3. Phase C is aimed at developing plans to meet the small order (retail) needs of all Federal customers, in each market area and

region, based on comprehensive market surveys.

We have found that

self-service stores are, at best, only one tool to meet the needs of Federal agencies for commonly-used, commercial type items where the average order size is often small. Our 16 GSA depots annually process about 3 million requisitions for stock items where the value of the order is less than $25. Hence, the cost of filling the order frequently exceeds the value of the order itself. In addition, our purchasing offices throughout the country are receiving thousands of orders for nonstock items purchased on special orders for direct deliveries, where the value is less than $25 and the cost of the service itself exceeds the value of the order. All of these problems pose a challenge to find better solutions.

To attack this larger, longer-range problem as well as to monitor the completion of phases A and B above I have approved the plan of

-

the Commissioner of Federal Supply to appoint a high-level specialist on his staff, supported by a team of market research experts, to aggressively pursue the entire reform program. As in the case of the furniture and multiple award schedules programs, I will be pleased to regularly inform this Committee of our progress, and will welcome periodic reviews by the GAO and the GSA Inspector General.

II. Other Agency Initiatives

Recovery under Contract Audits

GSA's Inspector General reported to the Congress May 1, 1980, that some 140 reports had been issued by his office that identified prospective or recommended savings of $26 million. I want to emphasize that the term "recommended savings" used in the IG Report must be used in the right context. For example, contract audit recommendations are advisory in nature. The questioned costs are set aside for consideration by the contracting officer in pricing contracts and should not be construed as being absolute savings. Other factors known to the contracting officer may negate some of the audit recommendations during the negotiation process. Historically, 60 percent of contract audit recommendations are being sustained by our contracting officers.

We fully recognize the importance of contract audits, unfortunately we do not have the desired management overview in this area. We do have a manual tracking system, that is, the negotiator/contract specialist will send a copy of his memorandum explaining the transaction to the auditor, who will keep track of the results as indicated in the IG's report. Admittedly, our record is not a very good one

in submitting copies of the negotiation memorandum to the auditors. We will be concentrating on this area in the future. Notices will be given to all procurement officers reemphasizing this requirement, and the management reviews will bring our performance to the attention of senior managers.

I would like to address our management coverage of 3 of the 11 types of audits identified on page 14 of the IG Report. These three areas or types comprise over 80 percent of the $26 million identified

therein.

First, all audits dealing with claims receive management overview. (These account for $10.7 million of the $26 million.)

This review

been accomplished by a GSA Order requiring the establishment of a Claims Review Board in the operations offices located in both headquarters as well as all regions. This order was issued on February 5, 1980, and most offices have established or are in the process of establishing their respective boards. Besides enhancing management's role in the area of audits involving claims, three functional elements will be closely associated with the claims process, namely: legal, audits and the contracting officer. This cooperation is crucial, as many claims audits remain open for long periods: for example, many construction claims go to litigation and are not settled for years.

Second are the audits dealing with Price Reduction/Defective Pricing, an area, Senator, you are most familiar with as it involves Multiple Schedule awards. (These audits account for $4.1 million of the $26 million.) In order to facilitate our response to price reduction and defective pricing audits, we recently issued an amendment dated August 25, 1980, to our Contract Clearance Order. This amendment places our contract clearance activity in the office of Acquisition Policy in a key role. They will be responsible for reviewing and approving actions taken in response to audits of this type prior to the time any settlement is agreed with a contractor.

Third, and last, lease escalation audits have been a problem, and will continue to be until our current backlog of reviews is cleared (These audits account for $6.5 million of the $26 million.)

up.

We are confident that such disputes should not reoccur in the future, as we have revised our lease escalation provisions. Since April 28, 1978, the new escalation provision, which is tied to the Consumer Price Index published by the Department of Labor, has been included in all new, superseding or succeeding leases. This practice is more in step with procedures in other Federal Agencies. In effect, this removes the element of disputable cost that have previously prevailed in this type of negotiation. It must be recognized that the provision was not retroactive, and therefore leases with the old provision will still be effective until the leasing period expires.

The remaining categories of contract audits are no less important from an agency standpoint, even though the questionable costs are not as large. A limited number of these contract audits are receiving management overview through the existing contract clearance procedures and Acquisition Management Assistance Reviews. A large number of contract audits in these other categories are receiving pre- or postaward reviews by the Office of Acquisition Policy and by the various Services through the Contract Clearance requirements established January, 1979. In this regard, the Public Buildings Service is reviewing and approving all contract audits of construction change orders. In addition, we are reviewing contract audits during our Acquisition Management Assistance Reviews of the Regions and Services through a random sampling of contract files.

The importance of the contract audit program will be reemphasized

The letter will stress the

in a policy letter which is being sent to all Regional Administrators and to appropriate contracting officers appointed under our new Contracting Officer Warrant Program. importance of making effective use of the Contract Audit Reports and highlight the requirement in the regulations for submitting a copy of the Record of Negotiations to the appropriate contract audit office.

A-76

A revised OMB Circular A-76, issued on March 29, 1979, reaffirmed the government policy of relying on the private sector for needed goods services. It also stated that there are certain functions that are inherently governmental and should be performed by government employees, and that decisions between contract and in-house performance should be based on a rigorous cost comparison.

The revised circular

will have a major impact on GSA because a significant number of the agency's activities are of a commercial or industrial nature. Specifically, some 1,400 activities have been identified as subject to A-76 review. As 1,200 of these are currently being performed inhouse, the reviews will increase the number of solicitations issued by GSA. The revisions have also generated a need for significant amounts of training.

During the past year GSA has:

Prepared two agency-wide orders, one prescribing GSA's

policy on A-76 and the other detailing its appeals procedure.