October 17, 2013
The Honorable Chuck Hagel
Secretary of Defense
1400 Defense Pentagon
Washington, DC 20301-1400
Dear Mr. Secretary:
On September 26, 2013, the Government Accountability Office (GAO) issued Human Capital: Opportunities Exist to Further Improve DoD’s Methodology for Estimating the Costs of Its Workforces (GAO-13-792). The report was mandated by the House Conference Report accompanying the National Defense Authorization Act for Fiscal Year 2013 with instructions to “determine whether the methodology employed [in DoD’s Directive-Type Memorandum (DTM) 09-007] is accurate. On July 3, 2013, the DoD replaced DTM-09-007 with Department of Defense Instruction (DoDI) 7041.04, Estimating and Comparing the Full Costs of Civilian and Active Duty Military Manpower and Contract Support. Accordingly, GAO’s report incorporated an analysis of DoDI 7041.04.
The purpose of this letter is to impress upon you the significance of the failures documented in the report.
Numerous reports issued by the Project On Government Oversight (POGO), GAO, and other interested organizations have documented the fact that DoD expends approximately $200 billion each year on service contracts. POGO has documented that DoD expends on contracted services nearly three times what it would cost were those services performed by civilian personnel.
The methodology for calculating the comparative costs for performing DoD services is critical to determining which sector of the DoD workforce can perform the services in the most “approriate and cost-effective” manner, as required by 10 U.S.C. § 129a(a). It is therefore essential that the methodology of DoD’s cost comparison models accurately and reliably provide decision-makers with information to help determine which workforce sector is best able to perform specific services most cost-effectively. It is equally important that the DoD have in place:
(1) an administrative system capable of ensuring that these cost comparison models are appropriately applied by decision-makers throughout the DoD whenever consideration of cost is a factor; and
(2) administrators and decision-makers who are both competent and committed to ensuring that these cost comparison models are appropriately implemented and utilized.
POGO would like to emphasize the following critical failures on the part of DoD:
1. DoD’s cost comparison models do not accurately calculate the full costs of performing a specified set of services by each of the workforce sectors under consideration. Most notable is DoD’s failure to provide a model that accurately calculates the overhead that is appropriately attributable to implementation of services performed by DoD personnel.
2. DoD does not have an administrative system to assess whether its strategic planning, personnel decisions, and resource allocation have significantly improved as a result of introducing comparative cost analyses into budgetary and administrative decisions, and if not, to provide specific recommendations on how the inadequacies should be corrected.
3. DoD does not have an administrative system to assess how pre-award projected cost savings compare with post-award actual cost savings resulting from using cost analysis models for strategic planning, personnel decisions, and resource allocation. Such a system should address, at a minimum, how actual spending compared to projected cost savings, as a function of total contract expenditures, both for contracts where a pre/post cost comparison was conducted.
4. DoD does not have an administrative system to assess the frequency with which it chooses the more costly workforce following a cost comparison. Such a system should include, in the instances in which the Department chooses the more costly workforce, an assessment of the justifications for choosing the more costly workforce, and an assessment of whether those justifications are well-founded and in accordance with laws, regulations, and government-wide policy.
5. The Office of the Secretary of Defense (OSD), the flagship and rudder for administration, implementation and practice of DoD workforce policy and practice, does not subject a single workforce-mix decision to its own mandated cost analysis. A most telling example of OSD’s failure to implement its own cost comparison directive is when the Director for Cost Assessment and Program Evaluation (CAPE) decided to replace the DTM-09-007 with DoDI 7041.04: CAPE contracted out the design and development for DoDI 7041.04 without ever conducting the comparative cost analysis required by DTM-09-007.
6. DoD has no administrative system or office in place that is committed to ensuring that:
a. There is a uniform Department-wide cost comparison model;
b. There is a system for informing all affected components and personnel of what their responsibilities are as they relate to DoDI 7041.04 and how they can effectively access any and all information and data essential to their implementation of those responsibilities;
c. All components are monitored to ensure that the cost comparison model is appropriately implemented and utilized in every instance mandated by DoDI 7041.04; and
d. All DoD decision-makers comply with applicable statutes, regulations, and DoD directives relating to ensuring that workforce-mix decisions are cost effective.
Unfortunately, there is a culture embedded within the DoD that is committed to transferring to contractors service responsibilities that are most cost-effectively performed by DoD employees. One expalination might be government hiring ceilings; however, DoD’s own conclusion regarding its FY 2010 service contract spending award total is quite shocking: “The savings are here. This is Total Force Manpower, but its growth has been unchallenged and often we don’t even know what is in the base." (Emphsis added) Additionally, there are structural incentives built into DoD workforce-mix decisions that favor military personnel for the performance of services that are more cost-effectively provided by civilian employees. If DoD is to stop wasting tens of billions of dollars a year in its performance of mandated services, both elected and appointed officials must take whatever action is necessary to correct the failures documented in GAO’s report and underscored in POGOs analyses.
While DoD has been working to improve its reporting and oversight capability related to contracts for services for the past several years, these improvements are not occurring as quickly as some would like or think possible. POGO is afraid this still-developing and very important capability may fall prey to the sequestration and Budget Control Act axe even while success in this area is the key to freeing resources for force structure recapitalization, funding other priorities, and reducing the total DoD budget. We believe fully funding and supporting the DoD-wide contractor manpower reporting application and program will pay DoD dividends for decades to come and is essential in making improve workforce decisions.
POGO remains willing to confer with you or your staff about these critical failures and what can be done to correct them. If you have any questions or would like to set up a meeting to discuss our findings and recommendations, please contact us at (202) 347-1122.
Paul Chassy, Ph.D., J.D.
Scott H. Amey
cc: Christine H. Fox
Director, Cost Assessment and Program Evaluation
 Government Accountability Office, Human Capital: Opportunities Exist to Further Improve DoD’s Methodology for Estimating the Costs of Its Workforces (GAO-13-792), September, 25, 2013. (Downloaded October 10, 2013)
 H.R. Rep. 112-705, December 18, 2012, p. 725. (Downloaded October 10, 2013)
 Department of Defense Instruction 7041.04, Estimating and Comparing the Full Costs of Civilian and Active Duty Military Manpower and Contract Support, July 3, 2013. (Downloaded October 10, 2013)
 Project On Government Oversight, Bad Business: Billions of Taxpayer Dollars Wasted on Hiring Contractors, September 13, 2011. Project On Government Oversight Letter to Senator Brown and Gillibrand and Representative Hinchey, POGO Challenges DoD’s Disclosure of Budgeting and Spending Service Contract Data, October 24, 2012. Project On Government Oversight Letter to Senator McCaskill, Congress Being Misled About True Costs of Service Contracts, November 30, 2012.
 According to USAspending.gov, DoD service contract spending has ranged from $204 billion in FY 2008 to $186 billion in FY 2012. (Downloaded October 16, 2013); Defense Procurement and Acquisition Policy, Defense Pricing, “FY 2012 Spend Charts,” no date provided. (Downloaded October 16, 2013)
 Project On Government Oversight Blog, “DoD Contractors Cost Nearly 3 Times More than DoD Civilians,” November 30, 2012.
 10 U.S.C. § 129a(a) states that “The Secretary of Defense shall establish policies and procedures for determining the most appropriate and cost efficient mix of military, civilian, and contractor personnel to perform the mission of the Department of Defense.”
 Department of Defense, American Society of Military Comptrollers, “Service Support Contractors: One of the FY 2012 Budget Efficiencies,” October 2011, slide number 6. (Downloaded October 9, 2012)