Agencies must cut service contracting by 15 percent

OMB will tell agencies to focus on management support service contracts and reduce spending by $6 billion. OMB said contracting for management support services ...

This story has been updated from its original version.

By Jason Miller
Executive Editor
Federal News Radio

The White House wants agencies to cut spending on management support service contracts by 15 percent over the next 14 months.

As a part of the administration’s Campaign to Cut Waste, Jeff Zients, the Office of Management and Budget’s deputy director for management, and Dan Gordon, the administrator of the Office of Federal Procurement Policy, called for a reduction that is expected to save an additional $6 billion by the end of fiscal 2012.

“That is where the spending is increasing,” said Dan Gordon, administrator of the Office of Federal Procurement Policy, Thursday during an event at OMB in Washington. “I’m not sure that this is the area where the spending is absolutely the fastest, but it is certainly increasing faster procurement spending was in the prior decade. We are talking about quadrupling of spending in this area over the prior decade. It’s not only a question of quantity, there’s also issues of quality. The fact is this is an area that tends to be high risk for the government and for the taxpayers.”

Gordon said about 74 percent of these contracts are time-and-materials, labor hours or cost-plus type contracts, which the administration believes puts the government at most risk.

The White House has been focusing on reducing the use of high risk contracts. The President mandated agencies reduce spending by $40 billion between 2011 and 2012 by decreasing their use of high risk contracts.

OFPP wants agencies to focus on 15 product codes that make up management support services. These include professional and management services such as policy review and development services, and personal service contracts. It also includes IT support services such as automatic data processing services around development, acquisition support and back up and security services.

“There will be agencies or parts of agencies that will say we need these services and that’s really a program decision, not a contracting shop decision,” Gordon said. “And our answer to them in that case, then you will need to find savings by negotiating, for example, fixed prices instead of time-and-materials, or at least negotiating for a lower hourly rate, if that’s the way you were paying. But where we can, we need to cut back on these services so that we can reach this 15 percent goal by the end of fiscal 2012 and drive spending from $40 billion down to $34 billion.”

Part of the way agencies will reach the $6 billion in savings is by analyzing spending patterns and buying only what their budget allows them to afford. OMB wants agencies to look for areas where there is an over reliance on contractor expertise and where the agency is not in total control of the program.

Agencies already should have some idea of how much money they are spending on management services. Congress required in the 2010 Consolidated Appropriations Bill that each department develop a service contract inventory–similar to the one the Defense Department produces. The Government Accountability Office found in March that of the nine agencies they reviewed, seven had started their analysis, but were not very far along.

Gordon said OFPP received all the service contract inventories from the civilian agencies as required by the law.

“In addition, last November when we gave agency guidance we alerted them to these 15 product and service codes, and we said these are areas that should be of special interest,” Gordon said in an exclusive interview with Federal News Radio after the event. “When you are thinking about is there a risk of over reliance on contractors, we alerted them to focus on these 15 product and service codes.”

Gordon said another reason for focusing on management and support contracts is when agencies conducted internal reviews where they had over reliance on contractors, these types of services made up the majority of the insourcing pilots.

“We were concerned about the work potentially either being close to inherently government or in any event leading to situations where the agency was overly relying on contractors,” Gordon said.

Gordon said OFPP will issue implementation guidance in the coming months. Additionally, OFPP will work with agencies through the AcqStat sessions to help determine the best ways to reduce management support service contracts.

He added several agencies already are relooking at these contracts. Gordon said the Commerce Department has cut back on management support service contracts and renegotiated contracts to pay lower rates on the ones they do need.

The Defense Department also has reduced the number of high-risk contracts by five percent. It also is paying as much as 10 percent less for the same or better services by moving toward fixed price contracts, said Richard Ginman, director of Defense procurement and acquisition policy.

Reaction to the cut in management support service contracts from industry was tepid.

“We understand the need for government to find efficiencies in this time of economic belt tightening, but caution applying numeric reductions as goals,” said Trey Hodgkins, the vice president of national security and federal procurement policy at TechAmerica. “We need to make sure that contractors do not bear an inordinate portion of the burden. There is also a need to make sure we are not shifting mission requirements previously met through managed services onto a government workforce that is already under hiring freezes and restrictions on pay. In the area of acquisition workforce, there is no additional bandwidth.”

Stan Soloway, president and CEO of the Professional Services Council, said his organization is concerned that specific dollar targets too often take precedence over strategic decision making.

“Although this is not an insourcing initiative, telling agencies to cut 15 percent of their support contracts by the end of next year could create the same kind of undisciplined process that has marked much of the Defense Department’s insourcing initiatives,” Soloway said. “This puts significant responsibility on OMB and agency leadership to ensure that does not happen. The rationale behind OMB’s acquisition initiatives to buy smarter, balance the workforce and reduce risk is clear. But OMB must provide clear and consistent guidance to agencies on how to prioritize these goals to avoid shifting costs from one line item to another or choosing the wrong type of contract.”

The initiative is yet another piece to the administration’s Campaign to Cut Waste. Agencies have been trying to reform their acquisition processes and the makeup of their agencies in several ways.

For instance, agencies have been reconfiguring their ratios for federal employees to contractors, which OMB says there are service support areas that rely too much on vendors.

OMB said these efforts are paying off. OFPP found in February agency spending on contracting across the board dropped by $11 billion in 2010 as compared to 2009.

Fifteen codes make up management support services:


Description of Function Product & Service Code
Cost Benefit Analyses B505
Policy Review/Development Services R406
Program Evaluation Services R407
Program Management/Support Services R408
Program Review/Development Services R409
Specifications Development Service R413
Management Services/Contract & Procurement Support R707
Intelligence Services R423
Engineering and Technical Services R425
Systems Engineering Services R414
Personal Services Contracts R497


Description of Function Product & Service Code
ADP Systems Development Services D302
Automated Information Systems Services D307
ADP System Acquisition Support Services D314
ADP Backup and Security Services D310

RELATED STORIES: OMB: Contract spending down but more cuts needed

OFPP calls for Fed to contractor ratio analysis

Agencies having trouble analyzing service contracts

Agency pilots help cultivate ‘inherently governmental’ changes

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