Staff Paper Prepared for the President's Commission to Study Capital Budgeting

June 19, 1998

How can procurement risk be better controlled? How can contracts be let and managed more effectively?


The Federal Government's failure to adequately address the risk in the acquisition of many major capital assets is well known and has consumed many pages of newsprint. The Commission on Government Procurement addressed the issue in 1969. The Commission's Report led to the establishment of the Office of Federal Procurement Policy in the Office of Management and Budget in 1974. In 1976, OMB Circular A-109, Major Systems Acquisition, was issued to provide guidance to agencies on reducing the risk through good planning and management of the procurement.

However, compliance with A-109 and periodic GAO and Congressional concerns were largely ignored by most agencies, and a disciplined capital asset acquisition process was neither implemented, nor enforced, in most agencies. Examples of large acquisitions that have made recent headlines include FAA's Air Traffic Control System and IRS's Tax Systems Modernization (see separate paper that provides a synopsis of this project). There have been too many others.

As part of the drive to balance the budget and respond to the growing volume of taxpayer demands for a greater return for tax dollars spent, the President and Congress have put in place a framework to improve the way agencies annually acquire $65-$70 billion of new capital assets.

The legislative framework consists of three parts:

A team of more than 80 staff from 14 agencies and interagency groups, including the Chief Financial Officers Council, and the Chief Information Officers Council, integrated the legislative initiatives with administration initiatives to develop a unified process to acquire and manage capital assets across the federal government. That process is contained in the Capital Programming Guide, which OMB issued as a supplement to OMB Circular A-11 in July of 1997. The guide provides best practices to ensure that capital assets contribute to the achievement of agency strategic goals and objectives within budget limitations. The General Accounting Office helped develop the guide by studying best practices from state and local governments, the federal government, and private industry.

The best practices contained in the Guide indicate that there are three key elements to controlling the procurement risk and managing contracts more effectively. They are: (1) good up front planning to clearly identify the best capital asset to fulfill the performance gap; (2) stable funding; and (3) good acquisition planning that results in limited development, makes effective use of competition and incentives, and requires the use of a performance-based management system to provide program managers and others information on the achievement of, or deviation from, goals during the procurement process. These three key elements have been missing in the headline grabbing acquisition failures.

The planning phase of the capital programming process should first determine if cost-beneficial means for meeting program performance requirements other than a capital asset are available. If not, the agency should create an integrated project team (IPT) to manage the acquisition process. The team should determine:

This process starts with a strategy to review the market and ends with the development of an acquisition plan, outlining the best approach to acquire the recommended asset. There should be risk analysis that identifies how risk for the different parts of the project will be isolated, minimized, monitored, and controlled. High risk should be accepted only insofar as it can be justified by high expected returns, and only if project failure can be absorbed by the agency without loss of service capability or significant effect on budget. If funding is approved in the budgeting phase, the acquisition plan will be implemented in the procurement phase. It is critical that before requesting funding and entering into a contract that the agency knows what it can buy and how much it will cost.

As discussed in another paper on full funding of asset acquisitions, a funding mechanism that ensures that the project will be funded as planned is critical to holding the contractor and the government management team accountable for achieving the cost, schedule, and performance goals. When a stable funding stream is assured, provided that the project achieves its goals, the opportunity to use performance-based fixed price contracts is increased because the contractor can implement more efficient work planning and management practices. When the work is not funded as planned, because incremental funding levels are changed from year-to-year, the contractor must make adjustments to the original plan that change the original cost and schedule goals and sometimes the performance goals. It has been demonstrated in a DOD study that the cost to the government to achieve the original performance goals will be three dollars for every dollar the planned funding levels are reduced . When the funding is changed the contractor can no longer be held accountable for achieving the proposed results.

Once Congress has approved funding and OMB has apportioned it to the agency, the procurement phase begins. The first action is for the integrated project team (IPT) to review and update, if necessary, the acquisition plan to ensure that the risk management techniques considered in the planning phase are still appropriate. The risk can be reduced by an acquisition strategy that:

Probably the greatest risk factor affecting contract performance is the amount of development needed for the project. Projects requiring full scale development have the greatest potential to experience cost and schedule overruns and not meet performance goals. Whenever possible, the purchase of commercial and non-developmental items to satisfy needs is preferred.

The effective use of competition and financial incentives is another means to reduce the risk. If given the opportunity, industry can be helpful in proposing innovative solutions. Requirements in solicitations should be written not as detailed design specifications, but rather as broad-based statements of objectives or targets for asset function and performance, including long-term operating and management costs, that allow sources to propose various alternative solutions to meet the agency's needs.

The project cost, schedule, and performance goals established through the planning phase of the project and approved in the budgeting phase serve as the basis for the procurement of the asset as well as the basis for assessing risk. Performance-based management systems (earned value, which was developed by the Federal Government and adopted by industry) should be used to provide managers with the contract status information they need to judge the achievement of, or deviation from, goals until the asset is accepted and operational. If the goals are not being met, performance-based management systems allow for early identification of problems, analysis of potential corrective actions, estimates of changes to the original goals needed to complete the project, and the information necessary for agency portfolio analysis decisions. If corrective actions cannot bring the project to within 90 percent of its cost, schedule, and performance goals, agencies need to consider what other action is appropriate (e.g., rebaselining or terminating the contract).


The Commission could support the efforts to require good capital programming practices by recommending that OMB and Congress establish criteria that they could use to ensure that agencies demonstrate planning expertise in their requests for funding new capital assets. Failure to meet these good acquisition planning criteria would mean that the project would not be approved for funding.

The Commission could support the requirement in the Capital Programming Guide that agencies use an earned value management system to manage all major capital asset acquisitions and that OMB and Congress review the acquisition status information at least once a year, or as deemed necessary, for acquisitions not achieving 90 percent of goals. Acquisitions that do not meet objectives in a cost-effective manner should be recommended for termination.

President's Commission to Study Capital Budgeting