CIVILIAN AND CONTRACTOR WORKFORCES: DOD's Cost Comparisons Addressed Most Report Elements but Excluded Some Costs

In addition to more than 2.2 million active duty and reserve personnel, DOD employs about 760,000 federal civilians and more than 560,000 contractors. In the Senate Report 114-49 accompanying a bill for the National Defense Authorization Act for Fiscal Year 2016 included a provision for DOD to issue a report (1) assessing functions performed by federal civilian and service contractor personnel, (2) accounting for the full costs of federal civilian and service contractor personnel performing these functions, (3) comparing these costs, and (4) assessing available hiring and retention authorities for federal civilians.

The Senate report also included a provision for GAO to assess DOD's report, which DOD submitted to Congress in April 2017. This report examines the extent to which DOD's report addressed the prescribed congressional elements.

GAO reviewed DOD's report and compared it to the prescribed elements, examined documents relevant to DOD's cost estimating and comparison methodology, and interviewed DOD officials, including those in its Office of Cost Assessment and Program Evaluation responsible for the calculations in DOD's report.

In response to Congressional direction, the Department of Defense (DOD) issued a report in April 2017 comparing the costs of federal civilian and service contractor personnel at select installations. The report addressed three out of four provision elements and partially addressed one, as discussed below. DOD concluded that neither federal civilians nor service contractors were predominately more or less expensive, with costs being dependent on position, location, and level of seniority. DOD noted that it used a non-probability based sample of personnel for its report, and the results are not generalizable.

An assessment of performance of functions being performed by federal civilian and service contractor personnel at six military installations, with four being in the continental United States and two being outside the continental United States. GAO believes that DOD addressed this requirement because it developed a methodology to assess performance of functions performed by federal civilians and service contractors at 17 organizations within nine geographic regions including two locations outside the continental United States. DOD used data from the Defense Civilian Personnel Data System to identify military installations with large reported numbers of federal civilians. DOD determined that personnel need to perform at least 80 percent common tasks to be able to make a comparison.

An accounting of the fully-burdened, or full, cost of federal civilian and service contractor personnel performing functions at the selected installations including training, benefits, reimbursable costs, and facility overhead. GAO believes that DOD partially addressed this requirement because while it calculated the labor costs of selected federal civilian and service contractor full-time equivalents performing similar functions for organizations at government-owned facilities, it excluded certain non-labor costs from its calculations.

A comparison of the costs of performance of these functions by federal civilians and service contractor personnel at the selected installations. GAO believes that DOD addressed this requirement because it compared calculated costs for selected federal civilians and service contractors performing similar functions at selected installations and included those comparisons in its report.

An assessment of the flexible employment authorities for the employment and retention of federal civilian employees. GAO believes that DOD addressed this requirement because it sent questionnaires to DOD hiring officials and human resource professionals to collect information on flexible employment authorities and conducted interviews with these and human resource professionals at the same 17 organizations used for the cost comparison. Based on an analysis of the information collected, DOD's report included several conclusions regarding flexible hiring authorities and made one recommendation.

GAO is not making any recommendations; however, DOD non-concurred with GAO's assessment that DOD partially addressed the element to account for the full cost of personnel. GAO believes the assessment is correct as discussed in the report.

The Department of Defense (DOD) is one of the largest employers in the  federal government with approximately 1.4 million active-duty  servicemembers, 813,000 reserve component servicemembers, 762,000  federal civilian full-time equivalent employees, and approximately  561,000 contractor full-time equivalent personnel. In cases where federal  civilians or service contractors can perform similar functions, determining  whether federal civilians or service contractors are less expensive to  employ is a complicated task, particularly for an organization with a  complex mission and a workforce as large and diverse as DOD.

Since January 2001, we have identified Strategic Human Capital  Management as a high-risk area because skills gaps within individual  federal agencies—as well as across the federal workforce—can lead to  costly, less-efficient government. In addition, the federal government’s  fiscal challenges, which we reported on in January 2017 and in other  products, underscore the importance of DOD employing a strategic  approach to determining the appropriate mix of its military, civilian, and  contracted services to perform its mission, and determining the functions  that are critical for the department to achieve its missions. However,  workforce cost is one of several factors such as timing, durations of tasks,  productivity, economic conditions in the local labor market, and whether a  function is considered inherently governmental, that influence workforce  decisions.

Senate Report 114-49, accompanying a bill for the National Defense  Authorization Act for Fiscal Year 2016, included a provision for DOD to  report a comparison of the costs of functions performed by federal  civilians and service contractor personnel at selected installations, among  other things. Specifically, the provision included four elements for DOD to  report: (1) an assessment of performance of functions being performed by  federal civilians and service contractor personnel at six selected  installations, (2) an accounting of the full cost of federal civilian and  service contractor personnel at the selected installations, (3) a  comparison of the costs of performance of these functions by federal  civilians and service contractor personnel at the selected installations,  and (4) an assessment of the flexible employment authorities for the  employment and retention of federal civilian employees. DOD submitted  its report (referred to hereafter as DOD’s Cost-Comparison Report) to  Congress in April 2017.

Senate Report 114-49 also includes a provision for us to review the  sufficiency of DOD’s Cost-Comparison Report. This report assesses the  extent to which DOD’s Cost-Comparison Report addressed the four  elements of the provision in Senate Report 114-49.

To assess the extent to which DOD’s Cost-Comparison Report addressed  the four elements of the provision in Senate Report 114-49, we reviewed  and compared DOD’s Cost-Comparison Report with the four elements in  Senate Report 114-49. DOD’s Cost-Comparison Report was expected to  be issued in February 2017 according to DOD officials. However, its  issuance was delayed until April 2017. We conducted interviews with  DOD’s Office of Cost Assessment and Program Evaluation (CAPE)  officials responsible for designing and conducting DOD’s Cost- Comparison Report. These interviews included discussions regarding  how CAPE officials designed their methodology and gathered and  analyzed data. We discussed steps taken to ensure data reliability, but  did not assess the reliability of CAPE’s data. We also obtained and  reviewed documents relevant to DOD’s cost-comparison approach. In  addition, we interviewed officials with the Office of the Under Secretary of  Defense for Personnel and Readiness to discuss efforts related to  identifying federal civilians and support contractors performing similar  functions. We also interviewed officials within the Office of the Under  Secretary of Defense-Comptroller to gain perspective on cost elements  related to cost comparisons. We reviewed DOD’s policies and guidance  on workforce management and estimating costs. These documents  include DOD Instruction 1100.22, Policy and Procedures for Determining  Workforce Mix (April 12, 2010) (Change 1, Dec. 1, 2017); DOD 7000.14- R, Financial Management Regulation; and DOD Instruction 7041.04,  Estimating and Comparing the Full Costs of Civilian and Active Duty  Military Manpower and Contract Support (July 3, 2013). We also reviewed  Office of Management and Budget Circular A-11 to determine relevant  federal civilian personnel costs.

We conducted this performance audit from January 2017 to April 2018 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objective. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

Since 2001, DOD’s total workforce has changed in size and composition.  DOD’s military, civilian, and contractor workforces peaked around 2011  and have since decreased in size, as shown in figure 1. Several factors  have contributed to changes in the size of the workforces including  varying levels of U.S. involvement in the conflicts in Iraq and Afghanistan,  military to civilian and contractor conversions, contractor insourcing, and  the growth in certain workforces such as acquisition and cyber.

DOD’s management of its workforce is governed by several workforce  management statutes, including sections 129, 129a, and 2463 of Title 10  of the United States Code. Section 129 directs that DOD civilian  personnel be managed each fiscal year on the basis of, and consistent  with, total-force management policies and procedures established under  section 129a, the workload required to carry out the functions and  activities of the department, and the funds made available to the  department each fiscal year. Section 129a directs the Secretary of  Defense to establish policies and procedures for determining the most  appropriate and cost-efficient mix of military, civilian, and contracted services to perform the mission of the department. Finally, Section 2463  directs the Under Secretary of Defense for Personnel and Readiness to  devise and implement guidelines and procedures to ensure that  consideration is given to using, on a regular basis, DOD civilian  employees to perform new functions and functions performed by  contractors that could be performed by DOD civilian employees.

DOD Instruction 1100.22, Policy and Procedures for Determining  Workforce Mix (April 12, 2010) (Change 1, Dec. 1, 2017) establishes  policy, assigns responsibilities, and prescribes procedures for determining  the appropriate workforce mix of the military, civilian, and contracted  services. The instruction provides criteria for workforce-mix decisions and  directs DOD components to conduct a cost comparison to determine the  low-cost provider for all new or expanding mission requirements and for  functions that have been contracted but could be performed by DOD  civilian employees.

In addition, over the past 10 years DOD has taken steps to better  understand the costs associated with its workforces. For example, we  found in September 2013 that DOD had improved its methodology for  estimating and comparing the full cost of work performed by military and  civilian personnel and contractor support, but the methodology continued  to have certain limitations, such as the lack of guidance for certain cost  elements related to overhead. We made five recommendations,  including for DOD to assess the advantages and disadvantages of  allowing the continued use of different cost-estimation tools across the  department or directing department-wide application of one tool, and  revise its guidance in accordance with the findings of its assessment.  DOD implemented this recommendation but has not yet implemented the  other four recommendations although it concurred or generally concurred  with them.

DOD’s Cost- Comparison Report Addressed Most Elements in Senate Report 114-49

DOD’s Cost-Comparison Report addressed three elements and partially  addressed one element concerning the accounting for the fully-burdened,  or full, cost of federal civilian and service contractor personnel performing  functions at the selected installations, as shown in table 1. DOD  concluded that for the 21,000 federal civilians and service contractors  compared, neither federal civilians nor service contractors were  predominately more or less expensive, with the costs being dependent  upon the function being performed, location, and level of expertise. DOD  noted that the results were not generalizable across the department.

Each of the elements and our assessment are discussed below.

DOD Developed a Methodology to Assess Performance of Functions Being Performed by Federal Civilian and Service Contractor Personnel on Military Installations

We believe that DOD addressed the reporting element to assess  performance of functions performed by civilian and contractor personnel  by developing a methodology to assess performance of functions  performed by federal civilians and service contractors at organizations  within nine geographic regions including two locations outside the  continental United States.

Organizations included in DOD’s methodology include the following:

US Army Intelligence and Security Command

Aviation and Missile Research, Development, and Engineering Center

Tripler Army Medical Center  DOD’s methodology included the following:

Selecting installations and organizations: DOD used data from the  Defense Civilian Personnel Data System to identify military  installations with large reported numbers of federal civilians.  According to DOD officials, they eliminated from consideration those  installations that had no reported contractors. From this subset of  installations, DOD selected organizations to represent all three  military departments and diverse geographical locations, to include  two locations outside the continental United States.

Assessing the functions performed by civilians and contractors  to identify federal civilians and service contractors performing  similar functions: DOD assessed the performance of functions at  these selected locations to identify federal civilians and service  contractors performing similar functions as there is no direct mapping  or perfect match between existing taxonomies used to quantify federal  civilian positions and contracted services. Further, DOD reported that  the day-to-day functions performed by federal civilian employees do  not always directly correlate to the designated occupational series or  the job title for their position. For example, an individual with an  occupational series assigned as an accountant may actually perform  work more consistent with that of a financial analyst. According to  DOD’s Cost-Comparison Report, DOD did not rely on occupational  series names or job titles alone to determine the actual work being  performed by federal civilians. Specifically, DOD conducted site visits  with each organization and relied on local managers’ direct knowledge  of the actual tasks that their federal civilians and service contractor  personnel performed. According to DOD’s Cost-Comparison Report,  DOD determined that personnel need to perform at least 80 percent  common tasks to be able to make a comparison. For the  organizations selected, DOD compared the costs of all federal  civilians and service contractors identified as performing similar  functions.

The challenges DOD identified in DOD’s Cost-Comparison Report on  determining the functions performed by contractor personnel are  similar to those we encountered in our prior work on DOD’s efforts to  compile and review of an inventory of contracted services. Section  2330a of Title 10 of the U.S. Code directs the Secretary of Defense to  annually prepare an inventory of activities performed during the  preceding fiscal year pursuant to staff augmentation contracts.  Section 2330a also directs the secretary of each military department  and head of each defense agency responsible for activities in the  inventory to, within 90 days after the Secretary of Defense submits the  inventory, review the contracts and activities in the inventory for which  that secretary or agency head is responsible, in part to identify  activities that should be considered for conversion. Our prior work has  identified, among other issues, that the absence of a complete and  accurate inventory of contracted services hinders DOD’s management  of these services. According to DOD officials, the Office of the Under  Secretary of Defense (Personnel and Readiness) has also recognized  the challenges associated with the various taxonomies and lexicons  associated with articulating the size and composition of federal  civilian, military, and contracted services workforces, and has efforts  underway with the goal of better aligning those to enable more holistic  total force management of all sources of labor. According to DOD  officials, by improving available workforce data, DOD can support  better-informed leadership decisions, improve accuracy of analyses,  and provide consistent explanations of the department’s workforce  resources. DOD officials told us that this effort has an estimated  completion of December 2018.

DOD Accounted for Labor Costs but Excluded Some Costs That Encompass Full Costs of Personnel

We believe that DOD partially addressed the reporting element to account  for the full cost of civilian and contractor personnel by providing an  accounting of the labor costs of selected federal civilian and service  contractor full-time equivalents for personnel performing similar functions  at government-owned facilities during calendar year 2015, but excluding  certain non-labor costs from its cost calculations. According to DOD  officials, 2015 was the last year for which complete data were available.

DOD Accounted for Federal Civilian and Contractor Labor Costs

DOD developed a methodology for identifying labor costs associated with  federal civilian and service contractor full-time equivalents during  calendar year 2015 at government-owned facilities for its cost  comparisons. Based on reviews of applicable guidance and consultations  with the Office of the Under Secretary of Defense – Comptroller, DOD  included numerous federal civilian costs collected from several sources in  DOD’s Cost Comparison Report, as shown in table 2.

In addition, to assure data quality, DOD officials told us that they took  steps to identify data errors in the data collected including identifying  missing data fields and data entries that might indicate data errors. For example, DOD officials told us that they verified that they had pay records  for every pay period in calendar year 2015 by identifying potential errors  and outliers and sharing these with the Defense Finance and Accounting  Service and the selected DOD organizations for review. Officials also  stated that DOD sent its complete calculated data sets to each  organization for review against their own pay records and that all errors  were corrected or outliers were explained. Additionally, according to our  analysis, DOD excluded overtime from its costs related to federal civilians  in accordance with Office of Management and Budget Circular A-11.  However, DOD included overtime pay in its report separately for context  and noted that overtime pay is a significant part of civilian compensation  for some organizations. Officials noted that those funded via a working  capital fund arrangements, such as depots, use overtime to handle  surges in demand throughout the year. DOD noted in its report that  selected service contracts at government facilities and developed three  methodologies to identify labor costs associated with service contractor  full-time equivalents during calendar year 2015, as shown in table 3.

DOD stated in its report that identifying service contractor full-time  equivalents is a significant challenge because the level of detail available  in each contract varied such that DOD could not employ a single  methodology, and unlike federal civilian pay data, there is no centralized  database on service-contractor pay. DOD reported that contracts are  rarely written to address the cost-per-contractor as a full-time equivalent,  and some contracts do not differentiate between labor and non-labor  costs. DOD noted in its report that the negotiated price of the contract  includes direct costs, including labor and non-labor costs, and indirect  costs such as overhead. Further, the contract costs include service  contractor profit.

Based on our review of DOD’s Cost-Comparison Report, DOD used non- excludable contract costs as a basis in two of its methodologies. These  costs to DOD are associated with labor, and include pay and benefits  provided to service contractor personnel, contractor profit, and overhead  the contractor included in the cost of the contract. When the number of  service contractor full-time equivalents and full costs for a contract was  known, DOD used the first method, dividing contract costs by the number  of service contractor full-time equivalents to arrive at the cost per service  contractor full-time equivalent. When the number of billable hours was  known, DOD used the second method, multiplying the ratio of contract  costs divided by billable hours by a standard number of annual billable  hours. For contracts in which the labor rate was known but costs could  not be disaggregated, DOD multiplied the labor rate by a standard 1,880  annual billable hours unless a contract specified the labor rate as a  number of annual billable hours. For example, Defense Logistics Agency  contractor-labor rates for wage grade equivalent contractor full-time  equivalents are based on 2,080 annual labor hours.

DOD Excluded Certain Costs that Comprise Full Costs

We assessed DOD’s report as partially addressing the reporting element  to account for the full cost of federal civilian and contractor personnel  because DOD excluded certain non-labor costs from its costs  calculations—(1) direct non-labor costs for government owned facilities  and government provided supplies, (2) indirect costs for general and  administrative and overhead for civilians, and (3) costs to manage  contracts—from its costs calculations. Senate Report 114-49 stated that  DOD is to include an accounting of the full cost of DOD federal civilian  and service contractors performing similar functions, including facility  overhead. DOD stated in its report that the methodology utilized to  compare the costs of federal civilian and service contractor full-time  equivalents was consistent with DOD Instruction (DODI) 7041.04,  Estimating and Comparing the Full Costs of Civilian and Active Duty  Military Manpower and Contract Support (July 3, 2013), hereafter referred  to DODI 7041.04. However, DODI 7041.04 states that the full cost of  personnel should include direct and indirect non-labor costs, such as  those referenced previously. DOD officials stated that they considered  including non-labor costs in their calculations but did not because they  believe these costs would add approximately the same to both federal  civilian and service contractor costs. DODI 7041.04 instructs that if a  function is performed on government property, the costs of goods,  services, and benefits that are common costs may be excluded provided  the number of government and contactor personnel is equivalent. DODI  7041.04 further instructs that when the number of government and  contractor personnel differs, adjustments must be made to the cost  estimates to account for the difference in number of government and  contractor personnel.  While there were some instances where it was the  case that DOD’s cost estimates involved an equal number of civilian and  contractor personnel performing functions on government property, there  were many instances in where the personnel numbers differed  and  common costs should not have been excluded. For example, in DOD’s  comparisons of federal civilians and service contractors at Fort Belvoir  Community Hospital, DOD conducted comparisons of 19 functions where  2 functions had equal numbers of federal civilian and service contractors  and 17 functions had differing numbers of federal civilian and service  contractors. In one comparison, the number of contractors was over three  times the number of civilians. DOD officials also stated that they believe  their methodology is in accordance with DODI 7041.04 because DODI  7041.04 states that the cost elements in the instruction can be modified or  augmented in each specific case as necessary, but DOD components  should be prepared to support such decisions with sufficient justification.  We acknowledge that DODI 7041.04 states that the cost elements can be  modified, but by excluding non-labor costs in its cost comparisons, DOD  did not account for the full cost of federal civilians and service contractors  as requested in the mandate.

DOD Compared Its Calculated Costs of Performance of Selected Functions by Federal Civilians and Service Contractor Personnel at Selected Installations

We believe that DOD addressed the reporting element to compare costs  by comparing its calculated costs of selected federal civilians and service  contractors performing similar functions at selected installations. DOD  reported that its results represent selected personnel performing functions  within selected organizations and are not generalizable across the  department. DOD concluded that for the federal civilian and contractor  full-time equivalents included in the study, the costs varied by  organization, location, and function being performed. DOD presented  comparisons of federal civilian and service contractor full-time equivalents  costs and expressed these results as a cost ratio. However, it is not clear  how the results would be different if all costs that encompass full costs of  personnel would have been included in DOD’s comparisons. See tables 4  and 5 below for examples of greater costs for the performance of  functions by federal civilians or service contractors at Fort Belvoir  Community Hospital in Fort Belvoir, Virginia.

DOD Assessed Flexible Hiring Authorities Available for Employment and Retention of DOD Civilian Employees

We believe that DOD addressed the reporting element by assessing the  flexible employment authorities for the employment and retention of  federal civilian employees at the same 17 organizations used for the cost  comparison. Specifically, DOD sent questionnaires to DOD hiring officials  and human resource professionals to collect information on flexible  employment authorities. DOD included a broad spectrum of  organizational missions in its query of management and human resource  officials regarding the use and availability of flexible hiring authorities.  Noting that this assessment is more subjective than the others in DOD’s  Cost-Comparison Report, DOD queried senior leaders, middle managers,  front-line supervisors and human resource professionals regarding which  authorities are being used and the effectiveness of each. According to  DOD’s report, in this way, DOD was able to gauge the extent to which  each type of authority was used as well as the satisfaction with and  effectiveness of each. DOD’s Cost-Comparison Report made several  conclusions regarding flexible hiring authorities and made one  recommendation. The findings included that there was a variance in the  authorities used between organizations, management unfamiliarity with all  available authorities, and a belief among managers that expanded use of  some authorities is needed to produce more quality hires. DOD’s Cost- Comparison Report recommended DOD and OPM should explore  opportunities to refine, consolidate, or reduce unused, inefficient, or  cumbersome hiring authorities.

We provided a draft of this report to DOD for review and comment. In   written comments, DOD non-concurred with our assessment that DOD  partially addressed the mandated reporting element to provide an  accounting of the fully-burdened cost of federal civilian and service  contractor personnel performing functions at the selected installations to  include training, benefits, reimbursable costs, and facility overhead.  DOD’s comments are reproduced in their entirely in appendix I. DOD also  provided technical comments, which we incorporated as appropriate.

DOD stated that we presented the three reporting elements identified in  the congressional mandate absent the full context and congressional  intent. Specifically, DOD stated that in the congressional mandate, the list  of elements to be included in the report is not a stand-alone list and DOD  stated that we present the elements as a stand-alone list. DOD further  stated that the list of elements in the mandate is preceded by a paragraph  that we did not reproduce in our report, but which provides context and  congressional intent for the reporting elements.

We do not believe that the language omitted from our report changes the  meaning of the reporting elements to be included in DOD’s cost  comparison report because the paragraph omitted clearly states that the  purpose of the report is to provide the results of a study that includes a  comparison of the fully-burdened cost of the performance of functions by  DOD civilian personnel with the fully-burdened cost of the performance by  DOD contractors. The paragraph preceding the reporting elements and  the elements reads as follows:  The committee directs the Secretary of Defense to submit to  the  Committees on Armed Services of the Senate and the House of  Representatives, and to the Comptroller General of the United  States, a report setting forth the results of a study, conducted by  the Secretary for the purposes of the report, of a comparison of  the fully-burdened cost of performance of functions by Department  of Defense (DOD) civilian personnel with the fully-burdened cost  of the performance of functions by DOD contractors by no later  the February 1, 2016. The study shall include:   (1) An assessment of performance of such functions at six  DOD installations selected by the Secretary for purposes  of the study from among DOD installations at which  functions are performed by an appropriate mix of civilian  personnel and contractors, with four such installations to  be located in the continental United States and two such  installations to be located outside the continental United  States;  (2) An accounting of the fully-burdened cost of DOD  civilian personnel and contractors performing functions for  DOD (including costs associated with training, benefits,  reimbursable costs under chapter 43 of title 41, United  States Code, and facility overhead) in order to permit a  direct comparison between the cost of performance of  functions by DOD civilian personnel and the cost of the  performance of functions by contractors;  (3) A comparison of the cost of performance of the full  range of functions, required expertise, and managerial  qualities required to adequately perform the function to be  compared, including:  a. Secretarial, clerical, or administrative duties,  including data entry;  b. Mid-level managers and other personnel  possessing special expertise or professional  qualifications;  c. Managers and other leadership; and  d. Personnel responsible for producing  congressionally-directed reports.

The committee recommends that, in conducting the study, the  Secretary should take into account the policy that inherently  governmental functions vital to the national security of the United  States may not be performed by contractor personnel. The report  required shall include an assessment of the flexible employment  authorities available to the Secretary for the employment and  retention of civilian employees of the DOD, including an  identification of such additional flexible employment authorities as  the Secretary considers appropriate to shape the civilian  personnel workforce of the DOD. Not later than 120 days after  receipt of such report, the Comptroller General shall submit to  Congress a report that includes an assessment of the adequacy  and sufficiency of the report submitted by the Secretary, including  any recommendations for policy or statutory change as the  Comptroller deems appropriate.

As we reported, DOD noted in its cost comparison report that it identified  labor costs used in its comparisons. However, DOD did not include direct  and indirect non-labor costs and DODI 7041.04 states that the full cost of  personnel should include these non-labor costs as we discussed earlier in  the report. Therefore, DOD only partially addressed the reporting  provision.

In addition, DOD stated that we omit relevant language related to  congressional intent for the second reporting element (i.e., an accounting  of the fully-burdened cost of DOD civilian personnel and contractors).  DOD stated that the text, “. . . in order to permit a direct comparison  between the cost of performance of functions by DOD civilian personnel  and the cost of the performance of the function by contractors,” conveys  the congressional intent that the study is for comparison and our  exclusion of the text in our restatement of the element omitted language  indicating relevant Congressional intent. We do not believe that the  language omitted in our report changed the meaning of the reporting  element, which is that DOD was to include an accounting of the fully- burdened costs of federal civilians and service contractors in its cost  comparisons.

DOD further stated that we did not assess the second reporting element  (i.e., an accounting of the fully-burdened cost of DOD civilian personnel  and contractors) as it is directly stated but rather that we assessed the  element by redefining it and then asserting that DOD partially addressed  it. DOD noted that the direct language of the second reporting element is  for DOD to include an “accounting” of the fully burdened cost of DOD  civilian personnel and contractors. DOD asserted that we misinterpreted  the meaning of “accounting” when we determined that DOD partially  addressed the mandate because it did not “calculate” certain non-labor  costs. We disagree. As we discuss in our report, DOD did account for the  labor costs associated with federal civilian and service contractors by  gathering labor cost data from several sources, but it did not include non- labor costs in its cost calculations. In order to account for the fully  burdened costs of federal civilians and service contractors, as directed to  do so by the preamble to the reporting elements, as well as the second  reporting element, DOD should have included all labor and non-labor  costs in the cost calculations.

DOD also stated that our assessment incorrectly implies that to “account”  for costs is equivalent to “calculating” costs as evidenced by the following  quote from our draft report, "We acknowledge that DODI 7041.04 states  that the cost elements can be modified, but by excluding non-labor costs  in its cost comparisons, DOD did not account for the full cost of federal  civilians and service contractors as requested in the mandate." DOD  stated that although DOD did not “calculate” some non-labor costs, they  did “account” for them in accordance with DODI 7041.04 and as directed  in the congressional mandate. DOD asserted that in multiple places,  DODI 7041.04 states that common costs "are excluded" and "may be  excluded" from cost comparisons. DOD provided facility costs as an  example of non-labor costs accounted for but not calculated in its cost  comparisons. DOD stated that in its report, all of the civilian positions and  contractor functions are performed at government-owned facilities. Thus,  facility costs are common costs and may be excluded. DOD stated that  their report accounted for facility costs by recognizing that such costs  exist and are common costs, thus, DOD properly excluded such costs in  accordance with DODI 7041.04, and their report satisfied the  Congressional mandate.

We disagree. As mentioned above, the preamble to the mandated  reporting elements and the second reporting element specifically directed  that DOD account for the fully-burdened cost of DOD civilian and  contractor personnel. Because there are multiple costs associated with  civilian and contractor personnel, calculations are necessary in order to  account for the full cost of these workforces. DODI 7041.04 instructs that  if a function is performed on government property, the costs of goods,  services, and benefits that are common costs may be excluded provided  the number of government and contactor personnel is equivalent. While  there were some instances where it was the case that DOD’s cost  estimates involved an equal number of civilian and contractor personnel  performing functions on government property, there were many instances  where the personnel numbers differed and common costs should not  have been excluded. For example, in DOD’s comparisons of federal  civilians and service contractors at Fort Belvoir Community Hospital, DOD  conducted comparisons of 19 functions where 2 functions had equal  numbers of federal civilian and service contractors and 17 functions had  differing numbers of federal civilian and service contractors. In one  comparison, the number of contractors was over three times the number  of civilians. DODI 7041.04 further instructs that when the number of  government and contractor personnel differs, adjustments must be made  to the cost estimates to account for the difference in number of  government and contractor personnel. DOD did not make these  adjustments in is calculations and as result non-labor costs should not  have been excluded; therefore, DOD did not account for the fully- burdened costs, as directed by Congress.

We are sending copies of this report to the appropriate congressional  committees. We are also sending copies to the Secretary of Defense, the  Director of the Office of Cost assessment and Program Evaluation and  other interested parties. This report will also be available at no charge on  our Web site at http://www.gao.gov.

Should you or your staff have any questions concerning this report,  please contact Brenda S. Farrell at (202) 512-3604 or farrellb@gao.gov.  Contact points for our Offices of Congressional Relations and Public   Affairs may be found on the last page of this report. GAO staff who made  key contributions to this report are listed in appendix II.

Appendix I: Comments from the Department of Defense

Appendix II: GAO Contact and Staff Acknowledgments

In addition to the contact named above, Vincent Balloon, Assistant  Director; Timothy Carr, Felicia Lopez, Clarice Ransom, Michael Silver,  and Norris “Traye” Smith made key contributions to this report.

Department of Defense: Actions Needed to Address Five Key Mission  Challenges, GAO-17-369 (Washington, D.C.: June 13, 2017)

DOD Civilian and Contractor Workforces: Additional Cost Savings Data  and Efficiencies Plan Are Needed, GAO-17-128 (Washington, D.C.:  October 12, 2016)

Federal Hiring: OPM Needs to Improve Management and Oversight of  Hiring Authorities, GAO-16-521 (Washington, D.C.: August 2, 2016)

DOD Service Acquisition: Improved Use of Available Data Needed to  Better Manage and Forecast Service Contract Requirements,  GAO-16-119 (Washington, D.C.: February 18, 2016)

Civilian and Contractor Workforces: Complete Information Needed to  Assess DOD’s Progress for Reductions and Associated Savings,  GAO-16-172 (Washington, D.C.: December 23, 2015)

DOD Inventory of Contracted Services: Actions Needed to Help Ensure  Inventory Data Are Complete and Accurate, GAO-16-46 (Washington,  D.C.: November 18, 2015)

Sequestration: Comprehensive and Updated Cost Savings Would Better  Inform DOD Decision Makers if Future Civilian Furloughs Occur,  GAO-14-529 (Washington, D.C.: June 17, 2014)

Human Capital: Opportunities Exist to Further Improve DOD’s  Methodology for Estimating the Costs of Its Workforces, GAO-13-792  (Washington, D.C.: September 25, 2013)

Human Capital: Additional Steps Needed to Help Determine the Right  Size and Composition of DOD’s Total Workforce, GAO-13-470  (Washington, D.C.: May 29, 2013)

Defense Outsourcing: Better Data Needed to Support Overhead Rates for  A-76 Studies, GAO/NSIAD-98-62 (Washington, D.C.: Feb. 27, 1998)