Rules on outsourcing sometimes hinder the process

Once again, the federal government is wrestling with the who, what, when, how and
whether of privatization. This has been a controversial topic at least since the 1966
inauguration of Office of Management and Budget Circular A-76, which sets out rules for
competition between the public and private sectors. The circular helps define the type of
work suitable for such competitions—everything except inherently governmental

More recently, Congress enacted two significant laws on this topic. And officials at
the highest levels of the executive branch, as part of the reinvention initiative, are
asking whether some things done by the government would be done better if contracted out.

One of the statutes, 10 U.S. Code, Section 2462, requires the Defense Department to
contract out nongovernmental functions that can be done more economically by the private
sector. DOD is trying to balance this mandate with other provisions, such as the Arsenal
Act, which requires DOD to keep certain core competencies in-house.

Whatever the decision, someone is disappointed. When contractors lose a competition
with the government, they often cry foul, sometimes with justification. And federal
workers are justifiably unhappy about the prospect of losing their jobs. Sometimes,
government employees threatened with displacement by contractors resort to court action to
keep their jobs. Circular A-76 grants them the right to appeal to a federal court.

Some opposition by federal workers is less overt, however. The General Accounting
Office recently upheld protests by two would-be contractors in the case of DZS/Baker LLC

The Air Force invited proposals to perform maintenance at Wright-Patterson Air Force
Base, Ohio. All proposals were rejected as unacceptable.

Two rejected bidders protested. It turned out that 14 of the 16 evaluators would have
lost their jobs if the work had been contracted out. GAO, ruling this was a conflict of
interest that could not be mitigated, upheld the protest. The Air Force objected in vain
that it needed evaluators’ expertise and knowledge.

Expect this dilemma to recur as other work is considered for outsourcing. When those
workers whose positions are at risk are kept off the evaluation team, the government may
have to rely on others less qualified to judge proposals.

On the other hand, it is too much to expect dispassionate objectivity when the
evaluator’s own job is at stake.

Another type of obstacle appeared in an Air Force procurement for civil engineering
services at Eglin Air Force Base, Fla. The bulk of the work was subject to a fixed monthly
price, regardless of the tasks ordered. The solicitation originally had nonbinding
estimates, but even these were removed.

In the case, BMAR & Associates Inc. (B-281664), GAO upheld a protest claiming that
the proposed contract included unreasonable risks. One important factor in this decision
was that the government’s bid for in-house performance did not have to include any
contingency for work above the estimates. This put private-sector vendors at an unfair

The other statute is the Federal Activities Inventory Reform Act of 1998. The FAIR Act
directs agencies to develop and publish inventories of activities suitable for contracting

OMB, which oversees these efforts, proposes to fold the FAIR process into its existing
program under Circular A-76. Some in the private sector, however, are suspicious of the
A-76 process, in part because of problems such as those in the protest decisions cited
above. They want OMB to use the FAIR Act as a starting point for a bolder, more definitive

One continuing problem is how to treat the concept of best value in an outsourcing
context. When best value is the criterion for award, the winner may not be the
lowest-priced bidder. Yet when agencies compare private- and public-sector performance,
bottom-line price is what matters.

It is logical to change the rules to include quality of performance in the comparison.
Sometimes a small increase in cost is worth a large improvement in service. For the
present, however, Section 2462 stands in the way of such a change at DOD.

Congress may not yet be through with legislating the rules for private-public

Joseph J. Petrillo is an attorney with the Washington law firm of Petrillo &
Powell, PLLC. E-mail him at

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