[Federal Register: May 29, 2003 (Volume 68, Number 103)]
[Notices]               
[Page 32134-32142]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29my03-167]                         

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OFFICE OF MANAGEMENT AND BUDGET

 
Performance of Commercial Activities

AGENCY: Office of Management and Budget, Executive Office of the 
President.

ACTION: Revision to Office of Management and Budget Circular No. A-76, 
“Performance of Commercial Activities.”

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SUMMARY: The Office of Management and Budget (OMB) is making revisions 
to Circular No. A-76 to improve the management of commercial 
activities. The revisions: (1) Strengthen application of public-private 
competition, so agencies may realize improved performance of commercial 
activities, especially those that are performed by government personnel 
without competition or converted to contract without consideration of 
the government's capabilities; (2) incorporate additional principles of 
the Federal Acquisition Regulation (FAR) into the public-private 
competition process, including the ability to conduct an expanded best 
value cost-technical tradeoff source selection process; (3) make 
agencies accountable to taxpayers for results achieved from public-
private competitions, irrespective of the source or sector that 
performs the work; and (4) provide guidance for the transparent 
development of inventories of commercial and inherently governmental 
activities.
    The revised Circular replaces the current OMB Circular No. A-76. 
The revised Circular also supersedes and rescinds the following 
documents: OMB Circular No. A-76 Revised Supplemental Handbook (Revised 
2000), March 1996; OMB Circular No. A-76 Transmittal Memoranda Nos. 1-
25; and Office of Federal Procurement Policy (OFPP) Policy Letter 92-1, 
Inherently Governmental Functions, September 23, 1992.

DATES: Effective Date: This revised Circular is effective May 29, 2003.
    Applicability: The revised Circular shall apply to inventories 
required, and streamlined and standard competitions initiated, after 
the effective date. Direct conversions and cost comparisons, including 
streamlined cost comparisons, initiated but not completed by the 
effective date shall be covered by the revised Circular to the 
following extent. Direct conversions and streamlined cost comparisons 
shall be converted to streamlined or standard competitions under the 
revised Circular. Cost comparisons for which solicitations have not 
been issued before the effective date shall be converted to standard 
competitions under the revised Circular or, at the agency's discretion 
if permitted by the revised Circular, to streamlined competitions. The 
Circular in effect prior to this revision shall govern cost comparisons 
for which solicitations have been issued, unless agencies, at their 
discretion, convert such cost comparisons to standard competitions 
under the revised Circular, or, if permitted by the revised Circular, 
to streamlined competitions.

FOR FURTHER INFORMATION CONTACT: Office of Federal Procurement Policy, 
NEOB Room 9013, Office of Management and Budget, 725 17th Street, NW., 
Washington, DC 20503 (tel: (202) 395-3501 or 7808).
    Availability: Copies of OMB Circular A-76, as revised by this 
notice, may be obtained at the OMB home page at http://www.whitehouse.gov/omb/circulars/index.html#numerical.
 Paper copies of 
any of the documents identified above may be obtained by calling OFPP 
(tel: (202) 395-7579).

SUPPLEMENTARY INFORMATION: 

A. Overview

    To improve program performance to citizens and lower costs for 
taxpayers, OMB is making significant revisions to the processes and 
practices for determining whether a commercial activity will be 
performed by a public or private source. The revisions to OMB Circular 
No. A-76:
    [sbull] Increase visibility into government management by requiring 
agencies to develop lists of their commercial and inherently 
governmental activities;
    [sbull] Facilitate strategic decision making by ensuring effective 
agency planning for public-private competitions;
    [sbull] Promote better service to our citizens by clarifying and 
simplifying the processes used to make competitive selections between 
public and private service providers;
    [sbull] Close loopholes that diminish the return on taxpayer 
investment by: (i)

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eliminating direct conversions and (ii) requiring that commercial 
activities competed under this Circular be periodically recompeted to 
ensure that the cost and quality of performance remain reasonable;
    [sbull] Provide a level playing field for public-private 
competitions to ensure that commercial activities are performed by the 
best source at the lowest possible cost;
    [sbull] Improve public trust by incorporating appropriate 
mechanisms of transparency, fairness, and integrity into public-private 
competition; and
    [sbull] Strengthen accountability by: (i) centralizing agency 
oversight, (ii) holding public sector service providers to the same 
performance standards as those imposed on private sector providers, and 
(iii) requiring that the performance of service providers (both public 
and private) be tracked so that current experiences may inform and 
improve future decisions.
    In addition to making significant substantive changes, OMB is 
modifying the organization of the Circular to improve clarity and ease 
of use. The main body of the Circular describes overarching policy 
tenets and the scope of agency responsibilities. The procedures for 
carrying out these policies are set forth in three attachments:
    Attachment A, Inventory Process, describes how agencies develop 
lists of commercial and inherently governmental activities.
    Attachment B, Public-Private Competition, identifies the required 
steps for conducting competitions between the public and private 
sectors (e.g., planning, soliciting, negotiating), making performance 
decisions, and tracking implementation.
    Attachment C, Calculating Public-Private Competition Costs, defines 
how agencies determine the cost of public sector performance and 
compare these costs to a private sector offer.
    A fourth attachment, Attachment D, Acronyms, Definitions, and Index 
provides a detailed glossary and index of key terms used in the 
Circular and its attachments.
    The proposed Circular would have incorporated long-standing 
limitations imposed on federal agencies regarding the reimbursable 
services they provide to state and local government. OMB Circular No. 
A-97, Provision of Specialized or Technical Services to State and Local 
Units of Government by Federal Agencies Under Title III of the 
Intergovernmental Cooperation Act of 1968, currently implements these 
requirements. Circular No. A-97 remains in effect as a separate, stand-
alone Circular, and is unchanged by the final revisions to Circular No. 
A-76.

B. Background

    Federal agencies rely on a mix of public and private sector sources 
to perform a wide variety of commercial activities. OMB Circular No. A-
76 establishes the policies and procedures for identifying commercial 
activities and determining whether these activities should be provided 
by a private sector provider through a contract, by government 
personnel through a letter of obligation, or by a public reimbursable 
source (another agency) through a fee-for-service agreement.
    Before an agency shifts commercial work from one source to another 
(e.g., to or from performance by government personnel to performance by 
a contractor or public reimbursable source), Circular No. A-76 
historically has required the agency to conduct a public-private 
competition in which the cost of performance is compared between the 
public and private sectors. The Circular has traditionally required 
agencies to perform a “cost comparison” by:
    [sbull] Developing a performance work statement (PWS);
    [sbull] Creating a management plan to determine the government's 
“most efficient organization” (MEO);
    [sbull] Establishing an in-house government cost estimate that is 
certified by an independent reviewing official;
    [sbull] Issuing a solicitation in accordance with the FAR seeking 
offers from private sector and public sector sources, except for the 
in-house source, whose cost estimate is submitted and evaluated 
independently;
    [sbull] Identifying the best offer submitted in response to the 
solicitation and comparing it to the in-house estimate; and
    [sbull] Making a decision based on the lowest cost alternative, 
which is subject to review under an administrative appeals process.
    The Circular has recognized a variety of circumstances in which 
agencies are not required to conduct cost comparisons. For example, the 
Circular has allowed agencies to directly convert work to or from the 
private sector without cost comparison under certain circumstances, 
such as where an activity was or would be performed by an aggregate of 
10 or fewer “full-time-equivalent” employees (FTEs). For additional 
discussion regarding the mechanics of Circular No. A-76, see 67 FR 
69769, 69770-71 (November 19, 2002).
    On November 19, 2002, OMB issued a notice in the Federal Register 
of proposed changes to Circular No. A-76 to significantly improve the 
procedures used to conduct, and the results achieved from, competitions 
between public and private sources. The changes OMB proposed were 
intended to address recurring complaints about the Circular's 
effectiveness. More than 700 public comments were submitted to OMB in 
response to the Federal Register notice. For a description of the 
proposed changes to the Circular and the accompanying Supplemental 
Handbook (hereinafter collectively referred to as the “prior 
Circular”), see 67 FR 69769, 69771-74. For copies of the public 
comments on the proposed revisions, see http://www.omb.gov.
    The next section of this preamble discusses the new features of the 
revised Circular, including its relationship to the President's 
Management Agenda. The discussion highlights the most significant 
public comments and explains how these comments are addressed in the 
revised Circular.

C. An Improved Framework for Managing the Government's Commercial 
Activities

    The Administration's general policy is to rely on competition to 
select the providers of commercial activities. This policy is supported 
by published reports and historical data demonstrating that public-
private competition generates significant cost savings, efficiency, and 
innovation.
    Despite the benefits that public-private competition generates, 
many of the government's 850,000 FTEs that agencies have identified as 
performing commercial activities (nearly half of all federal employees) 
remain insulated from the dynamics of competition. To reverse this 
trend, the President's Management Agenda called upon agencies to 
develop plans for opening their commercial activities to the discipline 
of competition. In response, agencies across government have developed 
tailored plans that lay the foundation for institutionalizing public-
private competitions.
    Circular No. A-76 seeks to ensure that competition plans--and the 
President's broader vision of a market-based government--are 
successfully implemented. The revisions to the Circular achieve this 
result by significantly improving the processes for applying public-
private competitions to government-performed commercial activities.
    In particular, the revised Circular: (1) Facilitates strategic use 
of competition as a tool to improve overall agency

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performance, (2) ensures fairness, integrity, and transparency in 
sourcing decisions, and (3) strengthens agency accountability for 
achieving results.

1. Facilitating Strategic Use of Competition

    The revised Circular seeks to promote strategic decision making by 
ensuring that application of public-private competition results in 
performance by the best available source--irrespective of the sector. 
The revised Circular also aims to make processes clear and accommodate 
agency needs.
a. Competition-based Policy Orientation
    The revised Circular, like the prior Circular, relies on 
competition as the foundation for determining whether government 
personnel should perform a commercial activity. See ] 4.c. of the 
revised Circular. The revised Circular requires use of either 
streamlined or standard competitions. The agency's competitive sourcing 
official (CSO)--i.e., a specific agency official responsible within the 
agency for implementing the Circular--must justify, in writing, most 
decisions to exempt a commercial activity performed by government 
personnel from competition. See ] 5.b. of the revised Circular. In 
addition, deviations from the Circular's policies or the procedures set 
forth in the attachments must be approved by OMB. See ] 5.c. of the 
revised Circular.
    i. Emphasis on sector neutral competition. Because OMB seeks to 
emphasize selection of the best service provider, as determined through 
competition, the revised Circular deletes a longstanding statement that 
the government should not compete with its citizens. Various commenters 
opposed the deletion, arguing that an important message will be lost 
regarding the significant role the private sector plays in facilitating 
the effective operation of government. OMB appreciates the critical 
contributions made by the private sector. Without the private sector, 
the government would not be able to meet the many needs of our 
citizenry. Deletion of the “reliance” statement from the revised 
Circular is not intended to denigrate this contribution. Nor does this 
action signal a retreat from the Administration's commitment to a 
market-based government that is unafraid of competition, innovation, 
and choice. The deletion is simply meant to avoid a presumption that 
the government should not compete for work to meet its own needs. Such 
a suggestion conflicts with the Circular's main function of providing 
policies and procedures to determine the best service provider--
irrespective of the sector the provider represents.
    The main policy tenets of the Circular have been refined to ensure 
that government performance of commercial activities does not result in 
unfair competition. In particular, a new proviso has been added to make 
clear that, with rare exception, an agency shall not perform work as a 
contractor or subcontractor to the private sector. See ] 4.l. of the 
revised Circular. In addition, the Circular will continue to prohibit 
an agency from reorganizing or restructuring a commercial activity to 
circumvent the Circular. See ] 5.f. of the revised Circular. As a more 
general matter, the revised Circular is intended to encourage greater 
trust and more robust participation in public-private competition by 
both sectors through processes that promote fairness, integrity, and 
transparency.
    ii. Establishment of competition timeframes. Timeframe standards 
have been incorporated into the revised Circular to motivate agencies 
to complete competitions and to instill greater confidence that 
agencies will follow through on their plans. Current processes have 
been criticized for allowing agencies to extend public-private 
competitions indefinitely. Under the revised Circular, a standard 
competition must generally be conducted within a 12-month period 
beginning on the date the competition is publicly announced and ending 
on the date a performance decision is made. See ]] D.1. & D.6.b. of 
Attachment B. A standard competition is the general competitive process 
provided by the revised Circular when an agency selects a provider 
based on formal offers or tenders submitted in response to an agency 
solicitation.
    While a majority of the commenters supported the concept of time 
limits, there was considerable disagreement over the appropriate time 
limits. Several agency commenters requested that the timeframes for a 
standard competition be lengthened by several months and that greater 
leeway be given to agencies in need of extensions. Some commenters also 
complained that the 15-day time limit in the proposed Circular for use 
of streamlined processes is unrealistic.
    The revised Circular continues to impose a 12-month limit as a 
general rule. In addition to instilling confidence in the process, time 
limits ensure that the benefits of competition are realized. However, 
to provide sufficient flexibility to the agencies, the revised Circular 
provides that the CSO, without delegation, may extend the 12-month 
period by 6 months with notification to OMB. The revised Circular does 
not adopt a provision in the proposed Circular that would have allowed 
the CSO (referred to as the “4.e. official” in the proposed Circular) 
to waive the one-year completion requirement at announcement of the 
competition and set an alternative completion date if the competition 
was particularly complex and notification was provided to OMB. However, 
if specified timetables are insufficient, an agency could seek longer 
completion periods using the Circular's deviation procedures. See ] 
5.c. of the revised Circular.
    As discussed below, the revised Circular significantly refines the 
framework for using streamlined processes. In doing so, the Circular 
modifies the proposed timeframes. Specifically, a streamlined 
competition must be completed within 90 calendar days from public 
announcement (described below) to performance decision unless the CSO 
grants a time limit waiver. Time limit waivers may not exceed 45 
calendar days, for a maximum of 135 calendar days from public 
announcement to performance decision. If an agency cannot complete an 
announced streamlined competition within the time limit, the agency 
must either convert the streamlined competition to a standard 
competition or request an extension from OMB using the deviation 
procedure in paragraph 5.c. of the Circular. See ] C.2. of Attachment 
B.
    For added transparency, the revised Circular calls for public 
announcements of certain key actions taken in connection with either 
standard or streamlined competitions. In particular, agencies must 
publicly announce the beginning of competitions, performance decisions 
made at the end of a competition, and any cancellation of an announced 
competition. Announcements must be made through FedBizOpps, http://fedbizopps.gov
, the government-wide point of entry on the Internet for 
information on federal business opportunities. FedBizOpps is a user-
friendly web site that is well known to service providers wishing to 
help federal agencies meet their missions. Announcements of competition 
and performance decisions must also be publicized locally. See ] B. of 
Attachment B.
    iii. Elimination of direct conversions and creation of new 
streamlined competition process. The revised Circular makes a number of 
modifications regarding the handling of activities involving 65 or 
fewer FTEs. These changes seek to instill greater use of public-private 
competition for small

[[Page 32137]]

activities in a highly flexible and minimally burdensome, but fully 
accountable, manner.
    Despite strong policy statements favoring public-private 
competitions, a number of commenters pointed out that the long-standing 
practice of permitting “direct conversions” (e.g., typically for work 
performed by 10 or fewer FTEs) undermines this policy. Until now, under 
the prior Circular, agencies have been allowed to convert activities 
from public to private sector performance, or the reverse, under 
certain circumstances without public-private competition. Commenters 
asserted that, overall, this authority encourages agencies to go 
directly to contract as a matter of administrative convenience, even 
where a more efficient, cost-effective government organization could be 
the better alternative.
    OMB agrees that agencies may be foregoing opportunities to reap 
savings and make better economic decisions through public-private 
competitions when they undertake a direct conversion. At the same time, 
OMB appreciates that the current processes for public-private 
competition are often time-consuming, costly, and burdensome for use 
under the conditions in which direct conversions are typically applied. 
In addition, while the prior Circular provided for a streamlined cost 
comparison process for evaluating public and private sector performance 
for commercial activities performed by 65 or fewer FTEs, flexibility 
has been limited.
    The revised Circular builds on the foundation created by the prior 
Circular's streamlined process, by adding flexibility and 
accountability. For activities performed by 65 or fewer FTEs, the 
streamlined process enables agencies to efficiently capture the 
benefits of public-private competition without the burdens associated 
with current processes. See ]] A.5.b. and C. of Attachment B.
    The new streamlined competition gives agencies considerable 
latitude to make cost-effective choices. For example, when determining 
an estimated contract price for performing the activity with a private 
sector source, an agency may use documented market research or solicit 
proposals in accordance with the FAR. See ] C.1.b. of Attachment B. 
Agencies are free to use streamlined acquisition tools, such as a 
Multiple Award Schedules contract (see FAR Subpart 8.4) to obtain 
proposals from the private sector. In light of the significant 
efficiencies offered by the new streamlined competition process and the 
general goal of relying on public-private competitions, the revised 
Circular eliminates direct conversions.
    The revised Circular incorporates a number of safeguards to ensure 
that agencies act as responsible stewards when using streamlined 
procedures. First, unlike the current procedures for streamlined cost 
comparisons, the revised Circular requires agencies to publicly 
announce both the start of a streamlined competition and the 
performance decision made by the agency. See ] B. of Attachment B. The 
notice announcing the initiation of a competition must include, among 
other things, the activity being competed, incumbent service providers, 
number of government personnel performing the activity, names of 
certain competition officials, and the projected end date of the 
competition. As noted above, agencies will have up to 135 calendar days 
to conduct a streamlined competition from the date it is publicly 
announced.
    Second, the revised Circular ensures fairness by requiring that 
separate agency officials document cost estimates--one for agency 
performance and another for performance by either the private sector or 
a public reimbursable source. Cost calculations and comparisons must be 
documented on a standardized streamlined competition form (SLCF). See ] 
C.1. of Attachment B and ] A.12. of Attachment C.
    Third, although the conversion differential typically used in a 
public-private competition does not apply to a streamlined competition, 
agencies must certify that the performance decision, as documented on 
the SLCF, is cost-effective. See Figure C3. of Attachment C. Agencies 
must make the certified SLCF available to the public upon request. See 
] C.3.b. of Attachment B.
    Fourth, agencies must track the results of competitions. In 
addition to reporting quarterly to OMB on the status of in-progress and 
completed competitions, agencies must monitor results, irrespective of 
the service provider, after the agency makes a performance decision. 
Agencies will be expected to implement a quality assurance surveillance 
plan, record the actual cost of performance, and collect performance 
information that may be considered in future competitions. See ] E.4. 
of Attachment B.
    iv. Creation of the MEO. Several agency commenters stressed that 
effective public-private competition requires that agencies have the 
flexibility to adjust their in-house team's use of contract support 
when developing the MEO--i.e., the staffing plan that will form the 
foundation of the agency's tender in a standard competition. The 
commenters noted that an existing mix of government personnel and 
contractor support may not be optimal given the agency's current needs 
and, on this basis, objected to language in the proposed Circular 
prohibiting the creation of new contracts as part of MEO development.
    OMB seeks to vest agencies with the managerial authority they need 
to make sound programmatic decisions and has amended the Circular's 
coverage on standard competitions to give agencies the flexibility to 
create the best possible MEO. In developing their MEOs, agencies will 
be allowed to include contract support through new or potential 
contracts. However, agencies will not be permitted to include new MEO 
subcontracts if doing so would result in the direct conversion of work 
performed by government employees. See ] D 4.a.(1)(a). of Attachment B.
    While agencies will have greater flexibility in standard 
competitions, they will be held fully accountable to the taxpayer for 
their actions. In addition to publicly announcing the start of a 
competition and performance decisions, the agency must perform and 
document a comprehensive calculation of costs on a standard competition 
form (SCF). As part of this effort, agencies must conduct price and 
cost realism analyses on all cost proposals and estimates, including 
the agency cost estimate. Directly interested parties may contest 
performance decisions (see below for additional discussion on 
contests). Upon resolution of a contest challenging a performance 
decision, or expiration of the time for filing such a contest, the 
certified SCF shall be available to the public upon request. 
Performance decisions under standard competitions, like those made 
under streamlined competitions, are subject to monitoring to ensure 
achievement of results. See ] E.4. of Attachment B.
b. Enhanced Inventories of Government Activities
    An accurate inventory identifying an agency's commercial and 
inherently governmental activities is vital to a federal manager's 
ability to identify opportunities for which application of public-
private competition is likely to yield the best return for the agency. 
For this reason, the revised Circular refines and expands guidance on 
the establishment of inventories. See Attachment A of the Circular. The 
revised Circular builds on existing statutory obligations set forth in 
the Federal Activities Inventory Reform (FAIR) Act (Pub. L. 105-270; 31 
U.S.C. Sec.  501 note) that require agencies to

[[Page 32138]]

prepare annual inventories of the commercial activities performed by 
their employees. These enhancements, many of which incorporate guidance 
contained in recent OMB memoranda, such as M-03-09 (“Year 2003 
Inventories of Commercial and Inherently Governmental Activities”), 
include the following:
    i. More accurate picture of agencies' overall activities. The 
revised Circular requires agencies to categorize all activities 
performed by government personnel as either commercial or inherently 
governmental. Agencies also must submit an annual inventory summary 
that reasonably equates to their authorized personnel requirements. 
Thus, in addition to identifying FAIR Act covered commercial activities 
and inherently governmental activities, agencies must summarize their 
other commercial inventory--e.g., military personnel, foreign national 
employees, and “other,” such as activities performed at military 
depots and by government corporations. Similarly, agencies must include 
foreign national employees and military personnel employed by the 
agency in their summarized inherently governmental inventory. See ] 
A.5. of Attachment A.
    ii. Clarified rationales for government performance of a commercial 
activity. The revised Circular requires agencies to choose one of six 
reason codes to explain why their personnel are performing a commercial 
activity. The reason codes are similar to, but more simplified than, 
the codes in the proposed Circular. In addition, the CSO must prepare a 
written justification if the agency concludes that the activity is 
eligible but not appropriate for private sector performance. See ] C.2. 
of Attachment A. Of particular note, the revised Circular, unlike the 
proposed Circular, authorizes challenges to an agency's application of 
reason codes. See ] D.2. of Attachment A. This step responds to calls, 
as reflected in the public comments, for greater transparency and 
accountability in the inventory process.
    iii. Consistent identification of inherently governmental 
activities. Agencies will be required to submit annual inventories of 
their inherently governmental positions. As part of this effort, the 
proposed Circular sought to establish a presumption that all activities 
are commercial in nature unless an activity is justified as inherently 
governmental. A large number of commenters supported this change as a 
mechanism for ensuring that commercial activities are not camouflaged 
as inherently governmental. However, others strongly objected, 
asserting that the policy will pressure agencies to contract for 
activities that are intimately related to the public interest.
    The revised Circular deletes this presumption to reassure the 
public that there is no intention to outsource inherently governmental 
activities. Inherently governmental activities must be performed by 
public employees, and the executive branch will continue to depend on 
its able workforce to execute these important responsibilities.
    At the same time, the revised Circular retains a requirement from 
OFPP Policy Letter 92-1, Inherently Governmental Functions, and the 
proposed Circular that there be an exercise of substantial discretion 
in the application of government authority in order for an activity to 
be considered inherently governmental. See ] B.1.a. of Attachment A. 
Policy Letter 92-1 defines “inherently governmental” activities to 
include activities that require the “exercise of discretion” in 
applying Government authority. While the phrase “substantial 
discretion” does not appear in the definition, the policy letter 
provides additional guidance on the meaning of the phrase “exercise of 
discretion.” This guidance expressly states that “inherently 
governmental functions necessarily involve the exercise of substantial 
discretion.”
    Several commenters asserted that the proposed addition of the word 
“substantial” to the definition of “inherently governmental” in the 
revised Circular constitutes a major policy shift. OMB does not agree 
that this change signifies a major policy shift from Policy Letter 92-
1. Although the absence of the adjective “substantial” from the 
definition in the policy letter may have caused some confusion in the 
past, OMB does not believe the clarification to require the exercise of 
substantial discretion will unnecessarily restrict the definition of 
inherently governmental, as some commenters argued. OMB has concluded 
that this clarification will enable agencies to make a cleaner 
delineation between those activities which are appropriately performed 
only by government personnel and those that are appropriately performed 
by either the public or private sector. To further assist agencies in 
identifying inherently governmental activities, the revised Circular 
provides a more concise definition of “inherently governmental” and 
rescinds the more complex description contained in OFPP Letter 92-1. 
See ] B.1.a. of Attachment A.
    The revised Circular adopts the safeguards that were laid out in 
the proposed Circular to ensure that agency designations are rationally 
based. Specifically, the CSO must justify, in writing, all decisions to 
designate activities as inherently governmental. In this regard, OMB 
disagrees with one commenter's suggestion that the justification 
requirement imposes an unfair burden on agencies that designate 
activities as inherently governmental and notes that the revised 
Circular imposes a similar justification requirement on agencies who 
believe a commercial activity is unsuitable for competition. Also, the 
list of inherently governmental activities and the associated 
justifications will be made available for public review, with limited 
exception. See ]] A.4. and B.1. of Attachment A. Finally, an agency's 
classification of an activity as inherently governmental may be 
challenged. See ] D.2. of Attachment A.
c. Better Planning
    Many commenters made the point that agencies generally lack 
experience in planning for and conducting public-private competition. 
They feared that the results of competition will fall short of 
expectations--especially in light of the time constraints under which 
competitions must be conducted--unless agencies make more concerted 
efforts to properly plan for them.
    OMB strongly agrees that effective agency planning is a critical 
prerequisite for sound sourcing decisions. The revised Circular refines 
and bolsters the coverage in the proposed Circular on preliminary 
planning. See ] A. of Attachment B. This coverage applies to the two 
types of competitions authorized by the revised Circular: standard 
competitions and streamlined competitions.
    Before announcing the commencement of a streamlined or standard 
competition, agencies must complete a series of actions. These actions 
include:
    [sbull] Determining the scope (i.e., the activities and positions 
to be competed);
    [sbull] Conducting preliminary research to determine the 
appropriate grouping of activities as business units (e.g., consistent 
with market and industry structures);
    [sbull] Assessing the availability of workload data, quantifiable 
outputs of activities, and agency or industry performance standards; 
and
    [sbull] Determining the baseline cost of the activity as performed 
by the incumbent service provider.
    Agencies also must appoint competition officials. For standard 
competitions, these officials will include:

[[Page 32139]]

    [sbull] An agency tender official (ATO) with decision-making 
authority who is responsible for the agency tender (i.e., the agency 
management plan submitted in response to a solicitation for a standard 
competition) and represents the agency tender during source selection;
    [sbull] A contracting officer (CO) who is responsible for issuance 
of the solicitation and the source selection evaluation and 
participates on the team that develops the performance work statement 
(PWS);
    [sbull] A PWS team leader who is responsible for developing the PWS 
and quality assurance surveillance plan, determines if the government 
will furnish property, and assists the CO with the solicitation;
    [sbull] A human resource advisor (HRA) who is responsible for 
assisting the ATO in human resource-related matters related to the 
agency tender; and
    [sbull] A source selection authority (SSA) who is responsible for 
source selection.
    While the revised Circular imposes timeframes to ensure 
competitions are completed within a reasonable period, these periods 
will not begin until the agency completes its planning and announces 
the competition. See ] B. of Attachment B. This approach will ensure 
competitions are adequately and properly planned.
    The revised Circular, like the proposed Circular, recognizes the 
talents of the federal workforce, the conditions under which it 
operates, and the importance of providing the workforce with adequate 
training and technical support during the competition process to ensure 
they are able to compete effectively. In this regard, the revised 
Circular requires that the ATO have access to available resources 
(e.g., skilled manpower, funding) necessary to develop a competitive 
agency tender. See ] A.8.a. of Attachment B. In addition, if material 
deficiencies are found in an agency tender (i.e., the agency management 
plan submitted to respond to a solicitation for a standard 
competition), OMB will expect the agency's CSO to take all necessary 
steps to identify the source of the problem and allow the ATO the 
opportunity to correct the deficiency.
d. More Manageable and Accommodating Source Selection Processes
    As noted above, and discussed more extensively in the preamble to 
the proposed Circular, the competition processes provided for in the 
prior Circular have been criticized as time consuming, complex, and 
difficult to manage. Many also believe that the prior Circular does not 
sufficiently accommodate agency needs to consider quality and 
innovation, especially where these needs may require complex and inter-
related services.
    The revised Circular's guidance on source selections is designed to 
be more manageable, more reliant on well-established FAR principles, 
and more accommodating than that which was developed over the years for 
the performance of cost comparisons--i.e., the traditional cost-centric 
process for conducting public-private competitions.
    The revised Circular, like the proposed Circular, provides several 
alternative procedures for conducting source selections, two of which 
give agencies leeway to take non-cost factors into account. 
Specifically:
    [sbull] An agency may use sealed bidding where the award will be 
made strictly on the basis of price and price-related factors and the 
agency will not need to negotiate with sources. See ] D.5.a. of 
Attachment B.
    [sbull] An agency may conduct a lowest price technically acceptable 
source selection where the performance decision is based on the lowest 
cost offer of all the offers that have been determined to be 
technically acceptable. This process permits exchanges between the 
parties. See ] D.5.b.(1). of Attachment B.
    [sbull] An agency may conduct a phased evaluation source selection 
process to have the flexibility of considering alternative performance 
levels that sources may wish to propose. During the first phase, only 
technical factors are considered, and all prospective providers (the 
agency, public reimbursable sources, and private sector offerors) may 
propose performance standards different from those specified in the 
solicitation. If the agency determines that a proposed alternative 
performance standard is appropriate and within the agency's current 
budget, the agency must issue a formal amendment to the solicitation 
and request revised submissions. In the second phase, the SSA makes a 
performance decision after performing price and cost realism analyses 
to compare offers and tenders that were determined to be technically 
acceptable at the conclusion of the first phase. See ] D.5.b.(2). of 
Attachment B.
    [sbull] An agency may conduct a tradeoff source selection process 
with cost-technical tradeoffs similar to those authorized by FAR Part 
15, if non-cost factors are likely to play an important role in the 
selection decision. Like the FAR Part 15 process, all prospective 
providers (private sector offers, public reimbursable sources, and the 
agency) may propose different performance standards than stated in the 
solicitation. The contracting officer is required to determine if any 
desired tradeoffs are affordable and document the rationale for these 
tradeoffs. The Circular limits use of tradeoffs to: (1) Information 
technology (IT) activities, (2) contracted commercial activities, (3) 
new requirements, (4) segregable expansions, or (5) activities approved 
by the CSO before public announcement, with notification to OMB. See ] 
D.5.b.(3). of Attachment B.
    While the phased evaluation and tradeoff source selection give 
agencies greater leeway to take non-cost factors into account, OMB 
anticipates that cost will oftentimes be the most important factor when 
these processes are used. Either way, the Circular will continue to 
require the meaningful consideration of cost as a factor in all public-
private competitions. For example, in a tradeoff source selection, the 
specific weight given to cost or price must be at least equal to all 
other evaluation factors combined unless quantifiable performance 
measures can be used to assess value and can be independently 
evaluated. (The solicitation for a tradeoff source selection must 
identify the specific weight given evaluation factors and sub-factors, 
including cost or price.) See ] D.3.a.(3)(b) of Attachment B.
    In addition, the revised Circular will continue to require the 
calculation of a conversion differential for all source selections 
under standard competitions. The conversion differential is a cost that 
is the lesser of 10 percent of the MEO's personnel-related costs or $10 
million over all the performance periods stated in the solicitation. 
The conversion differential is added to the cost of performance by a 
non-incumbent source. If the incumbent provider is a private sector or 
public reimbursable source, the conversion differential is added to the 
cost of agency performance. If the agency is the incumbent provider, 
the conversion differential is added to the cost of private sector or 
public reimbursable performance. See ] D.5.c.(4)(c). of Attachment B 
and ] A.5. of Attachment C. For the tradeoff source selection, the 
conversion differential is added to the cost for a non-incumbent 
source. Consideration of the conversion differential in the tradeoff 
process is not intended to discourage agencies from selecting other 
than the lowest cost provider. Rather, application of the conversion 
differential is intended to ensure that cost is given meaningful 
consideration in trading off cost and

[[Page 32140]]

non-cost considerations in the final performance decision.
    Numerous comments addressed the proposed source selection 
processes. Most focused either on the tradeoff process (referred to as 
the “integrated evaluation process” in the proposed Circular) or the 
application of the Circular to acquisitions of architect and 
engineering (A&E) services.
    i. Expanded use of tradeoffs. Reactions to the proposed coverage on 
tradeoffs were mixed. Some commenters complained that tradeoffs were 
inappropriate for competitive sourcing. They asserted that the 
subjective nature of tradeoffs would invite gaming that, in turn, would 
discourage robust participation in public-private competitions. Others, 
by contrast, expressed support for the new option. They pointed out 
that a more integrated FAR-type competition process, with appropriate 
elements of Circular A-76, was recommended by the Commercial Activities 
Panel. (The Panel, which included experts from both the public and 
private sectors--including Congress, the Executive Branch, industry, 
and the Federal employee unions--was established by section 832 of the 
Fiscal Year 2002 Defense Authorization Act to study competitive 
sourcing. The Panel issued a report with recommendations in May 2002.) 
Some commenters strongly encouraged OMB to expand use of the tradeoff 
process and the procedures of FAR Part 15 to activities other than IT 
to enable agencies to gain broader experiences and insight.
    OMB does not agree with those who argue that tradeoffs are 
inappropriate for public-private competitions. OMB believes that 
agencies need greater ability to consider non-cost factors if they are 
to make strategic decisions for the agency. On the other hand, OMB 
understands that the tradeoff process may not be appropriate in all 
instances, especially given the special considerations that must be 
taken into account with any public-private competition, including those 
involving tradeoffs. See ] D.5. of Attachment B. OMB therefore has 
concluded that the parameters described in the proposed Circular for 
using tradeoffs are reasonable and has adopted these parameters in the 
revised Circular. As noted above, these parameters allow the CSO to 
consider appropriate application of the tradeoff process for non-IT 
activities on a case-by-case basis.
    ii. Application of the Circular to A&E services. A number of 
commenters argued that the procedures in the Circular conflict with 
statutory requirements in the Brooks Act, 40 U.S.C. 541, et seq., which 
prescribe a specific process for evaluating quality and cost in 
proposals for A&E. Some suggested that OMB revise the Circular to 
reflect the procedures in FAR Subpart 36.6, which implements the 
requirements of the Brooks Act. Others suggested that direct 
conversions be authorized to address these needs.
    OMB appreciates that the processes statutorily prescribed for 
acquiring A&E services are different from those in FAR Parts 14 and 15, 
which are used for most types of purchases other than for A&E services. 
OMB does not believe that this difference should automatically render 
the policies and management responsibilities of the Circular 
inapplicable to A&E services. No clearly commercial activity, whether 
A&E services or any other type of service, should be sealed off from 
the forces of competition. However, the revised Circular acknowledges 
that there may be a need for use of part 36 procedures. See ] 
D.3.a.(2). of Attachment B. OMB believes that additional thought is 
required regarding the specifics of how the revised Circular would be 
applied to A&E services and the type of deviation that might be needed. 
Therefore, OMB encourages agencies that have identified A&E services in 
their competition plans to consult with OFPP as they prepare to 
undertake competitions and request deviations as appropriate.
e. Right of First Refusal
    The proposed Circular would have assigned to the HRA the 
responsibility for determining, in conjunction with the CO, compliance 
with right-of-first-refusal requirements when the agency is the 
incumbent service provider and a performance decision favors private 
sector performance. One commenter, in particular, strongly objected to 
this augmentation of responsibilities, asserting that it would 
effectively force a government official to make hiring decisions for 
the selected contractor. OMB has concluded that this responsibility 
should not be assigned to the HRA and the Circular has been revised 
accordingly. As a result, the contractor will determine who is 
qualified to work on the contract.
f. Use of Innovation
    OMB believes the new standard and streamlined competition processes 
should effectively accommodate agency needs for the vast majority of 
public-private competitions conducted under the Circular. At the same 
time, OMB recognizes both the need for flexibility to address unique 
circumstances and the value in experimentation to improve business 
management processes as agencies gain experience with the Circular and 
greater insight into how its principles are best achieved. For this 
reason, the revised Circular provides a process by which agencies, with 
OMB's prior written approval, may deviate from the processes prescribed 
by the Circular. See ] 5.c. of the revised Circular. OMB will carefully 
consider agency requests for deviations to determine if they are 
justified and in the government's best interest, taking into 
consideration the special circumstances that surround a public-private 
competition, especially those that involve an agency tender. The 
deviation process may also be considered for pursuit of alternatives to 
public-private competitions in appropriate circumstances, such as 
public-private partnerships, public-public partnerships, and high 
performing organizations.
g. Focused Implementation
    After considerable deliberation, OMB decided to eliminate the 
proposed coverage on fee-for-service interagency agreements with public 
reimbursable sources (referred to in the proposed Circular as 
interservice support agreements, or ISSAs). The coverage was set forth 
at Attachment D of the proposed Circular.
    OMB believes a more directed management focus, in the short term, 
should enable agencies to more quickly acclimate themselves to the 
Circular's improved processes. OMB anticipates that faster agency 
acclimation to standard and streamlined competitions will translate 
into successful use of competition for the activities agencies have 
identified in their competition plans, which, in most cases, are 
internal activities that have traditionally been shielded from the 
pressures of the marketplace.
    OMB remains committed to finding appropriate incentives for all 
public and private sources to perform at their best when providing 
services to the taxpayer. OMB hopes that faster acclimation to the 
revised Circular, and the institutionalization of competitive sourcing 
generally, will lay a firm foundation for expanded application of 
public-private competition to agency-to-agency arrangements over time.

2. Ensuring Fairness, Integrity, and Transparency

    The revised Circular seeks to improve public trust in sourcing 
decisions by incorporating appropriate mechanisms of transparency, 
fairness, and integrity. These mechanisms are critical for ensuring the 
type of robust participation that will effectively bring market

[[Page 32141]]

pressures to bear, as well as the type of even-handed environment that 
will result in performance by the best source. Mechanisms include the 
following:
a. Greater Uniformity in the Application of Basic Requirements
    Various provisions in the revised Circular are designed to create 
greater equality in the application of requirements to agencies and 
private sector offerors. For example:
    [sbull] The ATO must respond to a solicitation within the same 
timeframes required of private sector offerors. An agency may extend 
this timeframe for all offerors if it is in the best interest of the 
government. See ] D.4.a.(2). of Attachment B.
    [sbull] An agency tender may be excluded from a standard 
competition without cancellation of the competition, if the SSA 
identifies a material deficiency and the CSO determines that the 
material deficiency cannot be corrected with a reasonable commitment of 
resources. See ] D.5.c.(3). of Attachment B.
    [sbull] Once work has been competed under the Circular, agencies 
must recompete work being performed by government personnel or public 
reimbursable sources in accordance with the same time limitations 
imposed by the FAR on contracts with the private sector, unless the CSO 
grants a specific exemption for a high performing organization. See ] 
E.5.b. of Attachment B.
    [sbull] Before exercising options for additional performance of 
work that has been competed under the Circular, agencies must determine 
that performance by the incumbent provider (MEO, public reimbursable 
source, or private sector provider) meets the requirements of the 
solicitation and that continued performance is advantageous to the 
agency. See ] E.5.a. of Attachment B.
    Some commenters felt these changes will undo special considerations 
in the existing circular that ensure a level playing field between the 
sectors, especially when the government is the provider. By contrast, 
others suggested that procedural differences in the handling of agency 
tenders and private sector offers are still too great, even with the 
changes described above. For example, some asserted that the latitude 
given to the government to make a late tender submission is broader 
than that afforded to the private sector and creates an unfair 
advantage for the government.
    To build confidence in the competitive sourcing process, OMB has 
minimized differences, wherever possible. At the same time, legitimate 
special considerations that need to be addressed to ensure a level 
playing field have been taken into account. For example, when a 
material deficiency is discovered in an agency tender and a question 
arises as to whether the deficiency can be corrected, the agency must 
take all reasonable steps to enable corrective action. OMB expects the 
CSO to give consideration to all possibilities for addressing material 
deficiencies that cannot be easily corrected. Considerations include 
the commitment of additional resources and, if necessary, a request to 
OMB to deviate from the Circular by extending the time for completing a 
competition--assuming such extension is within reason and the CSO can 
demonstrate the deficiency will be corrected.
b. Avoiding the Appearance of Conflicts of Interests
    The revised Circular establishes new rules to avoid the appearance 
of a conflict of interest. In particular, the revised Circular 
separates the PWS team formed to write the PWS from the MEO team formed 
to develop the agency tender. In addition, the MEO team, directly 
affected personnel and their representatives, and any individual with 
knowledge of the MEO or agency cost estimate in the agency tender are 
not allowed to be advisors to, or members of, the source selection 
evaluation board. See ] D.2. of Attachment B.
c. Public Release of Tenders
    The revised Circular adds a new provision requiring the release of 
the agency tender, public reimbursable tenders, and the certified SCF 
upon the resolution of any contest challenging the performance decision 
or the expiration of the time for filing such a contest. See ] D.6.e. 
of Attachment B. The SCF documents all costs calculated in the 
competition to make a performance decision. Several agencies asserted 
that this information should be treated as proprietary and not 
released--even after a performance decision--just as a private sector 
offer would not be released under similar circumstances. OMB believes 
that a tender should not be hidden from the taxpayer to whom we are 
ultimately accountable. At the same time, the Circular makes clear that 
proprietary information of private sector providers of subcontracts 
included in agency or public reimbursable tenders shall not be 
released.
d. Fairer and More Accurate Cost Estimates
    As a general matter, Attachment C is intended to ensure that 
public-private competitions reflect the full cost of performance by the 
government so that competitions are fair. Agencies will be expected to 
use the costing procedures in Attachment C combined with the COMPARE 
costing software to calculate and document the costs on the SCF or SLCF 
for a streamlined or a standard competition. Agencies may not use 
agency budgetary estimates to develop government cost estimates. See ] 
4.h. of the revised Circular.
    The revised Circular also makes adjustments to the handling of 
certain costs to eliminate unfair results. For example, based on 
contractor recommendations in the public comments, the revised Circular 
prohibits the government from including the cost of contractor security 
clearances as a one-time conversion cost that is added to the 
contractor's price. By removing this cost from the comparison, a more 
level playing field is created between the government and the private 
sector.
e. Improved Process for Contests
    One agency commenter with significant experience in using A-76 
recommended that the revised Circular rely on the agency protest 
process set forth in the FAR rather than perpetuating a separate 
administrative process. The commenter complained that the Circular's 
administrative process adds little value beyond that offered by relying 
upon the FAR.
    The revised Circular replaces the prior Circular's administrative 
appeals process with the processes in the FAR at 33.103. As a result, 
challenges by directly interested parties and resolution of such 
challenges by the agency are governed by the procedures in FAR 33.103. 
A directly interested party may challenge any of the following actions 
taken in connection with a standard competition: (1) A solicitation; 
(2) the cancellation of a solicitation; (3) a determination to exclude 
a tender or offer from a standard competition; (4) a performance 
decision, including, but not limited to, compliance with the costing 
provisions of the Circular and other elements in an agency's evaluation 
of offers and tenders; or (5) a termination or cancellation of a 
contract or letter of obligation if the challenge contains an 
allegation that the termination or cancellation is based in whole or in 
part on improprieties concerning the performance decision. No party may 
contest a streamlined competition. However, agencies will be held 
accountable for performance decisions made in connection with such 
competitions, as addressed in ] E. of Attachment B.

[[Page 32142]]

    Several commenters complained the definition of “interested 
party” in the proposed Circular was too narrow because it limited a 
public offeror's access to administrative relief only through the ATO. 
OMB seeks to ensure equal and fair access to challenge processes and 
has revised the Circular to broaden the definition of interested party 
to permit administrative challenge by a single representative appointed 
by a majority of directly affected employees in addition to the ATO. 
See the definition of directly interested party in Attachment D.

3. Strengthening Accountability for Results

    The ultimate success of Circular A-76 in delivering results for the 
taxpayer requires that public or private sources make good on their 
promises to the government. To this end, the revised Circular 
incorporates various accountability protections. For example, as 
discussed in ] C.1.a.ii. of this preamble, competition timeframes have 
been incorporated into the Circular, among other things, to instill 
greater confidence by all participants that agencies are committed to 
the timely and competitive selection of the best provider. Other 
accountability mechanisms include the following:
a. Centralized Oversight Responsibility
    Agencies must establish a program office responsible for the daily 
implementation and enforcement of the Circular. Improved oversight will 
serve to enhance communications, facilitate sharing of lessons learned, 
and significantly improve overall compliance with the Circular. See ] 
4.g. of the revised Circular.
b. Letters of Obligation
    For a performance decision favoring the agency, the CO will be 
required to establish an MEO letter of obligation with an official 
responsible for performance of the MEO. The CO shall incorporate 
appropriate portions of the solicitation and the agency tender into the 
MEO letter of obligation and distribute the letter to appropriate 
individuals including the ATO. (For a performance decision favoring a 
public reimbursable source, the CO will be required to develop a fee-
for-service agreement with the public reimbursable source.)
c. Improved Post Competition Oversight
    Agencies must track agency execution of streamlined and standard 
competitions, using a government-wide management information system. 
Information to be tracked by this system will include, among other 
things: Baseline costs, start date, number of directly affected 
employees performing the activity, solicitation information, type of 
acquisition and source selection, decisions for tradeoff source 
selections, number of private sector offers received, performance date 
and decision, socio-economic information, decisions for tradeoff source 
selections, and number of directly affected employees that are 
involuntarily separated. Agencies must review their data to make 
process improvements, identify streamlining measures, determine trends, 
and identify savings. Tracking is required irrespective of whether the 
service provider is from the public or private sector. This system will 
help to ensure public providers are subjected to the same oversight 
that private providers routinely face.
    Finally, agencies must post lessons learned and best practices on 
SHARE A-76! See ] 4.g. of the revised Circular. In this way, current 
experiences can routinely be used to inform and improve competition 
practices and decision making.

Mitchell E. Daniels, Jr.,
Director.
[FR Doc. 03-13457 Filed 5-28-03; 8:45 am]

BILLING CODE 3110-01-P