OMB-A76 Outsourcing Rules

PDF version of this report
You must have Adobe Acrobat reader to view, save, or print PDF files. The
reader is available for free

OMB-A76 Outsourcing Rules

by Faulkner Staff

Docid: 00011431

Publication Date: 1903

Report Type: TUTORIAL


The purpose of OMB A-76 was to create greater efficiencies and reduce
costs in US government agencies through the examination and outsourcing of
targeted agency activities. Despite initial hesitancy from agency
personnel to outsource services, bringing in outside vendors to take on
tasks has become common over time – so much so that in 2009 President Obama
called for better examination of outsourcing activities to ensure that the
practice avoids wasteful spending. At the same time, competitive
restrictions put in place by OMB A-76 were relaxed. Currently, OMB A-76 is
still the standard for outsourcing government functions.

Report Contents:

Executive Summary

[return to top of this report]

During the 1960s, the Office of Management and Budget released
legislation, called OMB Circular A-76, designed to help separate
governmental and commercial activities.

The purpose of this piece of legislation was to determine, using
competitive sourcing inventories, which activities should be conducted by
the government and which activities could be completely or partially
outsourced to provide greater efficiencies and reduce costs.

Unfortunately, the first iteration of OMB A-76 contained gaping loopholes
that allowed agencies to award contracts in-house without considering the
cost savings or efficiencies that could be accomplished by outsourcing. A
revision to OMB A-76 was released in 2003 that helped close those
loopholes, but private sector vendors are still finding it difficult to
land contracts based on the OMB A-76 guidelines and the submission
process. In some cases, when the contract is awarded to a private vendor,
legislative maneuvering creates additional difficulties for the winning

The improvements in OMB A-76 have helped the process. However, further
revisions on the legislation need to be decided upon and implemented.
Until that time, private sector vendors will continue to find it difficult
to locate activities that are open for bidding and to meet the
requirements or make the final cut for the activity.


[return to top of this report]

OMB Circular A-76 is the federal government’s policy directive concerning
performance of commercial activities. In the context of the Federal
Government’s ongoing cost reduction efforts, this piece of legislation
provides guidance and procedures for determining whether recurring
commercial activities should be operated in-house using Government
facilities and personnel, under contract with commercial sources, or
through inter-service support agreements (ISSAs).

OMB A-76 is not designed to move all technologies and applications within
an agency to contract services. Instead, it is designed to encourage
competition and choice in the management and performance of commercial
activities. The legislation empowers federal managers to make sound and
justifiable business decisions. It sets the policies and procedures that
executive branch agencies must use in identifying commercial-type
activities and determining whether these activities are best provided by
the private sector, by government employees, or by another agency through
a fee-for-service agreement. The term typically used to describe this
process is competitive sourcing.

On May 29, 2003, the Office of Management and Budget unveiled
long-awaited revisions to OMB Circular A-76, which went into effect
immediately. The new revisions included fundamental policy changes to make
the legislation friendlier for the federal worker by doing away with the
longstanding presumption that all commercial-type activities in government
belong in the private sector. The new emphasis as set forth in the
revision is on obtaining the best value for the citizen, regardless of who
performs the work.

Competitive sourcing is one of the key elements of the President’s
Management Agenda. Following the principals of competitive sourcing,
executive agencies must study some of the commercial activities currently
performed by federal employees. The purpose of these studies is to
determine how the most value will be derived from these commercial
activities – through maintaining the activity in-house, outsourcing it, or
some combination of the two.

Activities that are defined as inherently governmental functions will
always be maintained in-house with federal employees. An inherently
governmental function is defined as an activity that is so intimately
related to the public interest as to mandate performance by government
personnel. These activities require the exercise of substantial discretion
in applying government authority and/or in making decisions for the

A commercial activity is a service that is not as intimately related to
the public interest and could be performed by the private sector. This
means commercial activities can be subject to competition and through that
competition can be an area where cost can be reduced and efficiencies

In 2009, President Obama issued a memorandum calling for additional
guidelines for what should and should not be outsourced. In part, this
call to action was issued as a means of reducing governmental spending.
Obama stated, “However, the line between inherently governmental
activities that should not be outsourced and commercial activities that
may be subject to private sector competition has been blurred and
inadequately defined. As a result, contractors may be performing
inherently governmental functions. Agencies and departments must operate
under clear rules prescribing when outsourcing is and is not appropriate.”

In addition to OMB A-76 the Federal Activities Inventory Reform (FAIR)
Act requires that executive agencies make an annual accounting of the
commercial activities performed by federal employees. This accounting must
be submitted to the OMB. Inherently governmental activities performed by
federal employees must also be accounted for. The agency lists that result
from this are referred to as FAIR Act Inventories. After the OMB reviews
and approves an agency’s inventory, the agency must post it on its public
web site.

Current View

[return to top of this report]

OMB A-76 has been in effect since the 1960s, but the most recent revision
was made during 2003. According to the guidelines outlined in this
revision, the following provisions should be met when an activity is

  • Specific deadlines for completing studies must be met. In most cases
    the deadline is twelve months for standard competitions, and 90 days for
    streamlined competitions.
  • Direct conversions are not allowed as an option for agencies to meet
    their competitive sourcing goals. In the past, a direct conversion
    allowed an agency to contract a function being performed by government
    employees without determining whether private or public performance of
    the function was the most cost effective. This could be unfair to
    employees and also might not be the best result for the taxpayer.
    Agencies are now required to use either streamlined or standard
    competitions, a guideline which protects both employees and taxpayers.
  • Agencies can now conduct competitive sourcing considering the
    realistic costs of the activities being studied. In the past, agencies
    had to identify four existing federal contracts to estimate the cost for
    private sector performance which could often result in unrealistic
    expectations for the cost of a project.
  • Agencies must appoint competition officials with specific
    responsibilities. For standard competitions, for example, an agency must
    appoint a human resources advisor (HRA); an agency tender official
    (ATO); a performance work statement (PWS) team leader; a source
    selection authority (SSA); and a contracting officer (CO). This clearer
    description of roles makes the whole study process more transparent and
    fairer to all involved.

Streamlined Competition

In a streamlined competition, an agency determines an estimated contract
price for performing the work by an outside contractor. The agency has a
fair amount of latitude in determining the estimated contract price, and
the agency may solicit proposals from prospective contractors or may
conduct more informal market research, including basing the estimate on
contractor prices from multiple award schedule contracts. The process of
soliciting proposals is not required, however, so another type of research
may be conducted if it is more beneficial to the agency. In some
instances, this has resulted in a complete breakdown of the process which
calls for contractor bidding on specific functions; the result of which
has been a higher cost to perform the function using outsourcing methods
than what the expense of using an internal agency.

The agency also determines how much it costs to perform the function
in-house, with government employees. The agency can cost either the
existing organization or develop a plan to streamline the organization and
base its in-house cost estimate on that plan. This streamlining is called
a most efficient organization (MEO). In theory, after the costs for both
the public and private sectors are compared, the organization that costs
the least wins. A decision on streamlining or outsourcing a project must
be made within 90 days from the date it was publicly announced.
Unfortunately, the result is not always a reduced cost to the agency once
all costs associated with outsourcing are considered.

Standard Competition

In a standard competition an agency selects a service provider based on
formal offers submitted in response to an agency contract solicitation.
The government submits its own offer along with prospective private
contractors. In a standard competition, the government organization
develops a MEO, where the agency develops the staffing plan that will form
the basis for the agency’s offer in the competition. The MEO typically
involves streamlining of the existing organization and is designed to
place the government in the best competitive position against the private
sector bidders.

A standard competition must be completed within twelve months of the date
that it was publicly announced. The Competitive Sourcing Official can
extend this deadline by an additional six months, and, as in a streamlined
competition, this deadline could be extended even further with OMB’s prior
written approval.

In a standard competition, unlike a streamlined competition, there is a
conversion differential, which is added to the costs of the non-incumbent
competitors. The conversion differential is the lesser of 10 percent of
the MEO’s personnel-related costs or $10 million over all the performance
periods stated in the solicitation. This is intended to preclude moving
work from one provider to another where estimated savings are marginal and
captures non-quantifiable costs related to a conversion, such as
disruption and decreased productivity.


[return to top of this report]

The OMB A-76 is an ongoing legislation with no end date established. Over
time, OMB A-76 will continue to evolve, although there is currently no
addendum or revision in the works. However, the current economic climate
and the election of President Trump could mean that changes are
inevitable. President Trump has relaxed restrictions imposed by the Obama
administration, which could affect the number of outsourcing contracts
that are awarded and the conditions under which such contracts can be won.
Future changes to this piece of legislation are likely to further define
the process of examining, bidding, and awarding various projects and
activities within government agencies.

Congress continues to ask for reviews of the process, and the reviews
show that there is much work to do to even meet OMB A-76 processes as
outlined. The prospect of additional rules or regulations is not welcome
by most agencies. While it would seem that the process should be in place
and its operation automatic, agencies continue to struggle with meeting
any goals set forth. This is partially due to the complicated nature of
the process, but also can be laid at the feet of cutbacks that leave
agencies short of the manpower necessary to accomplish the tasks. In
addition, politics always plays a part in any decision even if it is far
removed from the source. For example, the Omnibus Appropriations Act of FY
2012 places a moratorium on the conduct of OMB A-76 competitions. In July
2017, the House voted to continue the seven-year moratorium on
public-private competition for one year. In June, 2018, the House
Appropriations Committee approved legislation to continue to support the
ban on competitions between federal employees and private contractors.

Additionally, budget freezes affect OMB A-76, with some recent freezes
directly affecting the amount and types of outsourcing.


[return to top of this report]

One of the frustrations that many vendors are facing with the current
state of OMB A-76 is the low rate at which private sector vendors are
awarded contracts that have been bid out. In part, this could be
attributed to fear over the loss of government jobs. This fear causes many
agencies to choose less efficient methods of meeting the requirements of
OMB A-76. To help combat this difficulty in the OMB A-76 process, further
revisions to the guidelines need to be considered.

In addition to this, private contractors should anticipate the lack of
enthusiasm for outsourcing particular activities. Many vendors, upon
realizing they are bidding for projects that are not likely to be awarded
to them have removed themselves from the process entirely. The result of
this is that the spirit of OMB A-76 may not be fully realized. If private
vendors become involved in the legislative process, however, then those
vendors can help realize the change that will make the OMB A-76
examination and bidding process more functional, and more profitable for
everyone involved.

Finally, private vendors should also look to process that have not yet
come under examination to find areas where outsourcing would be most
beneficial for US citizens. When these areas are discovered, vendors can
invest the time necessary to begin the examination and bidding process.
The OMB A-76 legislation outlines very specific guidelines for how the
bidding process should take place and what elements are necessary for a
bid to be considered.

[return to top of this report]

[return to top of this report]