GAO Rejects Contractor Claims About DoD Costing Methodology

Friday, September 27, 2013 - 12:09pm

WASHINGTON (Sept. 27, 2013) – The Government Accountability Office has rejected the Professional Services Council’s criticisms of the Department of Defense’s methodology for assessing the cost of work performed by military, civilian and contractor personnel.

“The Professional Services Council, the contractor lobbying group, got ripped off by a contractor,” American Federation of Government Employees National President J. David Cox Sr. said. “PSC hired a think tank, the Center for Strategic and International Studies, to produce made-to-order research which assailed the integrity of the methodology  used by the Department of Defense to assess the costs of performance by military personnel, civilian personnel, and contractors. Unfortunately for PSC, GAO rejected their claims. If anything, the recommendations indicate that the methodology is biased against civilian personnel.”

In the recently issued report, “Human Capital: Opportunities Exist to Further Improve DoD’s Methodology for Estimating the Costs of Its Workforces (GAO-13-792),” GAO reports a revised version (DoD Instruction 7041.04) “reflects improvements to DoD’s methodology for estimating and comparing the full cost to the taxpayer of work performed by military and civilian personnel and contractor support since the issuance of” Directive-Type Memorandum 09-007. GAO noted pro-contractor changes, including taking into account “the cost of foregone taxes, lost productivity during periods of transition, and some other non-common costs associated with converting from contract to government performance.”

 However, GAO also had several recommendations for improving the methodology:

  1. Improve accountability for in-house overhead. DoD’s methodology accounts for the items that contribute to overhead costs, reports GAO, but costs are not attached to those items. When subject-matter experts in military departments can’t assign costs to those overhead items, the default position is to automatically impose a 12% overhead charge on the in-house workforce. The DoD Inspector General determined in 2003 that this charge is generally arbitrary and unjustifiable and that it was instrumental in a botched OMB Circular A-76 privatization process that wrongly contracted out the work of 600 Defense Finance and Accounting Services employees. DoD must revise the methodology so that only actual overhead costs are imposed on in-house workforces, not imaginary overhead costs.
  2. Improve accounting for the military’s advertising, and recruiting, and training costs and establish business rules for estimating Reserve and National Guard costs. While DoD has great insight into the costs of civilian personnel, we don’t have the same accountability with respect to military personnel costs. In addition to increasing the accountability of military personnel costs, the department must be rigorous in requiring that any non-military essential conversions of work from civilian to military performance be cost-effective and in the actual interests of taxpayers, as determined by the methodology.
  3. Don’t attribute excessive retirement costs to civilian and military personnel. As GAO politely put it, “our analysis found that the instruction also directs the inclusion of several cost elements that may not be appropriate to consider. These include payments for part of unfunded liabilities—any previously identified shortfalls in federal retirement assets….” It’s bad enough that sourcing decisions are made on the basis of short-changing workers on their pensions, but it’s outrageous to exaggerate the costs of those pensions and put civilian employees at an unfair competitive disadvantage.
  4. Use more accurate data in determining the cost of contractors. In the event components don’t have identical or comparable contracts to use as precedents, the methodology instructs DoD to use a General Services Administration (GSA) database. The GSA rates may be higher than what contractors would charge if they actually negotiated with agencies. However, contractors have only themselves to blame for posting such high rates on the GSA schedules. Fortunately, as GAO points out, this problem will be rectified when the Department completes its long-delayed inventory of contract services. AFGE is proud to be the biggest booster of the inventory, and we look forward to it finally being completed. Contractors, on the other hand, have fought bitterly against the accountability that an inventory would impose on them.
  5. Improve the consistency of the application of the methodology across the department. AFGE agrees that DoD should be moving towards one system. However, a more consistent approach will likely come about only after more and more parts of DoD actually use the methodology. Of even greater importance is that the department, with Cost Assessment and Program Evaluation and Personnel and Readiness taking the lead, should establish as soon as possible an agile, user-friendly tool to apply the costing methodology in support of the sourcing and workforce management decisions of commanders and managers at all levels across the department. 

“Here’s the bottom line,” Cox said. “Surely, we can all stipulate that DoD dollars are precious and must be used wisely. Surely, we can all stipulate that we must make decisions about who performs work on the basis of a rigorous methodology, instead of caps and freezes, prejudices and ignorance. The DoD costing methodology is not perfect, but, as GAO notes, it is improving.

“We will work with DoD to eliminate the biases against civilian personnel on overhead and retirement costs. We will work with the department to account for the costs of active-duty and reserve military personnel. We will support the department’s efforts to finish the inventory so that contractor costs will finally be transparent. We urge lawmakers and stakeholders to do the same. And the more it is used, the more opportunities we will have to perfect that methodology and make its application more uniform.”