UPDATE: New Outsourcing Rules Released The Office of Management and Budget has issued what Director Mitch Daniels Jr. called “a radical simplification” of rules for outsourcing government work. The final revision to OMB Circular A-76, published in the May 29 Federal Register, requires agencies to complete sourcing competitions within 12-18 months after they are announced. It no longer permits direct conversion of small government units to the private sector. Best-value provisions of Part 15 of the Federal Acquisition Regulation may be used along with cost to decide competitions not only for information technology work, as was originally proposed, but also for any other function an agency chooses. OMB officials said they expect a surge of new sourcing competitions, because agencies have been holding back until the final circular was released. The old circular will apply only if a solicitation has already been issued. “I think it has proceeded too slowly,” Daniels said. “I think it needs to accelerate.” He predicted the new rules will attract more small, minority and woman-owned firms seeking to compete for jobs now performed by federal employees. “We have had far too few competitions and far too few competitors,” he said in a briefing for reporters in Washington. “Far too many businesses, particularly small businesses, were deterred from participating in competitions by the cost and…complexity.” OMB said the new circular is designed to “ensure a level playing field” for federal employees and contractors. Both the in-house team and contractors are required to submit bids on the same deadline. If a bid is late, the bidder – whether government or private – may be disqualified from the competition. Both the in-house team and contractors would be allowed to amend their bids if a “material deficiency” is found. Federal employees would have the same rights as contractors to appeal decisions in a competition to the agency head, but it will be up to the courts whether employees or their unions can file appeals before the General Accounting Office and the Court of Federal Claims. If an in-house team wins a competition, the work would be re-competed in no more than five years, just as contracts are periodically re-competed. The final rules provide that a “standard competition” must be completed within 12 months after it is announced, but an agency may extend it for another six months without OMB approval. However, Daniels said, “For a very high percentage of all actions, we believe they will be accomplished in 30 days or less.” Competitions under the old Circular A-76 frequently dragged on for three years or more. In place of direct conversion, OMB set new rules for streamlined competitions for government units of 65 employees or fewer. An agency may conduct market research or seek bids from contractors under simplified acquisition procedures before deciding whether to contract out the work. Streamlined competitions are to be completed within 90 days from the time they are announced, but agencies are allowed to extend that to 135 days. Angela Styles, administrator of OMB’s Office of Federal Procurement Policy, said direct conversions were eliminated at the urging of federal employee unions. They argued that work should not be turned over to contractors without giving government employees a chance to compete for their jobs. But union representatives said the new streamlined competition is no improvement, because it eliminates the requirement that a contractor’s bid must be at least 10% below the agency’s in-house cost. The 10% cost differential still applies in standard competitions involving units with more than 65 employees. Daniels acknowledged union opposition to the Bush administration’s competitive sourcing initiative, saying, “Anytime you revolutionize a process somebody is going to be threatened.” He insisted the administration “is indifferent to who wins a competition.” OMB has cited studies showing that sourcing competitions produce an average 30% cost saving even if the in-house team wins, because the competition forces agencies to make their operations more efficient. The administration had told agencies to begin competitions on 15% of their commercial jobs by the end of the current fiscal year September 30. Styles acknowledged that only “a couple” of agencies will meet that target, but added, “We have developed a specific plan for each agency to get to 15%.” The Senate has passed legislation prohibiting the use of any numerical goal unless there is research to back it up. That provision is part of the Senate version of the Defense Authorization bill that is now before a joint Senate-House conference committee. OMB had earlier said President Bush wanted to compete half of the government’s 850,000 commercial jobs, but Daniels said there is no timetable for reaching that goal. The final rules dropped an earlier proposal that all government jobs should be presumed to be commercial in nature. OMB said it eliminated that provision “to reassure the public that there is no intention to outsource inherently governmental activities.” The circular says a job is “inherently governmental” if it involves “an exercise of substantial discretion in the application of government authority.” Agencies are required to publish annual inventories of jobs they classify as commercial and inherently governmental, and those classifications will be open to appeal. In addition, agencies must justify in writing their decisions under what is known as Reason Code A, identifying an activity that is commercial in nature but will not be eligible for outsourcing. Daniels said, “There has been a tendency to shield the more white-collar work” from competition. An agency may choose to use best-value provisions of FAR Part 15 for job competitions in any category, but Styles said cost will be at least a 50% factor in judging those competitions. Unions have charged that best-value standards are too subjective and open to favoritism. “With the introduction of the unprecedented and highly controversial ‘best value’ public/private competition process, OMB is allowing contractors to submit less responsive and more expensive bids than federal employees and still take work from federal employees,” Bobby Harnage, president of the American Federation of Government Employees, said in a statement. While qualified government employees have the right of first refusal on jobs with a contractor, Harnage charged, “A-76 continues to give contractors incentives to undercut federal employees on pay and benefits.” He said the union will fight the new rules in Congress. The text of the revised Circular A-76 is available at www.omb.gov.