(Editor’s Note. For efforts to streamline government and save money, the federal government is turning to privatization to meet its public service needs. Privatization is a broad term currently in popular use that refers to having private entities perform activities traditionally performed by the public sector. Outsourcing is a predominate form of privatization and is expected to create unprecedented opportunities for contractors to participate. The following is based on an article we recently encountered by Michael Charness and James Farnsworth of the law office of Vinson & Elkins in the October 1999 issue of Government Contract Audit Report as well as our experience helping clients compete for public versus private competitions. This article is intended to provide a basic understanding of the rules future outsourcing competitions are likely to follow.

Outsourcing is a long practice. In 1966, the Office of Management and Budget (OMB) issued Circular A-76 establishing the policy and procedures for converting government performance of commercial activities to the private sector. A-76 intended to determine if it is more economical for the federal agency currently performing the commercial work to continue or for either another federal agency or private sector contractor to take over the activity. The A-76 Supplemental Handbook sets forth specific provisions including how to conduct cost comparisons of what it costs the government versus the private sector to perform the same activity. (This is very important since the cost structures of industry sometimes vary considerably from the public sector (e.g. rent is not paid on government facilities). The handbook seeks to adjust proposed prices to put the private versus public bidders on a more "equal footing".)

Until 1994, use of A-76 to outsource government functions was generally limited. However, faced with the need to modernize its weapons under restraints of limited budgets, the Department of Defense, backed by Congress, has renewed its outsourcing efforts with an eye to turning over the savings to weapon modernization. DOD plans to study 230,000 positions that can be outsourced under A-76, expecting to save $11.2 billion by 2005.

Renewed interest in outsourcing was spurred by the enactment of the Federal Activities Inventory Reform (FAIR) Act in late 1998. FAIR requires federal agencies to list activities eligible for privatization and outsourcing and make this list available to the public. FAIR does not mandate outsourcing these activities but rather directs agencies to review activities for outsourcing opportunities, including A-76 procurement. The first FAIR list was expected this fall.

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