Legislation would force agencies to track costs of operations

The Bush administration is crafting legislation to require agencies to account for the full costs of their programs, providing new information that should help managers decide if an in-house function should be subject to competition from the private sector. Increasing public-private competition is a chief goal of the legislation, according to Philip Dame, deputy assistant director for budget analysis and systems at the Office of Management and Budget. Dame gave an overview of the legislation at the April meeting of the Budget Officers Advisory Council, an interagency council of budget officials. The administration's 2002 budget describes the legislation as a tool to help managers. "If program managers are going to be held more accountable for the achievement of output targets, they should be given accurate information on the cost of their programs and flexibility in choosing service providers," the budget said. The legislation is slated to go to agencies for comment by mid-June, according to Dame. The legislation seeks to plug gaps in agency accounting systems that have long handicapped federal managers and caused delays in the public-private competition process governed by OMB Circular A-76. Traditionally, agencies have used accounting systems that track how appropriated dollars are spent, rather than providing a detailed breakdown of all the costs of an agency's activities. The legislation will mandate that agencies account for the support, overhead and other non-direct costs associated with their programs, according to Carl DeMaio, director of government redesign at the Reason Public Policy Institute. The administration will require that agencies use accounting tools, such as activity-based costing, to determine those costs. "These [accounting] tools are out there in the financial management world," said DeMaio, "None of them have been required before." The legislation will set out the accounting mandate and subsequent OMB guidance will outline the tools agencies may use to track the full costs of their programs, according to DeMaio. These tools will include activity-based costing, he said. Agencies that have experimented with activity-based costing include the Immigration and Naturalization Service, the Patent and Trademark Office, the Army, Coast Guard and the Marine Corps. The Marine Corps has moved aggressively to use the activity-based methodology, tapping consulting firm Grant Thornton LLP to develop reliable cost data for virtually every activity performed across the Corps, according to Steven Sorett, a lawyer with Reed Smith LLP. While several accounting firms offer models that simplify activity-based costing, agencies must first collect the cost data to use the accounting method, Sorett said. "There is no question [agencies] will have to accumulate their data in a way that can be fed into the accounting models," he said. "If [agencies] haven't been thinking along these lines, there will be a lot of scurrying to capture the data." The accounting legislation could have a major effect on how A-76 competitions are conducted, according to DeMaio and other experts. Because the government lacks a sound method for estimating overhead and non-direct costs, a 12 percent fee is added to the in-house bid to cover such costs. Contractors and federal unions have both charged that this fee distorts the true cost of the in-house bid. "One of the major challenges in A-76 competitions is the inability for agencies to calculate the full costs associated with an activity done in-house. If you can't calculate that activity from a starting point, it becomes hard to compare a vendor's [bid]," said DeMaio. Better accounting could eliminate the need for the 12 percent fee and speed up the A-76 process, Sorett said. "Everybody would agree if we had a true public sector accounting system that tracked costs the way the private sector does, a lot of these [A-76] cost rules would not be needed," said Sorett. "If you actually have a clean activity-based costing [system] for the activity under study, the pricing and costing study would go a lot faster for the [in-house group]." More precise cost data could also cut down on A-76 appeals, according to Sorett and DeMaio. The American Federation of Government Employees will wait for full details on the proposed legislation before declaring a position, according to defense policy analyst Wiley Pearson. But Pearson did say that any A-76 reform should apply to both in-house and private sector firms. "Too often and in too many cases we have seen these so-called reforms unilaterally applied to one partner without thought of the other," he said. "While it's laudable to correct the accounting system, if you do it for only one side and don't take accounting on the other side of the equation, you've basically moved a political agenda and nothing more."