Recent Developments In Federal Outsourcing
 
June 1, 2000
 
David Scott "Dave" Black- Northern Virginia

Office of Management and Budget (OMB) Circular A-76 mandates a detailed process for evaluating the costs and benefits of outsourcing work previously performed by government employees. Recent developments show that the process remains controversial among federal agencies, federal employees, and private contractors. Agencies, employees and their unions complain that the process is long, highly complex, costly and detrimental to morale. Private contractors typically complain that the current A-76 process does not provide a “level playing field” for competition because assumptions and adjustments made to particular cost elements of competing proposals unfairly favor the government. Contractors have also complained that employees whose jobs are the subject of an A-76 study have a conflict of interest and should not be involved in the source selection process. The following is a summary of recent developments in the area of federal outsourcing.

Legislative and Regulatory Developments

On May 4, 2000, OMB issued a notice in the Federal Register proposing to limit the participation of federal employees whose jobs are included in an A-76 cost comparison study as members of a related A-76 Source Selection Team. In its announcement, OMB stated that limiting such participation is “a better business practice.” Under the proposed new rule, “individuals who hold positions in an A-76 study should not be members of the Source Selection Team, unless an exception is authorized by the head of the contracting activity,” in “compelling circumstances.” Agency and public comments on this proposed change to the OMB Circular A-76 Revised Supplemental Handbook were due by June 19, 2000. OMB’s announcement comes on the heels of a GAO decision last year sustaining a protest of an A-76 cost comparison study after finding that the evaluation process was “fundamentally flawed” because 14 of the 16 agency evaluators held positions that could be contracted out as a result of the study.

On the legislative front, Congress is considering amendment of the Federal Activities Inventory Reform (FAIR) Act. The inaugural 1999 FAIR Act inventories completed by 115 agencies revealed that almost 900,000 federal employees (of a civilian workforce of about 1.7 million) perform work that is not inherently governmental and thus could be contracted out to the private sector. Although the FAIR Act permitted interested parties to challenge an agency’s inclusion or exclusion of an activity from its list, anecdotal evidence suggests that challenges were only marginally successful.

Proposed legislation currently before House and Senate subcommittees would expand the content of inventory lists and broaden the time and substance of challenges to the lists. Both bills, H.R. 4103 and S. 2242, would require agencies to provide lists of both commercial and inherently governmental activities. For the first time, interested parties could challenge an agency’s classification of a particular activity as “inherently governmental.” Moreover, the time for launching a challenge would be lengthened from 30 to 90 working days after the agency’s publication of the list. The proposed bills would also restrict agencies from performing commercial activities for other agencies pursuant to an agency agreement without permitting public-private competition through an A-76 cost-comparison study.

Agency Actions

The Navy recently began employing a concept known as “strategic sourcing” as an additional approach to reengineering organizations within the Department. The crux of “strategic sourcing” is a “functionality assessment” that reviews the operation of an entire function, which can include both commercial and inherently governmental activities, to determine whether processes can be eliminated, improved or streamlined. In this way, strategic sourcing is broader than A-76 studies, which focus on the costs of conducting commercial activities in-house versus contracting out. As part of the functionality assessment, the Navy considers whether it can achieve savings by converting the organization or parts of the organization to performance by the private sector. In this way, strategic sourcing may result in private-public competition for activities or functions not previously deemed “commercial.” Strategic sourcing is likely to be implemented by other DoD departments. DoD guidelines for strategic sourcing have been drafted and are awaiting final approval.

Developments in A-76 Case Law

In two decisions earlier this year, the GAO demonstrated its willingness to play an active role in overseeing the conduct of A-76 studies to ensure that agencies comply with the applicable A-76 study procedures. In Aberdeen Technical Services (issued Feb. 22, 2000), the GAO sustained a protest based on flaws in the estimate of personnel costs, the agency’s failure to allowed a price reduction offered by the private-sector offeror in its final proposal, and the agency’s failure to ensure that the in-house solution offered the same level of performance as the “best value” private-sector offeror. In Trajen, Inc. (issued March 28, 2000), the GAO sustained a protest of a review authority’s decision on the ground that it lacked a reasonable basis for reversing the initial cost comparison conclusion in favor of the private offeror. The opinion features a detailed discussion of the government’s consideration of “one-time conversion costs” and the adjustment of the contractor’s proposal to reflect the payment of federal income tax.

No doubt further inflaming federal employees who already complain they lack a sufficient voice in the A-76 process, the Court of Federal Claims (COFC) recently held that federal employees and their unions cannot sue in federal court to protest an allegedly flawed cost-comparison study under A-76. See American Federation of Gov’t Employees v. United States, No. 00-130C (Fed. Cl. May 10, 2000). The case is significant because the Court held that federal employees and their unions are not “interested parties” under the provisions of the Tucker Act, which grants the COFC bid protest jurisdiction. The COFC reasoned that “interested parties” under the Tucker Act include persons who have standing in federal district courts under the Administrative Procedure Act (APA) to challenge procurement decisions. However, the COFC concluded that federal employees and their unions lack such APA standing because they are not within the zone of interests protected by the cost-comparison provisions of either the FAIR Act or 10 U.S.C. § 2462.