[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Notices]
[Pages 69769-69774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29472]
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OFFICE OF MANAGEMENT AND BUDGET
Performance of Commercial Activities
AGENCY: Office of Management and Budget, Executive Office of the
President.
ACTION: Proposed revision to Office of Management and Budget Circular
No. A-76, ``Performance of Commercial Activities.''
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[[Page 69770]]
SUMMARY: The Office of Management and Budget (OMB) proposes major
revisions to Circular No. A-76 to improve the management of commercial
activities that are needed to conduct the business of government. The
revisions would expand the use of public-private competitions to all
activities performed in-house and through commercial inter-service
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 cost-technical trade-off 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 A-76: the
``Revised Supplemental Handbook to OMB Circular A-76'' (March 1999);
OMB Circular A-76 Transmittal Memoranda Nos. 1-24; Office of Federal
Procurement Policy (OFPP) Policy Letter 92-1, ``Inherently Governmental
Functions''; and OMB Circular A-97, ``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 A-76 (hereafter
``Supplemental Handbook''), OFPP Policy Letter 92-1 and OMB Circular A-
97 would be rescinded.
DATES: Interested parties should submit comments to OFPP, Office of
Management and Budget, at the address shown below on or before December
19, 2002.
ADDRESSES: Due to potential delays in OMB's receipt and processing of
mail, respondents are strongly encouraged to submit comments
electronically to ensure timely receipt. We cannot guarantee that
comments mailed will be received before the comment closing date.
Electronic comments may be submitted to: [email protected].
Please put the full body of your comments in the text of the electronic
message and as an attachment. Please include your name, title,
organization, postal address, telephone number, and e-mail address in
the text of the message. Comments may also be submitted via facsimile
to 202-395-5105. Comments may be mailed to Mr. David C. Childs, Office
of Federal Procurement Policy, Office of Management and Budget, 725
17th Street NW., New Executive Office Building, Room 9013, Washington,
DC 20503.
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) 395-6104).
Availability: Copies of the proposed revision to OMB Circular A-76
may be obtained at the OMB home page at www.whitehouse.gov/OMB/
circulars/index.htmlnumerical. Copies of the current OMB
Circular A-76, the Revised Supplemental Handbook, applicable
Transmittal Memoranda, OFPP Policy Letter 92-1, and OMB Circular A-97
are also available on the OMB home page. Paper copies of any of the
documents identified above may be obtained by calling OFPP (tel: (202)
395-7579).
SUPPLEMENTARY 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 A-76 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 public-private competition
by (i) eliminating exceptions that have permitted federal agencies to
provide services to one another on a sole-source basis under
reimbursable fee-for-service 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 cost-technical tradeoffs for information
technology (IT) and certain other activities;
[sbull] Improve public trust in public-private 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 post-award 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 A-76
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 A-76 establishes the policies
and procedures for identifying commercial activities and determining
whether these activities should be provided through contract with
commercial service providers, by in-house government personnel, or
through reimbursable fee-for-service providers under ISSAs with other
government agencies.
Before an agency shifts commercial work from one sector to another
(e.g., from in-house performance to contract, or vice versa), Circular
A-76 generally requires the agency to conduct a public-private
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 in-house 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 in-house
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 in-house 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 in-house 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 ``full-time-equivalent'' 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 in-house 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 in-house 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 A-76 Processes
Since its original issuance in 1966, Circular A-76 has been revised
three times--in 1967, 1979, and 1983. The Supplemental Handbook, first
issued in 1979, has been revised three times--in 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 A-76 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 public-private
competitions, especially when in-house performance is contemplated.
However, many believe the process for carrying out public-private
competitions under Circular A-76 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 A-76 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 public-private competitions. However, it
places significant limitations on an agency's ability to use cost-
technical tradeoffs in a public-private 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
public-private 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 in-house offer--causing some to question if conflicts of interest
could exist. These concerns serve to discourage participation in
public-private 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
post-competition 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
high-value service provider, few steps are routinely taken to ensure
this potential translates into positive results.
D. Proposed Revisions to Circular A-76
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 cost-effective,
timely, and responsible manner. Therefore, OMB is proposing major
revisions to Circular A-76 to: (1) Improve and expand the use of
competition in public-private sourcing decisions, (2) better ensure
fairness, integrity, and transparency in the decision-making 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 two-page document) lays
out the basic
[[Page 69772]]
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 A--Inventory Process
Attachment B--Public-Private Competition
Attachment C--Direct Conversion Process
Attachment D--Inter-Service Support Agreements
Attachment E--Calculating Public-Private Competition Costs
Attachment F--Glossary 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/NSIAD-00-11 (November 1999); Evidence on Savings from DOD A-76
Competitions, Center for Naval Analysis, CRM 98-125 (November 1998);
Long-Run Costs and Performance Effects of Competitive Sourcing, Center
for Naval Analysis, CRM D0002765.A2 (February 2001).
The President has identified competitive sourcing--i.e., the
process of opening the government's commercial activities to the
discipline of competition--as one the five main initiatives of his
Management Agenda for improving the performance of government. Changes
set forth in the proposed revisions to Circular A-76 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 92-1 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. 105-270; 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 anti-competitive agency-to-agency 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 inter-agency
use e.g., such as a government-wide 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 long-standing
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 A-97. Circular A-97 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 A-76. By rescinding Circular A-97 and
incorporating its requirements in Circular A-76, the key policies
addressing the appropriate parameters of federal performance of
commercial activities will be set forth in one document.
b. Expanded Reliance on Well-Established 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 FAR-type principles and practices
throughout the Circular is intended to bring public-private
competitions closer to mainstream source selection and reduce confusion
that may currently
[[Page 69773]]
make it more difficult for parties to compete. Examples of FAR-type
principles that have been incorporated into the revised Circular
include:
[sbull] Greater uniformity in the application of basic requirements
to private and in-house providers. For instance, in-house 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 cost-technical 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 in-house performance similar
to that expected of private sector contractors. Agencies relying on an
in-house 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 in-house 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
A-76. Reflective of the focus of the Circular for most of its history,
the term connotes a cost-only 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 inter-related 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 ``one-size-fits 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 non-cost 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 in-house
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 in-house offeror would then compete based on price
against the revised performance standard. See ] C.4.a.(c).2. of
Attachment B.
Finally, if non-cost factors are likely to play a more dominant
role, agencies may conduct an ``integrated evaluation process'' with
cost-technical tradeoffs similar to those authorized by FAR Part 15.
Like the FAR Part 15 process, private sector offers, public
reimbursable providers and in-house providers may submit higher
performance standards than the solicitation. If the in-house 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 A-76 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
[[Page 69774]]
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 one-year 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 in-house, 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. 02-29472 Filed 11-15-02; 12:37 pm]
BILLING CODE 3110-01-P