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.
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.