Public Contract Law Journal

To Deal or Not to Deal: Can Circular A-76 Be Made Great Again?

by Connor G. Luff

Connor G. Luff ( is a 2018 graduate of The George Washington University Law School and a Notes Editor of the Public Contract Law Journal. The author would like to thank his Note editors, his professors, and his family for their continuous support and insights. The author would also like to thank his loving fiance´e for her undying support and patience throughout this entire experience.

I. Introduction

In its prime, Walter Reed Army Medical Center1 was one of the top military medical facilities in the country.2 From presidents to soldiers, it treated a number of historic and famous military personnel and civil servants.3 But in early 2007, The Washington Post published a series of articles exposing the hospital’s declining reputation.4 The articles’ revelations were stunning.5 Hospital staff mistreated and mismanaged suffering soldiers by losing paperwork and quartering them in deplorable conditions,6 often leaving them to care for themselves.7

In response to The Washington Post articles, Secretary of Defense Robert M. Gates created a special Independent Review Group to investigate the validity of the articles’ claims and recommend necessary changes.8 The Group found that at the time of the Iraq and Afghanistan Wars, Walter Reed suffered from the “simultaneous occurrence” of three issues: (1) “the decision of the Base Realignment and Closure (BRAC) Commission;”9 (2) “[the] pressure to outsource traditional military service functions through [Circular] A-76;”10 and (3) “military to civilian personnel conversions.”11 The Group described the convergence of these issues as “the Perfect Storm.”12

The latter two elements of this “Perfect Storm” fell under the scope of government procurement.13 The Group found many issues at Walter Reed derived from Office of Management and Budget’s (OMB) Circular A-76 directive, a government procurement policy that directed federal agencies to subject federal jobs to competition with the private sector.14 The Group determined that Circular A-76 forcedWalter Reed management to place heavy emphasis on “outsourc[ing] traditional military service functions” to the private sector.15 The Group also highlighted the conversion of military personnel to civilian personnel as problematic, a derivative effect of the outsourcing emphasis.16 The Washington Post’s investigation, coupled with the Group’s report, sparked a nationwide debate about Circular A-76 and competitive sourcing of government jobs.17

Because of these events and the ensuing debates, the government discontinued Circular A-76; it has not been reissued.18 However, since the election of President Trump on November 8, 2016, speculation about the return of Circular A-76 is again in the news.19

While limitations plagued and prevented Circular A-76 from achieving its desired ends,20 competitive sourcing remains a desirable option for the federal government to achieve best value for agency activities, while also increasing performance and cost accountability.21 The federal government should avoid throwing the baby out with the bathwater by learning from prior failures and improving the competitive sourcing procedure.

This Note suggests Circular A-76 should be reimplemented with a clear policy goal focused on agency-specific value rather than cost savings. Moreover, in addition to a policy goal that focuses on value, the Circular’s framework should be altered to allow agencies to make sourcing decisions based on realistic cost data and provide sufficient time to compile such data. Making critical alterations to the competitive sourcing process will motivate federal agencies to achieve best value and allow them to make decisions supported by realistic cost data.

Part II provides background information on the origins of Circular A-76 and the directive’s original goals. Part II also discusses the Circular’s most recent history. Part III provides an overview of Circular A-76’s basic mechanics. Part IV identifies issues within Circular A-76 that were obstacles to its success. This section identifies the conflicting policy message of Circular A-76 and the specific mechanical issues within its guidelines. Part V of this Note argues that Circular A-76’s issues can be corrected by stating a clear policy goal emphasizing agency-specific value, and by allowing federal agencies a two-year grace period to implement an efficient organization plan to achieve this value. This Note suggests that only after the two-year period can the agency be considered for competition with the private sector. This solution seeks to maximize competition and emphasize agency-specific value by first allowing the public sector the chance to achieve best value and only subjecting those agencies to private competition when necessary.

II. Humble Beginnings

The Eisenhower administration issued the first official policy regarding the outsourcing of government-performed commercial activities in 1955 through the Bureau of the Budget’s Bulletin No. 55-4.22 No. 55-4 emphasized that the general policy of the federal government was not to compete against but to rely, where cost-effective,23 upon the private sector to perform the commercial activities of the government.24 The official policy of the Bureau of the Budget stated:

It is the general policy of the administration that the [f]ederal [g]overnment will not start or carry on any commercial activity to provide a service or product for its own use if such product or service can be procured from private enterprise through ordinary business channels. Exceptions to the policy shall be made by the head of an agency only where it is clearly demonstrated in each case that it is not in the public interest to procure such product or service from private enterprise.25

The initial implementation of the outsourcing policy faced heavy criticism for its shortcomings.26 In 1964, the Comptroller General revealed the Air Force’s implementation of the directive at its base in Japan led to increased costs.27 In 1965, the General Counsel of the U.S. Civil Service Commission issued an opinion noting that supervision of contract employees by government personnel was illegal.28 Finally, in the same year, a Department of Defense (DoD) study led department heads to believe many service contracts violated civil service laws and that those same contracts cost more than if the government performed the tasks.29

In an effort to correct the shortcomings of No. 55-4 and its successors, OMB established formal guidelines for agencies facing sourcing decisions and issued Circular A-76 in 1966.30 President Johnson stated the goal of Circular A-76 was “[to] conduct the affairs of the [g]overnment on an orderly basis; to limit budgetary costs; and to maintain the [g]overnment’s policy of reliance upon private enterprise.”31 Furthermore, President Johnson sought to correct issues that plagued earlier implementations of the policy by directing each department and agency head to designate an assistant secretary whose only responsibility was to review Circular A-76 and understand its guidelines.32

Over the next several decades, A-76 policy resulted in many attempts by the executive branch to trim the federal budget by outsourcing commercial activities performed by government employees to the private sector.33 The government procurement community debated the effectiveness of these policies.34

In the early 2000s, many in the government contracts community — in both the private and public sector — took exception to the A-76 process.35 At the direction of Congress, the Commercial Activities Panel was established to address these concerns and issue recommendations for changes to the Circular.36 The Panel developed ten principles to implement in the competitive sourcing37 process and made three recommendations to fix some of the Circular’s patent defects.38 The Panel’s main recommendation was that the Circular should follow Federal Acquisition Regulation (FAR) principles.39

In response to the Panel’s findings and recommendations, Circular A-76 was revised in 2003 (2003 Circular).40 The official policy of the 2003 Circular stated the “longstanding policy of the federal government has been to rely on the private sector for needed commercial services,” but also that “maximum value” should be achieved through “the forces of competition.”41 The 2003 Circular attempted to simplify the Circular A- 76 process by aligning competition procedures with the FAR and requiring shorter competition time frames.42 However, the 2003 Circular failed to address the root problems of the public-private competition process that plagued previous versions of the Circular.43 Namely, the 2003 Circular (coupled with President George W. Bush’s Management Agenda)44 presented agencies with conflicting policies and goals,45 focused too heavily on time frames,46 and forced federal agencies and private contractors to submit bids based on hypothetical costs.47

In response to the events at Walter Reed Army Medical Center, Congress indefinitely suspended all DoD Circular competitions.48 Despite the efforts of numerous investigations and reports,49 the 2003 Circular never was reimplemented. Since 2011, members of Congress have unsuccessfully attempted to remove the moratorium.50

III. The Workings of Circular A-76

While the importance of Circular A-76’s history and origin cannot be understated, working knowledge of how a department or agency activity becomes subject to the Circular A-76 sourcing process is crucial. After OMB’s revision of the 2003 Circular, each agency had to follow two steps: (1) inventory the commercial and inherently governmental activities performed by agency employees; and (2) of those activities that are commercial in nature, conduct a competition to determine whether the government should continue to perform that activity or whether the activity should be contracted out to the private sector.51

A. Inventorying Activities

The 2003 Circular first required executive departments and agencies to take two annual inventories: one to inventory commercial activities performed by government employees and another to inventory inherently governmental activities performed by government employees.52 Following these inventories, the agency then had to submit both inventories, along with an inventory summary report, to OMB.53

An agency’s first major determination was whether an activity was inherently governmental.54 While there was much discussion as to what constitutes an inherently governmental activity,55 the Circular provided an intuitive definition. It defined an inherently governmental activity as one that is so related to the public interest or required a substantial exercise of discretion that a government official should perform the activity.56

While determining the level of discretion involved in an activity was an important factor, it was not dispositive.57 The 2003 Circular required the agency to consider the entire scope of the position’s discretionary ability and actual authority.58 A-76 guided agencies to consider whether the discretion could:

commit[] the government to a course of action when two or more alternative courses of action exist and decision making is not already limited or guided by existing policies, procedures, directions, orders, and other guidance that (1) identify specified ranges of acceptable decisions or conduct and (2) subject the discretionary authority to final approval or regular oversight by agency officials.59

After inventorying inherently governmental activities performed by government employees, the 2003 Circular required agencies to inventory commercial activities performed by government employees.60 Commercial activities, as defined by the 2003 Circular, were essentially any activities that could be performed by the private sector and were not inherently governmental.61 The 2003 Circular defined a commercial activity as:

[a] recurring service that could be performed by the private sector. This recurring service is an agency requirement that is funded and controlled through a contract, fee- for-service agreement, or performance by government personnel. Commercial activities may be found within, or throughout, organizations that perform inherently governmental activities or classified work.62

In conjunction with this determination, the agency also had to provide a reason why those commercial activities were performed by government employees.63

B. Competition Pathways

Once an agency designated an activity as a commercial activity performed by government employees, and deemed the activity suitable for competition, the competitive sourcing pre- planning guidelines of A-76 went into effect.64 During this stage, the agency had to determine what activity and how many full time equivalent positions (FTE)65 would be subject to competition.66 Then, after determining the activity and FTEs, the agency had to determine the incumbent service provider’s baseline cost of performing the activity.67 The agency then would determine the form of competition — streamlined or standard — and the proposed competition schedule.68 Finally, the agency had to appoint a Competitive Sourcing Official (CSO).69 The CSO was responsible for the solicitation and for appointing the Competition Officials.70

1. Standard Competition Procedures

For an agency to conduct a standard competition, the activity had to be performed by more than sixty-five FTEs.71 If this requirement was met, the agency had twelve months to complete the competition.72 From this point, a standard competition operated much in the same way as a normal government procurement under the FAR.73 The agency had to determine if sealed or negotiated procurement procedures would be utilized.74 If negotiated procedures were used, the agency then decided on the appropriate source selection process.75 Furthermore, the solicitation had to outline the factors or tradeoffs to be evaluated during the selection process.76

The key aspect of A-76 standard competition procedures was the roles of the Competition Officials and their responsibilities.77 Competition Officials handled the duties of developing a cost analysis of the work to be performed, developing a Most Efficient Organization (MEO) plan (what the agency believed could be the most efficient way to perform the activity through staffing and organization),78 and determining whether the selected bidder complies with the solicitation and the competition provisions.79 These functions helped the agency formulate an Agency Tender (AT) to compete with private sector bidders while at the same time removing chances of conflicts of interest by ensuring independence.80 The AT required the agency to include, among other items,81 the MEO plan and an agency certified cost estimate based on the MEO plan.82 From this, the agency would determine the contract awardee, either a private contractor or the AT,83 and implement surveillance and monitoring plans to ensure the contract was faithfully and adequately performed.84

2. Streamlined Competitions

Streamlined competitions under the 2003 Circular minimized the competition process for agency activities performed by sixty-five or fewer FTEs.85 Under streamlined procedures, the agency had to determine three costs: (1) the cost of agency performance;86 (2) the potential contract price of a private sector source performing the activity “using documented market research or soliciting cost proposals in accordance with the FAR;”87 and (3) the difference between the costs of (1) and (2).88 The agency had to complete this process within ninety days of the agency’s public announcement of the streamlined competition.89 If the result of these determinations showed that a private sector source should perform the work, the CO issued a solicitation to determine a service provider.90 If the results indicated the public sector should continue to provide the work, the CO would provide the agency with a letter of obligation to perform the activity.91

IV. Understanding the Issues of Circular A-76

From the very inception of Circular A-76, administration to administration (and Congress to Congress) viewed and approached the Circular’s objective from different perspectives and attempted to reach different goals.92 Understanding this is key to framing Circular A-76’s problems, because political goals drove the most two recent revisions.93 From the outset, those in the procurement community recognized that the 2003 Circular contained many problems.94 Specifically, they recognized that the revised Circular failed to fix problems of prior Circulars and also created new problems by increasing demands.95

This Note identifies two areas of concern that must be remedied in any reimplementation of the Circular. First, one of the fundamental flaws of the 2003 Circular was its “muddled” policy message.96 The Circular’s policy statement directed agencies to focus on cost-savings, while at the same time made it known that federal policy was to rely upon the private sector for its commercial needs.97 Second, the 2003 Circular failed to base competitions on authentic data and forced needless restrictions on the competition process.98 While the Panel recognized that “[c]ompetition, including public- private competitions, have been shown to produce significant savings for the government, regardless of whether a public or a private entity is selected,”99 the projected savings by such competitions are neither reliable nor guaranteed to materialize.100

A. A Conflicting Policy Message

One of the fundamental concerns with the 2003 Circular was its conflicting policy goal.101 Professor Steven Schooner identified this tension,102 arguing that the 2003 Circular presented a mixed message as to the exact policy of the federal government when it came to the performance of the government’s commercial activities.103

The 2003 Circular stated “[t]he longstanding policy of the federal government has been to rely on the private sector for needed commercial services. To ensure that the American people receive maximum value for their tax dollars, commercial activities should be subject to the forces of competition.”104 Professor Schooner observes that the first sentence of this policy passively supported previous Circulars’ commitment to the private sector and that the second sentence actively refused to advocate for the public or private sector but instead valued competition between the two.105 This created a conflict in policy and thus allowed for differing interpretations of the Circular’s goal.106 While some agencies may have taken the policy at face value and believed maximum value achieved through competition was the goal of the Circular, some may have believed, based on historical context, that the goal was to outsource activities to the private sector for the lowest cost.107

This confusion was partly responsible for the Walter Reed Army Medical Center scandal.108 The Group identified “pressure to outsource traditional military service functions through A-76” as one of the elements of the “Perfect Storm.”109 It is arguable that the policy message of the 2003 Circular, when taken in the context of President George W. Bush’s Management Agenda110 and Circular A-76 procedure prior to the 2003 Circular,111 created this pressure because of its unclear policy. Prior versions of Circular A-76 stated a clear preference for outsourcing the government’s commercial activities.112 The policy of the 2003 Circular did nothing to clearly indicate a significant departure from prior versions.113 With this confusion, it is reasonable to believe DoD acquisition officials interpreted the 2003 Circular as entirely consistent with past Circulars.

B. The Mechanical Issues of the 2003 Circular

The 2003 Circular was recognized widely for its lofty goals and expectations in terms of cost savings and reduction in the federal workforce.114 It placed a high priority on subjecting federal jobs to the A-76 process, timeliness of competition completion, and cost savings.115 This combination of goals and expectations placed the A-76 process on precarious ground.116 While timeliness and cost savings are objectively desirable goals for any government procurement, they must be pursued in a sensible fashion and be based on realistic data.117

1. Competitions Based on Hypothetical Data

Under streamlined and standard competitions, both the private sector bid and the AT estimated the price or cost of performing the commercial activity.118 The procuring agency could then estimate the cost savings of the competition by comparing the AT and the private sector bid against the baseline costs of the incumbent service provider.119

Using the hypothetical estimates to base expected cost savings was illfounded for several reasons.120 Because these estimates are hypothetical and based solely on the source’s perception of how the work could be done, there was an inherent risk that cost savings may not be achieved.121 This left substantial room for tenderers and bidders to manipulate cost savings achieved as an element of their offer / bid.122 As a result, both the private and the public sector side of the A-76 process complained that the competition process favored the other.123 Moreover, the government procurement community continuously debated the validity of the purported cost savings actually achieved by the 2003 Circular.124 Instability in such an important statistic calls into question the efficacy of the entire process and whether it is worth pursuing.125

2. The Use of an Arbitrary Overhead Rate

Another mechanical issue under the 2003 Circular, identified by both DoD and the Government Accountability Office (GAO), required federal agencies competing for a commercial activity to use a twelve percent overhead rate to calculate overhead costs associated with performing a specific task.126 The 2003 Circular intended this rate to reflect costs from two types of overhead: general and administrative overhead costs and operational overhead costs.127 General and administrative costs included “salaries, equipment, space, and other tasks related to headquarters management, accounting, personnel, legal support, data processing management, and similar common services performed external to the activity, but in support of the activity being competed.”128 Operational overhead costs included “costs that are not 100 percent attributable to the activity being competed but are generally associated with the recurring management or support of the activity.”129 The rate assigned to these costs was supposed to represent what percentage of each dollar spent on a particular activity was spent on costs indirectly associated with the activity.130

But the twelve percent rate assigned by the 2003 Circular was an arbitrary number unsupported by any data in the 2003 Circular or otherwise.131 Because of this arbitrary percentage rate, the private sector believed “‘the deck [was] stacked’ in favor of the government.”132 The 2003 Circular’s purpose was to conduct competitions between the public and private sectors and utilize FAR procedures to ensure fair and efficient competitions to achieve “maximum value.”133 This effort was undermined because the agency could not accurately reflect the overhead costs associated with a specific task.134

In trying to formulate an MEO, a twelve percent overhead rate may or may not have accurately reflected the appropriate overhead rate for competing agencies.135 In any given case, an agency might have under-calculated or overcalculated its overhead, thus giving the agency a competitive advantage or putting it at a disadvantage.136

The net effect of this arbitrary rate negatively impacted the very goal of the 2003 Circular, regardless of the interpretation of its policy message, because it created circumstances in which artificial competitive advantages could arise, thus discouraging competition.137

3. The Needless Enforcement of a Conversion Differential

Finally, under the 2003 Circular, before any commercial activity could be converted to either a private source or a public source under a standard competition, the CSO had to ensure that the non-incumbent bid/tender offer would save the government more than ten percent in personnel-related costs or $10 million of the current total cost to perform the commercial activity.138 The CSO accomplished this by adding the lesser of ten percent of personnel costs of the projected MEO plan or $10 million “over all the performance periods stated in the solicitation” to the non-incumbent’s total adjusted cost of performance.139 Adding the conversion differential ensured the government would not convert service providers for marginal savings, and that offers included potentially incalculable costs, such as work stoppages or unquantifiable inefficiencies.140

However, the conversion differential amount presented a confusing message for the CSO. The seemingly overarching goal of the Circular was to find the best service at the best price, no matter the source.141 But the conversion differential required the CSO add to the non-incumbent source’s bid a value that might not actually represent a real cost to the government. This addition altered the decision-making process for the CSO and may have even resulted in the selection of the incumbent service provider over the non-incumbent source despite the non-incumbent source’s offer (even with the conversion differential) providing better long-term value to the government.142

A-76 competitions where the agency won because of the conversion differential exemplified these problems.143 The agency’s MEO was not based on hard data, but rather based on a planned reorganization of the current agency structure that may or may not actually have produced the results outlined in the MEO plan.144 Without proper planning and oversight by agency officials, the private sector would have been precluded from performing the service, despite presenting a more realistic, cost-efficient offer, simply because the MEO incorrectly estimated personnel costs.145

V. Reinstating a Sound Competitive Sourcing Policy

For any reinstatement of the Circular to be successful, several adjustments must be made. Chief among these alterations is the need to create a policy goal that is not divided against itself.146 A clear, concise policy message must capture the essence of the Circular so agencies can base sourcing competitions on their agency’s specific goals.

Second, the Circular must be fixed mechanically. Any new implementation of the Circular needs to address the cost saving and accounting flaws of the 2003 Circular and must restructure the Circular’s framework so actual competition can foster and produce the best value for the agency and taxpayer.

A. Picking a Policy Goal

There are two schools of thought on how to address the Circular’s policy message.147 One is to commit the Circular to its previous policy of not competing with the private sector, thus relying solely upon the private sector to complete all of the government’s commercial needs.148 The other is to commit the Circular to a policy of achieving best value (not cost savings) for the government, no matter the source, and remove any message suggesting sole reliance upon the private sector.149 As Walter Reed shows, focusing solely on cost savings and relying upon the private sector to provide the needs of government is not a practical goal. Rather, a reimplemented Circular A-76 should emphasize a best value policy. This removes the pressure to cut costs and to reduce the federal work force because agencies can make the A-76 process mission-oriented and focused on the agency’s needs.150 In practice, an agency will no longer have to make cost the overwhelming factor of consideration.

B. New Procedures

Under a best value policy directive, Circular A-76 can be reorganized to ensure the agency is getting the best value possible. First among these changes is to consolidate the two forms of competition, streamlined and standard, into one simple form of competition. This addresses one of GAO’s chief concerns, highlighted in its review of the 2003 Circular.151

Second, every agency will be required to create a MEO plan for each commercial activity performed by the agency, in order of commercial activities that require the most funding.152 At the end of the third quarter of each fiscal year, agencies will be required to submit to Congress both an inventory of commercial activities and current (or in progress) MEO plans.153

In creating the MEOs, the agency will not be required to use the twelve percent overhead rate of the 2003 Circular, but instead will develop activity specific overhead rates.154 By removing the standard twelve percent rate and using realistic cost estimates, the private sector will be able to plan better for any future competitions with the government and can help hold the government accountable for overhead costs.155

After the CSO and Competition Officials create the MEO plan and submit its proposed costs to agency heads and Congress, the agency will be required to implement the MEO plan as soon as reasonably possible.156 This reorganization will remain in place for a minimum period of two years. During this two-year period, the agency will supervise and audit the MEO to ensure MEO cost targets are either being met or exceeded.157 This period will give the agency sufficient time to assess the MEO’s level of success, alter the MEO if needed, and allow the agency to make any future competitive sourcing decisions based on real data supplied by the MEO.

After two years of MEO services, the agency will decide whether to hold a competition with the private sector. The agency will make this determination based on the original MEO cost plan, actual MEO costs incurred over the two-year period, and current market conditions.158 In making this determination, the agency’s acquisition employees will conduct a review of the current private sector market for the same activity based on the MEO’s costs and rely upon the figures presented by the MEO.159 The agency will then compare the MEO’s current cost figures to the original MEO plan and to the projected private sector costs to determine whether the activity should be subjected to private sector competition. Decisions to forgo a competition will require the agency to submit to Congress an explanation for forgoing competition and to re-evaluate the MEO every two years using the above-mentioned method. Decisions to conduct a competition will follow FAR-like procedures and will emphasize best value.

Finally, if the activity is subject to this new process, the determination will not be conditioned upon a conversion differential or the tradeoff source selection requirements. The conversion differential and the tradeoff source selection requirements in the 2003 Circular unfairly limit the competitiveness of sourcing competitions.160 The conversion differential, which theoretically discourages agencies from switching sources for nominal savings, limits the authority and discretion of the CSO, who best understands the agency mission.161 Instead, if the determination calls for a competition, the winner will be determined with the agency mission and best value in mind.

A basic overview of how this solution would work is illustrated best through an example. Assume background checks performed by Office of Personnel Management (OPM) constitute a commercial activity that could be performed either by OPM or the private sector. Under this Note’s proposal, once OPM identifies background checks as a commercial activity, it will develop a MEO plan based on the creation of a Performance Work Statement (PWS),162 identifying the specific goals and requirements of the activity. It will then send both the MEO and the PWS to Congress. Next, the agency implements the MEO for a period of two years, during which time the agency can assess and evaluate the MEO performance, compile cost data, and reassess the activity goals.

At the end of the two-year period, OPM will evaluate the compiled MEO data against market conditions and the original projected MEO costs. Based on this comparison, the agency will decide whether conducting a competition will further the agency’s mission. If OPM decides against conducting a competition, it must submit an explanation, supported by cost data, to Congress detailing why it believes competition is unnecessary. OPM will then be required to repeat the process for the next two years.

If OPM decides to conduct the competition, the solicitation will emphasize what OPM determines to be the factors that constitute best value and follow FAR procedures. OPM will not make cost savings the overriding factor unless it reasonably determines this is in the government’s best interest. If the MEO wins the competition, the evaluation process for theMEO will resume as if the competition was not held. If the private sector or some combination of sources wins, this source will be subject to FAR contract management guidelines.

VI. Conclusion

For far too long, the A-76 process emphasized the wrong policy and worked against itself by relying upon hypothetical data.163 These failures led to procurement efforts with despicable results, like the Walter Reed scandal.164 In the words of President Bush, “[i]t is not right to have someone volunteer to wear our uniform and not get the best possible care. I apologize for what they went through, and we’re going to fix the problem.”165

The solution this Note offers may not fix all problems of the 2003 Circular, but it offers a positive step in the right direction. By shifting Circular A-76’s focus to agency-specific value and removing unnecessary limitations on competition, this solution enables agency-specific results by allowing the agency to make decisions based on realistic data, all while holding decision makers accountable. Rather than having the agency create an MEO based on hypothetical data in hopes that it can provide the service for a lower cost than the private sector, the agency will have a two-year grace period to prove it can achieve a better value than the private sector. This will incentivize federal employees to maximize efficiency while at the same time foster competition with the private sector.

It is unclear what the future of competitive sourcing holds.166 But with this uncertainty comes an opportunity to learn from the mistakes of the past. A reevaluation of the Circular could greatly benefit the United States by creating a more efficient government that can offer the American people a higher quality of service.

  1. Walter Reed Army Medical Center, formerly located in Washington, D.C., closed in 2011 following a six-year transition to Bethesda, Maryland, that began in 2005. See Katie Moisse, Walter Reed Army Medical Center to Close After 102 Years, ABC NEWS (July 27, 2011),
  2. See id.
  3. See id.
  4. See Dana Priest & Anne Hull, Soldiers Face Neglect, Frustration at Army’s Top Medical Facility, WASH. POST (Feb. 18, 2007),
  5. See id.; see also Michael Winerip, And This Was Called Care? The Walter Reed Story, N.Y. TIMES (Sept. 30, 2013),
  6. See Priest & Hull, supra note 4; see also Dana Priest & Anne Hull, Almost Home, But Facing More Delays at Walter Reed, WASH. POST (Sept. 15, 2007), [hereinafter Almost Home]
  7. See Almost Home, supra note 6.
  9. Id. at 10 n.21 (noting BRAC is the process the Department of Defense “used to reorganize its base structure to more efficiently and effectively support forces.”).
  10. Id. at 10 (footnote omitted).
  11. Id.
  12. See id. (noting that the simultaneous occurrence of these issues during the wars “increased the probability for the failures and shortcomings at Walter Reed.”).
  13. See id.
  15. See INDEPENDENT REVIEW GROUP, supra note 8, at 10.
  16. See id.
  18. See id.
  19. See, e.g., Jason Miller, Trump Signs Government Reorganization Order, FED. NEWS RADIO (Mar. 13, 2017),; see also Charles S. Clark, Will Trump Bring Back Outsourcing and A-76?, GOV’T EXECUTIVE (Dec. 22, 2016),
  21. See id.
  22. Bulletin No. 55-4 was the predecessor to Circular A-76. The Bureau of the Budget was the predecessor to OMB. BUREAU OF THE BUDGET, EXEC. OFFICE OF THE PRESIDENT, BOB BULL. NO. 55-4, COM.-INDUSTRIES ACTIVITIES OF THE GOV’T PROVIDING PRODUCTS OR SERVS. FOR GOV’T USE (1955) [hereinafter BOB BULL. NO. 55-4]. The decision of the Eisenhower administration to officially create a policy of relying upon the private sector for the government’s commercial needs largely derived from the nation’s needs in World War II and the Cold War. During World War II, the government relied heavily upon the private sector to support the war effort. As World War II quickly turned to the Cold War, the private sector remained the logical choice for the government to maintain military readiness without requiring a massive expansion of government facilities. Additionally, because of a general preconceived assumption regarding efficiencies in the private sector, the general sense was that the private sector would eliminate the bureaucratic issues that come with public bureaucracy. See generally Dan Guttman, Governance by Contract: Constitutional Visions; Time for Reflection and Choice, 33 PUB. CONT. L.J. 321, 326–30 (2004); see also Mohab T. Khattab, Revised Circular A-76: Embracing Flawed Methodologies, 34 PUB. CONT. L.J. 469, 472 (2005).
  24. Following No. 55-4’s issuance in 1955, there were several reiterations of the directive in subsequent Bureau of the Budget Bulletins (No. 57-7 and No. 60-2), making the commitment to outsourcing apparent. See L. ELAINE HALCHIN, CONG. RESEARCH SERV., RL31024, THE FEDERAL ACTIVITIES REFORM ACT AND CIRCULAR A-76 6 (2007). The policy of outsourcing government jobs was not a new idea at the time of No. 55-4 issuance. Prior to No. 55-4, the government outsourced many of its jobs to the private sector and the policy was a considerable topic of debate. As early as 1932, Congress investigated the possible benefits of outsourcing commercial activities traditionally done by government employees (with mixed results). Those in favor of such a change based their argument on the idea that the government should not be competing with the private sector, and that the private sector could do the same service or produce the same product more efficiently and less costly. A report in the early 1950s by the Intergovernmental Relations Subcommittee of the House Committee on Government Operations found that “the number of such activities conducted by Government agencies posed a real threat to private industry and imperiled the tax structure.” Those opposed saw these changes as a violation of civil service laws and costlier than having government employees perform those activities. COMM. ON GOV’T PROCUREMENT, 92ND CONG., REP. ON GOV’T PROCUREMENT 57–58 (COMM. PRINT 1972).
  25. BOB BULL. NO. 55-4, supra note 22.
  26. REP. ON GOV’T PROCUREMENT, supra note 24, at 57.
  27. See id.
  28. See id.
  29. See id.
  30. See CAP, supra note 23, at 2.
  31. Memorandum Announcing Revised Guidelines Governing Development by the Government of Products or Services for Its Own Use, 1 PUB. PAPERS 269 (Mar. 3, 1966).
  32. See id.
  33. See HALCHIN, supra note 24, at 10 - 15.
  34. The GAO found that the A-76 process prior to 1972 lacked structure for executive departments and agencies to perform competitions. As a result, departments and agencies lacked initiative to take inventory of all the commercial activities performed by their employees and subject them to competitive sourcing. U.S. GENERAL ACCOUNTING OFF., B-158685, BETTER CONTROLS NEEDED IN REVIEWING SELECTION OF IN-HOUSE OR CONTRACT PERFORMANCE OF SUPPORT ACTIVITIES 1 (1972).
  35. “The [Commercial Activities] Panel’s report noted that both federal employees and private firms complain that the A-76 competition process does not meet the principles’ standard of a clear, transparent, and consistently applied process.” CAP, supra note 23, at 8; see also Khattab, supra note 22, at 470–71.
  36. National Defense Authorization Act, Pub. L. No. 106-398, § 832, 114 Stat 1654A, 221 (2000).
  37. While the 2003 Circular does not expressly define competitive sourcing, it means the public sector and the private sector must undergo a competition to determine which source provides the best value and/ or lower cost to the government and resulting winner is said to have been determined through competitive sourcing. Competitive sourcing is not a synonym for the term “outsourcing.” “Outsourcing” implies that the agency makes the decision to contract the work out to the private sector prior to conducting any competition or research. See 2003 CIRCULAR, supra note 14 at 1; see also Outsourcing, BLACK’S LAW DICTIONARY (10th ed. 2014).
  38. Relevant FAR principles include:

    (1) support agency missions, goals, and objectives; (2) be consistent with human capital practices designed to attract, motivate, retain, and reward a high performing federal workforce; (3) recognize that inherently governmental and certain other functions should be performed by federal workers; (4) create incentives and processes to foster high performing, efficient, and effective organizations throughout the Federal Government; (5) be based on a clear, transparent, and consistently applied process; (6) avoid arbitrary full-time equivalent or other numerical personnel goals; (7) establish a process that, for activities that may be performed by either the public or the private sector, would permit public and private sources to participate in competitions for work currently performed in-house, work currently contracted to the private sector, and new work, consistent with these guiding principles; (8) ensure that, when competitions are held, they are conducted as fairly, effectively, and efficiently as possible; (9) ensure that competitions involve a process that considers both quality and cost factors; and (10) provide for accountability in connection with all sourcing decisions.

    CAP, supra note 23, at 8. Recommendations for changes included: “[c]onduct public-private competitions under the framework of an integrated FAR-based process”; “[m]ake limited changes to the existing A-76 process”; “[e]ncourage the development of high-performing organizations.” CAP, supra note 23, at 12.
  39. See id.
  40. 2003 CIRCULAR, supra note 14, at 1.
  41. Id. at 1.
  42. See COMPETITIVE SOURCING supra note 20, at 2, 7.
  43. See Khattab, supra note 22, at 471; see generally Colloquium, The Future of Competitive Sourcing, 33 PUB. CONT. L.J. 263 (2004).
  45. Steven L. Schooner, Competitive Sourcing Policy: More Sail Than Rudder?, 33 PUB. CONT. L.J. 263, 273 (2004); see also Khattab, supra note 22, at 508 – 13.
  46. COMPETITIVE SOURCING, supra note 20, at 5.
  47. Schooner, supra note 45, at 273; see also 2003 CIRCULAR, supra note 14, at attachment C, C-5.
  48. National Defense Authorization Act for Fiscal Year 2008, Pub. L. No. 110-181, § 325, 122 Stat. 3, 61–62 (2008).
  50. See Freedom from Government Competition Act of 2015, H.R. 2044, 114th Cong. (2015); see also Contracting Fairness: Hearing Before the Subcomm. on Gov’t Operations, 114th Cong. 6–8, 7–13 (2016) (statement of Angela B. Styles, Chair, Crowell & Moring LLP).
  51. 2003 CIRCULAR, supra note 14, at 1, attachment A, A-1.
  52. Id. at attachment A, A-1.
  53. Id.
  54. Id.
  56. 2003 CIRCULAR, supra note 14, at attachment A, A-2. The Circular provides further examples of inherently governmental activities:

    (1) [b]inding the United States to take or not to take some action by contract, policy, regulation, authorization, order, or otherwise; (2) [d]etermining, protecting, and advancing economic, political, territorial, property, or other interests by military or diplomatic action, civil or criminal judicial proceedings, contract management, or otherwise; (3) [s]ignificantly affecting the life, liberty, or property of private persons; or (4) [e]xerting ultimate control over the acquisition, use, or disposition of United States property (real or personal, tangible or intangible), including establishing policies or procedures for the collection, control, or disbursement of appropriated and other federal funds.

  57. Id.
  58. Id.
  59. Id.
  60. Id. at attachment A, A-1.
  61. Id. at attachment A, D, A-3, D-2.
  62. Id. at attachment D, D-2.
  63. The Circular outlines six possible reasons (marked A-F) why a commercial activity is performed by government employees:

    (A) the commercial activity is not appropriate for private sector performance pursuant to a written determination by the Contract Sourcing Officer; (B) the commercial activity is suitable for a streamlined or standard competition; (C) the commercial activity is the subject of an in-progress streamlined or standard competition; (D) the commercial activity is performed by government personnel as the result of a standard or streamlined competition (or a cost comparison, streamlined cost comparison, or direct conversion) within the past five years; (E) the commercial activity is pending an agency approved restructuring decision (e.g. closure, realignment); (F) the commercial activity is performed by government personnel due to a statutory prohibition against private sector performance.

    See id. at attachment A, A-3.
  64. Id. at 1.
  65. The 2003 Circular defines FTE as

    [t]he staffing of Federal civilian employee positions, expressed in terms of annual productive work hours (1,776) rather than annual available hours that includes non-productive hours (2,080 hours). FTEs may reflect civilian positions that are not necessarily staffed at the time of public announcement and staffing of FTE positions may fluctuate during a streamlined or standard competition. The staffing and threshold FTE requirements stated in this circular reflect the workload performed by these FTE positions, not the workload performed by actual government personnel. FTEs do not include military personnel, uniformed services, or contract support.

    Id. at attachment D, D-5.
  66. Id. at attachment B, B-1.
  67. Id.
  68. Id.
  69. Id. at 2.
  70. Id. at 1, attachment B, B-1. There are five Competition Officials. These positions, all inherently governmental, are the Agency Tender Official, the Contracting Officer (CO), the Performance Work Statement (PWS) Team Leader, the Human Resource Advisor, and the Source Selection Authority. Id. at attachment B, B-1–B-3.
  71. Id. at attachment B, B-1.
  72. The CSO may extend this time restraint by six months if the “CSO (a) expects the standard competition to be particularly complex; (b) signs the time limit waiver before public announcement; and (c) provides a copy of the time limit waiver to the Deputy Director for Management, OMB, before public announcement.” Id. at attachment B, B-6.
  74. 2003 CIRCULAR, supra note 14, at attachment B, B-8.
  75. Id.
  76. Id.
  77. Id. at attachment B, B-10, B-11.
  78. Id.
  79. Id.
  80. Id. at attachment B, B-10–B-11.
  81. The AT is required to include “… the MEO’s quality control plan; (d) the MEO’s phasein plan; and (e) copies of any existing, awarded MEO subcontracts (with the private sector providers’ proprietary information redacted).” Id. at attachment B, B-10.
  82. Id. at attachment B, B-10.
  83. Id. at attachment B, B-13–B-18.
  84. Id. at B-19.
  85. Id. at B-1.
  86. The 2003 Circular states that the agency may base this cost on the incumbent activity provider but “is encouraged to develop a more efficient organization, which may be a Most Efficient Organization” as the basis for this cost. See id. at attachment B, B-4.
  87. Id.
  88. Id.; see also id. at attachment C, C-6.
  89. The CSO may extend this time frame by forty-five days “if the CSO expects the agency to create an MEO or issue a solicitation for private sector offers.” This waiver must be signed prior to the public announcement. If the competition is not completed within the time frame suggested by the CSO, the competition will convert to a standard competition or the CSO may request an extension by written request to the OMB. Id. at attachment B, B-5.
  90. Id.
  91. Id.
  92. Compare REPORT OF THE NATIONAL PERFORMANCE REVIEW, CREATING A GOVERNMENT THAT WORKS BETTER AND COSTS LESS 7–10 (1993) [hereinafter CREATING A GOVERNMENT] and THE PRESIDENT’S MANAGEMENT AGENDA, supra note 44, at 17–18, with National Defense Authorization Act for Fiscal Year 2010 Pub. L. No. 111-84, § 325, 123 Stat. 2190, 2253–54 (2009).
  93. One of the goals of the 2003 Circular was to put up for competition over half of federal jobs, in an effort to shrink the government. See THE PRESIDENT’S MANAGEMENT AGENDA, supra note 44, at 17; see also CREATING A GOVERNMENT supra note 92, at 7–10 (emphasizing the Clinton administration’s goal of reducing the size of the “civilian, non-postal workforce by [twelve] percent …”).
  94. Notably, those in the procurement community argued the 2003 Circular would be difficult to implement because of lofty goals and expectations regarding how many competitions would take place and how quickly they would be completed, and because these goals were predicated on “effective Human Capital Practices.” See David M. Walker, The Future of Competitive Sourcing, 33 PUB. CONT. L.J. 299, 303 (2003); see also Schooner, supra note 45, at 263; see also COMPETITIVE SOURCING, supra note 20; see also Guttman, supra note 22, at 356–60.
  95. Supra note 94.
  96. See Schooner, supra note 45, at 274.
  97. Id.; 2003 CIRCULAR, supra note 14, at 1.
  98. See Schooner, supra note 45, at 273.
  99. CAP, supra note 23, at 8.
  100. See Schooner, supra note 45, at 273.
  101. See id. at 271.
  102. Professor Schooner is the Nash & Cibinic Professor of Government Procurement Law and is Co-Director of the Government Procurement Law Program at The George Washington University Law School.
  103. See Schooner, supra note 45, at 273.
  104. See 2003 CIRCULAR, supra note 14, at 1.
  105. See Schooner, supra note 45, at 295.
  106. Id.
  107. See id.
  108. INDEPENDENT REVIEW GROUP, supra note 8, at 10.
  109. Id.
  110. THE PRESIDENT’S MANAGEMENT AGENDA, supra note 44, at 17.
  111. “In the process of governing, the Government should not compete with its citizens. The competitive enterprise system, characterized by individual freedom and initiative, is the primary source of national economic strength. In recognition of this principle, it has been and continues to be the general policy of the Government to rely on commercial sources to supply the products and services the Government needs.” OFFICE OF MGMT. & BUDGET, EXEC. OFFICE OF THE PRESIDENT, CIRCULAR A-76, PERFORMANCE OF COMMERCIAL ACTIVITIES (1983) (revised 1999).
  112. Id.
  113. See Schooner, supra note 45, at 271–72.
  114. See also THE PRESIDENT’S MANAGEMENT AGENDA, supra note 44, at 17–18.
  115. See COMPETITIVE SOURCING, supra note 20, at 5; see THE PRESIDENT’S MANAGEMENT AGENDA, supra note 44, at 17.
  116. See generally COMPETITIVE SOURCING, supra note 20, at 5.
  117. See Schooner, supra note 45, at 273.
  118. 2003 CIRCULAR, supra note 14, at attachment B, B-4, B-11.
  119. Id. at attachment B, B-1.
  120. See Schooner, supra note 45, at 273.
  121. Id.
  122. Compare Max B. Sawicky, Show Me the Money: Evidence is Sorely Lacking that the Bush Administration’s Proposed A-76 Rules for Contracting Will Bring Budget Savings, ECONOMIC POLICY INSTITUTE BRIEFING PAPER NO. 145, Oct. 9, 2003, at 2, with Walker, supra note 94, at 307 (showing the divergence when assessing the actual cost savings of A-76).
  123. CIRCULAR A-76 AND THE MORATORIUM, supra note 17, at 2.
  124. Sawicky, supra note 122, at 2.
  125. Id.; see Schooner, supra note 45, at 271–72.
  126. The overhead costs are calculated by multiplying the personnel costs (“[a]gency labor costs for direct and indirect labor necessary to meet the requirements in the solicitation”) by a percentage rate. 2003 CIRCULAR, supra note 14, at attachment C, C-20.
  127. Id. at attachment D, D-7.
  128. Id.
  129. Id.
  130. Id.
  131. See DOD MET STATUTORY REPORTING REQUIREMENTS, supra note 49, at 12–13; see also Khattab, supra note 22, at 513–17.
  132. Thomas L. McGovern, The Top 10 “Drags” on Competition in the A-76 Environment, 36 PROCUREMENT LAW. 7, 7 (2001).
  133. See 2003 CIRCULAR, supra note 14, at 1.
  134. See DOD MET STATUTORY REPORTING REQUIREMENTS, supra note 49, at 12–13.
  135. See Khattab, supra note 22, at 514; see McGovern, supra note 132, at 7.
  136. See Khattab, supra note 22, at 513.
  137. McGovern, supra note 132, at 7.
  138. 2003 CIRCULAR, supra note 14, at attachment B, B-16.
  139. For example, if the AT projects theMEO personnel costs at $100,000, the conversion differential number would be the lesser of 10% of the MEO’s projected personnel cost of $100,000 or $10,000,000. Since 10% of the MEO’s personnel cost is the lesser value ($10,000), this amount is added to the non-incumbent source’s total adjusted cost of performance. For instance, assume that an agency is the incumbent service provider and submits a tender offer of $10 million and the personnel costs of the MEO is $100,000.00. If a private contractor submits a bid of $10 million, $10,000.00 will be added to its total adjusted cost of performance because it is the non-incumbent provider and because $10,000.00 is less than $10 million. The agency’s total adjusted cost of performance is then subtracted from the private contractor’s adjusted total cost of performance to determine the low-cost provider. If this results in a positive number, this suggests the private contractor should receive the contract. However, if this results in a negative number, this suggests the incumbent agency should provide the service. Since $10,000,000.00 – $10,010,000.00 = –$10,000, this suggests the incumbent agency should continue to provide the service under the MEO. Id.
  140. See id.
  141. Id. at 1.
  142. While the CSO is free to utilize Tradeoff Source Selection Provisions under the 2003 Circular, the Circular states: “[t]he specific weight given to cost or price shall be at least equal to all other evaluation factors combined …” Id. at attachment B, B-8.
  143. See McGovern, supra note 132, at 12.
  144. See Schooner, supra note 45, at 273. Moreover, the MEO’s cost estimate utilizes the previously discussed arbitrary 12% overhead rate. Using this rate could be the difference in whether the conversion differential impacts competition. See McGovern, supra note 132, at 12.
  145. Furthermore, if the government is the incumbent service provider, the government enjoys either a $10 million or 10% of MEO personnel cost cushion in cost estimates. This is just another reason why competition is needlessly limited by the conversion differential. Cf. Khattab, supra note 22, at 517.
  146. See Schooner, supra note 45, at 295.
  147. See id.
  148. See id.
  149. See id.
  150. The Panel offered this as the very first sourcing principle. The Panel found that having agencies use the A-76 process to “[s]upport agency mission, goals, and objectives” links the A-76 process to serving the agency in the best way it can. COMMERCIAL ACTIVITIES PANEL, supra note 73, at 6–7.
  151. COMPETITIVE SOURCING, supra note 20, at 6 (noting agencies had the ability to make arbitrary inventory and grouping decisions under the 2003 Circular for the sake of conducting streamlined competitions).
  152. This idea builds upon former GAO Comptroller General David Walker’s idea that the government should prioritize the creation of High Performance Organizations (HPO). The focus of Mr. Walker’s suggestion was directed toward government jobs that will never be subject to competitive sourcing but nonetheless correctly identifies what the government should be working toward. See Walker, supra note 94, at 304–05.
  153. This will be done in concurrence with the Federal Activities Inventory Reform Act of 1998, which requires agencies submit to Congress inventories of their commercial and inherently government activities no later than the third quarter of each fiscal year. See Federal Activities Inventory Reform Act of 1998, Pub L. No. 105-270, § 2, 112 Stat. 2382, 2382 (1998). The MEO will also be submitted with a PWS, as required by the 2003 Circular, that also identifies the goals / missions of the activity to be performed and how the agency currently believes the goal / mission can be accomplished. 2003 CIRCULAR, supra note 14, at attachment B, B-6.
  154. For a detailed discussion on how the line item overhead rate in the Circular should be replaced by using the line item rate for operating expenses supplied by the Financial Ratio Benchmark, see Khattab, supra note 22, at 515–17. It is not lost upon the author that this may be the most difficult aspect of the Circular to correct. The government’s (in)ability to account for costs is extremely well publicized and the government procurement community continuously calls for serious changes. See generally DEP’T OF DEF. INSPECTOR GEN., REPORT NO. DODIG-2015-144, SUMMARY OF DOD OFFICE OF THE INSPECTOR GENERAL AUDITS OF DOD FINANCIAL MANAGEMENT CHALLENGES (2015); see also Jamie Crawford, Audit Reveals Army’s Trillion-Dollar Accounting Gaffes, CNN POLITICS (Aug. 23, 2016, 3:55 PM),
  155. See Khattab, supra note 22, at 517.
  156. Agencies that fail to implement the MEO in a reasonable time period will forfeit their two-year grace period and will be forced to conduct a competitive sourcing competition with the private sector. Unlike the 2003 Circular (which did not offer an affirmative punishment for noncompliance with time limitations), this alteration instills the fear of immediate competition into the agency to force compliance and efficiency.
  157. The author again realizes that the government’s accounting practices will need to improve for this solution to achieve positive results. Failure to invest in the long-term future of the government’s accounting abilities places the future public-private competitions in serious jeopardy. Infra note 158.
  158. As noted by Mohab Tarek Khattab’s 2005 Note on Circular A-76, there are adequate resources to monitor market conditions and compare them. See Khattab, supra note 22, at 516.
  159. See id.
  160. See McGovern, supra note 132, at 12.
  161. See Khattab, supra note 22, at 516.
  162. The 2003 Circular defines “Performance Work Statement” as “[a] statement in the solicitation that identifies the technical, functional, and performance characteristics of the agency’s requirements. The PWS is performance-based and describes the agency’s needs (the ‘what’), not specific methods for meeting those needs (the ‘how’). The PWS identifies essential outcomes to be achieved, specifies the agency’s required performance standards, and specifies the location, units, quality and timeliness of the work.” 2003 CIRCULAR, supra note 14, at attachment D, D-7.
  163. See Schooner, supra note 45, at 273–74, 295; see Khattab, supra note 22, at 513–17.
  164. See INDEPENDENT REVIEW GROUP supra note 8 at 1.
  165. Peter Baker, At Walter Reed, Bush Offers an Apology, WASH. POST (Mar. 31, 2007),
  166. Miller, supra note 19.