Interagency Contracting:

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

GAO-05-456: Published: Jul 29, 2005. Publicly Released: Jul 29, 2005.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: DOD does not plan to develop a methodology for customers to use in determining whether use of franchise funds' contracting services is in the best interest of the government. DOD customers have been provided with direction and training that the decision to use a franchise fund is a business decision that should be made in the best interest of DOD. There is no required business case analysis; customers are directed to consider prices and fees among other factors in making their decision.

    Recommendation: 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, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD has taken steps to reinforce DOD customers' ability to define their needs and desired outcomes clearly by 1) conducting training for DOD program office officials and contracting officers; and 2) issuing policy memos and giving presentations that reinforce the importance of this topic. DOD has implemented training to help DOD program office officials and contracting officers define contract needs and outcomes more clearly. This training, conducted by DOD's Office of the Under Secretary of Defense for Acquisition Technology and Logistics, Defense Procurement and Acquisition Policy (DPAP) began as a part of the "Get it Right" campaign. In these training sessions, DPAP emphasizes the importance of better statements of work. According to a high level DOD official, the results of this training should be that the initial package from DOD customers is well understood and defined. In addition, DOD has issued some policy memorandums that reinforce the importance of defining contract needs and desired outcomes clearly. In a July 20, 2005, memo entitled "Proper Use of Non-DOD Contracts" and addressed to several DOD departments, the Under Secretary of Defense stated that procurements must be well defined. In a September 20, 2005, memorandum entitled "Interagency Acquisition: A Shared Responsibility" and addressed to several DOD departments, the Acting Director of DPAP stated that "DOD customers must ensure that their requirements are clearly defined, and include measurable outcomes desired". Finally, in a presentation given at the GSA Expo 2006, DOD outlined DOD expectations of both requiring activities and assisting agencies, as well as the role of the contracting officer.

    Recommendation: 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, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD has made progress in monitoring and evaluating its use of franchise funds through development of a spend analysis using Federal Procurement Data System-Next Generation (FPDS-NG) data. According to DOD Defense Procurement and Acquisition Policy (DPAP) officials, this analysis examined the goods and services DOD bought from the General Services Administration (GSA) and the Department of Interior, which officials say accounted for more than 90 percent of DOD's interagency contract spending. Because the analysis includes Interior, it addresses DOD's obligations for goods and services at Interior's franchise fund. The spend analysis on the Department of Interior shows that the amount of dollars obligated on interagency contracts through Interior has decreased between 2005 and 2007. In addition to the spend analysis, DOD officials told us that DOD is developing an Intergovernmental Value Added Network (IVAN) system, which is designed to capture information about contracts and orders, such as type of order, contract award amount, and fee information. Currently, IVAN is in limited production mode, but DOD officials plan to move the system into a larger production environment to enable DOD to roll-out the system to a larger user base. DOD is working with its services and various agencies to finalize the implementation plans. In addition, DOD officials said that the Acquisition Council for E-Government has agreed to sponsor a two-year pilot of IVAN with several participating agencies, including the Department of the Interior. Ultimately DOD officials stated that this system should provide DOD with a more reliable source of data on interagency contracting activity than is currently provided by FPDS-NG.

    Recommendation: 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, the Secretary of Defense should 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.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: FedSource has taken several steps to achieve this recommendation. On August 3, 2005, FedSource developed a policy memo which establishes performance measures to measure compliance with federal procurement regulations. Specifically, the performance measurement "Compliance" calls for a review of a sample of task orders to ensure that task orders issued on behalf of customers meet all legal, regulatory, and policy requirements. To measure this objective, FedSource reviews compliance regularly and reports this information. In addition to the establishment of new performance measures, FedSource has developed procedures to address areas related to compliance, such as developing independent government cost estimates, ordering from blanket purchase agreements, and ordering procedures for project support contracts. Also, the Department of the Treasury's Administrative Resource Center continues to conduct reviews of FedSource branch offices to ensure compliance with federal procurement regulations and policies. Although FedSource has achieved the recommendation of developing procedures and performance measures, GAO has not evaluated the degree to which FedSource has implemented these procedures and measures.

    Recommendation: To ensure that GovWorks and FedSource adhere to sound contracting practices, the Secretaries of the Interior and the Treasury 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.

    Agency Affected: Department of the Treasury

  5. Status: Closed - Implemented

    Comments: The Department of Interior has completed action on this recommendation. In June 2008, Interior provided documentation of performance metrics employed by the Performance, Assessment and Improvement Branch of the Acquisition Services Directorate. In July 2007, the Department of the Interior provided a progress update, but this progress update did not specifically identify the development of performance metrics. In 2006 the Department of the Interior had provided a progress update and supporting documentation on actions related to the recommendation. Interior had taken a number of actions, including issuing new acquisition-related policies, but some action items are still being implemented. One notable area not yet implemented is the development of performance metrics, monitoring and tracking performance issues, and making recommendations to senior management of continuous performance improvement. However, as of 2006, Interior had established a Performance, Assessment and Improvement (PAI) Branch responsible for this area.

    Recommendation: To ensure that GovWorks and FedSource adhere to sound contracting practices, the Secretaries of the Interior and the Treasury 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.

    Agency Affected: Department of the Treasury

  6. Status: Closed - Implemented

    Comments: FedSource has taken several steps to implement this recommendation. They developed a policy memo in July 2005 entitled "Interagency Acquisitions" which states that it is the policy of FedSource to work closely with all customers to define contract requirements, expected outcomes, and conduct effective oversight. With each task order, FedSource provides its customers with guidelines identifying the relationships and responsibilities of the contractor, customer, and FedSource. Finally, FedSource developed a Customer Ordering Guide that resides on the home page of their website. This guide outlines the roles and responsibilities of various parties involved in the contracting process (e.g., the customer and FedSource), and provides guidelines for ordering goods and services through FedSource. These guidelines outline responsibilities for activities such as defining requirements and administering task orders. Although FedSource has developed procedures for franchise fund contracting officers to work closely with customers to define contract outcomes and effective oversight methods, GAO has not evaluated the degree to which these procedures translate into practice.

    Recommendation: To ensure that GovWorks and FedSource adhere to sound contracting practices, the Secretaries of the Interior and the Treasury should develop procedures for franchise fund contracting officers to work closely with DOD customers to define contract outcomes and effective oversight methods.

    Agency Affected: Department of the Interior

  7. Status: Closed - Implemented

    Comments: As of July 2007. the Department of Interior had undertaken the steps necessary to achieve this recommendation. Specifically, in March 2007, DOI and the Department of Defense (DOD) established a Memorandum of Agreement which outlined the roles and responsibilities of both departments in relation to DOI providing acquisition services to DOD through the franchise fund GovWorks, as well as DOI's Southwest Branch in Fort Huachuca, AZ. This agreement emphasized the importance of DOI and DOD working together on issues such as ensuring statements of work are complete and that contract surveillance and oversight requirements are defined, adequate, and implemented. In 2006, DOI provided a progress update, and supporting documentation, on actions related to the recommendation. DOI had taken actions, notably revising a standard customer service agreement to define roles and responsibilities of both the franchise fund and clients, but some action items are still being implemented. At that point, DOI has not yet been able to establish a DOD-wide Memorandum of Agreement.

    Recommendation: To ensure that GovWorks and FedSource adhere to sound contracting practices, the Secretaries of the Interior and the Treasury should develop procedures for franchise fund contracting officers to work closely with DOD customers to define contract outcomes and effective oversight methods.

    Agency Affected: Department of the Treasury

  8. Status: Closed - Implemented

    Comments: According to a FedSource official, FedSource has now assigned warranted contracting officers to each of its offices. FedSource has also issued a policy entitled "Acquisition Authority" which outlines the responsibilities of Contracting Officers, Contracting Officer Technical Representatives, and others. Although GAO did not evaluate whether the warranted contracting officers are performing all contracting officer functions, FedSource did provide us with sample task orders that indicate contracting officers are now signing off on those orders--a change since GAO's report was issued.

    Recommendation: To ensure that the FedSource workforce has the skills to carry out contracting responsibilities, the Secretary of the Treasury should assign warranted contracting officers to positions responsible for performing contracting officer functions.

    Agency Affected: Department of the Treasury

  9. Status: Closed - Not Implemented

    Comments: OMB has taken steps to improve the use of all types of interagency contracts, including franchise funds. As a first step, OMB established a working group and issued a memo in November, 2005 stating the need for increased attention by agencies that manage interagency contracts and agencies that rely on them to meet mission requirements to ensure that these contracts are used properly and in a strategic manner. In June, 2008, OMB issued guidance on the use of interagency contracts, including a model agreement, intended to improve the use of interagency contracting. OMB does not have more specific plans to expand monitoring to include franchise funds contracting operations' compliance with procurement regulations and policies as recommended in this report.

    Recommendation: In order to provide incentives for the franchise funds to adhere to procurement regulations and to ensure that franchise funds operate as intended, the Director of the Office of Management and Budget should 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.

    Agency Affected: Department of the Interior

  10. Status: Closed - Implemented

    Comments: OMB has taken steps to improve monitoring of all types of interagency contracts, including franchise funds. OMB established a working group to improve the management and use of interagency contracts. In a memo dated November 21, 2005, the Associate Administrator of OFPP stated "our continued ability to take full advantage of interagency contracts requires increased attention by agencies that manage these contracts and agencies that rely on them to meet mission requirements. We must ensure that these contracts are used properly and in a strategic manner. The working group will provide a structure to help OFPP and the federal acquisition community carry out actions to improve contracting results." The memo further states that the efforts will focus on reinforcing proper use of interagency acquisitions through guidance to clarify the roles and responsibilities of interagency contract managers and their customers. Over the longer term, OMB plans to look at how the governance structure for creating and renewing interagency contracts can be improved. These efforts are still in the early stages and no results have yet been reported. On June 6, 2008, OMB issued a memo and guidance on improving the management and use of interagency acquisitions. GAO consulted and provided comments to OMB at several points during the development of the guidance. The guidance addresses this recommendation and clarifies roles and responsibilities for all interagency contracting actions, including those conducted through franchise funds.

    Recommendation: In order to provide incentives for the franchise funds to adhere to procurement regulations and to ensure that franchise funds operate as intended, the Director of the Office of Management and Budget should develop guidance to clarify the roles and responsibilities of the parties involved in interagency contracting through franchise funds.

    Agency Affected: Department of the Treasury

 

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