POGO Challenges DoD's Disclosure of Budgeting and Spending Service Contract Data

It is clear that an increasing number of Senators and Representatives are concerned about the Department of Defense’s (DoD) inability to account for how it expends hundreds of billions of dollars each year to procure services from contractors. It is equally clear that DoD has ...

October 24, 2012

By Danielle Brian and Paul Chassy

To:

Senator Sherrod Brown
713 Hart Senate Office Bldg.
Washington, DC 20510
Senator Kirsten Gillibrand
478 Russell Senate Office Bldg.
Washington, DC 20510
Representative Maurice Hinchey
2431 Rayburn House Office Bldg.
Washington, DC 20515

Dear Senators Brown and Gillibrand and Representative Hinchey:

It is clear that an increasing number of Senators and Representatives are concerned about the Department of Defense’s (DoD) inability to provide appropriate stewardship for how it expends hundreds of billions of dollars each year to procure services from contractors. Without reliable and accurate data, how can Congress exercise its responsibility to hold DoD accountable for complying with requirements for submitting accurate budget requests? Additionally, how are taxpayers to know whether their dollars are expended in a cost-effective fashion in the absence of government transparency?

On April 25, 2012, Senators Brown and Gillibrand and 24 Senate colleagues sent a letter to Secretary of Defense Leon E. Panetta regarding the DoD’s growing reliance on service contractors.¹ A month earlier, on March 26, Representative Hinchey and 130 House colleagues sent a similar letter to the Secretary.² The Project On Government Oversight (POGO) has obtained copies of DoD’s identical responses to your letters.³ DoD’s response is another example of how the Pentagon refuses to clearly acknowledge its failures when it comes to balancing its workforce in a cost-efficient manner.⁴ Set forth below are observations we request you consider in holding DoD accountable for service contract budgeting and spending.

In response to your recommendation that DoD “[e]liminate the arbitrary [and self-imposed] cap on its civilian workforce,” the best DoD could offer was to assert that it remains committed to “ensur[ing] the workforce is appropriately balanced and aligned to our most critical priorities.” This response is unsupported by DoD’s own data.

The data make clear two points relevant to capping DoD’s civilian workforce: (1) POGO calculated from DoD figures that DoD expends between 2.35 and 3.53 times more of its funding on service contracts than on its civilian workforce; and (2) the cost of an average contractor full-time equivalent (CFTE) is between 2.94 and 8.60 times more than an average DoD civilian full-time equivalent (GFTE).⁵ (Enclosure 1)⁶ Capping the civilian workforce reduces flexibility for DoD to utilize the most cost-efficient personnel to meet its missions, which is required by law.

These data substantiate the main finding of POGO’s Bad Business report documenting billions of dollars in waste resulting from service contracts.⁷ Since POGO published its report, there has been increased attention on DoD’s reliance on service contracts and the costs that are incurred.⁸

Again, according to DoD’s personnel and cost figures for FY 2010, it spent from 2.35 to 3.53 times more for its contractor workforce than its civilian workforce. POGO derived these numbers comparing the $253.8 billion spent on service contracts to the $72 billion spent on civilian personnel,⁹ which when adjusted for all non-compensatory costs totaled approximately $108 billion, as indicated in Enclosure 1. Neither of these significant imbalances in spending satisfies the statutory requirement of a cost-efficient, balanced workforce. To put it succinctly, DoD’s claimed commitment to workforce balance is not based on the reality of its human capital planning or spending.

The Deputy Secretary of Defense released a memorandum directing that targets for service support contractors by component remain at the Department’s FY 2012 budget level through FY 2018.¹⁰ (Enclosure 2) These targets reflect budgeted expenditures, not necessarily actual expenditures. The memorandum also provided that the FY 2012 budget targets for all GFTE were to be extended through FY 2018. According to reliable DoD sources, not twenty-four hours later, the Deputy Secretary rescinded his memorandum. But the issue is still pending as the Senate Armed Services Committee (SASC) included a provision in its version of the FY 2013 National Defense Authorization Act (NDAA) requiring DoD to reduce expenditures on both its civilian and contractor workforce.¹¹ As we documented above, the average cost of a CFTE is anywhere from 2.94 to 8.60 times more than the average cost of a GFTE; consequently, were DoD to institute a comparable percent reduction in the number of contractor and civilian workers, that would not result in comparable taxpayer savings. One can only affirm DoD’s concern that it cannot be expected to make comparable reductions across its entire workforce when civilian caps are in place and there is insurmountable pressure on the agency to turn to contractors when work is required?¹²

In DoD’s response to your recommendation that it “[c]onduct cost comparisons when making outsourcing decisions,” DoD claimed it was limited by Congress, citing “restrictions on public-private competition (cost comparisons) under section 2461 of title 10.” That statement is misleading. It is true that DoD is currently restrained from conducting public-private competitions in accordance with OMB Circular A-76 until DoD fully implements the requirements of 10 U.S.C. § 2330a. However, DoD has other models, such as those outlined in Directive-Type Memorandum 09-007,¹³ it can use to conduct cost comparisons, and Congress has placed no restrictions on the use of those models.

According to the Court of Federal Claims,¹⁴ in March 2010, the Air Force conducted a DTM-COMPARE¹⁵ cost comparison between a contractor’s performance of services and performance by government civilian employees. Issuing its decision in a bid protest action filed by the affected contractor, the Court stated: “The cost comparison was done in response to a statutory requirement that the Department of Defense ensure that consideration be given to whether civilian employees can be utilized to perform functions being performed by outside contractors."¹⁶ These cost comparison models are designed to ensure that performance of a given service be provided by that sector of the DoD workforce that represents the best value for the American people. In fact, the Air Force’s cost analysis “demonstrated that performance by government civilian employees would be more cost-effective, saving the Air Force $5.4 million or 18 percent over a five-year period."¹⁷

Integral to DoD’s statutory obligation to review its workforce composition is its obligation under 10 U.S.C. § 2330a to generate an annual inventory of contract services (ICS).¹⁸ As the SASC report for the FY 2013 NDAA makes clear, four years after passage of 10 U.S.C. § 2330a, as amended,¹⁹ DoD still has failed to fully implement the inventory’s requirements set forth in the law.²⁰ The SASC report stated that “DOD has continued to drag its feet” and that the inventory will provide informed strategic human capital planning and facilitate an appropriate mix of military, civilian, and contractor personne.²¹ DoD’s claim of congressionally imposed restrictions on the use of A-76 cost comparisons is therefore a poor excuse for its failure to come into compliance with the law and to realize cost savings.

POGO’s review of DoD documents shows that DoD’s FY 2010 budget request for contracted services was roughly $138 billion but that DoD actually expended roughly $253.8 billion on contracted services, while its ICS reported expenditures of only $121 billion on contracted services.²² (Enclosure 3) According to DoD’s contract obligation total, DoD obligated $204 billion for services in FY 2010. (Enclosure 3) Obviously, there is a great deal of discrepancy in DoD’s spending figures.

The magnitude of the disparity between contractor workforce costs and civilian workforce costs is disconcerting in its own right, but the magnitude of discrepancy in DoD’s data estimates presents an even more critical dysfunctionality. DoD’s mandated review of its total workforce requires that it be provided with valid and reliable data on the size of each component and what it expended on each component in order for it to determine a cost-effective balance in its total workforce. DoD decision-makers obviously do not have access to reliable data estimates.

DoD’s response should not go unchallenged. On December 20, 2011, Representative Hinchey sent a letter to Frank Kendall, then-Acting Under Secretary of Defense for Acquisition, Technology, and Logistics (AT&L) in which AT&L was requested to “provide a budget exhibit pursuant to 10 USC 235 that separately accounts for all FY12 service contracts for all appropriations, for both base and OCO spending. Even though information related to research and development contracts are not included in this section of title 10, please include them....'²³ On February 22, 2012, Mr. Kendall sent a response.²⁴ Mr. Kendall attempts to explain away DoD’s “apparent inconsistencies in reporting FY 2010 budget and execution data on contracts for services,” stating, “[they] very likely resulted from making direct comparisons using differently constructed data sets.” In other words, the DoD acknowledges making an apples-to- oranges comparison as a basis for justifying its service contract expenditures.

DoD should be required to provide accurate and timely data, as well as explanations for large variances in workforce size and service contracting expenditures. Mr. Kendall attempted to provide such an explanation, stating:

For illustration, the $63 billion figure you refer to reflects only the base budget amount by object class 25.1, 25.2, 25.4, 25.5, 25.6, 25.7, and 25.8 for the FY 2010 President’s Budget request, while the $106 billion figure includes the Overseas Contingency Operations (OCO) amount by the same object class and period. Although the accounting system identifies significant amounts specifically to OCO, the Department cannot isolate all OCO obligations from base budget obligations in our actual data. The $121 billion is a distinctly different figure as shown in the FY 2010 Inventory of Contracts for Services Report to Congress, reflecting the amounts obligated as report in the Federal Procurement Database System (FPDS) on January 5, 2011, by product service code … These figures in FPDS do not report by object class but by service portfolio as reflected in the budget submissions; they do include both base budget and OCO obligations using single-year and multi-year appropriations and they do not consistently account for de-obligations of service contracts during FY 2010. [Emphasis added]

Without credible data, DoD strategic planners cannot meet their obligation to create a balanced workforce, despite DoD’s assurances to the contrary. DoD’s claim that it “cannot” employ a system that accurately accounts for how every congressionally appropriated and budgeted dollar is actually spent suggests that it prefers not to be held accountable.

This is not to say DoD does not face credible challenges to assuring that contractor costs are accounted for in the budget process. In response to a question for the record (QFR) from Senator Claire McCaskill to Mr. Aronowitz, he provided the following information:

There are two main challenges associated with projecting contractor costs forward. The first challenge is that many of the services and skills provided by contractors are not necessarily full-time, enduring requirements, but rather provide Army with various services and skills to complete a variety of functional requirements. Although some of the requirements for which Army contracts for services are enduring, using task-based contracts provides Army the flexibility to execute funding on a variety of functional requirements throughout the year of execution whereas programming an enduring requirement for a civilian billet for a specific requirement limits the Army’s flexibility to adjust to emerging requirements.

The second main challenge arises from the fact that the budget is built from Object Classes. Contract services, however, are managed and grouped into “portfolios,” as directed by USD(ATL) in response to statutory mandate. These budget objects and portfolios are not interchangeable: there is no clear cross-walk between them. Acquisition support managers are supposed to be controlling contract services spending based on these portfolios, but because these portfolios are not interchangeable with the object classes used in the budget and financial accounting systems, this cannot be done effectively. Object Class data itself is also not without its own flaws; the “Other services” object class includes a disparate variety of functions, like data digitization, chaplain services, intelligence services, and auditing. This kind of problem in budget object classifications only serves to further exacerbate the problem of lack of interchangeability with portfolios, and makes it even more difficult to project contracts costs forward.²⁵

It is clear that the Comptroller and Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics should be directed to reorganize and integrate DoD’s accounting and budgeting systems in such a way as to permit a transparent budget submission to Congress regarding projected and actual expenditures for service contracts.

In response to a QFR from Senator Daniel K. Akaka to Mr. Aronowitz asking whether the Army has a strategy for using the data it collects for its contractor inventory as part of its budget and acquisition process, Mr. Aronowitz responded,

Contractor inventory data has not yet been used by the Army as part of its budget and acquisition process, but there is a strategy to utilize the data going forward. Beginning in Fiscal Year 2012, the Army Acquisition Executive is obtaining Army-wide semi-annual services requirements forecasts and quarterly cost reports for services acquisitions valued at $10M and above. This data will help to provide program management and funding visibility for services acquisitions. This initiative implements part of the Army’s 2011 Services Optimization Implementation Plan, with an aim to increase effectiveness, efficiency, and promote costs savings as the Army acquires essential services to support our Soldiers and their families. The Deputy Assistant Secretary of the Army, Civilian Personnel and Quality of Life has also assembled a working group with the Army Budget Office, Army Program Analysis & Evaluation, and the Assistant Secretary of the Army for Manpower and Reserve Affairs to integrate the Contractor Manpower Reporting Application into the budget process.²⁶

The question remains, even if the Army is able to integrate its Contractor Manpower Reporting Application (CMRA) into the budget process, when will the rest of DoD adopt the Army’s CMRA and begin to integrate credible data into its budget process?

As highlighted throughout this letter, the Pentagon’s budget and cost determination processes are flawed. The “Audit the Pentagon Act” (S. 3487),²⁷ a bi-partisan effort lead by Senator Tom Coburn (R-OK), would create new enforcement mechanisms coupled with new incentives for the Pentagon to improvement financial management accountability. While we think being audit-ready is not a panacea, and the underlying accounting systems used by the government must be examined more closely, this will at least force the Pentagon to improve the status quo and allow auditors to review the books in a way that is not possible today.

Finally, POGO will continue to shine a light on the insufficiency of DoD’s ICS and to urge policy-makers to authorize a study of cost modeling systems required to ensure DoD is able to maintain a balanced and cost-effective workforce. In fact, POGO recommends that the NDAA for 2013 include improvements to the ICS that will allow DoD to better compare civilian and service contract costs and request a Government Accountability Office cost modeling review that will result in a the best model for achieving workforce cost efficiencies. (Enclosure 4) In addition, POGO will closely follow the issues raised in this letter and provide specific recommendations for how to fix them, where needed.

We would appreciate an opportunity to meet with you and your staff to discuss these issues further. To set up a time at your convenience, please contact Dr. Paul Chassy at [email protected] or Scott Amey at [email protected] or 202-347-1122.