New Year, New Challenges for Federal Contractors The squeeze is on for federal contractors in 2010. Initiatives put in place by the Obama administration and Congress call for insourcing some service contracts; greater reliance on strategic sourcing and pressure for discount pricing; tougher oversight of contractors; and scaling back the use of so-called “high risk” contracts, such as noncompetitive and cost reimbursement awards. In addition, published reports say the Office of Management and Budget has told agencies to prepare for a freeze or even a reduction in spending in the 2011 budget, which will go to Congress in February. While Recovery Act spending will continue to prop up some industry sectors, such as highway and building construction, service contractors in particular are likely to face increasing pressure. OMB reported that agencies have submitted plans for cutting contract spending by 3.5% in the current fiscal year, achieving half of the 7% reduction ordered by President Obama over the next two years. OMB said the first round of savings will total about $19 billion. To achieve the savings, OMB said agencies are using a combination of strategies, including program terminations and cuts, internal spending caps and more effective use of competition. Details of the agencies’ plans won’t be made public until spring, but OMB did release some highlights: Insourcing. Ten of the 24 largest agencies included insourcing as part of their cost-cutting plans. In addition, the 2010 Consolidated Appropriation Act directs all civilian agencies to create an inventory of their service contracts and evaluate whether some of the work should be insourced. The Defense Department is already moving on an insourcing initiative announced by Secretary Robert Gates in April. Administration officials say insourcing will focus first on areas such as acquisition, which are considered close to “inherently governmental” functions. OMB is working on a new definition of “inherently governmental.” Agencies have also been told to examine areas where they may be relying too heavily on contractors, with an eye to bringing some of the work in-house. Strategic sourcing. While strategic sourcing has been around for some time, the Obama administration sees it as a cornerstone of its effort to reduce spending. OMB pointed to an initiative by the Department of Homeland Security, which standardized its desktop operating systems, e-mail, and office automation and awarded a single contract to provide those products agency-wide. In addition, OMB is urging agencies to demand deeper discounts on blanket purchase agreements. “High risk” contracts. The administration has declared war on noncompetitive and cost reimbursement contracts as well as time-and-materials/labor-hour awards. President Obama has ordered agencies to reduce their use of those contract types by 10% per year. The OMB report, issued Dec. 21, highlights examples of agencies’ cost-cutting moves: •The Energy Department’s National Nuclear Security Administration began using reverse auctions, saving about 18% on the average contract. •NASA’s Michoud Assembly Facility in Louisiana broke up a large cost-reimbursement contract that covered operations and maintenance, among other things. It awarded a new contract covering facilities management support at an estimated saving of $89 million over five years. •The Office of Personnel Management will review its use of contractors to provide clerical and technical support to a wide range of important programs, including its investigations, retirement, legal, financial management, and public affairs functions. Those services were outsourced in 2004. OMB’s review will determine whether some or all the work should be brought in-house. Pilot projects. The 24 largest agencies have begun pilot projects to address the mix between government workers and contractors. OMB said pilots were selected based on several criteria, including the potential erosion of in-house capability, insufficient contractor oversight, or the potential for improved performance or cost savings through insourcing. About one-third of the pilots involve acquisition offices or functions. Another one-third focus on IT support. Agencies will report to OMB by May 1 on the pilot projects’ results. A summary of results will be made public. Nine agencies are analyzing their contracts for IT functions. “Most of these agencies reported that they are heavily reliant on contractors and question whether the agency has the ability to maintain control of its mission and operations,” OMB said. “Frequent turnover of contractors at some of the agencies has caused further concern that institutional and technical knowledge will be lost.”