Federal Register: November 19, 2002 (Volume 67, Number 223)
DOCID: FR Doc 02-29472
OFFICE OF MANAGEMENT AND BUDGET
Management and Budget Office
NOTICE: NOTICES
ACTION: Commercial activities performance (Circular A-76):
DOCUMENT ACTION: Proposed revision to Office of Management and Budget Circular No. A76, ``Performance of Commercial Activities.''
SUBJECT CATEGORY:
Performance of Commercial Activities
DATES: Interested parties should submit comments to OFPP, Office of Management and Budget, at the address shown below on or before December 19, 2002.
DOCUMENT SUMMARY:
The Office of Management and Budget (OMB) proposes major revisions to Circular No. A76 to improve the management of commercial activities that are needed to conduct the business of government. The revisions would expand the use of publicprivate competitions to all activities performed inhouse and through commercial interservice support agreements (ISSAs). The revisions would also incorporate principles of the Federal Acquisition Regulation (FAR) into the competitive sourcing process, including the ability to conduct an expanded best value costtechnical tradeoff source selection process. In addition, the revisions would provide guidance for the development of inventories identifying the commercial and inherently governmental activities agencies perform, and prescribe limitations regarding the reimbursable services federal agencies may provide to state and local governments.
To accomplish these changes, OMB is proposing to revise and incorporate the following documents into the revised Circular A76: the ``Revised Supplemental Handbook to OMB Circular A76'' (March 1999); OMB Circular A76 Transmittal Memoranda Nos. 124; Office of Federal Procurement Policy (OFPP) Policy Letter 921, ``Inherently Governmental Functions''; and OMB Circular A97, ``Provision of Specialized or Technical Services to State and Local Units of Government by Federal Agencies Under Title III of the Intergovernmental Cooperation Act of 1968.'' The Revised Supplemental Handbook to Circular A76 (hereafter ``Supplemental Handbook''), OFPP Policy Letter 921 and OMB Circular A 97 would be rescinded.
SUMMARY:
Revision,
DOCUMENT BODY:
[[Page 69770]]
SUPPLEMENTAL INFORMATION
A. Overview
To lower costs for taxpayers and improve program performance to
citizens, OMB has undertaken major revisions to the processes and
practices in OMB Circular A76 that govern how federal agencies
determine whether commercial activities will be performed by public or private sources. The proposed revisions would:
[sbull] Significantly expand the use of publicprivate competition
by (i) eliminating exceptions that have permitted federal agencies to
provide services to one another on a solesource basis under
reimbursable feeforservice agreements (i.e., commercial ISSAs) and
(ii) requiring periodic recompetitions of commercial activities performed for the government;
[sbull] Make processes simpler and easier to understand, including
greater reliance on concepts and practices set forth in the FAR that
are familiar to, and well tested by, the acquisition community;
[sbull] Improve the effectiveness of competitions by giving
agencies greater flexibility to consider quality in source selections,
including the use of costtechnical tradeoffs for information technology (IT) and certain other activities;
[sbull] Improve public trust in publicprivate competitions by avoiding any appearance of conflicts of interest;
[sbull] Increase visibility into the management of government by
requiring agencies to develop lists of their commercial and inherently
governmental activities and make them available to the public; and
[sbull] Strengthen accountability for achieving results by
centralizing agency oversight for the management of commercial
activities and increasing the focus on postaward administration of
agreements with public providers to be more consistent with practices applied to contracts with private sector providers.
B. The Purpose and Procedures of OMB Circular A76
Federal agencies rely on a mix of public and private sector sources to perform a wide variety of recurring commercial activities that are needed to conduct the business of government. These activities range all the way from custodial services to data collection, computer services and research, testing, and maintenance of equipment used by our nation's war fighters. OMB Circular A76 establishes the policies and procedures for identifying commercial activities and determining whether these activities should be provided through contract with commercial service providers, by inhouse government personnel, or through reimbursable feeforservice providers under ISSAs with other government agencies.
Before an agency shifts commercial work from one sector to another
(e.g., from inhouse performance to contract, or vice versa), Circular
A76 generally requires the agency to conduct a publicprivate
competition in which the cost of performance is compared between and
among the public and private sectors. To perform a ``cost comparison'' under the current Circular, agencies must:
[sbull] Develop a performance work statement (PWS);
[sbull] Create a management plan to determine the government's ``most efficient organization'' (MEO);
[sbull] Establish an inhouse government cost estimate for the in
house plan that is then certified by an independent reviewing official
(IRO) for compliance with the PWS and costing policies set forth in the Circular;
[sbull] Issue a solicitation in accordance with the FAR seeking
offers from private and public sector sources, except for the inhouse
source, whose cost estimate is submitted and evaluated independently;
[sbull] Identify the best offer submitted in response to the solicitation and compare it to the inhouse estimate; and
[sbull] Make award to the lower cost alternative (which is subject to review under an administrative appeals process).
The Circular also recognizes a variety of circumstances in which agencies are
[[Page 69771]]
not required to conduct cost comparisons.
No shifting of work contemplated. Cost comparisons are not required where work is not presently being performed inhouse and the agency seeks to award a contract for a new or expanded service requirement or for a service that is currently being obtained through a competitively awarded contract.
Direct conversions. The Circular allows agencies to directly convert work to or from the private sector without cost comparison under certain circumstances. For example, work may be directly converted where an activity is or will be performed by an aggregate of 10 or fewer ``fulltimeequivalent'' employees (FTEs), or where conversion will result in no employee impact (e.g., because they are reassigned to comparable federal positions or voluntarily retire).
Ongoing agency performance. Commercial services activities that have been continuously performed by an inhouse provider or another agency through an ISSA are not subject to recurring cost comparisons. In March 1996, OMB amended the Supplemental Handbook to require cost comparisons before new or expanded work is performed inhouse or through an ISSA. However, there is no limitation on the length of the new agency performance agreements, thus allowing indefinite deferral of further competitions.
Exercise of agency waivers. Agency heads are authorized to waive cost comparisons under certain conditions. For instance, an agency may waive the cost comparison requirement where a conversion will result in a significant financial or service quality improvement and the proposed conversion will not serve to reduce significantly the level or quality of competition in the future award or performance of work.
C. Shortcomings of Current Circular A76 Processes
Since its original issuance in 1966, Circular A76 has been revised three timesin 1967, 1979, and 1983. The Supplemental Handbook, first issued in 1979, has been revised three timesin 1983, 1996 and 1999. Despite the revisions, including the development of streamlined cost comparisons for activities with 65 or fewer FTEs, the policies and processes of Circular A76 have not been widely applied. While the Department of Defense has undertaken some noteworthy efforts, most of the 850,000 FTEs that agencies have identified as performing commercial activities (nearly half of all federal employees) remain insulated from the dynamics of competition.
A variety of factors have limited the Circular's use and effectiveness:
The Circular's exceptions allow for significant amounts of agency work to be performed without competition. As described above, ISSAs between federal agencies for commercial support services in place before 1996 enjoy a special exemption from the Circular's competition requirements. Simply put, there is no requirement to subject these reimbursable agreements to competition unless an agency voluntarily decides to consider changing its current provider. As a result, billions of taxpayer dollars continue to be spent on federal operations that have never been exposed to the innovation and efficiency that competition generates. Even where competitions are conducted, there are no requirements to limit the period of performance if a public provider wins the competition. Consequently, many public providers continue to escape the competitive pressures that would likely motivate optimal performance.
The competition process is complicated and not well understood. Conducting a cost comparison can be time consuming and complex. In house providers often lack the training and technical support needed to develop management plans, solicitations, or fully allocated cost estimates. In addition, the Circular includes numerous procedures that are different from the established acquisition processes set forth in the FAR for conducting competitions among private sector sources. These differences serve as necessary safeguards for publicprivate competitions, especially when inhouse performance is contemplated. However, many believe the process for carrying out publicprivate competitions under Circular A76 could be made more understandable by using basic FAR principles.
Current processes do not give agencies sufficient flexibility to make best value decisions. Historically, Circular A76 has focused agency sourcing decisions on cost. Cost must always be a factor and often should be the most important factor. At the same time, securing good performance often hinges on quality considerations that may require agencies to make tradeoffs between cost and quality when evaluating sources. The 1996 Supplemental Handbook introduced the concept of best value to publicprivate competitions. However, it places significant limitations on an agency's ability to use cost technical tradeoffs in a publicprivate source selection process.
Many believe the process is susceptible to gaming. Despite various safeguards, including costing principles that allow federal managers to make cost comparisons between sectors that have vastly divergent approaches to cost accounting, there remains a general sense that publicprivate competitions are not always fair. This perception is driven, in part, by the fact that agencies have considerable control over the timing of competitions. Managers often delay the start of, or unnecessarily draw out, competitions without consequence, hurting morale and reducing the number of private sector firms willing to compete. In addition, federal employees historically have been allowed to participate both in defining performance requirements and developing the inhouse offercausing some to question if conflicts of interest could exist. These concerns serve to discourage participation in publicprivate competitions and weaken taxpayer confidence in the overall process.
Accountability for results is limited. When public employees compete and win work, government managers are often not held fully accountable for making good on the projected savings and improved performance identified in the agency's offer. Current guidance requires postcompetition reviews, but only for 20 percent of the functions performed by the government following a cost comparison. As a result, even where competition is used to transform a public provider into a highvalue service provider, few steps are routinely taken to ensure this potential translates into positive results.
D. Proposed Revisions to Circular A76
OMB is committed to improving significantly the processes and practices federal agencies use to determine whether commercial activities will be performed by public or private sector sources. These decisions have a direct and substantial effect on the government's ability to deliver quality service to our citizens in a costeffective, timely, and responsible manner. Therefore, OMB is proposing major revisions to Circular A76 to: (1) Improve and expand the use of competition in publicprivate sourcing decisions, (2) better ensure fairness, integrity, and transparency in the decisionmaking process, and (3) strengthen accountability for achieving results.
In addition to making significant substantive changes, OMB is
modifying the organization of the Circular to improve clarity and ease
of use. The main body of the Circular (now a twopage document) lays out the basic
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policy tenants and responsibilities that agencies must undertake.
Guidance for carrying out these responsibilities, and a detailed
glossary of acronyms and definition of key terms, are set forth in six attachments:
Attachment AInventory Process
Attachment BPublicPrivate Competition
Attachment CDirect Conversion Process
Attachment DInterService Support Agreements
Attachment ECalculating PublicPrivate Competition Costs
Attachment FGlossary of Acronyms and Definitions of Terms
The key substantive changes in the proposed revision to Circular A 76 are as follows:
1. Improving and Expanding the Use of Competition
This Administration's general policy is to rely on competition to select the providers of commercial activities that agencies perform in carrying out their missions. The benefits of competition are well documented. The General Accounting Office (GAO) and the Center for Naval Analysis repeatedly have concluded that subjecting larger in house operations to competition has consistently generated cost savings exceeding 30 percent. See, e.g., Future Years Defense Program: Funding Increase and Planned Savings in Fiscal Year 2000 Program Are at Risk, GAO/NSIAD0011 (November 1999); Evidence on Savings from DOD A76 Competitions, Center for Naval Analysis, CRM 98125 (November 1998); LongRun Costs and Performance Effects of Competitive Sourcing, Center for Naval Analysis, CRM D0002765.A2 (February 2001).
The President has identified competitive sourcingi.e., the process of opening the government's commercial activities to the discipline of competitionas one the five main initiatives of his Management Agenda for improving the performance of government. Changes set forth in the proposed revisions to Circular A76 are designed to facilitate broader and more strategic use of competitive sourcing as a management tool for improving agency performance.
a. Competition as the Norm
i. Presumption that an activity is commercial. The revised Circular will require agencies to presume that all activities are commercial in nature unless an activity is justified as inherently governmental. See Sec. 4.b. of the Circular and ] D.1 of Attachment A. To reinforce this presumption, agencies will be required to submit annual inventories of their inherently governmental positions. See ] C.3. of Attachment A. The Circular offers a more concise definition of ``inherently governmental'' and rescinds the more complex description contained in OFPP Letter 921 to achieve greater consistency in the identification of inherently governmental positions. The responsibility to develop an inherently governmental activities inventory will be in addition to the general obligation for agencies to prepare comprehensive annual inventories of their commercial activities performed by Federal activities, a requirement derived from the Federal Activities Inventory Reform (FAIR) Act (Pub. L. 105270; 31 U.S.C. 501 note). See ] C.1. of Attachment A. With limited exception, the list of inherently governmental activities will be made available for public review. These additional steps should help to improve the accuracy of inventories and cast greater transparency on the government's commercial activities overall.
ii. Elimination of anticompetitive agencytoagency arrangements. The revised Circular will eliminate the ``grandfather clause'' that currently permits public reimbursable service providers working under commercial ISSAs in existence prior to March 1996 to perform work indefinitely without being subject to competition. Agencies relying on public reimbursable providers will be required to develop plans for competing these commercial ISSAs within five years. All commercial ISSAs that are not competed or directly converted within this timeframe will be terminated, unless specific approval is granted by OMB's Deputy Director for Management, based on a report submitted by the head of the customer agency demonstrating why competition is not yet feasible. See ] B.3.of Attachment D.
In addition, customer agencies will be required to periodically test the marketplace by recompeting requirements performed by public reimbursable providers, just as they would with private sector contractors. This will help to ensure that all sources, public and private, are appropriately incentivized to perform at their best. Generally, agencies will be required to recompete commercial ISSAs every five years. The exact performance period will be identified in the ISSA or in a letter of obligation when the work is performed in house directly by the agency employees. See ]] C.2.a.(5). and C.5.a.(4). and b.(2). of Attachment B.
There will be limited exceptions to the recompetition requirement. For example, commercial ISSAs will not be subject to competition if the revenue generated to the public reimbursable service provider performing under the ISSA does not exceed $1 million on an annual basis. An exemption will also be provided for inherently governmental ISSAs that, among other things, establish contracts for interagency use e.g., such as a governmentwide acquisition contract or multi agency contract), and where the public reimbursable provider bears no responsibility to the customer agency for performance of the work and the customer agency is responsible for making all payments directly to the contractor. See ] A of Attachment D.
Finally, the revised Circular will incorporate longstanding limitations imposed on federal agencies regarding the reimbursable services they provide to state and local governments. See ] H of Attachment D. These requirements, which are based on section 302 of the Intergovernmental Cooperation Act of 1968 (31 U.S.C. 6505), are currently implemented in OMB Circular A97. Circular A97 states that federal agencies may provide only specialized or technical commercial services to a state or local government if, among other things: (1) The requesting state or local government entity demonstrates that it has sought but has been unable to identify a satisfactory private sector source, (2) the provision of such specialized and technical services shall not require additional resources, beyond those necessary to meet federal requirements, and (3) the service is currently provided by the agency for its own use and, if commercial in nature, has been competed in accordance with Circular A76. By rescinding Circular A97 and incorporating its requirements in Circular A76, the key policies addressing the appropriate parameters of federal performance of commercial activities will be set forth in one document.
b. Expanded Reliance on WellEstablished FAR Practices
The revised Circular requires that agencies generally comply with
the FAR in conducting competitions. See Sec. 4.d. of the Circular and
] C.2. of Attachment B. The general principles of the FAR are well
established and enjoy widespread familiarity within the procurement
community. Greater application of FARtype principles and practices
throughout the Circular is intended to bring publicprivate
competitions closer to mainstream source selection and reduce confusion that may currently
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make it more difficult for parties to compete. Examples of FARtype
principles that have been incorporated into the revised Circular include:
[sbull] Greater uniformity in the application of basic requirements
to private and inhouse providers. For instance, inhouse offers
(referred to in the proposed Circular as ``agency tenders'') will be
required to respond to a solicitation within the same timeframes
required of private sector offerors or public reimbursable tenders or
risk elimination from the competition. See ] C.3.a.(2), (8) and (9) of
Attachment B. Furthermore, instead of having an IRO review the agency
tender, while all other offerors are reviewed by the source selection
evaluation board (SSEB), the SSEB will simultaneously evaluate all
tenders simultaneously with all offers. See ]] C.4.a.(1).a, a.(2)., and a.(3).a. of Attachment B;
[sbull] Ability to conduct costtechnical tradeoffs in certain
circumstances, largely in accordance with FAR Part 15, including the
ability to eliminate an agency tender from the competitive range (see further discussion below);
[sbull] Exchanges between public tenders and the government in
accordance with the general principles set forth in the FAR for
exchanges between the government and the private sector. See ] C.4.a(3)(a). of Attachment B;
[sbull] Post award accountability for inhouse performance similar
to that expected of private sector contractors. Agencies relying on an
inhouse provider or a public reimbursable provider will be required to
document changes to the solicitation, track actual costs, and terminate
for failure to perform. See ] C.5.a.(4). of Attachment B. As described
above, agencies will also be required to recompete work being performed
by inhouse or public reimbursable providers in accordance with the
same time limitations imposed by the FAR on contracts with the private sector.
The revised Circular recognizes the talents and conditions under which the federal workforce operates and the importance of providing them with adequate training and technical support during the competition process to ensure they are able to comply with the requirements of the Circular and compete effectively. In this regard, the Circular requires that the agency tender official, the PWS team, and the MEO team be assisted by specific experts, including human resources, procurement, and management experts. See generally ] B.3.a. of Attachment B.
c. Greater Emphasis on Best Value
Cost comparisons have been the traditional focal point of Circular A76. Reflective of the focus of the Circular for most of its history, the term connotes a costonly sourcing decision. While cost will always be an important consideration in sourcing decisions, and often the most important consideration, agencies should also have the ability to take quality and innovation into account, especially where needs may require complex and interrelated services. For this reason, the term ``cost comparison'' has been dropped from the proposed Circular and replaced with the term competition.
The new focal point will be on ``standard competitions,'' or direct conversions when appropriate. Recognizing that agency needs cannot be met through a ``onesizefits all'' approach, the Circular's guidance is broader and more accommodating than that which was developed over the years for the conduct of cost comparisons.
For example, when conducting a standard competition, agencies will have three options for considering noncost factors. First, an agency may conduct a low price technically acceptable source selection where the performance decision is based on the low cost of offers that have been determined to be technically acceptable. See ] C.4.a.(3).b. of Attachment B. Second, if an agency wishes to have the flexibility of considering alternative performance levels that sources may wish to propose, the agency may conduct a ``phased evaluation process.'' During the first phase when technical factors are considered, the inhouse provider, public reimbursable providers and private sector offerors may propose performance standards different from those specified in the solicitation. If the agency determines that the proposed alternative performance standards are appropriate and are within the agency's current budget, the agency could issue a formal amendment to the solicitation and allow revised submissions. The technically qualified offerors and the inhouse offeror would then compete based on price against the revised performance standard. See ] C.4.a.(c).2. of Attachment B.
Finally, if noncost factors are likely to play a more dominant role, agencies may conduct an ``integrated evaluation process'' with costtechnical tradeoffs similar to those authorized by FAR Part 15. Like the FAR Part 15 process, private sector offers, public reimbursable providers and inhouse providers may submit higher performance standards than the solicitation. If the inhouse offer is not among the most highly rated proposals, it could be eliminated from the competitive range, as would be envisioned by FAR 15.306(c). The source selection authority (SSA) would be required to document its rationale for any tradeoffs as required by FAR 15.406. Given the special considerations that must be taken into account with a public private competition, the Circular recognizes that this integrated evaluation technique may not be appropriate for all needs and should be tested before wider application is authorized. For this reason, the Circular limits usage to (1) IT activities currently performed by federal employees, (2) contracted commercial activities, new requirements, or segregable expansions where an agency tender will be submitted, or (3) any other commercial activities where the agency's assistant secretary or equivalent level official with responsibility for implementing the Circular (i.e., the ``4.e official'') receives approval from OMB prior to issuance of the solicitation. See ] C.4.a(c)1. of Attachment B.
2. Ensuring Fairness, Integrity, and Transparency
The revised Circular will establish new rules to separate the team that is formed to write the solicitation from that established to develop the agency tender. In addition, the agency MEO team, directly affected personnel (and their representatives) and any individual with detailed knowledge of the MEO or agency cost estimate in the agency tender will not be allowed to be members of the SSEB. See ] D.2. of Attachment B. These steps are intended to avoid any appearance of a conflict of interest and garner the public's trust in the processes used to make critical sourcing decisions.
3. Strengthening Accountability for Results
The ultimate success of Circular A76 to deliver results for the
taxpayer requires that appropriate mechanisms be in place to ensure
selected public or private sources make good on their promises. To this end, the revised Circular will:
[sbull] Require agencies to centralize oversight responsibility.
Agencies will be required to establish a program office responsible for
the daily implementation and enforcement of the Circular. Improved
oversight will serve to enhance communications, facilitate sharing of lessons learned, and significantly improve overall
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compliance with the Circular. See ] C.1.b.(5). of Attachment B.
[sbull] Impose competition timeframes. The revised Circular states
that a standard competition shall be completed within one year of the
public announcement that a competition will be conducted. The 4.e.
official (i.e., an agency assistant secretary or equivalent level
official with responsibility for implementing the Circular) may waive
the oneyear completion requirement at announcement of the competition
and set an alternative completion date if the competition is
particularly complex and notification is provided to OMB. See ]
C.1.b.(3). of Attachment B. These timeframes are designed to
incentivize agencies to complete competitions and will instill greater
confidence by all participants that agencies are committed to
competitive sourcing and selecting the best provider. It will also ensure that the benefits of competition are realized.
[sbull] Improve post competition oversight. To ensure public
providers are subjected to the same oversight that private providers
routinely face, customer agencies will be required to document changes
in the solicitation and agency tender and track actual costs. Before
exercising an option for additional performance, the agency will be
required to determine that performance by the inhouse, public
reimbursable, or private contract provider meets the requirements of
the solicitation and that continued performance is advantageous to the agency. See ] C.5.b.(2). of Attachment B.
Mitchell E. Daniels, Jr.,
Director.
[FR Doc. 0229472 Filed 111502; 12:37 pm]
BILLING CODE 311001P
FOR FURTHER INFORMATION CONTACT
Mr. David C. Childs, Office of Federal Procurement Policy, NEOB Room 9013, Office of Management and Budget, 725 17th Street, NW., Washington, DC 20503 (tel: (202) 3956104).
Availability: Copies of the proposed revision to OMB Circular A76
may be obtained at the OMB home page at www.whitehouse.gov/OMB/
circulars/index.html