Continues to Face Challenges in Employing Sound Practices When Contracting For and Managing Service Contracts

It is essential that DOD employ sound practices when using contractors to  support its missions or operations to ensure the department receives  value. Collectively,  these problems expose DOD to unnecessary risk and make it difficult for  the department to ensure that it is getting value for the dollars spent. Furthermore, DOD lacks basic data  about its service contracts that could help it determine how it contracts  for services and how reliant it is on contractors. For example, at this time,  the department does not have complete and accurate information on the  number of services contracts in use, the services being provided by those  contracts, the number of contractors providing those services, and the  number and types of contracts awarded. The absence of well-defined  requirements and clearly understood objectives complicates efforts to  hold DOD and contractors accountable for poor acquisition outcomes. These types of contract actions, known as undefinitized contract actions,  are used to meet urgent needs or when the scope of the work is not clearly  defined. In fact,  DOD decided to pay the contractor nearly all of the $221 million in  questioned costs after making a determination based on additional  information. Selected Contract Type and Business Arrangements Not Always Appropriate

When contracting for services, DOD has a number of choices regarding the  contracting arrangements to use. DOD reported that it obligated nearly $10 billion  under time-and-materials contracts in fiscal year 2005, acquiring, among  other services, professional, administrative, and management support  services. According to DOD, time-and- materials contracts are considered high risk for the government because  they provide no positive profit incentive to the contractor for cost control  or labor efficiency and their use is supposed to be limited to cases where  no other contract type is suitable. In 2007, we also reported that DOD needed to improve its management  and oversight of undefinitized contract actions (UCAs), under which DOD  can authorize contractors to begin work and incur costs before reaching a  final agreement on contract terms and conditions, including price. If surveillance is not conducted, is  insufficient, or not well documented, DOD is at risk of being unable to  identify and correct poor contractor performance in a timely manner. As a result, incoming contract administration personnel did not  know whether the contractors were meeting their contract requirements  effectively and efficiently and therefore were limited in their ability to  make informed decisions related to award fees, which can run into the  millions of dollars. These are  positive steps, but inconsistent implementation has hindered past DOD  efforts to address these high-risk areas. To improve outcomes on the  whole, DOD must ensure that these policy changes and others are  consistently put into practice and reflected in decisions made on  individual acquisitions. We have ongoing work assessing DOD’s efforts to  implement a service acquisition management approach, including its  development of a structure for reviewing its major services acquisitions, as  well as its use of different types of contract arrangements. The National Defense Authorization Act for 2008 required DOD to take  additional actions to improve its visibility over the department’s reliance  on services contractors as well as its management and oversight of its  services acquisitions. We have also made numerous recommendations over the past 10 years  aimed at improving DOD’s management and oversight of contractors  supporting deployed forces, including the need for (1) DOD-wide guidance  on how to manage contractors that support deployed forces, (2) improved  training for military commanders and contract oversight personnel, and  (3) a focal point within DOD dedicated to leading DOD’s efforts to improve  the management and oversight of contractors supporting deployed forces. DOD has recognized that it faces challenges with contract  management and the department has taken steps to address these  challenges, including those outlined in this testimony. While DOD  has generally agreed with our recommendations intended to improve  contract management, much remains to be done.
Why GAO Did This Study

In fiscal year 2008, the Department of Defense (DOD) obligated over $200 billion on contracts for services, which accounted for more than half of its total contract obligations. Given the serious budget pressures facing the nation, it is critical that DOD obtain value when buying these services. Yet DOD does not always use sound practices when acquiring services, and the department lacks sufficient people with the right skills to support its acquisitions. Although DOD has ongoing efforts to improve its planning, execution, and oversight of service acquisitions, many concerns that prompted GAO to put DOD contract management on its high-risk list in 1992 remain. The committee asked GAO to address challenges facing DOD in measuring the value from and risks associated with its contracting for services. This testimony provides an overview of key concerns GAO cited in its previous reports. Specifically it focuses on (1) challenges DOD faces in following sound contract and contracting management practices and (2) recent actions DOD has taken to improve its management of service contracting. GAO has made numerous recommendations over the past decade aimed at improving DOD's management and oversight of service contracts, but it is not making any new recommendations in this testimony.

What GAO Found

DOD continues to face challenges in employing sound practices when contracting for and managing service contracts. The department has obtained services based on poorly defined requirements, used inappropriate business arrangements and types of contracts, and failed to adequately oversee and manage contractor performance. For example: (1) DOD sometimes authorized contractors to begin work before reaching a final agreement on the contract terms and conditions, including price. These arrangements, known as undefinitized contract actions, are used to meet urgent need or when the scope of the work is not clearly defined. In July 2007, GAO reported that DOD paid contractors nearly $221 million in questioned costs under one of these arrangements. (2) In fiscal year 2005, DOD obligated nearly $10 billion for professional, administrative, management support, and other services under time-and-materials contracts--contracts that are high risk for the government because they provide no profit incentive to the contractor for cost control or labor efficiency. As such, their use is supposed to be limited to cases where no other contract type is suitable and specific approvals are obtained. However, DOD frequently failed to provide such justification, and GAO's findings indicated the contracts were often used for expediency. (3) In a 2008 review, GAO found that incomplete contract files at some Army contracting offices hindered incoming contract administration personnel's assessments of contractors to make informed decisions related to award fees, which can run into the millions of dollars. These challenges expose DOD to unnecessary risk and may impede the department's efforts to manage the outcomes of its service contracts. For example, the absence of well-defined requirements complicates efforts to hold DOD and contractors accountable for poor acquisition outcomes. Use of inappropriate contract types, in addition to other factors, can result in DOD not obtaining the best value for its contract spending. Finally, failure to provide adequate oversight makes it difficult to identify and correct poor contractor performance in a timely manner. While DOD has taken some actions to respond to GAO's recommendations and congressional legislation, inconsistent implementation has hindered past DOD efforts to address these high-risk areas. To improve outcomes on the whole, DOD must ensure that these policy changes and others are consistently put into practice and reflected in decisions made on individual acquisitions. In addition, DOD needs to develop basic data about its service contracts to help inform how it contracts for services and its reliance on these contractors. GAO continues to assess DOD's efforts to implement a service acquisition management approach and the department's management and oversight of contractors supporting deployed forces.