Performance of Commercial Activities, OMB Circular No. A-76

OFFICE OF MANAGEMENT AND BUDGET

Performance of Commercial Activities, OMB Circular No. A-76

AGENCY: Office of Management and Budget, Executive Office of The

President.

ACTION: Notice of Transmittal Memorandum No. 15, to the OMB Circular

No. A-76, ``Performance of Commercial Activities,'' ``Revised

Supplemental Handbook.''

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SUMMARY: The Office of Management and Budget (OMB) publishes its

revisions to the Supplemental Handbook issued as a part of its August

4, 1983, OMB Circular No. A-76, ``Performance of Commercial

Activities.'' Circular No. A-76 was

[[Page 14339]]

originally published in the August 16, 1983, Federal Register, at pages

37110-37116.

The Revised Supplemental Handbook seeks the most cost-effective

means of obtaining commercial support services and provides new

administrative flexibility in the Government's make or buy decision

process. The revision modifies and, in some cases, eliminates cost

comparison requirements for recurring commercial activities and the

establishment of new or expanded interservice support agreements;

reduces reporting and other administrative burdens; provides for

enhanced employee participation; eases transition requirements to

facilitate employee placement; maintains a level playing field for cost

comparisons between Federal, interservice support agreement and private

sector offers, and seeks to improve accountability and oversight to

ensure that the most cost effective decision is implemented. The

proposed revision improves upon existing guidance by clarifying

provisions that may have made the cost comparison process unnecessarily

difficult or lead to less than optimal outcomes.

DATES: The provisions of the Revised Supplemental Handbook are

effective March 27, 1996 and shall apply to all cost comparisons in

progress that have not yet undergone bid opening or where the in-house

bid has not yet otherwise been revealed.

AVAILABILITY: Copies of the Revised Supplemental Handbook may be

obtained by contacting The Executive Office of the President, Office of

Administration, Publications Office, Washington, DC 20503, at (202)

395-7332. This document is also accessible on the OMB Home Page. The

on-line OMB Home Page address (URL) is http://www.whitehouse.gov/WH/

EOP/omb

FOR FURTHER INFORMATION CONTACT: The Budget Analysis and Systems

Division, NEOB Room 6104, Office of Management and Budget, 725 17th

Street, NW., Washington, DC 20503, Telephone Number: (202) 395-6104,

Fax Number (202) 395-7230.

SUPPLEMENTARY INFORMATION: OMB received 26 comments in response to its

request for comments on proposed revisions to the Supplemental

Handbook, published in the October 23, 1995, Federal Register, page

54394: fifteen from Federal agencies; ten from industry or trade groups

and one from an employee organization. A summary of the substantive

agency and public comments and changes made to the Supplemental

Handbook is attached.

Alice M. Rivlin,

Director.

Attachment--Summary of Agency and Public Comments and Changes Made to

the OMB Circular A-76 Supplemental Handbook

Introduction

1. Americans want to ``get their money's worth'' and want a

Government that is more businesslike and better managed. The

reinvention of Government begins by focusing on core mission

competencies and service requirements. Managers must begin by asking

some fundamental questions, like: why are we in this business; has

industry changed so that our involvement or level of involvement is no

longer required; is our approach cost effective and, finally, assuming

the Government has a legitimate continuing role to play, what is the

proper mix of in-house, contract and interservice support agreement

resources.

2. The OMB Circular A-76 Revised Supplemental Handbook is designed

to enhance Federal performance through competition and choice. It seeks

the most cost effective means of obtaining commercial products and

support services and provides new administrative flexibility in the

Government's make or buy decision process. The revisions modify and in

some cases eliminate cost comparison requirements for recurring

commercial and interservice support agreement services; reduce

reporting and other administrative burdens; provide for enhanced

employee participation; ease transition requirements; provide a level

playing field, while recognizing the differences between Government and

private sector accounting and performance measurement systems, and seek

to improve accountability and oversight to ensure that the most cost

effective decision is, in fact, implemented.

3. The purpose of Circular A-76 is not to convert work to or from

in-house, contract or interservice support agreement performance.

Rather, it is designed to: (1) Balance the interests of the parties

involved, (2) provide a level playing field between public and private

sector offerors, and (3) encourage competition and choice in the

management and performance of recurring commercial activities. In

establishing common ground rules for public-public and public-private

competitions, the Revised Supplement protects the procurement process,

establishes a common baseline for cost and quality assessments, creates

certain ``good employer'' relationships for affected Federal and

contract employees and determines competitively who is best prepared to

do the work. It is designed to empower Federal managers to make sound

business decisions related to the provision of recurring product or

support service requirements.

Summary of Comments and Changes

1. Inherently Governmental Functions

Inherently governmental functions, as defined in the Office of

Federal Procurement Policy (OFPP) Policy Letter 92-1, ``Inherently

Governmental Functions'' (Federal Register, September 30, 1992, page

45096 and the Federal Register, January 26, 1996, page 2627

implementing the Policy Letter through the Federal Acquisition

Regulations at Sections 7.103, 7.105 and 7.500) are not subject to

performance by contract. Therefore, management decisions that involve

the transfer of inherently governmental work between agencies,

including interservice support agreements (ISSAs), are not subject to

the Circular or the Revised Supplemental Handbook. Likewise, decisions

involving business management practices, the development of joint

ventures, asset sales, the devolution of activities to State and local

governments, the termination of obsolete services or the decision to

exit an entire business line are not subject to the cost comparison

requirements of the Circular.

Agency and Public Comments: Several commenters suggested that

individual functions should be defined as either inherently

governmental or commercial. One commenter suggested that the revision

modifies the definition of what is inherently governmental by including

exemptions for certain activities from the cost comparison requirements

of the Circular. Although the draft proposed to update and expand the

list of commercial activities attached to the August 1983 Circular A-

76, the listing remains unchanged. OMB is not considering revisions to

the Circular itself nor is OMB revising OFPP Policy Letter 92-1. The

Circular's listing of commercial activities is illustrative. It is not

meant to be all-encompassing. Activities at a greater or lesser degree

of specificity may be considered commercial activities. Questions

regarding whether a function is or is not commercial or inherently

governmental may be forwarded to OMB for review.

The Supplement clarifies that certain commercial activities are

exempt from the cost comparison requirements of the

[[Page 14340]]

Circular and may be converted to or from in-house, contract or

interservice support agreements without cost comparison, for reasons

other than cost. Inherently governmental activities are not commercial

in nature, are not subject to the Circular and cannot be converted to

contract performance.

2. Reliance on the Private Sector

The Revised Supplement delegates to agency management additional

authority to determine the proper mix of in-house, contract and

interservice support agreement resources. While the Revision retains

the 1983 Supplement's requirements to contract new or expanded work,

unless a cost comparison is conducted to support conversion to in-house

or interservice support agreement performance, it also requires

conversion to contract only when it is cost effective. The decision to

conduct a cost comparison is itself within the agency's discretion.

Agency and Public Comments: Industry and trade group commenters,

generally, sought a ``reinvigorated'' policy statement of strict

reliance on the private sector. In their view, the Revision should

require or, at a minimum, permit the direct conversion of all

commercial activities to contract performance, without cost comparison.

Objections were made to the proposal to permit agencies to continue

their existing interservice support agreements for commercial

activities, without cost comparison.

OMB is not, at this time, considering changes to the Circular A-76

itself. The Circular requires reliance on the private sector when shown

to be economically justified. It does not require the conversion of in-

house work to contract, as a matter of policy, unless a cost

comparison, conducted in accordance with its Supplement, demonstrates

it to be in the best interests of the taxpayer.

3. Exemptions From Cost Comparison

The Circular itself exempts certain recurring commercial activities

from cost comparison, including: Mobilization requirements within the

Department of Defense, the conduct of research and development (R&D),

and direct patient care activities in Government hospitals or other

health facilities.

The Revision clarifies this policy to permit activities that are

exempt from cost comparison requirements of the Circular to be retained

in-house or converted to or from in-house, contract or interservice

support agreement performance, without cost comparison. The list of

functions exempted from cost comparison is expanded to include:

national security activities, mission critical core activities, and

temporary emergency requirements.

Agency and Public Comments: There was a general level of agreement

among all commenters that the addition of these functions to the list

of those exempt from cost comparison was needed and appropriate.

Several commenters took exception to the proposed 10 percent of total

FTE limit for ``core activities.'' The Revision removes this limitation

and, thereby, provides a significantly expanded level of administrative

flexibility to identify functions as ``core'' and exempt them from cost

comparison. In place of the 10 percent core limit, one commenter

requested the right to appeal agency determinations of their core

requirements and decision to convert from in-house to contract

performance on the basis of a core designation. This change has not

been made. The determination of a ``core'' function is, fundamentally,

a management decision.

4. Annual Inventory and Reporting Requirements

The revision eliminates required study schedules and quarterly

study status reporting, as unnecessary and administratively burdensome.

Agencies are, however, required to maintain an inventory of commercial

activities with information on completed cost comparisons.

Agency and Public Comments: There was general agreement that the

existing OMB inventory and reporting system was unnecessary and

administratively burdensome. In accordance with one commenter's

suggestion, all inventory requirements are now identified in Appendix

3. These requirements are consistent with the Department of Defense

Commercial Activity Inventory and Reporting System, to permit

Government wide aggregations of data by function and reason code. At

their discretion, civilian agencies should be able to duplicate the DOD

inventory and reporting system without significant time or expense.

5. Waivers

The 1983 Supplement permitted agencies to issue cost comparison

waivers, if effective price competition is available and a

determination is made that an in-house Most Efficient Organization

(MEO) has no reasonable chance of winning a competition with the

private sector. Agencies were not permitted to waive cost comparison

requirements to convert from contract to in-house performance and there

is no mention of waivers with respect to interservice support agreement

competitions.

The Revision broadens an agency's authority to waive cost

comparisons to convert to or from in-house, contract or interservice

support agreement, without cost comparison, if it is found that: (1)

The conversion will result in a significant financial or service

quality improvement and that the conversion will not serve to reduce

significantly the level or quality of competition in the future award

or performance of work or (2) there is a finding that the in-house or

contract (in the case of a possible conversion from contract to in-

house performance) offers have no reasonable expectation of winning a

competition. In general, if an agency undertakes a major independently

conducted business analysis and determines that significant savings--in

excess of the minimum differential--can be achieved by conversion or,

if significant performance improvements are likely, beyond what could

be reasonably expected from a reorganization of the current approach,

the agency may be justified in waiving the A-76 cost comparison. The

Revision clarifies that agency waivers, with supporting documentation,

are subject to public review and the A-76 administrative appeal

process. Finally, the Revision also formalizes OMB's waiver guidance on

DOD Base Closures and expands it to include commercial activities at

civilian agency locations that have announced a date-certain closure.

Agency and Public Comments: There was a general level of agreement

among all commenters that the authority to issue waivers needed to be

broadened to include the conversion of work to or from in-house,

contract or interservice support agreement. There was also a general

level of agreement that the waiver requirements of the 1983 Supplement

were too narrow--only one waiver having been issued in over 12 years.

Concern was expressed, however, for the organizational level authorized

to issue such waivers. Originally, the comment draft limited the waiver

decision to the Secretary. In response to a number of comments, the

authority to issue a cost comparison waiver may now be delegated to the

Assistant Secretary level. Within DOD, this authority may be further

delegated to the Assistant Service Secretaries. This delegation

facilitates the appeal of waiver decisions, which has also been

clarified in the Revision over the comment draft.

6. Employee Participation

The Revision provides additional guidance regarding the development

of

[[Page 14341]]

the Performance Work Statement, in-house management plan and cost

estimate. The Revision encourages agencies to consult with employees

and involve them at the earliest possible stages of the competition

process, subject to the restrictions of the procurement process and

conflict of interest statutes. Agencies are requested to afford

employees and private sector interests an opportunity to comment on

solicitations prior to the opening of bids. This will ensure that the

solicitation is complete and that all parties are treated fairly. The

Revision also affords additional time to interested parties to submit

cost comparison appeals.

Agency and Public Comments: There was very little comment or

disagreement on this issue. One commenter felt that it was particularly

important that the Revision clarify employee participation

opportunities. The 1983 Supplement was silent on this issue.

7. Performance Standards

The 1983 Supplement did not permit conversion decisions to be based

upon the comparison of performance measures or standards. The Revision

authorizes conversion to or from in-house, contract or interservice

support agreement performance, if an agency determines that performance

meets or exceeds generally recognized performance and cost standards.

Performance standard-based competitions must reflect the agency's fully

allocated costs of performance and must be certified as being in full

compliance with the Managerial Cost Accounting Concepts and Standards

for the Federal Government, Statement of Recommended Accounting

Standards Number 4, or subsequent guidance. The cost comparability

procedures described in the Revision, such as those related to fringe

benefit factors, will also be used in assessing performance against

these standards.

Agency and Public Comments: There was very little comment or

disagreement on this issue, although one commenter suggested that the

use of existing manuals to establish performance standards for Federal

employees is too new an idea. Performance measures and cost standards

are becoming more widely used to assess performance in government and

in the private sector. Indeed their development is required by the

Government Performance Results Act (GPRA). As noted by several

commenters, the difficulty lies in assuring that historical performance

measures are accurate and comparable. The Revision establishes required

levels of oversight and certification to ensure that a high degree of

comparability is reached. The question was raised whether performance

standard-based cost comparisons could be used in interservice support

agreement comparisons. The Revision clarifies the paragraph to note

that the answer is yes, but only when those standards are consistent

with the comparative costing rules of the Revision. This may require

some detailed analysis of industry standards and adjustments to

internal agency performance measures.

8. Conversions With Federal Employee Placement

The Revision authorizes the conversion of functions involving 11 or

more FTE to contract performance, without cost comparison, if fair and

reasonable prices can be obtained from qualified commercial sources and

all directly affected Federal employees serving on permanent

appointments are reassigned to other comparable Federal positions for

which they are qualified.

Agency and Public Comments: There was strong support and strong

opposition to this provision. One commenter suggested that no

conversions should be authorized without a cost comparison--even if all

Federal employees are placed in other comparable Federal positions. It

was suggested that this new administrative flexibility denies taxpayers

the benefits of a cost comparison and fails to accommodate public

employee interests. Short of eliminating this provision, OMB was asked

to assure the right to appeal such decisions and that placement be

limited to the commuting area. In contrast, another commenter objected

to the idea that failure to place a single employee could require a

cost comparison or otherwise delay a direct conversion to contract.

The provision has been modified to clarify that in addition to

assuring placement in ``comparable Federal positions,'' the conversion

to contract with placement and without cost comparison is limited to

competitive awards. These direct conversions to contract must retain

the benefits of full and open competition. In the absence of adverse

actions to Federal employees and similar to the policy of reliance on

the private sector for new starts and expansions, Federal managers

should be permitted to rely on the competitive dynamics of the private

sector.

The request to limit Federal employee placements to the commuting

area has been rejected. The request is too limiting and not in the

long-term best interests of either the Government, who has an interest

in redirecting important resources, or individual employees.

The comment draft admonished Federal managers not to modify,

reorganize or divide functions for the purpose of circumventing the

requirements of the Revised Supplement. One commenter further requested

the ability to appeal individual organizational changes. While the

Revision expands the appeal process to permit interested parties to

appeal not only costing questions, as permitted under the 1983

Supplement, but also general compliance issues, it does not permit

appeals of basic organizational decisions. The A-76 appeal process is

not a surrogate to resolve management-union complaints.

9. The 10 FTE or Less Rule

The 1983 Supplement's 10 FTE or less rule that permits the

conversion of a function to contract performance without cost

comparison--even with adverse employee impacts--is extended by the

Revision to the conversion of similarly sized activities to in-house or

interservice support agreement performance, without cost comparison.

Agency and Public Comments: One commenter suggested that the 10 FTE

or less threshold be raised to 50 FTE. This change would permit the

conversion of activities to or from in-house, contract or interservice

support agreement, without cost comparison and without placement

(adverse action would be authorized). This recommendation was not

accepted.

The 10 FTE or Less Rule is a recognition that there is a break-even

point where the cost of conducting the comparison is not likely to

outweigh the expected benefits. The 10 FTE or Less Rule has long been

accepted as a reasonable approximation of this point. The Revision does

not change this requirement. Based upon agency experience, we believe

that cost comparisons at the 11-50 FTE levels do result in significant

MEO and competition savings.

10. MEO Implementation

The Revision eliminates the 1983 Supplement's 180-day MEO

implementation requirement. The Revision requires agencies to develop a

transition plan for each competitive solicitation. This approach should

permit agencies to plan for employee placements and facilitate a more

orderly transition of work to or from in-house, contract or

interservice support agreement.

The Revision permits agencies to assume that current organizational

structures and wage grade systems reflect their MEO. A signed

certification is required and may be based upon an

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number of reinvention initiatives. Certified MEO decisions are not

subject to appeal.

Agency and Public Comments: There was very little comment or

disagreement on the MEO implementation change. Taken in combination

with the Revision's new requirement to conduct Post-MEO Performance

Reviews, the provision permits for better employee and workload

transition planning.

Several commenters, however, asked for permission to consider

existing interservice support agreement reimbursable rates as fully

competitive costs, under the Circular, for purposes of comparisons with

the private sector. This change has not been made. In general, these

rates do not currently reflect the requirements of the CFO Act, GPRA or

the FASB, nor do they reflect the fringe benefits, liability, overhead,

depreciation, capital, contract administration, or other cost

adjustments necessary for a level playing field to exist, such as

Federal taxes. They are also often structured to permit the cross-

subsidization of one service to another within the agency's revolving

fund.

11. Cost Comparison Completion

The 1983 Supplement makes no mention of study completion time

frames. However, because functions could not be converted to contract

or in-house performance without a cost comparison, there has been an

incentive to never complete the cost comparison, if the desired outcome

is to maintain the status quo. The Revision requires agencies to report

to OMB on any study not completed within 18 months for single function

studies and 36 months for multi-function studies and the corrective

actions taken.

Agency and Public Comments: Several commenters objected to the

suggestion that A-76 cost comparisons (including the development of the

PWS and Management Plan) can or should be completed within 18 to 36

months. Other commenters objected that the time frames were too long

and did not reflect the 45-90 day average solicitation response times

required by most Government service support solicitations.

The required report is to OMB. It is not a requirement to complete

a study. However, where a study has not been completed, the agency must

explain what the problem is and what the agency is doing to assure that

study completion times will be reasonable. The analogy to the private

sector's solicitation response requirement is inappropriate, as the

Government is also developing historical workload and minimum

performance standard data. It is not expected that cost comparisons

conducted for possible conversion from contract to in-house performance

will require these longer time frames, as the workload and performance

measures are, generally, well developed.

12. Post-MEO Performance Reviews

Contracts are regularly inspected for performance and subjected to

financial audit. As a matter of accountability, the Revision requires

agencies to conduct Post-MEO Performance Reviews on not less than 20

percent of all functions retained or converted to in-house performance

as a result of a cost comparison. These reviews will confirm that the

MEO was properly estimated and implemented and that work is being

performed in accordance with the terms, quality standards and costs

specified in the PWS.

Agency and Public Comments: This proposal was found to be

insufficient by several commenters, while it was strenuously objected

to by several others. One commenter asked that the requirement be

eliminated as an additional and unnecessary administrative burden. The

name was changed from Post-MEO Performance Audit to Post-MEO

Performance Review to assuage concerns over the level of detail

required.

OMB is committed to ensuring that the cost comparison process is

fair and equitable. A major private sector complaint has been that

Government agencies ``buy-in.'' The problem is that the private sector

undergoes extensive contract performance inspections, evaluations, and

financial audits, while the in-house organization is currently subject

to none of these oversight reviews. It was urged that 100 percent of

all in-house cost comparison ``wins'' be subjected to Post-MEO Review.

There is, however, concern for the administrative burdens being imposed

by the Circular. Therefore, the Revision retains a 20 percent

requirement.

Several commenters suggested that if the MEO is found to be in

default, it should not be allowed to compete under a new solicitation.

This recommendation has not been accepted. The Revision calls for the

contracting officer to retreat first to the next low offeror, if

feasible. If retreat to the next low offeror (contract bid) is not

feasible, a new cost comparison is required. In retreating to the next

low offeror, a conversion to contract without additional cost

comparison is possible.

One commenter suggested that Post-MEO Reviews be announced in the

Commerce Business Daily. This recommendation has not been accepted

because it would be burdensome. To ensure compliance over time, the A-

76 inventory and reporting system will require agencies to prepare an

annual list of completed cost comparisons retained in-house or by

contract and the number of Post-MEO Reviews completed. This listings

will be made available to the public upon request.

One commenter asked whether failure to comply with the Transition

Plan implementing the MEO would be construed as a default. Changes have

been made to clarify that a significant failure to implement the

Transition Plan, such that it would invalidate the cost comparison,

would be considered a default. Another commenter suggested making the

review due one year after implementation of the MEO. The 180-day MEO

implementation requirement no longer exists and since the MEO may be

implemented via the transition plan establishing a hard date to conduct

the review is difficult. It must be completed within the cost

comparison period. The time frame for completing Post-MEO Performance

Reviews is left to the discretion of the agency, but must be within the

contract or cost comparison period.

13. The Streamlined Cost Comparison Alternative

In addition to the generic cost comparison methodology, a

streamlined cost comparison process has been developed for activities

involving 65 FTE or less. This approach avoids the cost comparison's

current reliance on the procurement process, until a final decision to

contract has been made. Within the policies and procedures laid out by

the Revision, existing contracts can be used to determine competitive

private sector costs.

Agency and Public Comments: The streamlined cost comparison

methodology was generally accepted and even widely acclaimed. The only

real disagreement centered on the size of functions that could be cost

compared using the approach, which was established in the comment draft

at not more than 50 FTE.

Several commenters asked that the threshold be unlimited or raised

significantly. OMB did not expect that either the private sector or the

unions would accept an unlimited streamlined approach, as it could be

applied to convert to or from in-house, contract or interservice

support agreement. One commenter, believing that most A-76 cost

comparisons to date have involved less than 50 FTE, suggested that all

such functions be required to use the Streamlined cost comparison

approach provided by the draft. This

[[Page 14343]]

recommendation was not accepted for the reasons noted above. Under the

streamlined approach and as a matter of equity, there is no opportunity

for the development of an in-house MEO, nor is there an opportunity for

the private sector to sharpen its competitive bid. The process relies

on current in-house and contract costs.

One commenter was concerned that contracting officers, as Federal

employees, might be inclined to select the more costly comparable

contracts, in order to give Federal employees a competitive advantage.

To mitigate against this possibility, it was suggested that industry

``input'' in the selection of comparable contracts is necessary. We

disagree. We are not prepared to make such an assumption nor is OMB

prepared to impose the additional administrative burdens implied by

such a process on the agencies. The contracting officer's selection of

comparable contracts--adjusted for scope and quality, are not subject

to appeal.

Two other important comments were received on this issue. First,

there was a request that a policy statement be included that it is the

policy of the Government to consolidate mutually supporting functions

to the extent possible, to achieve economies of scale. This

recommendation has not been accepted, because A-76 is not the place for

such a policy determination and should rather be left to agency

managers. It was also recommended that the section include a

prohibition on breaking functions down to permit the use of the

streamlined approach. Like the prohibition against modifications and

reorganizations to permit direct conversion to contract, the comment

draft has been revised to prohibit agencies from reorganizing

specifically to permit the use of a streamlined cost comparison.

14. Sector-Specific Cost Comparison Methodologies

The Revision provides sector-specific cost comparison methodologies

for aircraft and aviation services and for motor vehicle fleet

management services. Additional sector- specific cost comparison

methodologies are expected and interested parties are encouraged to

work with OMB on their development.

Agency and Public Comments: While comments were received in

response to the two industry cost comparison methodologies outlined in

the draft, there were no objections to the concept of sector-specific

cost comparisons or their development.

Initially, the General Services Administration (GSA) raised

concerns about the proposed cost comparison requirements for comparing

interservice support agreement performance of motor vehicle fleet

services. GSA was concerned that the requirement might conflict with

the GSA Administrator's statutory authorities regarding motor vehicles.

After further discussion, OMB and GSA agreed to jointly issue the

guidance in Appendix 7 on the conduct of these comparisons. Changes

were also made to the aircraft and aviation cost comparison methodology

to reflect cost accounting improvements suggested by industry and made

through the Interagency Committee for Aviation Policy (ICAP).

15. Costing Changes

a. Labor. Based upon the Air Force Management Engineering Agency

(AFMEA) man-hour availability report, the Revision increases the annual

available productive hours per Federal employee from 1744 hours to

1776. Fringe benefit factors are updated and expanded to include the

projected costs of retirement health benefits to the Government. The

standard retirement cost factor for the Federal Government's complete

share of the weighted CSRS/FERS retirement cost to the Government,

based upon the full dynamic normal cost of the retirement systems; the

normal cost of accruing retiree health benefits based on average

participation rates; Social Security; and Thrift Savings Plan (TSP)

contributions has been increased from 21.7 percent to the current

(1996) rate of 23.7 percent of base payroll for all agencies.

Agency and Public Comments: There was very little comment or

disagreement on the cost of labor or fringe. One commenter noted that

the number of productive military hours in a given year are not cited

and suggested that a 30 percent cost penalty be added to in-house bids

that assume continued or mixed military operations. The Revision has

been changed to require the Service's Comptroller to establish the

number of military productive hours in a year.

b. Material Costs. The escalation rates for supplies received from

GSA and DLA are removed. The escalation issues reflected in the 1983

Supplement are now reflected in the reimbursable rates used by these

agencies.

Agency and Public Comments: There was very little comment or

disagreement on the cost of materials.

c. Overhead. The inclusion of direct and indirect operations and

general and administrative overhead has long been an area that has led

to difficulty and controversy. This controversy has been aggravated by

the fact that the Supplemental Handbook requires, generally, the

calculation of the competitive costs of in-house MEO performance, not

the fully allocated cost of in-house (or contract) performance. In an

effort to resolve this problem and improve the integrity of the cost

comparison process, the Revision requires a standard overhead cost

factor of 12 percent of direct labor costs.

Agency and Public Comments: Industry and trade groups strongly

supported the standard overhead cost factor concept. It has been their

sense that agencies have significantly understated overhead in A-76

cost comparisons, generally. One commenter, recognizing the difference

between fully allocated costs and the comparative cost approach

utilized by the Supplement, suggested a rate of 15 percent instead of

the 12 percent in the comment draft. Agencies were either silent on the

issue, agreed, or agreed in principle but recommended a range of

alternative factors (ranging from 5 percent to 12 percent).

The Revision continues to require a 12 percent standard overhead

cost rate in each cost comparison. Within DOD, however, the Revision

distinguishes civilian from military overhead. DOD military overhead

will be established by the Service Comptroller. It should also be

reemphasized that the Revision permits any agency to submit data to

justify any one of a series of alternative agency-wide standard cost

factors to OMB for approval.

d. Cost of Capital. The 1983 Supplement did not require agencies to

consider the cost of capital in the development of their in-house cost

estimate, though such costs were effectively included in competitive

contract offers. The Revision requires that agencies include the cost

of capital for those assets purchased two years before or during the

cost comparison performance period and not provided to the contractor

as Government Owned and Contract Operated (GOCO) equipment or

facilities. Neither capital nor depreciation costs of GOCO facilities

and equipment are included in the cost comparison. This change is

designed to remove current incentives to delay cost comparisons while

new, more efficient equipment is acquired and to reflect the real costs

of new assets to the taxpayer.

Agency and Public Comments: There was very little comment or

disagreement on the limited inclusion of the cost of capital.

e. Severance Pay. The 1983 Supplement permitted agencies to

calculate severance at 2% of direct labor or as determined by a Mock

RIF. Based

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upon the low actual severance rates incurred to date and to avoid the

significant administrative costs and delays attendant with conducting a

detailed Mock RIF, the comment draft would have restricted severance

costs added to the contract bid to 2% of labor costs.

Agency and Public Comments: Upon review, several commenters

suggested that the 2 percent severance factor is too low given current

downsizing efforts. Placement is getting more and more difficult and a

wider range of services are now being considered for conversion. It was

also noted that recent emphasis on interservice support agreements and

franchising will result in the elimination of additional placement

opportunities.

To accommodate these concerns, the Revision now uses a factor of 4

percent. Agencies may also develop agency-wide severance pay factors,

with associated documentation, for approval by OMB.

f. Contract Administration. The 1983 Supplement permitted agencies

to use a contract administration factor (Table 3-1) or more accurate

data. Again, in an effort to improve upon the integrity of the cost

comparison process and reduce the administrative burdens of conducting

a cost comparison, the Revision requires the use of Table 3-1, but the

factors have been increased for most studies. This approach balances

recent changes in Federal procurement regulations, that make contract

administration easier, with concern that proper oversight is achieved.

Agency and Public Comments: There was very little comment or

disagreement on the cost factor for contract administration.

g. Gain or loss on Assets. The 1983 Supplement permitted agencies

to add to the contract price the loss taken on any asset excessed, even

if the asset is used by the in-house MEO and not made available to the

contractor. The Revision does not permit any losses to be calculated on

any asset not included in the MEO. Assets used by the MEO and not made

available to the contractor can only be calculated as gains and

subtracted from the contractor's bid.

Agency and Public Comments: There was very little comment or

disagreement on this issue.

h. The minimum Differential. The minimum differential represents

three costs; (1) costs not specifically included in the in-house cost

estimate; (2) unknown morale and other disruption costs caused by a

conversion decision; and (3) a minimum level of estimated savings to

the taxpayer. The differential also applies to conversion to in-house

performance.

Agency and Public Comments: There was very little comment or

disagreement on the minimum differential, although one commenter

recommended its elimination. Initially, the draft provided for the

minimum differential to be set at 10 percent of the labor costs in line

1 of the cost comparison form. It was noted, however, that this

differential can become more and more burdensome as studies involve

larger groups of employees. For this reason the minimum differential is

capped for conversions to or from in-house, contract or interservice

support agreement performance at the lesser of 10 percent of in-house

personnel-related costs (Line 1) or 10 million over the performance

period. Whenever a cost comparison involves a mix of existing in-house,

contract, new or expanded requirements, or assumes full or partial

conversions to in-house performance, each portion is addressed

individually and the total minimum differential is calculated

accordingly.

I. Prorating of Asset Costs. The Revision provides that assets made

available to the contractor are eliminated from consideration in the

cost comparison. Only the remaining competitive costs of operations or

maintenance are included. Assets not made available to the contractor

are included at their depreciation values.

Agency and Public Comments: One commenter suggested that assets

used by more than one in-house activity should also be treated as a

common cost and not included in the Government's in-house estimate. The

problem is that conversion to contract or interservice support

agreement will change that asset's consumption rate. Equity requires

that all assets used by the MEO and not provided to the contractor be

treated as having value, particularly when the contractor must replace

those assets at a direct cost to that contractor's competitive offer.

16. Other Changes

Other changes in the Revised Supplement are designed to address

specific problems that have been raised over the years. These include

the following:

a. Interservice Support Agreements

The 1983 Supplement required agencies to conduct cost comparisons

with the private sector prior to entering into an interservice support

agreement (ISSA). The 1983 Supplement also required all existing

interservice support providers to cost compare their current operations

not later than September 30, 1987, or all related work would be

converted directly to contract performance.

The Revision clarifies policies regarding the use of interservice

support agreements and establishes revised cost comparison

requirements. ISSAs may offer agencies the opportunity to reduce costs

through economies of scale. As a result and to encourage agency

consideration of ISSAs, the Revision permits agencies to consolidate

existing, new or expanded work requirements to ISSAs, without cost

comparison, if that work is transferred prior to October 1, 1997, and

the consolidation does not result in a conversion of work to or from

contract performance and the conversion is not otherwise authorized by

the Revision. Effective October 1, 1997, the Revision will permit

agencies to continue and to renew existing ISSA agreements without cost

comparison. Agency heads may also consolidate support services into

new, intra-service revolving or franchise funds without cost

comparison--assuming that such a consolidation does not involve the

conversion of work to or from in-house or contract performance.

Effective October 1, 1997, and unless otherwise exempt from the cost

comparison requirements of the Circular, new or expanded interservice

support requests must be justified by a cost comparison. ISSAs that

have themselves, however, conducted a cost comparison with the private

sector may, at the customer agency's discretion, accept new or expanded

work without further cost comparison on the customer or provider

agency's part, until the provider agency's workload increases by 30

percent or 65 FTE, at which time another provider cost comparison is

required.

Agency and Public Comments: Reaction to proposed interservice

support agreement cost comparison requirements was as mixed as it was

strong. The industry and trade group commenters were opposed to the

cost comparison process outlined in the Revision, as weakening the

provisions of the 1983 Supplement, though it is recognized that the

1983 provisions were not complied with in practice. The Revision,

generally, only restricts the growth of these activities and then only

as determined by a cost comparison.

In contrast and with only one exception, Federal agencies were

equally opposed to any requirement to compete even new or expanded work

with the private sector, prior to initiating an interservice support

agreement. Agencies are concerned that requiring A-76 cost comparisons

for interservice support agreements will have a chilling effect upon

the efficient

[[Page 14345]]

use of such agreements. In the view of the several commenters, the

under-utilization of existing Government capacity is already cause for

concern. The agencies were also opposed to the inclusion of

depreciation, capital, contract administration costs and the minimum

differential, when comparing interservice support agreement costs with

agency or contract offers. More importantly, these commenters expressed

concern that the administrative flexibilities made available by ISSAs

will be lost if subject to A-76 administrative appeal.

To further full and open competition, OMB has, in large part, not

adopted these agency recommendations. Interservice support agreements

are designed to provide commercial activities, under contract and under

an agreed upon reimbursable rate. Existing ISSAs will continue at the

customers option. The Revision relies on competition to determine their

growth. It is inappropriate to simply displace a private sector offeror

by resorting to internal agreements. Concerns for administrative

flexibility are met by the Revision's use of exemptions, waiver

opportunities and the incentives created to encourage existing ISSAs to

compete directly with the private sector. Nevertheless, in an effort to

encourage agencies to consider ISSAs, the draft was changed to permit

agencies to consolidate work to ISSAs prior to October 1, 1997, without

a cost comparison.

One commenter that strongly agreed with the draft's outline and

requirements, also sought to have the Revision clarify what a proposing

agency needed to submit in response to a requesting agency's

solicitation and to clarify the requesting agency's right to reject an

ISSA proposal. These changes have been made. The requirement was also

clarified to permit Federal and State governments to provide and

receive services without cost comparison to meet emergency disaster

relief requirements.

Finally, several commenters suggested that a specific exception be

granted to inherently governmental activities, particularly interagency

contract administration services. As previously noted, inherently

governmental functions are not subject to the cost comparison

requirements of the Circular or this Supplement. The Revision

clarifies, however, that inherently governmental levels of contract

administration are not subject to the cost comparison requirements of

the Supplement.

b. Military Personnel

The 1983 Supplement provided that commercial activities performed

by military personnel were to be converted to civilian performance.

This resulted in a reluctance to cost compare certain activities. The

Revision permits the military Services to cost military personnel at

the composite rate issued by the DOD Comptroller and, if retained in-

house, would permit these activities to continue to be performed by

military personnel. This change does not, however, authorize the

conversion from in-house civilian to military personnel.

Agency and Public Comments: There was very little comment or

disagreement on this issue.

c. Source Selection

There have been complaints that the 1983 Supplement was too cost

determinative and that it relied too heavily on the low bid offeror.

The benefits of competition should be expressed in terms of the quality

of services and in terms of cost to the taxpayer. The problem has been

how the Government's quality of services will be evaluated and by whom,

when: (a) A Government agency itself has a vested interest in the

competition and (b) the best overall private sector offeror chosen from

among qualified and responsive offerors is not the low contract

offeror. Guidance is provided on the use of competitive negotiation or

source selection techniques in A-76 cost comparisons. The Revision

permits agencies to conduct cost comparisons and award to other than

the low private sector offeror.

Agency and Public Comments: The private sector, generally, raised

concerns regarding the use of ``best value'' contracts and the

inclusion of ``past performance'' in the selection process. While

recognizing that the Revision includes needed guidance on the use of

source selection and negotiated procurement in a cost comparison with a

vested Government interest, these commenters sought assurances that the

Government's in-house bid would also undergo a ``best value'' and a

``past performance'' evaluation. The problem, of course, is that the A-

76 process assumes that the selected private sector offeror will

compete with a duly authorized Government cost estimate. A costing

penalty that would assume that the in- house bid was not a good past

performer was suggested, but not quantified, or accepted.

A-76 has long assumed that in-house performance is acceptable and,

thus, the in-house bid has always been treated as a responsive,

responsible offer. This is not unlike what is done in the private

sector when a true make or buy decision is being analyzed. While it is

true that as much as 25 percent of a contractor's technical proposal

may be weighted for evaluation purposes for past performance, the

contractor's bid does not directly include past performance in

competition with the Government's cost estimate. The recommendation has

not, therefore, been accepted.

d. Appeals

Following a tentative waiver or cost comparison decision, the A-76

Administrative Appeals process is invoked. The procedure does not

authorize an appeal outside the agency or judicial review, nor does it

authorize sequential appeals.

The Revision extends the time frame that appeals may be submitted

from 15 working days to 20. The agency may extend the appeal period to

a maximum of 30 work days if the cost study is particularly complex.

Agency and Public Comments: One commenter placed great emphasis on

the appeals process and was generally supportive of the process

outlined by the Revision. Greater latitude in the range of issues that

are subject to appeal, clarification as to the right to appeal agency

waiver decisions, and for the right to appeal to an authority outside

of the agency was requested. The Revision was changed to clarify that

appeals may be made, based upon the factual information contained in

agency waiver justifications. Changes were also made to modify the

scope of eligible appeals to include: formal information denials,

instances of clear A-76 policy violations, and to clarify that

streamlined and sector specific cost comparisons were subject to

appeal.

Not accepted was a recommendation to permit appeals of agency

reorganizational decisions. The issue here is the establishment of an

agency's reorganization for the alleged ``purpose'' of violating the

Circular. The recommendation could potentially subject all

modifications and organizational changes to an A-76 appeal. Also not

accepted was a recommendation that appeals be decided by another

agency. The request to appeal to an outside agency was not accepted,

because it would be administratively burdensome and because experience

with the Circular has not shown intra-agency appeals to be flawed. We

should note, however, that the Revision raises the level of the appeal

authority above that provided in the 1983 Supplement. Finally, one

commenter requested authority to

[[Page 14346]]

appeal agency ``core'' determinations. This recommendation was not

accepted; these are non-appealable management decisions.

One commenter noted that the appeals procedures did not

specifically address the use of performance measures as permitted by

Part I, Chapter 1.C.7. An additional paragraph clarifying this point

has been included in the Revision.

Another commenter suggested that the private sector should be able

to initiate a cost comparison requirement and, further, appeal any

agency decision to dismiss private proposals to contract out or conduct

a cost comparison. This recommendation was not accepted. The decision

to conduct a cost comparison, like other management decisions, is left

to the agency's discretion without appeal. While vendors may make

proposals to agency mangers to contract out and may identify ways to

reduce cost or overhead and improve services, there is no

administrative recourse provided by this Supplement, if the agency opts

not to conduct a study.

e. Right of First Refusal

The concept of the Right-of-First-Refusal was first established by

the 1979 Supplemental Handbook. This concept holds that, as a condition

of contract award, the contractor in an A-76 decision to convert from

in-house to contract performance shall provide adversely affected

Federal employees the ``Right-of-First-Refusal'' for jobs created in

the contractor's organization as a result of the award of the contract.

The Revision reaffirms this as a superior requirement, while

incorporating E.O. 12933, ``Non- Displacement of Qualified Workers

Under Certain Contracts,'' dated October 20, 1994, which extends the

Right-of-First-Refusal to existing and to subsequent contract employees

in this or follow-on contracts.

Agency and Public Comments: There was no comment on this issue.

[FR Doc. 96-7868 Filed 3-29-96; 8:45 am]

BILLING CODE 3110-01-P