Policy Letter on Management Oversight of Service Contracting

OFFICE OF MANAGEMENT AND BUDGET

Office of Federal Procurement Policy

Policy Letter on Management Oversight of Service Contracting

AGENCY: Executive Office of the President, Office of Management and

Budget (OMB), Office of Federal Procurement Policy.

ACTION: The Office of Federal Procurement Policy (OFPP) is reissuing

Policy Letter 93-1 on the ``Management Oversight of Service

Contracting.'' The Policy Letter includes appropriate changes from

proposed Supplement No. 1 which was issued on January 26, 1994 and

published in the Federal Register on February 2, 1994 (59 FR 4955).

-----------------------------------------------------------------------

SUMMARY: OFPP Policy Letter 93-1, ``Management Oversight of Service

Contracting,'' was signed by the former OFPP Administrator on November

19, 1993 and published in the Federal Register on December 2, 1993 (58

Fed. Reg. 63593). The Policy Letter is being reissued in its entirety

to replace the November 19, 1993 version.

The Policy Letter is being reissued to provide agencies with a more

``results-oriented'' approach to managing and administering service

contracts through the ``best practices'' concept. One way to achieve

excellence in contractor performance is to improve the acquisition,

management, and administration of service contracts. OFPP has several

initiatives underway that should help to achieve excellence in

contractor performance, e.g., emphasizing past performance in source

selection, stressing the need for more performance-based service

contracts, and developing best practices in contract administration.

This Policy Letter provides guiding principles through the ``best

practices'' concept that should help agencies develop, analyze, and

perfect requirements for service contracts which, in turn, should

improve contract management and administration. Other ``best

practices'' models in contract management and administration will be

issued as separate guidance.

SUPPLEMENTARY INFORMATION: A proposed Supplement No. 1 and requests for

comments was published in the February 2, 1994 Federal Register (59 FR

4955). Twenty-one comment letters were received in response to the

Federal Register notice, of which, one was from the private sector. A

summary of the more significant comments received and OFPP response to

them follows:

1. Best practices in Lieu of Mandated Written Management Control

Procedures and a Single Management Official

Several Inspectors General (IGs) commented that changing to the

``best practices'' concept will not promote the improvements that are

needed in managing and administering service contracts. The commenters

suggested that eliminating the requirement for management control

procedures and the single management official will increase the

vulnerability of the procurement system to waste, fraud, and abuse.

Traditionally, OFPP has taken an ``input-oriented'' approach to

managing and administering service contracts to respond to concerns

raised in Congressional hearings and reports that better controls are

needed to prevent abuses from occurring in the acquisition and use of

service contracts. We believe that this input-oriented approach, i.e.,

developing procedures, designating a single official, and adding

reporting requirements, has not added significant value to management

practices being used in the federal government. Hence, we believe that

a more ``results-oriented'' approach that suggests best practices that

add value in contract management and administration should help to

streamline the procurement process and achieve excellence in contractor

performance.

Therefore, the proposed revisions in Supplement No. 1 to section 8

(Responsibilities) has been incorporated in this reissued Policy

Letter. We have included a definition of ``best practices'' to clarify

our intent of this concept.

2. Use of Best Practices as Mandatory Guidance for Audit Purposes

Several IGs expressed concern that they are unable to use ``best

practices'' as mandatory regulatory guidance for audit purposes. OFPP

believes that the guidelines in section 7 and the questions in appendix

A should be viewed as warning signals to help agencies analyze and

perfect requirements for service contracts to prevent abuses from

occurring. As we continue to work with the agencies and industry to

develop ``best practices'' in contract management and administration

agencies should be able to use these guiding principles to make

improvements that add value to the procurement system. In keeping with

the principles of the National Performance Review, we believe that the

IGs should work with the procurement community to help achieve needed

improvements in service contracting.

Therefore, the proposed changes to section 8(d) in Supplement No. 1

will be incorporated in this reissued Policy Letter.

3. Exclusion of Interagency Acquisitions Under the Economy Act

Several commenters raised concern about excluding interagency

agreements from coverage of the Policy Letter in view of the problems

identified in the recent hearings on contract offloading. Other

commenters suggested that the exclusion should be clarified since an

interagency agreement under the Economy Act can be used to obtain

either in-house support from another agency or to obtain support from a

contract sponsored by another government organization.

OFPP's intent was to exclude interagency agreements where the

support service is being provided by in-house government employees.

Interagency acquisitions under the Economy Act where the servicing

agency contracts out for the support are covered by the Policy Letter.

In developing the requirement for the interagency agreement, the

requesting and servicing agencies should ensure that the principles

outlined in the Policy Letter are being followed.

Section 5 (Exclusions) has been revised to make clear that only

interagency acquisitions/agreements where support is provided by in-

house government employees are excluded from coverage of the Policy

Letter.

4. Other Exclusions

One agency suggested that the coverage of the Policy Letter was too

broad which creates an enormous administrative burden without a

demonstrated need. The agency suggested that such services as ADP and

telecommunications, training, medical services, or those that do not

affect government decisionmaking, support or influence agency policy

development, or affect program design and implementation should be

excluded. In addition it was suggested that research and development

(R&D) should be excluded since contracts for R&D are inherently

different from service contracts. The concern is that many of the

questions may be misapplied to R&D contracts since the very nature of

the work is very broad and imprecise.

OFPP disagrees with excluding the other suggested services since

they may be susceptible to abuse in those problem areas identified in

the Policy Letter. Prior GAO reports, the SWAT Report on Civilian

Agency Contracting, and the Director's recent services contract review

revealed that services contracting practices are uneven across the

Executive Branch and that various contract management problems should

be addressed.

We understand that a distinction can be made between R&D and

service contracts. Moreover, some of the questions may not be

appropriate for R&D because of the technical and scientific nature of

the work. We believe, however, that R&D contracts may be susceptible to

the problem areas identified in the Policy Letter and should not be

excluded. We have included a statement in the second introductory

paragraph in section 7 to recognize that R&D, as well as architect and

engineering services, are specialized categories of contracting.

Agencies should also ensure that they are in compliance with applicable

FAR guidance pertaining to those categories when using the guiding

principles in the Policy Letter.

As part of the National Performance Review, the procurement reform

legislation includes a provision to increase the small purchase

threshold to $100,000. This would significantly reduce the number of

service contracts subject to the Policy Letter because the Letter does

not apply to contracts below the small purchase threshold. Moreover, we

believe that the questions in appendix A are good guiding principles

that should help agencies better structure their requirements for all

services so that excellence in contractor performance is achieved.

DATES: The Policy Letter is June 23, 1994. It directs that

governmentwide regulations be promulgated to implement the policies

contained therein within December 20, 1994.

FOR FURTHER INFORMATION CONTACT: Linda G. Williams, Deputy Associate

Administrator, Office of Federal Procurement Policy, 725 17th Street

NW., New Executive Office Building, room 9013, Washington, DC 20503,

telephone (202) 395-3302. To obtain a copy of this reissued Policy

Letter, please call the Executive Office of the President's

Publications Office at (202) 395-7332.

Steven Kelman,

Administrator.

Policy Letter No. 93-1 [Reissued]

To the Heads of Executive Departments and Establishments

Subject: Management Oversight of Service Contracting

May 18, 1994.

1. Purpose

This Policy Letter establishes Government-wide policy, assigns

responsibilities, and provides guiding principles for Executive

Departments and agencies in managing the acquisition and use of

services.

2. Authority

This Policy Letter is issued pursuant to section 6(a) of the

Office of Federal Procurement Policy (OFPP) Act, as amended,

codified at 41 U.S.C. Section 405.

3. Background

On March 15, 1993, the Office of Management and Budget (OMB)

Director Leon Panetta requested that 17 major Executive Departments

and agencies review their service contracting programs. The purpose

of the review was to determine (1) if the service contracts were

accomplishing what was intended; (2) whether the contracts were cost

effective; and (3) whether inherently governmental functions were

being performed by contractors. The results of the reviews indicated

that service contracting practices and capabilities are uneven

across the Executive branch and that various common management

problems need to be addressed.

In addition to the Director's review, the National Performance

Review has found that improved support for customers of the

procurement system is needed. To do this it is important that

procurement officials work closely with program and other officials

to develop clear and precise statements of work for the products and

services being acquired. Contracting for services is especially

complex and demands close collaboration between procurement

personnel and the users of the service to ensure that contractor

performance meets contract requirements and performance standards.

This Policy Letter--which includes appropriate changes from

Supplement No. 1 [59 FR 4955 (1994)]--has been revised to provide

agencies with a more results-oriented approach to managing and

administering service contracts through the ``best practices''

concept. One way to achieve excellence in contractor performance is

to improve the acquisition, management, and administration of

service contracts. This Policy Letter provides guiding principles

through the ``best practices'' concept that should help agencies

develop, analyze, and perfect requirements for service contracts

which, in turn, should help to improve contract management and

administration. Other ``best practices'' models in contract

management and administration will be issued as separate guidance.

The guidance contained in the Office of Management and Budget

(OMB) Circular No. A-120, ``Guidelines for the Use of Advisory and

Assistance Services,'' has been rescinded by Transmittal Memorandum

No. 1, [58 FR 63593 (1993) and 59 FR 789 (1994)].

4. Definition

The following definitions are applicable to the Policy Letter:

a. Services are identifiable tasks to be performed, rather than

the delivery of an end item of supply. For purposes of this Policy

Letter, only services obtained under nonpersonal services contracts

are covered.

b. Best Practices. For purposes of this Policy Letter, best

practices are techniques that agencies may use to help detect

problems in the acquisition, management, and administration of

service contracts. Best practices are practical techniques gained

from experience that agencies may use to improve the procurement

process.

5. Exclusions

Excluded from coverage of this Policy Letter are services that

are (1) obtained through personnel appointments and advisory

committees, (2) obtained through personal services contracts

authorized by statute, (3) for construction, as defined in

Sec. 36.102 of the Federal Acquisition Regulation (FAR), or (4)

obtained through interagency agreements where the work is being

performed by in-house federal employees.

Also excluded from coverage of this Policy Letter are services

obtained under contracts below the small purchase threshold, and

services incidental to supply contracts. However, agencies should

ensure that they are in compliance with appropriate OFPP Policy

Letters applicable to service contracting and use good management

practices and contract administration techniques when using these

contracting methods to obtain services.

6. Policy

When contracting for services, it is the policy of the Federal

Government that:

a. Program officials are responsible for accurately describing

the need to be filled or problem to be resolved through service

contracting to assure full understanding and responsive performance

by contractors, and should obtain assistance from contracting

officials, as needed.

b. Services are to be obtained and used in ways that ensure that

the Government retains inherently governmental decision-making

authority.

c. Services are to be obtained in the most cost-effective

manner, without barriers to full and open competition, and free of

any potential conflicts of interest.

d. Sufficient trained and experienced officials are available

within the agency to manage and oversee the contract administration

function.

e. Effective management practices are used to implement the

guiding principles contained herein to prevent waste, fraud, and

abuse in services contracting.

7. Good Management Practices

While effective management oversight is required for all types

of service contracts, some require less oversight than others, as,

for example, such routine services as lawn mowing and food

preparation. Conversely, services that tend to affect Government

decision-making, support or influence policy development, or affect

program management are more susceptible to abuse. These, therefore,

require a greater level of scrutiny.

The following sections offer guidance to ensure that good

management practices are being followed. Agencies should involve

procurement and program officials when developing requirements for

service contracts. Appendix A contains a series of questions to help

analyze and perfect service contract requirements within these

guidelines. If the below guidelines apply, and if the response to

any of the questions listed in the appendix is affirmative, agencies

should ensure that they are in compliance with appropriate OFPP

Policy Letters applicable to service contracting, and use good

management practices and contract administration techniques.

Agencies should also continue to comply with the FAR guidance for

specialized categories of contracting such as research and

development (part 35) and architect and engineering (part 36) as

they use the guidance in this Policy Letter.

a. Inherently Governmental Functions

When contracting for services, agencies must ensure that any

final agency action reflects the informed, independent judgment of

agency officials. Contractors thus must not be allowed to perform

inherently Governmental functions as defined in OFPP Policy Letter

92-1, Inherently Governmental Functions (57 FR 45096 (1992)).

b. Cost Effectiveness

When a valid requirement exists, agency officials must ensure

that the requirement is obtained in the most cost-effective manner.

If contractor support is deemed appropriate, agencies should ensure

that their acquisition strategy will result in the acquisition of

services from a quality vendor that constitute the best value

considering costs and other relevant factors, and yield the greatest

benefit to the Government.

c. Control

When contracting for services, in particular for highly

specialized or technical services, agencies should ensure that a

sufficient number of trained and experienced officials is available

within the agency to manage and oversee the contract administration

function. This especially applies to such services as management and

professional support, studies, analyses, and evaluations, and

engineering and technical support. Agency officials need to be able

to make sound judgements on what the requirements should be, the

estimated costs, and whether the contractor is performing according

to the contract terms and conditions. Agency officials must retain

control over, and remain accountable for, policy decisions that may

be based, in part, on a contractor's performance and work products.

Agency officials must also provide an enhanced degree of management

controls and oversight when contracting for functions that closely

support the performance of inherently Governmental functions.

d. Conflicts of Interest

Agency officials must ensure that any actual or potential

conflicts of interest are identified and that appropriate steps are

taken to avoid, neutralized, or mitigate them. Service contracts are

not to be awarded to any individual or organization that is unable,

or potentially unable, to render impartial advice or assistance to

the Government, or that has an unfair competitive advantage over

competing contractors unless every effort is first taken to mitigate

such conflict or advantage. OFPP Policy Letter 89-1, Conflicts of

Interest Policies Applicable to Consultants, 54 FR 51805 (1989) and

FAR subpart 9.5 provide detailed guidance on conflicts of interest.

e. Competition

Full and open competition will assure cost effectiveness and

reduce the potential for favoritism and conflict of interest. To

maximize competition, the Competition in Contracting Act requires

thorough acquisition planning and limits exceptions. The Act

provides that lack of advance planning is not adequate justification

for sole source contracting. Any justification for a noncompetitive

contract should provide a detailed explanation as to why competition

cannot be achieved. Plans should be made to minimize the number of

subsequent noncompetitive awards.

8. Responsibilities

a. Heads of Agencies

Agency head (or their designees should ensure that:

(1) Requirements for servicers are clearly defined and

appropriate performance standards are developed so that contractor

performance meets contract terms and conditions.

(2) Service contracts are awarded and administered in such a

manner that will provide the customer is goods and services of

significant quality, on time and within budget.

(3) Specific procedures are in place when contracting for

services to assure compliance with OFPP Policy Letters 92-1,

Inherently Governmental Functions (57 FR 45096 (1992), 91-2, Service

Contracting (56 FR 15110 (1991), and 89-1, Conflicts of Interest

Policies Applicable to Consultants, 54 FR 51805 (1989).

(4) Implementation strategies are developed and necessary staff

training is initiated to assure effective implementation of these

policies.

b. Contracting Officials

Contracting officials should ensure that ``best practice''

techniques, such as those set forth below, are used when contracting

for services:

(1) The corporate experience section of an offeror's proposal

should be reviewed to detect conflicts of interest. Usually, the

corporate experience section contains the contractor's prior

business clients.

(2) Monthly progress reports should be reviewed to detect

whether the contractor may be performing inherently governmental

functions.

Contracting officials should also seek other best practices

techniques in contract management and administration that may be

used within their own contracting activities or other agencies that

will help to achieve excellence in contractor performance.

OFPP will also be working to develop governmentwide ``best

practices'' models in contract administration which will be issued

as separate guidance.

c. Federal Acquisition Regulatory Council

Pursuant to sections 6(a) and 25(f) of the OFPP Act, as amended,

41 U.S.C. 401 et seq., the Federal Acquisition Regulatory Council

shall ensure that the policies established herein are incorporated

in the FAR within 210 days from the date this Policy Letter is

published in the Federal Register. The 210 day period is considered

a ``timely manner'' as prescribed in 41 U.S.C. 405(b).

d. Inspectors General

The Inspectors General are encouraged to conduct vulnerability

assessments of service contracting and, where warranted, include in

their annual plans a review of service contracts to ensure

compliance with this Policy Letter.

The guidance in section 7 which refers to the questions in

appendix A, or any resulting ``best practices'' models developed by

OFPP should not be viewed as mandatory regulatory guidance for audit

purposes.

9. Judicial Review

This Policy letter is not intended to provide a constitutional

or statutory interpretation of any kind and it is not intended, and

should be construed, to create any right or benefit, substantive or

procedural, enforceable at law by a party against the United States,

its agencies, its officers, or any person. It is intended only to

provide policy guidance to agencies in the exercise of their

discretion concerning Federal contracting. Thus, this Policy Letter

is not intended, and should not be construed, to create any

substantive or procedural basis on which to challenge any agency

action or inaction on the ground that such action or inaction was

not in accordance with this Policy Letter.

10. Information Contract

For information regarding this Policy Letter contact Linda G.

Williams, Deputy Associate Administrator, Office of Federal

Procurement Policy, 725 17th Street, NW., Washington, DC, 20503.

Telephone (202) 395-3302.

11. Effective Date

This Policy Letter is effective 30 days after the date of

issuance. While these policies must be implemented in the FAR, it is

expected that agencies will take all appropriate actions in the

interim to develop implementation strategies and initiate staff

training, consistent with section 8a(4), to ensure effective

implementation of these policies.

Steven Kelman,

Administrator.

Appendix A

The following is a series of questions to help agencies analyze

and review requirements for service contracts.

A. Inherently Governmental Functions

If the response to the first question is affirmative, the

contract requirement is for an inherently Governmental function that

must be performed by Government officials; if the response to the

second question is affirmative, the contract requirement may be for

an inherently governmental function:

(1) Is the requirement for a function that is listed in appendix

A of OFPP Policy Letter 92-1, Inherently Governmental Functions?

(2) If the function is not listed in appendix A, do any of the

factors in the ``totality of the circumstances'' analysis discussed

in section 7(b) of Policy Letter 92-1 indicate that the function may

be inherently governmental?

B. Cost Effectiveness

If the response to any of the following questions is

affirmative, the agency may not have a valid requirement or not be

obtaining the requirement in the most cost effective manner:

(1) Is the statement of work so broadly written that it does not

support the need for a specific service?

(2) Is the statement of work so broadly written that it does not

permit adequate evaluation of contractor versus in-house cost and

performance?

(3) Is the choice of contract type, quality assurance plan,

competition strategy, or other related acquisition strategies and

procedures in the acquisition plan inappropriate to ensure good

contractor performance to meet the user's needs?

(4) If a cost reimbursement contract is contemplated, is the

acquisition plan inadequate to address the proper type of cost

reimbursement to ensure that the contractor will have the incentive

to control costs under the contract?

(5) Is the acquisition plan inadequate to address the cost

effectiveness of using contractor support (either long-term or

short-term) versus in-house performance?

(6) Is the cost estimate, or other supporting cost information,

inadequate to enable the contracting office to effectively determine

whether costs are reasonable?

(7) Is the statement of work inadequate to describe the

requirement in terms of ``what'' is to be performed as opposed to

``how'' the work is to be accomplished?

(8) Is the acquisition plan inadequate to ensure that there is

proper consideration given to ``quality'' and ``best value''?

C. Control

If the response to any of the following questions is

affirmative, there may be a control problem:

(1) Are there insufficient resources to evaluate contractor

performance when the statement of work requires the contractor to

provide advice, analysis and evaluation, opinions, alternatives, or

recommendations that could significantly influence agency policy

development or decision-making?

(2) Is the quality assurance plan too general to monitor

adequately contractor performance?

(3) Is the statement of work so broadly written that it does not

specify a contract deliverable or require progress reporting on

contractor performance?

(4) Is there concern that the agency lacks the expertise to

evaluate independently the contractor's approach, methodology,

results, options, conclusions, or recommendations?

(5) Is the requirement for a function or service listed in

appendix B of OFPP Policy Letter 92-1, or similar to a function or

service on that list, such that greater management scrutiny is

required of the contract terms and the manner of its performance?

D. Conflicts of Interests

If the response to any of the following questions is

affirmative, there may be a conflict of interests:

(1) Can the potential offeror perform under the contract in such

a way as to devise solutions or make recommendations that would

influence the award of future contracts to that contractor?

(2) If the requirement is for support services (such as system

engineering or technical direction), were any of the potential

offerors involved in developing the system design specifications or

in the production of the system?

(3) Has the potential offeror participated in earlier work

involving the same program or activity that is the subject of the

present contract wherein the offeror had access to source selection

or proprietary information not available to other offerors competing

for the contract?

(4) Will the contractor be evaluating a competitor's work?

(5) Does the contract allow the contractor to accept its own

products or activities on behalf of the Government?

(6) Will the work, under this contract, put the contractor in a

position to influence Government decision-making, e.g., developing

regulations, that will affect the contractor's current or future

business?

(7) Will the work under this contract affect the interests of

the contractor's other clients?

(8) Are any of the potential offerors, or their personnel who

will perform the contract, former agency officials who--while

employed by the agency--personally ad substantially participated in

(a) the development of the requirement for, or (b) the procurement

of, these services within the past two years?

E. Competition

If the response to any of the following questions is

affirmative, completion may be unnecessarily limited:

(1) Is the statement of work narrowly defined with overly

restrictive specifications or performance standards?

(2) Is the contract formulated in such a way as to create a

continuous and dependent arrangement with the same contractor?

(3) Is the use of an indefinite quantity or term contract

arrangement inappropriate to obtain the required services?

(4) Will the requirement be obtained through the use of other

than full and open competition?

[FR Doc. 94-12593 Filed 5-23-94; 8:45 am]

BILLING CODE 3110-01-M