In fiscal year 2005, DOD obligated nearly $270 billion on contracts for  products, research and development efforts, and services, such as for  information technology and management support. All indications are that this upward trend will continue. Aside from growth  in dollar value, there have also been changes in what DOD is buying. DOD’s new weapon system programs are expected to be the most  expensive and complex ever, and will consume an increasingly large share  of DOD’s budget. To illustrate, in the last 5 years DOD has doubled its  commitment to major weapon systems from $700 billion to $1.4 trillion. DOD is counting on these efforts to fundamentally transform military  operations. As overall obligations have increased, so has DOD’s reliance on the private  sector to provide services to fulfill DOD’s missions and support its  operations. Additionally, in recent years, federal agencies including DOD have moved  away from using in-house contracting capabilities and are making greater  use of existing contracts awarded by other agencies. Moreover, our work and that of some agency  inspectors general have uncovered instances of improper use of  interagency contracts, including issuing orders that were outside the  scope of the underlying contract, failing to follow procedures intended to  ensure best pricing, and failing to establish clear lines of accountability  and responsibility. At the same time that the amount, nature, and complexity of contract  activity has increased, DOD’s acquisition workforce has remained  relatively unchanged in size and faces certain skill gaps and serious  succession planning challenges. Sound Business Arrangements

I would like to turn now to briefly discuss some of DOD’s practices in  three areas—(1) competition and sound pricing; (2) incentivizing  contractors; and (3) contract oversight—that increase risks and  undermine DOD’s ability to establish sound business arrangements. In this case, we  found that the Army devoted twice as many contract dollars—nearly $495  million—to sole-sourced contracts for security guards at 46 of 57 Army  installations, despite the Army’s recognition that it was paying about   25 percent more for its sole-source contracts than for those it previously  awarded competitively. Incentivizing Contractors

Another element of a sound business arrangement is the fee mechanism  used to incentivize excellent contractor performance. In December 2005,  we reported that DOD gives its contractors the opportunity to collectively  earn billions of dollars through monetary incentives. Unfortunately, we  found DOD programs routinely engaged in practices that failed to hold  contractors accountable for achieving desired outcomes and undermined  efforts to motivate results-based contractor performance, such as    evaluating contractor performance on award-fee criteria that are not  directly related to key acquisition outcomes (e.g., meeting cost and  schedule goals and delivering desired capabilities to the warfighter);   paying contractors a significant portion of the available fee for what  award-fee plans describe as “acceptable, average, expected, good, or  satisfactory” performance, which sometimes did not require meeting  the basic requirements of the contract; and   giving contractors at least a second opportunity to earn initially  unearned or deferred fees. As a result, DOD has paid out an estimated $8 billion in award fees on  contracts in our study population, regardless of whether acquisition  outcomes fell short of, met, or exceeded DOD’s expectations. Contract Oversight

I would like to briefly discuss the third element of sound business  arrangements, DOD’s oversight of its service contracts. In  2005, we reported that DOD’s monitoring of nearly a third of the 90 service  contracts we reviewed was insufficient. Such examples illustrate the outcomes of poor acquisition  executions. DOD’s spending on goods and services has grown significantly since fiscal year  2000, and all indications are the trend will continue. DOD’s weapon systems acquisition and contract management processes have been  on GAO’s high-risk list for more than a decade. DOD obligated nearly $6.5 billion under letter contracts in fiscal year 2004.
Why GAO Did This Study

The Department of Defense's (DOD) spending on goods and services has grown significantly since fiscal year 2000 to well over $250 billion annually. Prudence with taxpayer funds, widening deficits, and growing long-range fiscal challenges demand that DOD maximize its return on investment, while providing warfighters with the needed capabilities at the best value for the taxpayer. DOD needs to ensure that its funds are spent wisely, and that it is buying the right things, the right way. In this testimony, GAO discusses (1) recent trends in DOD contracting activity and the environment in which this activity takes place, and (2) practices which undermine its ability to establish sound business arrangements, particularly those involving the selection and oversight of DOD's contractors and incentivizing their performance. This statement is based on work GAO has completed over the past 6 years covering a range of DOD acquisition and contracting issues. Some of these issues are long-standing. GAO has identified DOD contract management as a high-risk area for more than decade. With awards to contractors large and growing, DOD will continue to be vulnerable to contracting fraud, waste or misuse of taxpayer dollars, and abuse.

What GAO Found

DOD obligated nearly $270 billion on contracts for goods and services in fiscal year 2005, an 88 percent increase over the amount obligated in fiscal year 2000. All indications are that this upward trend will continue. Aside from growth in dollar value there have also been changes in what DOD is buying. DOD's new weapons system programs are expected to be the most expensive and complex ever and will consume an increasingly large share of its budget. In the last 5 years DOD has doubled its commitment to major weapon systems from $700 billion to $1.4 trillion, and DOD is counting on these efforts to fundamentally transform military operations. As overall obligations have increased so has its reliance on the private sector to provide services to fulfill DOD's missions and support its operations. Additionally, in recent years DOD has increased its use of existing contracts awarded by other agencies (i.e. interagency contracts). While this approach provides a number of benefits, our work, and that of some agency inspector generals, revealed instances of improper use, including issuing orders that were outside the scope of the underlying contract as well as failing to establish clear lines of accountability and responsibility. While the amount, nature, and complexity of DOD contract activity have increased, its acquisition workforce has remained relatively unchanged in size. At the same time, the acquisition workforce faces certain skills gaps and serious succession planning challenges. There are a number of DOD practices which undermine its ability to establish sound business arrangements. For example, with regard to competition and pricing, we recently found that the Army acquired guard services under authorized sole-source contracts at 46 of 57 Army installations, despite the Army's recognition that it was paying about 25 percent more for its sole-source contracts than for those it previously awarded competitively. Another element of a sound business arrangement is the fee mechanism used to incentivize excellent contractor performance. In December 2005, we reported that DOD gives its contractors the opportunity to collectively earn billions of dollars through monetary incentives. Unfortunately, we found DOD programs routinely engaged in practices that failed to hold contractors accountable for achieving desired outcomes and undermined efforts to motivate results-based contractor performance. As a result, DOD paid out an estimated $8 billion in award fees on contracts in our study population, regardless of whether acquisition outcomes fell short of, met, or exceeded DOD's expectations. DOD also increased its risk of poor acquisition outcomes by not assuring that another element of a sound business arrangement, contractor oversight, was sufficient. For example, in 2005 we reported that DOD's oversight on nearly a third of 90 service contracts reviewed was insufficient, in part because DOD failed to assign performance monitors.