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entitled 'Interagency Contracting: Franchise Funds Provide Convenience, 
but Value to DOD is Not Demonstrated' which was released on July 29, 
2005. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

July 2005: 

Interagency Contracting: 

Franchise Funds Provide Convenience, but Value to DOD is Not 
Demonstrated: 

GAO-05-456: 

GAO Highlights: 

Highlights of GAO-05-456, a report to congressional committees: 

Why GAO Did This Study: 

The Department of Defense (DOD) is the largest user of other federal 
agencies’ contracting services. The availability of these contracting 
services has enabled DOD and other departments to save time by paying 
other agencies to award and administer contracts for goods and services 
on their behalf. DOD can access these contracting services a number of 
ways, such as ordering directly from interagency contracts for commonly 
needed items. DOD also can pay someone else to do the work. For 
example, DOD uses franchise funds, which are government-run, fee-for-
service organizations that provide a portfolio of services, including 
contracting services. As part of a congressional mandate, GAO assessed 
whether franchise funds ensured fair and reasonable prices for goods 
and services, whether DOD analyzed purchasing alternatives, and whether 
DOD and franchise funds ensured value by defining contract outcomes and 
overseeing contractor performance.

What GAO Found: 

GovWorks and FedSource, two of the franchise funds that DOD has relied 
on for contracting services, have not always ensured fair and 
reasonable prices while purchasing goods and services. The franchise 
funds also may have missed opportunities to achieve savings from 
millions of dollars in purchases, including engineering, 
telecommunications, or construction services. In the course of its 
review, GAO examined $249 million worth of orders and work assignments 
from the contracts the franchise funds used to make purchases on DOD’s 
behalf. In many cases, GovWorks sought but did not receive competing 
proposals. GovWorks added substantial work—as much as 20 times above 
the original value of a particular order—without determining that 
prices were fair and reasonable. FedSource generally did not ensure 
competition for work, did not conduct price analyses, and sometimes 
paid contractors higher prices for services than established in 
contracts with no justification provided in the contract files. 

For its part, DOD—in the absence of clear guidance on the proper use of 
other agencies’ contracting services—chose to use franchise funds on 
the basis of convenience without analyzing whether using franchise 
funds’ contracting services was the best method for meeting purchasing 
needs. DOD also lacks information about purchases made through other 
agencies contracts, including franchise funds, which makes it difficult 
to make informed decisions about the use of these types of contracts. 
The franchise funds’ business-operating principles require that they 
maintain and evaluate cost and performance benchmarks against their 
competitors. However, the franchise funds did not perform analyses that 
DOD could have used to assess whether the funds deliver good value. The 
funds’ performance measures generally focus on customer satisfaction 
and generating revenues. These measures create an incentive to increase 
sales volume and meet customer demands at the expense of ensuring 
proper use of contracts and good value.

DOD and the franchise funds—which share responsibility for ensuring 
value through sound contracting practices such as defining contract 
outcomes and overseeing contractor performance—did not adequately 
define requirements. Without well-defined requirements, DOD and the 
franchise funds lacked criteria to measure contractor performance 
effectively. On a separate oversight-related issue, GAO found that the 
departments of the Interior and the Treasury—each of which has 
responsibility in the successful operation of the respective franchise 
funds—and the Office of Management of Budget have performed little 
oversight of GovWorks and FedSource.

What GAO Recommends: 

GAO recommends that DOD, the departments of the Interior and the 
Treasury, and the Office of Management and Budget improve the manner in 
which franchise funds are utilized to ensure value and to ensure 
compliance with procurement regulations. The agencies concurred with 
GAO’s recommendations and identified actions they have taken or plan to 
take to address them.

www.gao.gov/cgi-bin/getrpt?GAO-05-456.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David E. Cooper at (202) 
512-4125 or cooperd@gao.gov.

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Franchise Funds Did Not Always Ensure Fair and Reasonable Prices or 
Competitive Procedures: 

DOD Focused on Convenience and Did Not Pay Sufficient Attention to 
Analyzing Contracting Alternatives: 

DOD and Franchise Funds Did Not Pay Sufficient Attention to Defining 
Outcomes or Overseeing Contractor Performance: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Scope and Methodology: 

Appendix II: Franchise Fund Operating Principles: 

Appendix III: Overview of Contract Documents Used at GovWorks and 
FedSource: 

Appendix IV: Comments from the Department of Defense: 

Appendix V: Comments from the Department of the Treasury: 

Tables: 

Table 1: Steps to Purchase Good or Service through GovWorks or 
FedSource: 

Table 2: Contracting Methods Used by GovWorks or FedSource: 

Table 3: GovWorks Fiscal Year 2003 Orders: 

Table 4: FedSource Fiscal Year 2003 Projects Reviewed: 

Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions of 
Dollars): 

Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions of 
Dollars): 

Table 7: GovWorks Contract Documents Used to Define Desired Outcomes 
and Performance Criteria: 

Table 8: FedSource Contract Documents Used to Define Desired Outcomes 
and Performance Criteria: 

Figures: 

Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues: 

Figure 2: Example of Project for Which Army Paid FedSource 17 Percent 
In Fees and Markups: 

Abbreviations: 

DOD: Department of Defense: 

FAR: Federal Acquisition Regulation: 

GSA: General Services Administration: 

United States Government Accountability Office: 

Washington, DC 20548: 

July 29, 2005: 

Congressional Committees: 

In recent years, federal agencies have made increasing use of other 
agencies' contracting services to purchase goods and services in less 
turnaround time. Use of these services, generally referred to as 
interagency contracting, has enabled federal agencies to reduce the 
time they spend awarding and administering contracts in the face of 
acquisition workforce reductions and growing workloads. Although these 
services have grown rapidly and have helped streamline purchasing, 
using the many types of contracts demands a high degree of business 
acumen and contracting knowledge. Federal agencies can obtain 
contracting services through entrepreneurial, fee-for-service 
organizations, which are government-run but operate like businesses. 
Franchise funds are one such type of organization. 

We have reported on the challenges of using other agencies' contracting 
services and have cited the need to effectively manage this contracting 
environment. Indeed, we and the inspectors general of some federal 
agencies have found instances in which interagency contracts have been 
improperly used. Furthermore, we have reported that the agencies that 
provide and the agencies that use interagency contracting assistance-- 
such as franchise funds--should be subject to improved oversight and 
controls, clearer lines of accountability, and better policies, 
processes, and implementation. It is for these reasons that we have 
designated management of interagency contracting as a governmentwide 
high-risk area.[Footnote 1]

The Department of Defense (DOD) is the largest customer for other 
agencies' contracting services for purchases, typically ranging from 
office supplies to information technology. Use of interagency contracts 
has allowed DOD to focus more of its contracting offices' time and 
attention on the acquisition of specialized, highly sophisticated 
defense equipment. DOD uses two franchise funds in particular to make 
purchases on its behalf--GovWorks, which is run by the Department of 
the Interior, and FedSource, run by the Department of the Treasury. In 
fiscal year 2004, DOD paid these franchise funds more than $1.2 billion 
for purchases of goods and services. (See figure 1.)

The Conference Report accompanying the National Defense Authorization 
Act for Fiscal Year 2004 directed us to report on DOD's use of 
franchise funds.[Footnote 2] We assessed (1) whether franchise funds 
ensured fair and reasonable prices for goods and services; (2) whether 
DOD analyzed alternatives to determine the best method for acquiring 
certain goods and services; and (3) whether DOD and franchise funds 
ensured value through other sound contracting practices, such as 
defining contract outcomes, and overseeing contractor performance. 

To fulfill these objectives, we examined DOD's largest projects that 
involved contracting assistance from GovWorks and FedSource in fiscal 
year 2003, the most recent year for which complete data were available 
at the time we were planning our review. We reviewed 17 projects, 
including the interagency contracts used, and orders and work 
assignments representing $249 million in fiscal year 2003 DOD funding. 
We interviewed DOD customers and officials at the two franchise funds 
and reviewed documentation to assess the contracting practices used to 
place orders for goods and services. The results of our review cannot 
be generalized to all types of interagency contracts that DOD and the 
franchise funds used; however, we believe we have sufficient 
information to make informed judgments on the matters in this report. 
Appendix I provides details on our scope and methodology. We conducted 
our work from June 2004 through June 2005 in accordance with generally 
accepted government auditing standards. 

Results in Brief: 

In providing contracting services to DOD customers, the GovWorks and 
FedSource franchise funds did not always obtain the full benefits of 
competitive procedures, did not otherwise ensure fair and reasonable 
prices, and may have missed opportunities to achieve savings on 
millions of dollars in purchases. In half of the GovWorks orders we 
reviewed, we found that GovWorks sought, but did not receive, competing 
proposals. In more than half of the orders, GovWorks requested that 
contractors perform substantial, additional work without determining 
that prices were fair and reasonable. FedSource generally did not 
ensure competition for work, did not conduct and document price 
analyses, and sometimes paid contractors higher prices for services 
than were justified. In addition, FedSource relied on administrative 
personnel who were not trained as contracting officers to ensure that 
potential contractors had opportunities to submit offers. 

In the absence of clear guidance on the proper use of other agencies' 
contracting services, DOD customers did not perform analyses of 
contracting alternatives and chose to use the franchise funds on the 
basis of convenience rather than as part of an acquisition plan. DOD 
also lacks basic information about purchases made through franchise 
funds. Without this data, it is difficult to assess whether franchise 
funds' contracting services provide DOD value. For their part, although 
franchise funds' business-operating principles require them to maintain 
and evaluate cost and performance benchmarks against their competitors, 
the funds did not perform analyses that DOD could use to assess whether 
the funds deliver good value. Their performance measures generally 
focus on customer satisfaction and generating revenues, rather than 
compliance with contracting regulations. The fee-for-service 
arrangement provides incentives to emphasize customer service to ensure 
sustainability of the contracting operation at the expense of proper 
use of contracts and good value. 

DOD, GovWorks, and FedSource paid little attention to sound contracting 
practices for which they shared responsibility to help ensure value: 
carefully defining contract outcomes and specific criteria against 
which contractor performance can be measured and providing effective 
contractor oversight. DOD customers did not provide franchise funds 
with detailed information about their needs. Without this information, 
the franchise funds did not translate DOD's needs into well-defined 
contract requirements that contained criteria to determine whether the 
contractor performed successfully. In the absence of well-defined 
outcomes, DOD, GovWorks, and FedSource lacked criteria to provide 
effective contractor oversight. Regarding a separate oversight issue, 
the oversight of GovWorks and FedSource themselves, we found that the 
departments of the Interior and the Treasury and the Office of 
Management of Budget, each of which has responsibility in the 
successful operation of these franchise funds, have performed little 
oversight. 

DOD and the franchise funds have undertaken a number of corrective 
actions during the course of our review. To enhance their initiatives, 
we are making recommendations to the Secretary of Defense to develop a 
methodology for determining whether franchise funds' contracting 
services are in the best interest of the government and to monitor and 
evaluate DOD's use of these services. We also recommend that the 
Secretaries of the Interior and the Treasury develop procedures and 
performance measures to ensure that franchise funds' contracting 
officers fulfill the requirements of procurement regulations while 
maintaining their focus on customer service. To improve oversight of 
franchise funds, we recommend that the Director of the Office of 
Management and Budget expand its monitoring and reporting to include 
franchise funds' contracting services and develop guidance to clarify 
roles and responsibilities of customers and franchise funds in the 
contracting process. In comments on a draft of this report, DOD, the 
departments of the Interior and the Treasury, and the Office of 
Management and Budget concurred with our recommendations and identified 
actions they have taken or plan to take to address them. Written 
comments from DOD and the Department of the Treasury are reproduced in 
their entirety in appendices IV and V, respectively. 

Background: 

Franchise funds are government-run, self-supporting businesslike 
enterprises managed by federal employees. Franchise funds provide a 
variety of common administrative services, such as payroll processing, 
information technology support, employee assistance programs, public 
relations, and contracting.[Footnote 3] This review focuses on DOD's 
use of the franchise funds' contracting services. Franchise funds are 
required to recover their full costs of doing business and are allowed 
to retain up to 4 percent of their total annual income. To cover their 
costs, the franchise funds charge fees for services. The Government 
Management Reform Act of 1994 authorized the Office of Management and 
Budget to designate six federal agencies to establish the franchise 
fund pilot program.[Footnote 4] Congress anticipated that the franchise 
funds would be able to provide common administrative services more 
efficiently than federal agencies' own personnel. The original 
operating principles for franchise funds included offering services on 
a fully competitive basis, using a comprehensive set of performance 
measures to assess the quality of franchise fund services, and 
establishing cost and performance benchmarks against their competitors-
-other government organizations providing the same types of 
services.[Footnote 5] Although there are five franchise funds currently 
in operation, DOD primarily uses two for contracting services-- 
GovWorks, operated by the Department of the Interior, and FedSource, 
operated by the Department of the Treasury. Figure 1 shows the revenues 
for GovWorks and FedSource and the percentage of revenue derived from 
doing business with DOD in fiscal year 2004. 

Figure 1: GovWorks and FedSource Fiscal Year 2004 Revenues: 

[See PDF for image]

Note: Revenues include the cost of the goods and services acquired and 
the franchise funds' service charges or fees. 

[End of figure]

Effective contract management requires specialized knowledge and 
careful attention to a range of regulatory requirements and contracting 
practices designed to protect the government's interests. In obtaining 
contracting services through a franchise fund, three main parties share 
responsibilities for ensuring that proper procedures are followed: 

* government customer--the program office or agency in need of a good 
or service;

* franchise fund--the federal entity that provides contracting 
services; and: 

* contractor--the vendor that provides the good or service desired by 
the government customer. 

DOD program officials are most familiar with the technical requirements 
for the goods and services they need. DOD contracting officers can 
place orders directly through many interagency contracts. 
Alternatively, DOD pays the franchise fund to assume many of the 
contracting responsibilities that normally would have been handled by 
DOD's contracting officers if the customers had relied on them to 
purchase the goods or services. Whether DOD makes purchases directly or 
through another agency, regulatory procedures and requirements are the 
same, such as ensuring competition, determining fair and reasonable 
pricing, and monitoring contractor performance. Table 1 shows the basic 
steps to acquire a good or service through GovWorks or FedSource. 

Table 1: Steps to Purchase Good or Service through GovWorks or 
FedSource: 

Step: 1; 
Organization: DOD customer; 
Actions taken: Identifies need for a good or service, sometimes 
develops government cost estimate, prepares a description of the goods 
and services needed, and sends it to franchise fund. 

Step: 2; 
Organization: GovWorks or FedSource; 
Actions taken: Provides DOD customer an estimated price for acquiring 
good or service. 

Step: 3; 
Organization: DOD customer; 
Actions taken: Commits funds to pay franchise funds for purchase of 
good or service, plus fee. 

Step: 4; 
Organization: GovWorks or FedSource; 
Actions taken: Chooses a contracting vehicle from among several types; 
develops order for good or service to be provided under an existing 
contract or develops a new contract, conducts competition. Awards 
contract to a winning contractor or places order against an existing 
contract. Designates a contracting officer's representative or a 
contracting officer's technical representative to conduct contractor 
oversight. GovWorks generally appoints a representative from the 
customer agency. 

Step: 5; 
Organization: Contractor; 
Actions taken: Performs or subcontracts work for DOD according to 
order. 

Step: 6; 
Organization: DOD customer; 
Actions taken: Conducts contractor oversight. 

Step: 7; 
Organization: Contractor; 
Actions taken: Submits invoice to franchise fund for work performed. 

Step: 8; 
Organization: GovWorks or FedSource; 
Actions taken: Pays contractor for work performed. 

Source: GAO analysis of GovWorks' and FedSource's procedures. 

[End of table]

GovWorks and FedSource can either make use of their own or other 
agencies' contracts, or they can develop new, customized contracts to 
satisfy a DOD customer's needs. GovWorks generally uses other agencies' 
contracts, and FedSource generally uses its own contracts. Table 2 
lists the various types of contracting methods the franchise funds use. 

Table 2: Contracting Methods Used by GovWorks or FedSource: 

Contracting method: GSA schedule; 
Description: Under the General Services Administration (GSA) schedule 
program, GSA negotiates contracts with vendors for a wide variety of 
goods and services at varying prices. These contracts permit other 
agencies to place orders directly with the vendors, providing agencies 
with a simplified process of acquiring goods and services while 
obtaining volume discounts. 

Contracting method: Indefinite delivery/indefinite quantity (ID/IQ); 
Multiple-award and single-award; 
Description: These contracts can be used to acquire goods or services 
when the exact date of future deliveries is unknown but a recurring 
need is likely to arise. One type of indefinite delivery contract is an 
indefinite quantity contract. Indefinite quantity contracts provide for 
an indefinite quantity, within stated limits, of supplies or services 
during a fixed period. The Federal Acquisition Regulation (FAR) states 
a preference for multiple-awards of indefinite quantity contracts, but 
award to a single vendor is also permitted. Almost all of the ID/IQ 
contracts we reviewed were multiple-award. 

Contracting method: Requirements; 
Description: Under a requirements contract, the government designated 
activity is expected to purchase all of its needs for specific products 
or services from the holder of the contract. 

Contracting method: Blanket purchase agreement; 
Description: This type of agreement provides a simplified method of 
filling anticipated repetitive needs for supplies and services, 
allowing agencies to establish ìcharge accountsî with qualified 
vendors. 

Contracting method: 8(a); 
Description: Under the 8(a) program, the Small Business Administration 
enters into contracts with federal agencies and lets subcontracts for 
performing those contracts to eligible firms. Small businesses that are 
owned by socially and economically disadvantaged individuals and 
certified by the Small Business Administration are eligible for these 
contracts. 

Source: GAO analysis: 

[End of table]

While use of other agencies' contracting services may offer convenience 
and efficiency, our prior work and that of some agency inspectors 
general have identified problems with the use of other agencies' 
contracting services, including lack of compliance with federal 
requirements for competition and lack of contractor oversight. In prior 
work, we found that increasing demands on the acquisition workforce and 
insufficient training and guidance are among the causes for these 
deficiencies.[Footnote 6] Two additional factors are worth noting. 
First, the fee-for-service arrangement creates an incentive to increase 
sales volume because revenue growth supports growth of the 
organization. This incentive can lead to an inordinate focus on meeting 
customer demands at the expense of complying with contracting policy 
and required procedures. Second, it is not always clear where the 
responsibility lies for such critical functions as describing 
requirements, negotiating terms, and conducting oversight. Several 
parties--the government customer, the agencies providing the 
contracting services, and, in some cases, the contractors--are involved 
with these functions. But, as the number of parties grows, so too does 
the need to ensure accountability. We have previously reported that 
ensuring the proper execution of the contracting process is a shared 
responsibility of all parties involved in the acquisition process and 
that specific responsibilities need to be more clearly defined. 

Franchise Funds Did Not Always Ensure Fair and Reasonable Prices or 
Competitive Procedures: 

GovWorks and FedSource did not always obtain the full benefits of 
competitive procedures, did not otherwise ensure fair and reasonable 
prices, and may have missed opportunities to achieve savings on behalf 
of DOD customers for millions of dollars worth of goods and services. 
With limited evidence that prices were fair and reasonable, GovWorks 
sometimes added millions of dollars of work to existing orders--as high 
as 20 times the original order value. In addition, we found limited and 
inconsistent evidence in the GovWorks and FedSource contract files we 
reviewed that the franchise funds sought to negotiate prices or 
conducted price analysis when required. DOD customers told us they were 
under the impression that franchise funds ensure competition and 
analyze prices. However, we found numerous cases in which these 
practices did not occur. 

Criteria: 

The FAR states that contracting officers must purchase goods and 
services from responsible sources at fair and reasonable prices. Price 
competition is the preferred method to ensure that prices are fair and 
reasonable. The FAR also includes special competition procedures for 
orders placed under the types of contracts the franchise funds use, 
including GSA schedules and multiple-award contracts. DOD's procurement 
regulations have additional procedures for ensuring competition when 
purchasing services from these types of contracts with certain 
exceptions--such as urgency or logical follow-on. For example, when 
ordering from GSA schedules, DOD procurement regulations require 
contracting officers to request proposals from as many contractors as 
practicable and receive at least three offers. If three offers are not 
received, a contracting officer must determine in writing that no 
additional contractors can fulfill the requirement. Alternatively, the 
contracting officer may provide notice to all schedule holders that 
could fulfill the requirement.[Footnote 7] When prices for the specific 
services being ordered are not established in the contract, the FAR and 
GSA ordering procedures require contracting officers to analyze 
proposed prices and to document that they are determined to be fair and 
reasonable. For example, when labor rates are established in the 
contract, relying on labor rates alone is not a good basis for deciding 
which contractor is the most competitive. The labor rates do not 
reflect the full cost of the order or critical aspects of the service 
being provided, such as the number of hours and mix of labor skill 
categories needed to perform the work. These procedures are designed to 
ensure that the government's interests are protected when purchasing 
goods and services. 

GovWorks: 

We reviewed 10 orders--totaling about $164 million in fiscal year 2003 
funding--in which GovWorks provided contracting services to DOD's 
customers. With the exception of two orders, which were placed against 
GovWorks' own contracts, the orders we reviewed were placed against GSA 
schedules. In 5 of the 10 cases, GovWorks sought, but did not receive, 
competing proposals as required for the types of contracts used. In 3 
of the 10 cases, GovWorks sought and received multiple proposals for 
the work. In the remaining 2 cases, GovWorks placed orders on a sole- 
source or single-source basis and provided relevant explanations, such 
as an urgent need for the work and an award to a small disadvantaged 
business. Table 3 provides details on these 10 orders, and additional 
information is available in appendix I. 

Table 3: GovWorks Fiscal Year 2003 Orders: 

GovWorks sought but did not receive competing proposals: 

Customer: Air Force Aging Landing Gear Life Extension Program; 
Type of service: Engineering; 
Contracting method: GSA Schedule; 
Number of proposals received: 1; 
Award made to incumbent contractor: Yes; 
Time frame to submit proposals (days): 14. 

Customer: Air Force Deputy Chief of Staff Air and Space Operations; 
Type of service: Professional; 
Contracting method: GSA Schedule; 
Number of proposals received: 1; 
Award made to incumbent contractor: Yes; 
Time frame to submit proposals (days): 4. 

Customer: Air Force Material Command; 
Type of service: Network hardware; 
Contracting method: Interior multiple-award; 
Number of proposals received: 1; 
Award made to incumbent contractor: Yes; 
Time frame to submit proposals (days): 5. 

Customer: Army National Guard Bureau Chief Information Office; 
Type of service: Professional; 
Contracting method: GSA Schedule; 
Number of proposals received: 1; 
Award made to incumbent contractor: No; 
Time frame to submit proposals (days): 13. 

Customer: Navy Program Executive Officer Information Technology; 
Type of service: Information technology; 
Contracting method: GSA Schedule; 
Number of proposals received: 1; 
Award made to incumbent contractor: Yes; 
Time frame to submit proposals (days): 8. 

GovWorks sought and received competing proposals: 

Customer: Army Chief Technology Office; 
Type of service: Information technology; 
Contracting method: GSA Schedule; 
Number of proposals received: 2; 
Award made to incumbent contractor: Yes; 
Time frame to submit proposals (days): 16. 

Customer: Army National Guard Bureau; 
Type of service: Information technology; 
Contracting method: GSA Schedule; 
Number of proposals received: 3; 
Award made to incumbent contractor: No; 
Time frame to submit proposals (days): 45. 

Customer: Army National Guard Bureau; 
Type of service: Telecommunications; 
Contracting method: GSA Schedule; 
Number of proposals received: 7; 
Award made to incumbent contractor: No; 
Time frame to submit proposals (days): 28. 

GovWorks placed sole-or single-source orders: 

Customer: Army Chief Information Office; 
Type of service: Information technology hardware; 
Contracting method: Interior 8(a); 
Number of proposals received: 1; 
Award made to incumbent contractor: No; 
Time frame to submit proposals (days): Not applicable. 

Customer: Army Program Manager Signals Warfare; 
Type of service: Logistics; 
Contracting method: GSA Schedule; 
Number of proposals received: 1; 
Award made to incumbent contractor: No; 
Time frame to submit proposals (days): Not applicable. 

Source: GovWorks (data); GAO (analysis). 

[End of table]

In the five cases for which GovWorks sought competing proposals but 
received only one proposal for each order, GovWorks allowed 2 weeks or 
less for proposals to be submitted. In four of these cases, orders were 
ultimately placed with incumbent contractors to fill requirements for 
ongoing programs. For example, when the Air Force's Office of the 
Deputy Chief of Staff Air and Space Operations sought a contractor to 
provide analytical services, GovWorks gave potential contractors 4 
days--around Christmas--to respond. The one contractor that responded 
was the incumbent and received the order, which totaled $63.4 million. 
When the Air Force's Aging Landing Gear Life Extension Program needed a 
contractor to provide services involving landing gear technology, 
GovWorks invited 17 contractors to submit proposals and posted the 
solicitation on the Internet allowing 14 days for proposals to be 
submitted. The incumbent contractor, which had provided services to the 
program since its inception in 1998, submitted the only proposal and 
received the order, which totaled $19.8 million. Each of these 5 orders 
was subject to the standards for obtaining competing offers for DOD 
orders, but in only the case of the Aging Landing Gear Life Extension 
Program did contract documentation indicate that GovWorks had attempted 
to meet Defense procurement regulations for ordering from GSA 
schedules. 

Our findings at GovWorks are consistent with our previous work on DOD's 
use of other agencies' contracts.[Footnote 8] In our prior work we 
found that the reasons only one contractor responded to opportunities 
to compete for work included a perception among potential contractors 
that incumbent contractors have an advantage in competing for ongoing 
work and that very short time frames to prepare proposals discouraged 
others from competing. In this review, we found GovWorks received 
multiple proposals for work when there was no incumbent contractor and 
longer time frames allowed for competition to occur. 

In the five cases in which competing proposals were sought but not 
obtained, we found limited evidence of price analyses in GovWorks' 
contract files.[Footnote 9] In four of these cases, orders were subject 
to GSA ordering procedures for services requiring a statement of work. 
In the fifth case, an Interior multiple-award contract, the FAR 
required price analysis. (See table 3.) Consequently, GovWorks should 
have determined that the total price was fair and reasonable. GovWorks 
told us that it had conducted analyses, but we found that the files 
generally included only brief statements that prices had been 
determined reasonable, and GovWorks generally could not provide us with 
documentation showing what data had been gathered or analyses conducted 
to support the conclusion for the cases we reviewed. 

In 6 of the 10 cases we reviewed, GovWorks added substantial work 
beyond what was originally planned without determining that prices were 
fair and reasonable. For example, GovWorks increased an original order 
20-fold by adding $45.5 million for management consulting services for 
the National Guard Bureau Chief Information Office. GovWorks modified 
another National Guard order on numerous occasions, this time 
increasing the value of the original order for an automated information 
system from $17.6 million to $44.6 million. An order for reconnaissance 
and surveillance flight support to Army combatant commands increased in 
value from $7.4 million to $34.9 million. The order was intended to 
provide support in Bosnia, for a period of 15 months with no option to 
renew, but was expanded to include operations in Colombia, and the 
period of performance was extended by more than 2 years. In each of 
these examples, GovWorks assigned the additional work without 
conducting price analyses to determine whether the prices charged were 
fair and reasonable. 

FedSource: 

We reviewed seven FedSource projects--amounting to $85 million in 
fiscal year 2003--and found that the franchise fund did not compete 
orders it placed under multiple-award contracts or perform analyses to 
ensure fair and reasonable pricing.[Footnote 10] FedSource commonly 
used multiple-award contracts to make purchases for DOD. When placing 
orders against multiple-award contracts, DOD is generally required to 
ensure that contract holders have a fair opportunity to submit an offer 
and have that offer fairly considered for each order with certain 
exceptions--such as urgency or logical follow-on.[Footnote 11] In 
addition, FedSource used Blanket Purchase Agreements and requirements 
contracts for some of the projects we reviewed. Table 4 provides detail 
on the seven projects, and additional information is available in 
appendix I. 

Table 4: FedSource Fiscal Year 2003 Projects Reviewed: 

[See PDF for image] 

Source: Department of Treasury (data); GAO (analysis). 

[End of table]

The FedSource business model involves a two-step process of placing an 
order under previously awarded contracts and subsequently developing 
work assignments to define requirements for that order. In the first 
step, contracting officers issue orders indicating the type and 
approximate dollar value of work that FedSource anticipates will be 
required under each contract. This estimated value is based on 
historical usage. The second step is executed later when DOD identifies 
its needs. At this point, FedSource administrative personnel define 
tasks and outcomes and assign work to a contractor. In our past work, 
we recommended that the FAR clarify that agencies should not award 
large, undefined orders against multiple-award contracts and 
subsequently define specific tasks.[Footnote 12] The FAR was revised to 
encourage agencies to define work clearly so that the total price for 
work could be established at the time orders are issued.[Footnote 13] 
Although this requirement was in effect for the period of our review, 
we found that FedSource routinely allowed modifications to orders 
through work assignments that substantially increased the total price 
of the orders. 

FedSource did not provide contractors the opportunity to submit offers 
for orders under multiple-award contracts and have their offers fairly 
considered, as required by the FAR. FedSource officials told us that 
their business model does not provide contractors the opportunity to 
submit offers on orders. Instead, FedSource officials told us that 
administrative personnel were responsible for providing contractors a 
fair opportunity to be considered for work under multiple-award 
contract orders when assigning specific work to contractors. However, 
we found this generally did not occur. Of the 120 work assignments we 
reviewed, 75 were for work under multiple-award contracts. We found 
that in most of the 75 work assignments, FedSource administrative 
personnel did not provide contractors this opportunity. For example, 
FedSource used one of these contracts to fill several individual 
support staff positions at Brooke Army Medical Center at Fort Sam 
Houston and generally assigned work to one of the three multiple-award 
contractors without providing the other two contractors an opportunity 
to be considered. Justifications accompanying these assignments stated 
that assigning work to more than one contractor might create conflict 
among assigned staff over variations in pay and benefits. The Army's 
Fort McCoy used FedSource to obtain contractor support for a variety of 
construction projects, and FedSource assigned the work noncompetitively 
for all 12 work assignments we reviewed to 1 of 3 multiple-award 
contract holders--totaling $7.2 million. The contract holder, a firm 
specializing in staffing, subsequently passed the work through to local 
construction companies that Fort McCoy officials had identified. 
Justifications accompanying some of the projects stated that the 
FedSource contracting officer's representative had determined that it 
was "in the best interest of the government to award task orders to the 
vendor that solicited and brought in the business." A FedSource quality 
review later concluded that these justifications were inadequate. Many 
months after the assignments were made, a second justification was 
placed in the contract files citing numerous reasons for selecting the 
preferred contractor. One of the reasons was that the project required 
expedited effort to support urgent requirements, which might have been 
an acceptable reason, except that the justification did not indicate 
that use of the other two contractors would have resulted in 
unacceptable delays. 

In another example, the Navy needed to fill several administrative 
positions at its 31 regional recruiting centers around the country. 
Under another purchasing arrangement,[Footnote 14] FedSource assigned 
the work to two contractors, one for recruiting centers east of the 
Mississippi River and the other for centers to the west of the river. 
These arrangements did not establish prices for any of the services 
provided, and FedSource personnel told us that they accepted the prices 
provided by the contractors. This type of purchasing arrangement does 
not justify purchasing from only one source--contracting officers are 
still required to solicit price quotations from other sources. However, 
there was no evidence FedSource personnel had negotiated or analyzed 
these prices. 

In addition, FedSource did not always demonstrate that prices were 
reasonable.[Footnote 15] For example, in two of the customer projects 
we reviewed, FedSource made work assignments for construction services 
at the Army's Fort McCoy and Fort Snelling against a contract for 
operational support. Because the original contract had a very broad and 
undefined statement of work that did not explicitly include 
construction, no prices for that type of work had been established in 
the contract. For the project at Fort McCoy, the contractor that 
received the assignment solicited prices from potential subcontractors 
and presented their price, including a markup, to FedSource. We did not 
find any analysis to determine that the contractor's price was 
reasonable in FedSource's files. FedSource officials told us that they 
have since awarded a separate contract for construction services. 

In four of the five projects involving staffing support, FedSource paid 
contractors higher prices for services than were established in the 
contract. Most of the files we reviewed contained no justifications for 
the higher prices. For example, in our review of 25 work assignments 
for staffing support services at an Army medical center, 14 of the work 
assignments were priced higher than the price established in the 
contracts. In 9 of these cases, FedSource had agreed to additional sick 
leave or vacation time as part of the hourly rate, but FedSource's 
contract file contained no documentation indicating that the contractor 
employee qualified for the additional benefits. 

DOD Focused on Convenience and Did Not Pay Sufficient Attention to 
Analyzing Contracting Alternatives: 

DOD did not follow sound management practices designed to ensure value 
while expeditiously acquiring goods and services. DOD customers chose 
to use franchise funds based on convenience, rather than as part of an 
acquisition plan. DOD conducted little analysis, if any, to determine 
whether using franchise funds' contracting services was the best method 
for acquiring a particular good or service. For their part, although 
franchise funds' business operating principles require that they 
maintain and evaluate cost and performance benchmarks against their 
competitors, they did not perform analyses that DOD could use to assess 
whether the franchise funds deliver good value. Their performance 
measures generally focus on customer satisfaction and generating 
revenues, rather than proper use of contracts and sound management 
practices. This focus on customer satisfaction and generating revenues 
provides an incentive to emphasize customer service rather than 
ensuring proper use of contracts and good value. 

DOD Selected Franchise Funds for Convenience with Limited Analysis of 
Alternatives: 

DOD customers told us that they did not formally analyze contracting 
alternatives but generally chose to pay GovWorks and FedSource to 
provide contracting services because the franchise funds provided quick 
and convenient service. Some customers were dissatisfied with the speed 
and quality of services provided by DOD's in-house contracting offices. 
For example, two DOD customers told us that their contracting offices 
required 9 months to respond to their purchasing needs, while the 
franchise fund required only a few weeks. The franchise fund's ability 
to place orders quickly was valuable to DOD customers in these 
situations. DOD customers said that franchise funds' contracting 
services were less restrictive than other DOD contracting alternatives. 
Some DOD customers told us that GovWorks and FedSource made it easier 
to spend funds at the end of a fiscal year unlike DOD's in-house 
contracting offices. Two DOD customers said that GovWorks made it 
easier to spend small amounts of funding because GovWorks would place 
orders incrementally as funding became available. Some DOD customers 
mentioned that using FedSource meant they did not have to "live with 
the terms and conditions" of a long term contract or that it was easier 
to replace problem contractor employees. In one case, we were told 
that, if the organization had to fill positions with government 
employees, it would have less flexibility to hire the personnel it 
needed in a timely manner. 

Analysis of contracting alternatives helps to ensure that purchases are 
made by the most appropriate means and are in DOD's best interest; 
however, DOD has no clear mechanism for making this determination when 
using other agencies' contracting services. DOD's guidance on the use 
of these vehicles has been evolving for several years and has not yet 
been fully implemented. DOD also lacks a means to gather data on the 
use of interagency contracts on a recurring basis, although it has been 
subject over the years to various requirements to monitor interagency 
purchases. In 2003, in response to a congressional mandate,[Footnote 
16] DOD was unable to compile complete data on spending through 
interagency contracts. DOD officials told us that their financial 
systems are not designed to collect this data. Without this type of 
data, it is difficult to make informed decisions about the use of other 
agencies' contracting services. DOD issued guidance in October 2004 
that requires the military departments and defense agencies to 
determine whether using interagency contracts--such as those the 
franchise funds manage--is in DOD's best interest. While this guidance 
outlines procedures to be developed, and general factors to consider, 
it does not provide specific criteria for how to make this 
determination and does not require military departments and agencies to 
report on the use of interagency contracts. DOD has directed the 
military departments and defense agencies to develop their own guidance 
to implement this policy. Congress has also recently taken action to 
ensure DOD's proper use of interagency contracts.[Footnote 17] The 
conference report accompanying this legislation established 
expectations that DOD's procedures will ensure that any fees paid by 
DOD to the contracting agency are reasonable in relation to work 
actually performed. 

In 2001, Congress adopted legislation requiring DOD to establish a 
management structure and establishing savings goals for the procurement 
of services.[Footnote 18] The legislation also requires DOD to ensure 
that contracts for services are entered into or issued and managed in 
compliance with applicable laws and regulations regardless of whether 
the services are procured by DOD directly or through a non-DOD contract 
or task order.[Footnote 19] One of the goals of this legislation was to 
allow DOD to improve the management of the procurement of services. 
However, DOD generally chose to use franchise funds for reasons of 
speed, convenience, and flexibility rather than taking a strategic and 
coordinated approach to acquiring services. We found that prior to 
choosing to use a franchise fund, DOD did not analyze costs and 
benefits or prepare business cases to determine whether the franchise 
fund provided better value--considering the fees it charges--compared 
with other alternatives, such as using a DOD contracting office or 
purchasing goods or services through another federal agency's existing 
contract. As a result, DOD customers did not consider opportunities to 
leverage their buying power when using franchise funds. None of the DOD 
customers we spoke to analyzed trade-offs between total price, 
including fees, and the benefits of convenience. For example, on a 
group of work assignments for construction services valued at $7.2 
million, the Army's Fort McCoy paid FedSource a total of about $1 
million, or 17 percent above the subcontractor's proposed price, for 
the contractor markup and the franchise fund fee. Most of these 
assignments were placed towards the end of the fiscal year. This may 
have led to a higher price for the services than DOD would have paid in 
contracting directly with the subcontractors. Figure 2 shows the 
general process by which the Army's Fort McCoy used FedSource to obtain 
contractor support for construction services. 

Figure 2: Example of Project for Which Army Paid FedSource 17 Percent 
In Fees and Markups: 

[See PDF for image]

[End of figure]

The DOD customer said that FedSource made it easier than his own 
contracting office to assign work with values greater that $25,000 late 
in the fiscal year because FedSource's deadlines were not as strict. He 
also speculated that the subcontractor probably would have charged more 
if contracting directly with the government because dealing with the 
government is cumbersome and costly. He did not have information to 
indicate what the subcontractor's price might have been, nor did he 
perform any formal analysis to compare FedSource with other contracting 
opportunities. 

Conducting a thorough analysis also might have given DOD a better 
understanding of the fees paid to make purchases through the franchise 
funds. For example, DOD customers sometimes paid a GovWorks fee, or 
service charge, on top of a fee to use another agency's contract 
because GovWorks generally uses other agencies' contracts to make 
purchases for DOD customers. While some customers were aware of the 
fees they paid, in two cases, DOD customers selected GovWorks because 
its fees were lower than fees charged by other agencies; however, the 
customers did not realize that GovWorks' fees were in addition to the 
other agencies' fees. GovWorks' fees generally ranged from 2 percent to 
4 percent of the price for goods and services purchased, and our 
analysis showed that FedSource fees ranged from 2 percent to 8 percent 
for the contracts and orders we reviewed. Congress has mandated that 
DOD agencies report fees paid for the use of other agencies' contracts 
in the past and required DOD to do so again for fiscal year 
2005.[Footnote 20]

Franchise Funds Emphasize Customer Service over Good Value: 

The franchise funds' business operating principles require that they 
maintain and evaluate cost and performance benchmarks against their 
competitors. However, they did not perform analyses that DOD could use 
to assess whether the franchise funds deliver good value. FedSource 
claims that it achieves lower prices on goods and services because it 
aggregates requirements and negotiates price discounts. Further, 
FedSource claims that competition with other contracting offices 
provides an incentive to provide better quality at lower cost. However, 
this incentive may not drive costs down unless customers are sensitive 
to the cost of doing business with one agency over another and make 
decisions based on costs. Franchise fund officials told us that 
demonstrating these advantages was difficult because they lacked 
insight into the prices customers would have paid when using other 
contracting alternatives to fill their requirements. FedSource 
officials also explained that quantifying the value of the other 
benefits they provide--such as convenience and flexibility--is 
difficult. Instead, GovWorks and FedSource have used such measures as 
growth in total contracting activity and revenues as well as customer 
satisfaction but have little data to demonstrate that they provide 
better quality and lower price goods and services than other federal 
contracting alternatives can provide. In fact, GovWorks marketing 
materials emphasize convenience and value-added service rather than 
costs. In our prior work, we found that fee-for-service contracting 
arrangements emphasize the overall sustainability of the contracting 
operation, as the fees collected are used to cover the costs of doing 
business, which may lead to a focus on customer service at the expense 
of compliance with contracting policy and procedures. 

DOD and Franchise Funds Did Not Pay Sufficient Attention to Defining 
Outcomes or Overseeing Contractor Performance: 

DOD, GovWorks, and FedSource did not follow federal contracting 
procedures designed to ensure value while expeditiously acquiring goods 
and services. DOD and the franchise funds did not define desired 
outcomes and the specific criteria against which contractor performance 
could be measured and paid limited attention to monitoring contractors' 
work. As we have reported previously, it is not always clear where the 
responsibility lies for such critical functions as describing 
requirements, negotiating terms, and conducting oversight. Although the 
FAR states that contracting officers are responsible for including 
appropriate quality requirements in solicitations and contracts and for 
contract surveillance, the franchise funds do not have sufficient 
knowledge about the DOD customers' needs to fulfill these 
responsibilities without the assistance of the DOD customer. Recently, 
the franchise funds contracting operations performed some internal 
reviews that have findings similar to ours, and the funds are working 
to address the problems. These shortcomings mirror many of the findings 
of our previous work and are among the reasons we have designated 
interagency contracting as a governmentwide high-risk area. 

GovWorks and FedSource Did Not Clearly Define Outcomes or Establish 
Criteria for Quality: 

In the GovWorks and FedSource cases we reviewed, required outcomes were 
not well-defined, work was generally described in broad terms, and 
orders sometimes specifically indicated that work would be defined more 
fully after the order was placed. GovWorks and FedSource files we 
reviewed lacked clear descriptions of outcomes to be achieved or 
requirements that the contractor was supposed to meet. 

The FAR states that contracting officers are responsible for including 
the appropriate quality requirements in solicitations and contracts. 
Without these criteria, accountability becomes harder to determine and 
the risk of poor performance is increased. Clear definition of 
requirements promotes better mutual understanding of the government's 
needs. In a typical situation, the customer--a DOD program office, for 
example--is best qualified to know what it needs. However, once a DOD 
program office chooses to pay a franchise fund to make purchases on its 
behalf, the office must then rely on the franchise fund to provide the 
contracting expertise. The two parties have to work together to ensure 
that requirements for purchases are well-defined with sufficient detail 
to determine whether the desired outcomes were met and the goods and 
services provided meet the government's needs. Critical information 
must be documented in order to make these determinations. GovWorks and 
FedSource use different processes, and the tables in appendix III 
explain some of the pertinent contract documents used to define desired 
outcomes and criteria. 

In 7 of the 10 GovWorks orders we reviewed, statements of work were 
very broad. For example, six of these orders contained language stating 
that specific tasks could be added, deleted, or redefined throughout 
the period of performance. In some cases, DOD program officials told us 
that the statements of work were broad because they were not aware of 
all requirements when the order was placed or because they were 
operating in a constantly changing technological environment. DOD 
program officials also told us that the broad statements of work gave 
them flexibility to add requirements to existing orders as additional 
needs arose. 

Orders placed by FedSource against its contracts contained only a very 
general statement--generally just a few words--describing the work in 
broad terms and an anticipated dollar value. These orders did not 
clearly describe all services to be performed or supplies to be 
delivered so that the full price for the work could be established when 
the order was placed, as required by the FAR. As noted earlier, 
FedSource officials explained that in their business model, orders were 
not intended to describe specific work to be completed. Instead, 
FedSource administrative personnel issued work assignments that were 
intended to provide the clear descriptions of desired outcomes that the 
orders did not. However, we found that these work assignments were 
often unclear as well. Five of FedSource's largest customer projects 
for DOD involved use of contracts to provide staff. Work assignments 
for staffing services often described the position to be filled, 
including a general outline of duties. However, the assignments did not 
contain criteria for evaluating the work performed by contract 
employees. 

In addition, when providing staffing support, FedSource uses these 
contracts to fill positions individually, rather than describing 
functional needs or desired results. For example, at an Army medical 
center FedSource filled over 200 positions individually instead of 
aggregating these positions into fewer functional requirements. This 
acquisition approach does not provide contractors with the flexibility 
to determine how best to staff a function and does not lend itself to a 
performance-based approach. Under performance-based contracting, the 
contracting agency specifies the outcome or result it desires and 
leaves it to the contractor to decide how best to achieve the desired 
outcome.[Footnote 21] FedSource officials said they were moving toward 
a more performance-based contracting approach. 

To determine whether an environment had been created that would allow 
improper personal services relationships to develop, we interviewed 
officials at five DOD program offices that used FedSource contracts to 
staff individual positions. We asked questions about the work performed 
by the contractor employees and the relationships between the DOD 
customers and the contractor employees. The DOD officials said that 
generally: the services provided by the contract employee were integral 
to agency functions or missions; the contractor employees were 
providing services comparable to those performed using civil service 
personnel; and the services were provided on site and with the use of 
equipment provided by the government. With regard to the work 
relationships, DOD customers told us that government employees assigned 
and prioritized daily tasks for the contractor employees. FedSource 
guidelines also state that the government customer is responsible for 
verifying contract employee hours worked by signing the contractor's 
weekly timesheet. Further, a FedSource internal review found that 
statements of work contained "personal services-type language like 
'under the direction of' or 'oversee' or 'duties' or 'job 
description.'" Our review also found documents that had been edited to 
revise similar language. FedSource officials were aware of the 
potential that these contracts might be used for personal services and 
took various steps to clarify that personal services were not to be 
provided. For example, FedSource officials provided training for DOD 
customers on how to avoid creating a situation that had the appearance 
of personal services. Although this training is a positive step, poorly 
defined statements of work provided the opportunity for situations to 
arise in which personal services relationships could develop. 

FedSource relied on administrative staff, not contracting officers, to 
work with the customer to define and assign the specific tasks to be 
performed or the positions to be filled. A FedSource review found that 
trained contracting staff was needed for developing task order 
requirements and warranted contracting officers were required for 
issuing task orders. The FedSource administrative employees do not have 
the same level of expertise as contracting officers, who have 
specialized knowledge to ensure compliance with federal regulations and 
guidelines. Inadequacies we found in FedSource's contracting practices 
pointed to the challenges of relying on administrative personnel rather 
than contracting experts to review statements of work, choose 
appropriate contracting vehicles, ensure adequate competition, and sign 
off on assignments of specific work. 

DOD Customers, GovWorks, and FedSource Did Not Specify Necessary 
Criteria for Contract Oversight: 

DOD customers, GovWorks, and FedSource often relied on methods of 
contract oversight that lacked performance measures to ensure that 
contractors provided quality goods and services in a timely manner. 
Typically, the franchise funds failed to include an oversight plan that 
contained specific quality criteria in their contracts or orders. 
Without this critical information, neither DOD nor the franchise funds 
could effectively measure contractor performance. 

The FAR and DOD's procurement regulations require contract surveillance 
and documentation that it occurred.[Footnote 22] Contract surveillance, 
also referred to as oversight, is a contracting officer's 
responsibility, and DOD pays the franchise fund to assume the 
responsibilities of contracting officers. The Office of Management and 
Budget's Office of Federal Procurement Policy has issued policy stating 
that contract oversight begins with the assignment of trained personnel 
who conduct surveillance throughout the performance period of the 
contract to ensure the government receives the services required by the 
contract.[Footnote 23] DOD guidance states that documentation 
constitutes an official record and the surveillance personnel assessing 
performance are to use a checklist to record their observations of the 
contractor's performance. The guidance also states that all performance 
should be documented whether it is acceptable or not.[Footnote 24]

The GovWorks contract files we reviewed generally did not include 
contractor monitoring plans, quality assurance surveillance plans, test 
and acceptance plans, or other evidence of monitoring activities. 
However, the files did contain evidence that a contracting officer's 
representative from the DOD program office had been appointed to assist 
in performing contractor oversight. Although ensuring that contract 
oversight occurs is a contracting officer responsibility, GovWorks 
officials told us that surveillance plans were not usually kept in the 
GovWorks contracting officers' contract files. Instead, these plans 
were maintained by the contracting officer's representative at the DOD 
customer agency. When we asked about contract oversight, we found that 
in the absence of an agreed upon oversight plan, DOD customers 
generally ensured that there was some process in place for monitoring 
performance. Some customers described status meetings and regular 
progress reports, but generally told us that they had no specific 
criteria for monitoring contractor performance or established measures 
for determining the quality of services. Although GovWorks officials 
told us that their contracting officers did assist customers in 
measuring quality services from the acquisition planning stages through 
contract completion, we found little evidence that this actually took 
place. 

We found that FedSource generally did not ensure that contractor 
oversight occurred. As was the case with GovWorks, FedSource officials 
told us that they encouraged DOD to develop criteria for quality. 
However, FedSource allowed general information--such as job 
descriptions--to serve as requirements, even though the job 
descriptions contained no criteria for measuring quality. These 
descriptions did not provide sufficient information to establish an 
oversight plan. FedSource did not appoint trained contracting officers' 
representatives from DOD to conduct on-site monitoring. Instead, 
FedSource relied on its own administrative personnel, who had been 
trained as contracting officers' technical representatives but were not 
located on-site with the customer, to assess contractor performance. 
Because they were not on-site, they could not observe the quality of 
the contractors' work, and FedSource generally took the absence of 
complaints from DOD customers as an indication that the contractor was 
performing satisfactorily. A FedSource official explained that 
FedSource guidelines state that the customer agency's acceptance of the 
contract employee's time sheet indicates agreement that services have 
met quality standards and requirements. This policy lacks clear 
criteria and measures to determine whether the contractor has provided 
quality services. In place of criteria, we found DOD customers said 
they generally evaluated performance of contractor staff based on 
informal observation and customer satisfaction. 

The lack of adequate oversight is consistent with what we have reported 
in our recent work on contractor oversight for DOD service contracts, 
where we found that almost all of those that had insufficient oversight 
were interagency contracts. DOD explained that contractor oversight is 
not as important to contracting officials as awarding contracts and 
does not receive the priority needed to ensure that oversight occurs. 
DOD concurred with our recommendations to develop guidance on 
contractor oversight of services procured from other agencies' 
contracts, to ensure that proper personnel be assigned to perform 
contractor oversight in a timely manner no later than the date of 
contract award, and that DOD's service contract review process and 
associated data collection requirements provide information that will 
provide management visibility over contract oversight.[Footnote 25]

Oversight of Franchise Funds Has Been Limited: 

Aside from monitoring the contractors' performance, we also found that 
the departments of the Interior and the Treasury, which operate 
GovWorks and FedSource, respectively, and the Office of Management and 
Budget have conducted infrequent reviews of franchise funds' 
procurement activities. GovWorks and FedSource have recently conducted 
internal reviews of their operations that have identified concerns 
similar to those we found. 

A GovWorks' 2004 Management Review identified such issues as lack of 
acquisition planning for work added to existing awards, unanticipated 
increases in the amounts of orders, and inadequate documentation of 
many requirements such as competitive procedures, determinations that 
changes were within the scope of the contract, the basis of award 
decisions, and that prices were fair and reasonable. FedSource 
officials recently started conducting "office assistance reviews." A 
June 2004 FedSource review identified lack of documentation, use of 
purchasing agreements beyond their intended parameters and dollar 
limits, lack of price analysis, lack of quality assurance plans, and 
the need for warranted contracting officers rather than administrative 
personnel to perform much of the work. 

While the operating principles for franchise funds require the funds to 
have comprehensive performance measures, these measures do not 
emphasize compliance with contracting regulations and generally focus 
on customer satisfaction, financial performance, and generating 
revenues to cover operating costs. Several customers we interviewed 
were unaware of compliance problems and told us that they believed the 
franchise funds placed orders on a competitive basis, analyzed prices, 
or otherwise sought to ensure the best deal for the government when the 
funds, in fact, did not. GovWorks has taken steps that address concerns 
raised in its own reviews, such as increased training for contracting 
officers, developing a written acquisition procedures manual, and 
creating a uniform system of contract file maintenance and sample 
documents to ensure adequate documentation. GovWorks officials also 
told us they are trying to improve competitive procedures by requiring 
all solicitations for DOD work to be posted on e-Buy, an online system 
to request quotes for products and services.[Footnote 26] FedSource 
also has taken steps toward addressing concerns raised in this report, 
such as quality assurance planning, hiring contracting officers, and 
restructuring its operations. These initiatives are underway, and it is 
too early to tell whether they will improve contracting operations at 
the franchise funds. 

The Office of Management and Budget's oversight of franchise funds has 
been limited. The Office of Management and Budget and the Chief 
Financial Officers Council established business-operating principles as 
a foundation for effective franchise fund management and, as required 
by the Government Management Reform Act, submitted an interim report on 
the franchise fund pilot program to Congress in 1998. Among other 
efforts, the report recommended that the franchise funds should 
continue to seek opportunities to provide services at the least cost to 
the taxpayer, contributing to reducing duplicative administrative 
functions and consequently to the costs of those functions. The report 
noted that the franchise funds' performance measures were in varying 
stages of development. The report recommended that the Office of 
Management and Budget should report to Congress on franchise fund 
activity prior to the expiration of the pilot authority and that the 
office should continue to develop and implement operating guidance for 
the franchise fund program. Although the Office of Management and 
Budget's budget examiners conduct some monitoring of franchise funds as 
part of their general oversight responsibilities, Office of Management 
and Budget representatives said they have not conducted any 
comprehensive reviews of franchise funds since they submitted the 
required report to Congress. Neither have they reviewed the funds' 
contracting practices. 

Conclusions: 

GovWorks and FedSource, created as a result of governmentwide 
initiatives to improve efficiency, have streamlined contracting 
processes to provide customers with greater flexibility and 
convenience. However, GovWorks and FedSource have not always adhered to 
competitive procedures and other sound contracting practices. They have 
paid insufficient attention to basic tenets of the federal procurement 
system--taxpayers' dollars should be spent wisely, steps should be 
taken to ensure fair and reasonable prices, and purchases should be 
made in the best interest of the government. One factor contributing to 
these deficiencies is that the departments of the Interior and the 
Treasury have not ensured that the franchise funds' contracting 
services follow the FAR and other procurement policies. The franchise 
funds need to develop clear, consistent, and enforceable policies and 
processes that comply with contracting regulations while maintaining 
good customer service. Another contributing factor is that the roles 
and responsibilities of the parties involved in the interagency 
contracting process are not always clearly defined. GovWorks and 
FedSource are ultimately accountable for compliance with procurement 
regulations when they assume the role of the contracting officer. 
However, they often depend on the customer for detailed information 
about the customer's needs. To facilitate effective purchasing and to 
help obtain the best value of goods and services, all parties involved 
in the use of interagency contracts have a stake in clarifying roles 
and responsibilities. Additionally, franchise funds sometimes face 
incentives to provide good customer service at the expense of proper 
use of contracts and good value. These pressures are inherent in the 
fee-for-service contracting arrangement. 

Because the franchise funds have not always adhered to sound 
contracting practices, DOD customers must be cautious when deciding 
whether franchise fund contracting services are the best available 
alternative. In addition to convenience and flexibility, decisions to 
use franchise funds should be grounded in analysis of factors such as 
price and fees. Further, to enhance DOD's ability to develop sound 
policies related to the use of franchise funds, DOD needs measurable 
data that would allow it to assess whether franchise funds' contracting 
services help lower contract prices, reduce administrative costs, and 
improve the delivery of goods and services. This information would also 
be useful in leveraging DOD's overall buying power through strategic 
acquisition planning. No one knows the total cost of using other 
agencies' contracting services. Without understanding total cost, value 
is elusive. In addition, DOD customers should ensure that taxpayers' 
dollars are spent wisely by sharing in the responsibilities for 
developing clear contract requirements and oversight mechanisms. DOD 
customers are the best source of information about their specific needs 
and are also best positioned to oversee the delivery of goods and 
services. 

Given the incentive to focus on sustaining the franchise funds' 
operations and the many service providers from which customers like DOD 
may choose, objective oversight would help to ensure that franchise 
funds adhere to procurement regulations and operate as intended. The 
Office of Management and Budget, which designated and has previously 
evaluated the franchise funds, is well positioned to periodically 
evaluate, monitor, and develop guidance to improve the franchise funds' 
contracting activities. 

Recommendations for Executive Action: 

While a number of actions to improve DOD's use of other agencies' 
contracting services are already underway, to enhance these 
initiatives, we make the following eight recommendations to DOD, the 
Interior, the Treasury, and the Office of Management and Budget. 

To ensure that DOD customers analyze alternatives when choosing 
franchise funds and to provide DOD with the measurable data it needs to 
assess the value of the franchise funds' contracting services, we 
recommend that the Secretary of Defense take the following three 
actions: 

* Develop a methodology to help DOD customers determine whether use of 
franchise funds' contracting services is in the best interest of the 
government. The methodology should include analysis of tradeoffs. 

* Reinforce DOD customers' ability to define their needs and desired 
contract outcomes clearly. This skill includes working with franchise 
fund contracting officers to translate their needs into contract 
requirements and to develop oversight plans that ensure adequate 
contract monitoring. 

* monitor and evaluate DOD customers' use of franchise funds' 
contracting services, prices paid, and types of goods and services 
purchased. Prices include franchise fund fees and fees for use of other 
interagency contracts. 

To ensure that GovWorks and FedSource adhere to sound contracting 
practices, we recommend that the Secretaries of the Interior and the 
Treasury take the following two actions: 

* develop procedures and performance measures for franchise fund 
contracting operations to demonstrate compliance with federal 
procurement regulations and policies while maintaining focus on 
customer service and: 

* develop procedures for franchise fund contracting officers to work 
closely with DOD customers to define contract outcomes and effective 
oversight methods. 

To ensure that the FedSource workforce has the skills to carry out 
contracting responsibilities, we recommend that the Secretary of the 
Treasury take the following action: 

* assign warranted contracting officers to positions responsible for 
performing contracting officer functions. 

In order to provide incentives for the franchise funds to adhere to 
procurement regulations and to ensure that franchise funds operate as 
intended, we recommend that the Director of the Office of Management 
and Budget take the following two actions: 

* Expand monitoring to include franchise funds contracting operations' 
compliance with procurement regulations and policies. These findings 
should be available to customers to ensure transparency and 
accountability to customers and the Congress. 

* Develop guidance to clarify the roles and responsibilities of the 
parties involved in interagency contracting through franchise funds. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to DOD, the departments of the 
Interior and the Treasury, and the Office of Management and Budget for 
review and comment. We received written comments from DOD and the 
Department of the Treasury, which are reprinted in appendices IV and V 
respectively. The Department of the Interior and the Office of 
Management and Budget provided comments via e-mail. 

DOD concurred with our recommendations and identified actions it has 
taken or plans to take to address them. In response to our 
recommendation that the Secretary of Defense develop a methodology to 
help DOD customers determine whether the use of franchise funds' 
contracting services is in the best interest of the government, DOD 
indicated that action had been taken through the issuance of a policy 
memo titled Proper Use of Non-DOD Contracts and subsequent policies 
issued by the military departments. We acknowledge the DOD policy memo 
in our report and note that this guidance describes general factors to 
consider but does not provide specific criteria for how to make this 
determination. The policies issued by the military departments 
establish procedures for review and approval of the use of non-DOD 
contract vehicles, but do not address methods of determining whether 
this is in the best interest of the government. Our recommendation 
takes these actions into account and encourages DOD to go further by 
developing a methodology to help customers assess contracting 
alternatives. 

In response to our recommendation that DOD reinforce DOD customers' 
ability to define their needs and desired contract outcomes clearly, 
DOD maintained that it is the responsibility of the franchise fund 
contracting officer to decide whether or not the requirement is 
described accurately. Nonetheless, DOD committed to issue a memo by 
August 31, 2005, reinforcing the need for DOD customers to define 
clearly their requirements and articulate clearly their desired 
outcomes in the acquisition process. We believe that this memo, coupled 
with DOD's ongoing efforts to educate DOD customers about the use of 
interagency acquisitions, are steps in the right direction. 

Finally, in response to our recommendation that DOD monitor and 
evaluate DOD customers' use of franchise funds' contracting services, 
DOD concurred but explained that the data capture systems that would 
provide this information are not yet in place. DOD stated that the 
Federal Procurement Data System-Next Generation would provide this 
capability in fiscal year 2006. However, data collection is just one 
step in the evaluation process. In addition to collecting data, DOD 
will also need to compare alternatives and prices in order to make more 
informed choices. Further, the accuracy and reliability of interagency 
contracting data in the Federal Procurement Data System-Next Generation 
will depend heavily on accurate reporting by franchise funds. 

The Department of the Interior concurred with our recommendations and 
identified actions it has taken or plans to take to address them. The 
Interior highlighted 2004 accomplishments and acknowledged a need for 
better documentation to demonstrate compliance and value provided. The 
Interior also committed to ensuring an adequate contracting staff and 
to publishing information to help DOD determine the value of using the 
franchise fund. In response to our recommendation that the Department 
of the Interior develop procedures and performance measures for 
franchise fund contracting operations to demonstrate compliance with 
federal procurement regulations, the Interior highlighted a number of 
recent efforts to improve performance, including its 2004 management 
control review and performance improvement plan that will monitor 
compliance with federal procurement regulations. This plan establishes 
a goal of 75 percent reduction in reportable findings. Interior also 
stated that it had revised its acquisition review process, awarded a 
contract for a third party acquisition review, and provided additional 
training to its staff. Interior committed to continue monitoring 
performance and creating guidance as needed. In response to our 
recommendation that the Interior develop procedures for franchise fund 
contracting officers to work more closely with DOD customers, the 
Interior highlighted efforts to train its contracting officers and 
develop policies for working with DOD customers. 

The Department of the Treasury concurred with our recommendations and 
identified actions it has taken or plans to take to address them, 
including centralization of FedSource's acquisition workforce under one 
line of authority to allow for standardization and consistency. In 
response to our recommendation that FedSource develop procedures and 
performance measures for franchise fund contracting operations to 
demonstrate compliance with federal procurement regulations, the 
Treasury committed to continue to conduct reviews to measure and 
evaluate compliance with federal procurement regulations and policies. 
This is a positive step toward ensuring compliance. The Treasury also 
said that FedSource had instituted performance-based statements of work 
for its acquisitions. While this initiative focuses on some aspects of 
compliance and is important in managing contractor performance, our 
recommendation addresses the performance of the franchise fund. 
Developing performance measures related to compliance with procurement 
regulations would reinforce the agency's commitment to compliance and 
provide a means to monitor and demonstrate progress. In response to our 
recommendation that FedSource develop procedures for franchise fund 
contracting officers to work more closely with DOD customers, the 
Treasury indicated that FedSource will also develop procedures to 
provide its customers with clear guidance for defining contract 
outcomes. In response to our recommendation that FedSource assign 
warranted contracting officers to positions responsible for performing 
contracting officer functions, Treasury stated that FedSource has hired 
contracting officers to perform all contracting officer functions. 

* OMB concurred with our recommendations that OMB expand its monitoring 
to include franchise funds contracting operations' compliance with 
procurement regulations and policies and develop guidance to clarify 
the roles and responsibilities of the parties involved in interagency 
contracting through franchise funds. OMB stated that its Office of 
Federal Procurement Policy (OFPP) proposed to include the 
implementation of our recommendations in an undertaking pertaining to 
governmentwide acquisition contracts and incorporate franchise funds 
into that project. As part of that project, OMB/OFPP is asking the 
designated agencies to develop plans to ensure cost-effective and 
responsible contracting. The plans will address (1) training to 
contracting staff; (2) customer staff training; (3) management controls 
to ensure contracts are awarded in accordance with applicable laws, 
regulations, and policies; (4) contract administration; and (5) 
periodic management reviews. OMB acknowledged that this was only a part 
of the solution. We encourage OMB to give additional consideration to 
providing guidance that would clarify roles and responsibilities of the 
parties involved in interagency contracting through franchise funds. 

We are sending copies of this report to the Secretaries of Defense, the 
Interior, and the Treasury; the Director of the Office of Management 
and Budget; and interested congressional committees. We will provide 
copies to others on request. This report will also be available at no 
charge on GAO's Web site at http://www.gao.gov. 

If you have any questions about this report or need additional 
information, please call me at (202) 512-4841 (cooperd@gao.gov). 
Contact points for our Offices of Congressional Relations and Public 
Affairs may be found on the last page of this report. Other staff 
making key contributions to this report were Amelia Shachoy, Assistant 
Director; Lily Chin; Lara Laufer; Janet McKelvey; Kenneth Patton; Monty 
Peters; and Ralph Roffo. 

In memory of Monty Peters (1948-2005), under whose skilled leadership 
this review was conducted. 

Signed by: 

David E. Cooper, Director: 
Acquisition and Sourcing Management: 

List of Congressional Committees: 

The Honorable John Warner: 
Chairman: 
The Honorable Carl Levin: 
Ranking Minority Member: 
Committee on Armed Services: 
United States Senate: 

The Honorable Ted Stevens: 
Chairman: 
The Honorable Daniel K. Inouye: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
United States Senate: 

The Honorable Duncan Hunter: 
Chairman: 
The Honorable Ike Skelton: 
Ranking Minority Member: 
Committee on Armed Services: 
House of Representatives: 

The Honorable C. W. Bill Young: 
Chairman: 
The Honorable John P. Murtha: 
Ranking Minority Member: 
Subcommittee on Defense: 
Committee on Appropriations: 
House of Representatives: 

[End of section]

Appendix I: Scope and Methodology: 

We reviewed legislation establishing the franchise fund pilot program, 
governmentwide guidance relating to the program, and reports 
summarizing program outcomes. We held discussions with Office of 
Management and Budget representatives responsible for overseeing and 
providing guidance for the program and with Department of Defense (DOD) 
officials responsible for oversight of procurement issues. We performed 
work at the franchise funds managed by the departments of the Interior 
and the Treasury and interviewed officials and reviewed records 
relating to Interior's GovWorks and Treasury's FedSource programs. The 
Interior and Treasury franchise funds accounted for about 76 percent of 
total revenues for the six franchise funds during fiscal year 2003 (the 
most recently completed fiscal year at the time we were planning our 
field work) and about 95 percent of all services the six funds provided 
DOD. Contracting services the GovWorks and FedSource programs provided 
accounted for over 95 percent of total revenues at the Interior and 
Treasury franchise funds. To gain insight into how DOD customers were 
using franchise funds and into franchise fund contracting processes, we 
reviewed documentation relating to 17 selected customer projects 
totaling $249 million in funding provided and interviewed GovWorks and 
FedSource contracting personnel responsible for these projects and 
representatives of the DOD customers. 

To determine how DOD customers determined whether franchise funds 
provided a good value, we interviewed representatives of DOD customers 
for the selected projects and reviewed available documentation relating 
to decisions to use franchise fund contracts. We also reviewed 
information available from the franchise funds that would indicate 
whether the franchise funds provided a good value, and interviewed 
franchise fund officials. 

To determine how franchise fund contracting officers worked with DOD 
customers to define measurable quality standards for goods and services 
and develop effective oversight mechanisms, we reviewed contract 
documentation for selected customer projects that would establish 
quality standards, and documentation relating to contract oversight. We 
also discussed these issues with franchise fund contracting personnel. 
In addition, we discussed these issues with representatives of DOD 
customers and reviewed available documentation. 

To determine whether franchise funds followed the contracting practices 
needed to ensure fair and reasonable prices, we reviewed contract 
documentation for selected customer projects to assess the extent to 
which contracting personnel sought competition for work and analyzed 
proposed prices to determine whether they were fair and reasonable, and 
discussed these issues with contracting personnel. In addition, we 
discussed these issues with representatives of DOD customers and 
reviewed available documentation. 

To select customer projects for review, we obtained data files from the 
Department of the Interior's GovWorks and the Department of the 
Treasury's FedSource contracting programs that reflected customer 
projects active during fiscal year 2003, and the dollar value of 
customer funding provided for these projects during the year. We ranked 
these projects in terms of funding provided and selected projects 
representing the greatest dollar value of customer funding provided--10 
GovWorks projects accounting for $164 million and 7 FedSource projects 
accounting for $85 million. Table 5 summarizes GovWorks projects, and 
table 6 summarizes FedSource projects. 

Table 5: GovWorks Fiscal Year 2003 Projects Reviewed (in Millions of 
Dollars): 

DOD customer: Army Chief Technology Office; 
Contractor: Cherry Road Technology; 
Fiscal year 2003 funding provided: $26.1. 

DOD customer: Air Force Deputy Chief of Staff Air and Space Operations; 
Contractor: SAIC; 
Fiscal year 2003 funding provided: $21.3. 

DOD customer: Army National Guard Bureau Readiness Center; 
Contractor: SRA International Inc,; 
Fiscal year 2003 funding provided: $19.4. 

DOD customer: Air Force Material Command; 
Contractor: Lockheed Martin Inc; 
Fiscal year 2003 funding provided: $17.4. 

DOD customer: Army Chief Information Office; 
Contractor: TKC Communications Inc; 
Fiscal year 2003 funding provided: $15.1. 

DOD customer: Army National Guard Bureau Chief Information Office; 
Contractor: Booz Allen Hamilton Inc; 
Fiscal year 2003 funding provided: $14.4. 

DOD customer: Army Program Manager for Signals Warfare; 
Contractor: Lear Siegler Services Inc; 
Fiscal year 2003 funding provided: $14.0. 

DOD customer: Army National Guard Bureau Readiness Center; 
Contractor: Sprint Communications Company LP; 
Fiscal year 2003 funding provided: $13.6. 

DOD customer: Air Force Aging Landing Gear Life Extension Program; 
Contractor: General Atomics Inc; 
Fiscal year 2003 funding provided: $12.6. 

DOD customer: Navy Program Executive Officer for Information 
Technology; 
Contractor: Bearing Point; 
Fiscal year 2003 funding provided: $10.6. 

Total; 
Fiscal year 2003 funding provided: $164.3. 

Source: GovWorks data. 

Note: Total may not add due to rounding. 

[End of table]

Table 6: FedSource Fiscal Year 2003 Projects Reviewed (in Millions of 
Dollars): 

DOD customer: Walter Reed Army Medical Center; 
Fiscal year 2003 funding provided: $27.2; 
Number of work assignments reviewed: 66; 
Selection process for work assignments: Random selection. 

DOD customer: U.S. Army Fort McCoy; 
Fiscal year 2003 funding provided: $13.2; 
Number of work assignments reviewed: 12; 
Selection process for work assignments: Size. 

DOD customer: Army 88th Regional Readiness Command at Fort Snelling; 
Fiscal year 2003 funding provided: $10.1; 
Number of work assignments reviewed: 5; 
Selection process for work assignments: Size. 

DOD customer: The Pentagon; 
Fiscal year 2003 funding provided: $9.7; 
Number of work assignments reviewed: 5; 
Selection process for work assignments: All[A]. 

DOD customer: Navy Recruiting Command; 
Fiscal year 2003 funding provided: $8.4; 
Number of work assignments reviewed: 18; 
Selection process for work assignments: Random selection. 

DOD customer: Lackland Air Force Base; 
Fiscal year 2003 funding provided: $8.2; 
Number of work assignments reviewed: 14; 
Selection process for work assignments: Random selection. 

DOD customer: Brooke Army Medical Center at Fort Sam Houston; 
Fiscal year 2003 funding provided: $8.1; 
Number of work assignments reviewed: 25; 
Selection process for work assignments: Random selection. 

Total; 
Fiscal year 2003 funding provided: $84.9; 
Number of work assignments reviewed: 145[B]. 

Source: FedSource data. 

[A] One project only had five work assignments, and we reviewed all 
five assignments for that project. 

[B] We eliminated 25 of these work assignments from our analyses 
because they used a contract that expired or that was discontinued by 
the end of fiscal year 2003. 

[End of table]

GovWorks contracting personnel fulfilled the requirements of each 
project selected by award of a single order, and we reviewed contract 
documentation related to the relevant order. FedSource contracting 
personnel, in contrast, fulfilled the requirements of customer projects 
by award of one or more contracts or orders. Further, FedSource 
personnel initiated multiple work assignments--in some cases several 
hundred--to define specific work what would be performed under each of 
the contracts awarded or orders placed. Accordingly, we reviewed all 
contracts awarded or orders placed to fulfill the requirements of the 
selected customer projects and a sample of work assignments initiated 
under these contracts or orders. To select sample work assignments for 
review, we first ranked the work assignments in terms of dollar value 
of the work to be performed. For those projects where a relatively 
small number of work assignments accounted for a significant share of 
total project value, we selected the highest dollar value assignments 
representing at least 50 percent of total project value. For those 
projects where most individual work assignments represented only a 
small fraction of total project value, we selected all assignments 
valued at $150,000 or more and a sample--selected at random--of the 
remaining work assignments. 

We conducted our review between June 2004 and June 2005 in accordance 
with generally accepted government auditing standards. 

[End of section]

Appendix II: Franchise Fund Operating Principles: 

Operating principle: Services; 
Description: The enterprise should only provide common administrative 
support services. 

Operating principle: Organization; 
Description: The organization would have a clearly defined 
organizational structure including readily identifiable delineation of 
responsibilities and functions and separately identifiable units for 
the purpose of accumulating and reporting revenues and costs. The funds 
of the organization must be separate and identifiable and not 
commingled with another organization. 

Operating principle: Competition; 
Description: The provision of services should be on a fully competitive 
basis. The organization's operation should not be "sheltered" or be a 
monopoly. 

Operating principle: Self-sustaining/full cost recovery; 
Description: The operation should be self-sustaining. Fees will be 
established to recover the "full costs," as defined by standards issued 
in accordance with the Federal Accounting Standards Advisory Board. 

Operating principle: Performance measures; 
Description: The organization must have a comprehensive set of 
performance measures to assess each service that is being offered. 

Operating principle: Benchmarks; 
Description: Cost and performance benchmarks against other 
"competitors" are maintained and evaluated. 

Operating principle: Adjustments to business dynamics; 
Description: The ability to adjust capacity and resources up or down as 
business rises or falls, or as other conditions dictate, if necessary. 

Operating principle: Surge capacity; 
Description: Resources to provide for "surge" capacity and peak 
business periods, capital investments, and new starts should be 
available. 

Operating principle: Cessation of activity; 
Description: The organization should specify that prior to curtailing 
or eliminating a service, the provider will give notice within a 
reasonable and mutually agreed time frame so the customer may obtain 
services elsewhere. Notice will also be given within a reasonable and 
mutually agreeable time frame to the provider when the customer elects 
to obtain services elsewhere. 

Operating principle: Voluntary exit; 
Description: Customers should be able to "exit" and go elsewhere for 
services after appropriate notification to the service provider and be 
permitted to choose other providers to obtain needed service. 

Operating principle: Full-time equivalents accountability; 
Description: Full-time equivalents would be accounted for in a manner 
consistent with the Federal Workforce Restructuring Act and Office of 
Management and Budget requirements, such as Circular A-11. 

Operating principle: Initial capitalization; 
Description: Capitalization of franchises, administrative service, or 
other cross- servicing operations should include the appropriate full-
time equivalents commensurate with the level of effort the operation 
has committed to perform. 

Source: Office of Management and Budget and the Chief Financial 
Officers Council. 

Note: These principles were developed by the Office of Management and 
Budget and the U.S. Chief Financial Officers Council. The U.S. Chief 
Financial Officers Council is an organization of the chief financial 
officers and deputy chief financial officers of the largest federal 
agencies and senior officials of the Office of Management and Budget 
and the Department of the Treasury who work collaboratively to improve 
financial management in the U.S. government. 

[End of table]

[End of section]

Appendix III: Overview of Contract Documents Used at GovWorks and 
FedSource: 

Table 7: GovWorks Contract Documents Used to Define Desired Outcomes 
and Performance Criteria: 

Master contract or another agency's contract: Master contract contains 
information about the general scope of work; however, the exact dates 
and quantities of future deliveries are not known. The contract also 
includes additional details, such as maximum or minimum quantities that 
can be ordered under each individual order and the maximum that it may 
order during a specified period of time, and the time frame that 
contract remains valid. Under the GSA schedules (also referred to as 
multiple-award schedules and Federal Supply Schedules) Program, GSA 
establishes long-term governmentwide contracts with commercial firms to 
provide access to commercial supplies and services. Schedule contracts 
contain much of the same information as other master contracts. 

Purchase request: DOD customer describes the needs for goods or 
services and describes desired outcomes and quality standards that 
contractors are expected to meet. 

Task or delivery orders: Multiple orders can be written off of a master 
contract. Orders define work to be performed; location of work; period 
of performance; deliverable schedule; applicable performance standards; 
and any special requirements. Individual orders shall clearly describe 
all services to be performed or supplies to be delivered so the full 
cost or price for the performance of the work can be established when 
the order is placed. 

Source: GAO analysis of GovWorks documents and interviews with GovWorks 
officials. 

[End of table]

Table 8: FedSource Contract Documents Used to Define Desired Outcomes 
and Performance Criteria: 

Master contract: Contracting officers develop master contract based on 
anticipated needs. Master contract contains information about the 
general scope of work; however, the exact dates and quantities of 
future deliveries are not known. Also includes additional details, such 
as maximum or minimum quantities that the government may order under 
each individual order and the maximum that it may order during a 
specified period of time, and the time frame that contract remains 
valid. 

Order: Multiple orders can be written off of master contract. FedSource 
contracting officers issue orders to each contractor based on 
anticipated business for the year. FedSource briefly describes types of 
services and obligates funds to cover anticipated work. At this point, 
FedSource does not know exact quantities or dates of future deliveries. 

Purchase request: DOD customer describes needs for goods or services. 
Program office describes desired outcomes and quality standards that 
contractors are expected to meet. 

Work assignment: FedSource uses work assignment to define work to be 
performed, location of work, period of performance, deliverable 
schedule; applicable performance standards, and any special 
requirements. 

Source: GAO analysis of FedSource documents and interviews with 
FedSource officials. 

[End of table]

[End of section]

Appendix IV: Comments from the Department of Defense: 

OFFICE OF THE UNDER SECRETARY OF DEFENSE: 
ACQUISITION, TECHNOLOGY AND LOGISTICS: 
3000 DEFENSE PENTAGON: 
WASHINGTON, DC 20301-3000: 

JUL 22 2005: 

Mr. David E. Cooper: 
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G. Street, NW: 
Washington, DC 20548: 

Dear Mr. Cooper: 

This is the Department of Defense (DoD) response to the GAO draft 
report, "INTERAGENCY CONTRACTING: Franchise Funds Provide Convenience, 
but Value to DoD is not Demonstrated," dated June 30, 2005, (GAO Code 
120357/GAO-05-456). 

The report recommends that the Secretary of Defense develop a 
methodology to help DoD customers determine whether use of franchise 
funds' contracting services is in the best interest of customers 
ability to define their needs and desired contract outcomes early and 
that the Secretary of Defense monitor and evaluate DoD customers' use 
of franchise funds' contracting services, prices paid and types of 
goods and services purchased. 

The Department concurs with the recommendations. Our comments on the 
report are enclosed. Thank you for the opportunity to review and 
comment on the subject draft report. For any questions concerning this 
response, please contact Mike Canales, on 703-695-8571 or via e-mail at 
Michael.Canales@osd.mil. 

Sincerely, 

Signed by: 

Deidre A. Lee: 

Director, Defense Procurement and Acquisition Policy: 

Enclosure: As stated: 

DoD COMMENTS ON GAO DRAFT REPORT - DATED JUNE 30, 2005 GAO CODE 
120357/GAO-05-456: 

"INTERAGENCY CONTRACTING: FRANCHISE FUNDS PROVIDE CONVENIENCE, BUT 
VALUE TO DOD IS NOT DEMONSTRATED"

DEPARTMENT OF DEFENSE COMMENTS TO THE RECOMMENDATIONS: 

RECOMMENDATION 1: The GAO recommended that the Secretary of Defense 
develop a methodology to help DoD customers determine whether use of 
franchise funds' contracting services is in the best interest of the 
government-the methodology should include analysis of tradeoffs. (p. 
29/GAO Draft Report): 

DoD Response: Concur. Actions have already been taken at both DoD and 
Military Department (MILDEP) levels that address this recommendation. 
The OSD policy memo of October 29, 2004, entitled, "Proper Use of Non- 
DoD Contracts," and companion policy memos from the MILDDES including 
Air Force policy memo dated December 6, 2004, the Navy policy memo 
dated December 20, 2004, and the Army policy memo dated July 12, 2005 
(interim policy memo previously issued) were issued to provide 
direction to program managers, requirements personnel, financial 
management personnel and contracting personnel. The OSD memo places 
primary responsibility for compliance on acquisition Program 
Managers/Requirements personnel. It also identifies that a team 
approach, involving Contracting and Financial Management personnel, is 
best to ensure that acquisition strategies comply with policy and that 
the use of a non-DoD contract is in the best interest of the 
government. The DoD policy was jointly signed by the Acting Under 
Secretary of Defense for Acquisition, Technology, and Logistics and the 
Principal Deputy Under Secretary of Defense (Comptroller). All MILDEP 
policy memos implement the policy and provide a framework of the key 
aspects needed for compliance. 

RECOMMENDATION 2: The GAO recommended that the Secretary of Defense 
reinforce DoD customers' ability to define their needs and desired 
contract outcomes clearly. This skill includes working with franchise 
fund contracting officers to translate their needs into contract 
requirements and to develop oversight plans that ensure adequate 
contract monitoring. (p. 29/GAO Draft Report): 

DoD Response: Concur. DoD will issue a memo to reinforce the need for 
DoD "customers" to clearly define their requirements and clearly 
articulate their desired outcomes in the acquisition process. The 
expected date for issuance of the memo is August 31, 2005. If the 
decision has been made to use a franchise fund activity, it is the 
responsibility of the franchise fund contracting officer to ensure the 
DOD customers' needs and desired outcomes. are defined in a way that 
allows for proper solicitation, evaluation, award, performance and post 
award administration. Ultimately the franchise fund Contracting Officer 
must make a decision on whether or not the requirement is described 
adequately. In the same vein, the franchise fund and requiring activity 
must work together to perform appropriate contract monitoring. 

RECOMMENDATION 3: The GAO recommended that the Secretary of Defense 
monitor and evaluate DoD customers' use of franchise funds' contracting 
services, prices paid, and types of goods and services purchased. 
Prices include franchise fund fees and fees for use of other 
interagency contracts. (p. 29/GAO Draft Report): 

DoD Response: Concur. However, current data capture systems are not in 
place that will provide this information easily and consistent with 
policy requirements. The functionality to support this reporting will 
be established in the Federal Procurement Data System-Next Generation 
(FPDS-NG). The target date for implementation is Fiscal Year 2006. DoD 
is working with the MILDEPS to satisfy the requirements of Section 854 
of the FY05 National Defense Authorization Act, which may provide some 
of this information sooner. 

[End of section]

Appendix V: Comments from the Department of the Treasury: 

DEPARTMENT OF THE TREASURY: 
WASHINGTON, D.C. 20220: 

JUL 25 2005: 

Mr. David E. Cooper: 
Director, Acquisition and Sourcing Management: 
U.S. Government Accountability Office: 
441 G Street, NW: 
Washington, DC 20548: 

Dear Mr. Cooper: 

I am writing to provide the Treasury Department's comments on the 
Government Accountability Office's draft report, entitled Interagency 
Contracting: Franchise Funds Provide Convenience, but Value to DOD is 
Not Demonstrated. 

I would like to state that prior to your GAO audit, the FedSource 
centralized their acquisition workforce into a new Acquisition Center. 
This action was taken to address weaknesses identified through internal 
compliance evaluations and validated during this audit. Placing the 
FedSource contracting officers and other related acquisition personnel 
under one line of authority will allow for standardization and 
consistency. 

The following comments below address your recommendations in the 
report. 

Recommendation: The FedSource should develop procedures and performance 
measures for franchise fund contracting operations to demonstrate 
compliance with federal procurement regulations and policies while 
maintaining focus on customer service: 

I agree and the FedSource and their contracting office are conducting 
joint compliance reviews to measure and evaluate compliance with 
federal procurement regulations and policies. On all recent work, 
FedSource has instituted performance-based statements of work and 
quality assurance surveillance plans to ensure proper solicitation, 
evaluation, award, performance and post award administration. 

Recommendation: The FedSource should develop procedures for franchise 
fund contracting officers to work closely with DOD customers to define 
contract outcomes and effective oversight methods. 

I agree and the FedSource will be putting procedures in place to 
provide customers with clear guidance to define contract outcomes. 
FedSource has instituted performance-based statements of work and 
quality assurance surveillance plans to ensure proper solicitation, 
evaluation, award, performance and post award administration. 

Recommendation: The GAO recommends FedSource assign warranted 
contracting officers to positions responsible for performing 
contracting officer functions. 

I agree and the FedSource has hired Contracting Officers to perform all 
contracting officer functions. FedSource is conducting joint compliance 
reviews with their contracting office to measure and evaluate 
compliance with federal procurement regulations and policies. 

Thank you for the opportunity to respond to this draft GAO report. If 
you have any questions or wish to discuss these comments further, 
please contact me at (202) 622-0750. 

Sincerely,

Signed for: 

Barry K. Hudson: 
Acting Chief Financial Officer: 

cc: Martin Davis, Managing Director, Treasury Franchise Fund: 

FOOTNOTES

[1] GAO, High Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005). 

[2] H.R. Conf. Rep. No. 108-354 at 775-76 (2003). 

[3] Franchise fund enterprises are a type of intragovernmental 
revolving fund, all of which have similar legal authority and 
operations and are generally created to provide common administrative 
services. An intragovernmental revolving fund is established to conduct 
continuing cycles of businesslike activity within and between 
government agencies. An intergovernmental revolving fund charges for 
the sale of goods or services and uses the proceeds to finance its 
spending, usually without the need for annual appropriations. 

[4] Between May 1996 and January 1997 pilots were designated to be 
established at the departments of Commerce, Health and Human Services, 
the Interior, the Treasury, and Veterans Affairs and at the 
Environmental Protection Agency. Pub. L. No. 103-356, § 403. The pilots 
were to expire after 5 years, at the end of fiscal year 1999, but have 
been extended several times--and as of December 2004--Congress extended 
the date to October 1, 2005. 

[5] Appendix II lists 12 original operating principles for franchise 
funds. 

[6] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: 
January 2005) contains a list of related products. 

[7] Section 803 of the National Defense Authorization Act for Fiscal 
Year 2002, Pub. L. No. 107-107 (2001), requires DOD to develop 
regulations requiring DOD to solicit offers from all contractors that 
are offering the required services under a multiple-award contract for 
orders exceeding $100,000. For GSA schedule orders, section 803, as 
implemented, requires that DOD solicit all contractors offering the 
required services under the applicable schedule or enough contractors 
to ensure the receipt of three offers. If three offers are not 
received, a contracting officer must determine in writing that no 
additional contractors could be identified despite reasonable efforts 
to do so. Under certain circumstances, section 803 allows waivers of 
competition for multiple-award contract orders and GSA schedule orders. 
The implementing regulations in the Defense Federal Acquisition 
Regulation Supplement became effective in October 2002. Defense Federal 
Acquisition Regulation Supplement 208.404-70. 

[8] GAO, Contract Management: Few Competing Proposals for Large DOD 
Information Technology Orders, GAO/NSIAD-00-56 (Washington, D.C.: March 
2000); GAO, Contract Management: Not Following Procedures Undermines 
Best Pricing Under GSA's Schedule, GAO-01-125 (Washington, D.C.: 
November 2000); and GAO, Contract Management: Guidance Needed to 
Promote Competition for Defense Task Orders, GAO-04-874 (Washington, 
D.C.: July 2004). 

[9] GovWorks primarily used GSA schedule contracts. When ordering 
services that required a statement of work, GSA's Multiple-Award 
Schedules Program Owners Manual required that offices placing orders 
consider the level of effort and mix of labor proposed to perform 
specific tasks and make a determination that task order pricing was 
fair and reasonable (app. A, 2001). 

[10] We found Treasury competitively awarded the indefinite delivery 
contracts included in our review. 

[11] Defense Federal Acquisition Regulation Supplement 216.505-70. 

[12] GAO/NSIAD-00-56. 

[13] FAR 16.505 (a). 

[14] FedSource filled this requirement using two blanket purchase 
agreements. These blanket purchase agreements must follow section 
13.303-5 of the FAR, which requires obtaining quotes from other 
vendors. 

[15] The Treasury franchise fund primarily develops multiple-award 
contracts under section 16.505 of the FAR. When ordering services that 
are not specifically established in the contract, ordering offices are 
required to establish prices using the pricing procedures of FAR 
subpart 15.4. FAR Subpart 15.402 requires that supplies and services 
are purchased at fair and reasonable prices. 

[16] National Defense Authorization Act for Fiscal Year 2003, Pub. L. 
No. 107-314 § 824 (2002). 

[17] National Defense Authorization Act for Fiscal Year 2005, Pub. L. 
No. 108-375, § 854 (2004). The act prohibits DOD from purchasing goods 
or services through the use of an interagency contract unless the 
purchase is made in accordance with procedures for reviewing and 
approving the use of these contracts. These requirements take effect 
180 days after the enactment of the act. 

[18] 10 U.S.C. § 2330 as added by section 801 of the National Defense 
Authorization Act for Fiscal Year 2002. Section 802 added a note to 10 
U.S.C. § 2330 establishing savings goals. 

[19] 10 U.S.C. § 2330. DOD began implementing these requirements in May 
of 2002 by requiring the military components to propose their own 
process and procedures for management and oversight of all acquisition 
services. 

[20] National Defense Authorization Act for Fiscal Year 2003, Pub. L. 
No. 107-314 § 824 (2002), and § 854 National Defense Authorization Act 
for Fiscal Year 2005, Pub. L. No. 108-375 (2004). The fiscal year 2005 
requirement applies to all fees imposed on purchases exceeding the 
simplified acquisition threshold in fiscal years 2005 and 2006. 

[21] Performance-based services contracting emphasizes that all aspects 
of an acquisition be structured around the purpose of the work to be 
performed as opposed to the manner in which the work is to be 
performed, or broad, imprecise statements of work that preclude an 
objective assessment of contractor performance. 

[22] FAR 37.602-2, Quality assurance, FAR 46.104, Contract 
administration office responsibilities, and Defense Federal Acquisition 
Regulation Supplement 246.102. 

[23] Office of Federal Procurement Policy (Policy Letter 93-1). When 
contracting for services, in particular highly specialized or technical 
services, agencies should ensure that a sufficient number of trained 
and experienced officials are available within the agency to manage and 
oversee the contract administration function. 

[24] DOD, Guidebook for Performance-Based Services Acquisition in the 
Department of Defense (Washington, D.C.: December 2000). 

[25] GAO, Contract Management: Opportunities to Improve Surveillance on 
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.: 
March 2005). 

[26] e-Buy is an online Request for Quotations tool that allows federal 
buyers to send requests and receive quotes for products and services 
available under the GSA multiple-award schedules program. Implementing 
regulations for section 803 in the Defense Federal Acquisition 
Regulation Supplement state that posting of a request for quotations on 
"e-Buy" is one medium for providing fair notice to all contractors as 
required by the regulation. 

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