Study says DFAS competition works

A study commissioned by the Defense Finance and Accounting Service (DFAS) concluded that the agency should stick with its original plan for competition in pay services despite a two-and-a-half-year-old dispute.

The Center for Naval Analyses (CNA), a nonprofit research and analysis firm located in Alexandria, Va., this week released a report saying that DFAS should continue to operate military retired and annuitant pay services through Affiliated Computer Services. DFAS this past June hired the analysis center to do an independent review of the process that led to the award of the deal.

ACS in early 2001 won the contract, potentially worth $346 million over 10 years, to process monthly payments for retirees and spouses of deceased retirees. The contract was awarded after a public/private competition and affected 650 jobs held by DFAS employees.

A Defense Department inspector general report released March 21 found that DFAS overestimated what it would have cost the government to perform the work. That report stated a calculation error made the in-house, or public, estimate appear $31.8 million higher than it should have. An independent consultant hired by DOD to evaluate the contracts miscalculated personnel costs and improperly adjusted for inflation, the Inspector General said.

But according to the CNA study, adjusting costs to reflect an observed decrease in systems software workload gives a $42 million advantage to the contractor over the 10-year contract period when compared to the government's proposal. Compared to the cost of performing this function prior to the competition, using ACS will save about $100 million less over the 10-year contract period, CNA said.

According to the CNA report, ACS should retain the contract operations because:

* The actual cost of the contract is less than projected in the prior cost comparison and will continue to decrease based on fewer software changes requested by DFAS.

* With each passing year, the contract becomes less expensive when compared to the government's own in-house proposal in 2001.

* As measured by customer satisfaction, performance is as good or slightly better than prior to the contract.

* Retaining the current contractor is consistent with current policy and procurement rules under the Office of Management and Budget's A-76 Circular regarding public/private competitions.

* This option has the least negative effect on the prior government employees. All were offered reassignment within DFAS, separation or retirement incentives or employment with the contractor.

In early August, ACS announced it was selling its federal business to Lockheed Martin for $658 million. While the military retired and annuitant pay services falls on the federal side, it was not immediately clear if the sale would impact the contract ACS is performing for DFAS.

CNA analyzed four options to provide military retired and annuitant pay services: Retain the current contractor, return the operation to the government without competition, conduct a new A-76 competition and recompete among only private industry firms.

"This experience has provided some valuable lessons about the complexity of the A-76 process and we have taken care to apply those lessons," said Thomas Bloom, director of DFAS, in a statement. "We will continue to review the contractor's performance and evaluate our options annually."