Agency use of cost reimbursement contracts skyrockets, GAO finds

The Government Accountability Office is feeding fuel to the fire about the debate over the worthiness of cost type contracts.

GAO issued a report today that says while agencies spent $136 billion on cost reimbursement type contracts in 2008, up $16 billion since 2003, they are not managing these contracts well because, in part, they do not have the required data.

"Current reporting in the Federal Procurement Data System-Next Generation, specifically regarding the combination contract type and billions of dollars with missing contract types, does not provide decision makers with adequate visibility into the government's use of cost-reimbursement contracts," auditors state in a report called Extent of Federal Spending under Cost-Reimbursement Contracts Unclear and Key Controls Not Always Used.

"Further, while the Federal Acquisition Regulations cautions against the protracted use of cost-reimbursement contracts after experience provide a basis for firmer pricing, it does not set forth procedures or provide guidance for doing the analysis needed to make this determination."

The Office of Management and Budget wants to reduce the number of cost-type contracts across the government. It set a10 percent goal for agencies by the end of 2010 to do this.

The goal was part of a set of memos issued by OMB earlier this week.

"Cost-reimbursement contracts, as well as time-and-materials and labor-hour contracts, provide limited direct incentive to control costs," OMB's memo states.

"Reports from the Government Accountability Office, agency inspectors general and agency management point to a general overuse of these authorities and significant lost opportunities for savings and performance efficiencies."

OMB deputy director for management Jeffrey Zients told lawmakers earlier this week that chief acquisition officers should consider hybrid contracts that use some fixed price and some cost-type contracts.

"The Office of Federal Procurement Policy will review progress against the 10 percent reduction targets on a semiannual basis in fiscal 2010," Zients says.

"The best practices and strategies of successful agencies will be shared with those who experience challenges so they may take appropriate corrective actions to improve results."

Some in industry reacted with optimism about OMB's memos.

Stan Soloway, the president and CEO of the Professional Services Council, says the guidance "offers agencies strategic and balanced guidance and outlines sensible acquisition practices long-supported by industry."

"The memos highlight the importance of front-end acquisition planning, clarity in requirements, robust market research, matching appropriate contract type to the specific requirement and acquisition strategy, and enhancing the capabilities of the federal acquisition workforce," Soloway says.

For its part, GAO reviewed 92 contracts and task orders, and found about 30 percent didn't include any documentation or rationale for why it decided on cost reimbursement was their approach.

GAO also found little evidence that agencies are analyzing contracts' pricing history and requirements to determine if they can transition to a contract type with fixed prices.

OMB requires agencies to do that analysis as part of its recent acquisition reform memos. And Congress required agencies to provide a rationale for the use of cost reimbursement type contracts.

GAO made two governmentwide recommendations:

• OFPP should implement controls in FPDS-NG to preclude information from being entered without a contract type;
• OFPP should reconcile the conflicting instructions in the FPDS-NG user manual for coding combination contracts versus coding based on the preponderance of contract type.

OFPP agreed with the recommendations. It tells GAO that the next version of FPDS-NG scheduled to go live in February would make the contract type selection mandatory.

OFPP also tells GAO that recently it decided to change the procurement data site to eliminate combination contract as an option for all new contracts in 2010.

"The administration is committed to changing the old ways of Washington," says an OMB official, who requested anonymity because they were not approved to speak on this subject. "An essential part of that is tackling many of the problems tied to high-risk contracts, including cost-reimbursement contracts and non-competitive contracts, which often carry significant risk of overruns. This week OFPP issued guidelines to help agencies identify opportunities for improvement - some of which were recommended in the GAO report."

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On the Web:

GAO -- Report on cost reimbursement contracts (pdf)

OMB -- Memo on acquisition reforms (pdf)

FederalNewsRadio -- OMB's Zients stakes out acquisition reform plans

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