I. ISSUE:

The current clause limits contracting for personal services without clearly identifying what constitutes personal services thereby placing undo burden on both the government and private contractors. This burden has the potential to result in ineffective and inefficient operations that limit the use of contractor personnel to meet the government’s increased need to acquire services at reasonable costs. In addition, the ambiguity of the clause fosters an environment conducive to the creation of situations where “de facto” personal services are performed resulting in mismanagement of contractual services and ethical improprieties.

II. DISCUSSION:

a. Background. The true basis for the prohibition in the FAR against award of personal service contracts is difficult to ascertain; however, as it is described in the FAR, the prohibition centers on the concern that a personal service contract could create an employer-employee relationship between the government and the contractor’s personnel. Over the years this concern has been diminished by the fact that contractor personnel cannot become federal employees by virtue of a contract alone. Putting aside the concern that a contractor employee could become a government employee by virtue of a government contract, the proper analysis focuses on the legitimate concern that contracts shall not be used for the performance of inherently governmental functions. (See FAR 7.503.)

The FAR factors for analyzing the existence of an improper personal service contract are based on an opinion issued by the United States Civil Service Commission General Counsel in October 1967. The Comptroller General adopted this opinion later that year. These “Pellerzi Standards” are incorporated into Part 37 of the FAR. (See FAR 37.104(d).)

It appears that the primary concern about contracts for personal services is that a contract employee will seek to establish that he or she is a government employee entitled to the benefits of government employment. These benefits include compensation, retirement benefits and certain processes for hiring, evaluating, transferring and removing government employees. However, by strict interpretation of the requirements for federal employment, the courts have put to rest concerns about inadvertently hiring federal employees through service contracts. Arguments that personal service contracts violate Civil Service laws do not withstand close scrutiny.

One of the requirements for an individual to become a government employee is appointment in the Civil Service by a qualified official. The appointment process requires a significant degree of formality. Definite, unconditional action by an authorized federal official designating an individual to a specific Civil Service position is necessary to fulfill the appointment requirement. In other words, a contract for personal services does not fulfill the appointment requirement and cannot cause a person to become a government employee.

A review of discussions of the ban against personal service contracting shows that the real concern is the policy that contractors should not perform inherently governmental functions. As early as 1927, the Comptroller General overturned a Navy contract for the sampling of tea because the contract involved services necessary in connection with governmental activities which are for performance by regular employees of the government who are responsible to the government. The Comptroller General held that such services should not be performed by contractors. Although in the intervening years the personal service contract ban grew from Civil Service concerns, recently statutes and regulatory changes have brought the analysis back to the question of inherently governmental functions. Following enactment of the FAIR Act, the FAR now contains a definition of inherently governmental functions and a statement of policy regarding inherently governmental functions. The personal service contract ban no longer has relevance. The ban should either be narrowed to only those personal service contracts that involve performance of inherently governmental functions, or should be removed from the FAR altogether.

The adoption of market mechanisms to improve quality and customer service while reducing costs has remained one of the key defense reforms through the past three administrations. Yet, managing contract performance and measuring satisfaction associated with outputs rather than day to day interaction offers a challenge in this dynamically changing environment. The prevailing theory is that services can be purchased piecemeal from contractors, as needed, to meet the mission, thus avoiding the high cost of infrastructure associated with maintaining full-time staff. In practice, the short term mission contracted for frequently doesn’t reach a conclusive state but rather evolves into the next mission requirement creating a multitude of difficulties with regard to compliance with the personal services clause and maintaining the integrity of the contracting process and contract management for services.

Most services contracts that require contractor support performed at a government site experience this problem to some degree. The root cause can be traced back as early as the bid process. For example, funding restrictions force the government to seek cost savings. Requests for Proposals do not include requirements for space allocation or direct labor hours for a manager of contractor personnel to be charged directly to the contract. The contractor, by virtue of wanting to win and grow the government business, will agree to these terms and agree to manage personnel from a remote location, making it difficult for the contractor manager to be personally involved in the day-to-day supervision of his employees and in their professional development. The cost for management is then reflected as an embedded indirect cost in the cost proposal.

From the start of the contract performance period, the tendency is for contractor employees to want to please the customer and be responsive to the customer’s need. As there is usually not direct knowledge of the contract scope or terms, by members of either the contractor or government teams, relationships quickly develop which result in contractor site personnel taking technical direction from the government representative in an effort to deliver good service and the government begins to treat the contractor employee as a part of the government team. Over time, this practice results in de facto direct management of the contractor employees by a government person. As contract performance evolves, this relationship has a tendency to become more and more personal, creating and maintaining false expectations for both parties while also increasing contract cost as more tasks and greater expectations evolve.

b. Personal Services And Performance Based Service Contracting (PBSC). Traditionally, government service contracts have tended to emphasize inputs rather than outcomes typically detailing the procedures and processes to be used in delivering a service, amount and type of equipment, and/or time and labor to be used. Conversely, performance-based contracts clearly spell out the desired end result expected of the contractor. The manner in which the work is to be performed is left up to the contractor who is given as much freedom as possible to determine how best to meet the government’s performance objective. Performance-based contracts offer significant benefits; primarily, they encourage contractors to be innovative and to find cost-effective ways of delivering services. Shifting the focus from processes to results they also promise better outcomes.

Performance-based contracting is not new. In 1991, the Office of Federal Procurement Policy (OFPP) established Policy Letter 91-2 Service Contracting. This policy letter, issued in April 1991, establishes PBSC as a strategy for acquiring services with the objectives of improving the quality of the service provided and ensuring that the government pays only for services actually received.

It is the policy of the Federal Government that (1) agencies use performance-based contracting methods to the maximum extent practicable when acquiring services, and (2) agencies carefully elect acquisition and contract administration strategies, methods, and techniques that best accommodate the requirements. These policies have been incorporated in Federal Acquisition Regulation (FAR) Subpart 37.6 (Performance-Based Contracting), and additional guidance is on the OFPP document, A guide to Best Practices for Performance-Based Service Contracting. (OFPP Policy Letter 91-2 was rescinded effective March 30, 2000)

One of the most important acquisition challenges facing agencies today is the need to make the transition to performance-based acquisitions. In 2001, OMB Memorandum M01-15 set the goal for FY 2002 to award no less than 20 percent of the total eligible service contorting dollars available using PBSC techniques. The goal increases to 50 percent by FY 2005. With the increased emphasis on PBSC and outsourcing of functions to the private sector, Personal Services provisions of Federal Procurement Regulations are a barrier to efficient accomplishment of PBSC Goals.

c. Collaterals. During the last decade, reforms have focused on reengineering, consolidating, competing, and eliminating government services directed at reducing infrastructure and support costs. A campaign has been in force to implement business practices and competition in order to reduce the size of government through competition and outsourcing. With a focus on the acquisition of services and PBSC, the federal government has sought to reinvent operational and support functions by emphasizing a more “business-like” rather than “rules-based” environment. Although these reforms have made the acquisition process more streamlined and efficient, there is still much to be gained from closer examination of the contract administrative process for personal service contracting.

The regulatory prohibition against personal service contracts remains an issue of contention for all involved in the contracting process, government and contractor alike. With an enlightened and educated contracting workforce, it is less likely that prohibited personal service contracts are awarded; the transition normally occurs in the manner of administration of the contract which tends to create improper personal service relationships.

The increase in service contracting has forced a shift in the culture of the workforce, creating an increase in areas of administration and accountability with regard to the proper use of all resources. Our government workforce, once accustomed to performing the technical and functional mission, is now expected to share that responsibility with a contracted workforce without the traditional organizational structure. The lack of a common definition for personal services further confuses the issue. An examination of the respective patterns or trends in contract administration seems to indicate that personal services have evolved into an accepted practice in its subjectivity.

Addressing the problem of personal service contract restrictions offers potential rewards in the form of efficiencies yielded through reduced administrative costs and effectiveness in the achievement of more realistic management and performance of contract services. Unnecessary regulations that prohibit effectiveness will never allow for the achievement of efficiencies.

III. RECOMMENDATION:

The current FAR clause 37-104 should be modified to limit personal services contracting only to truly inherently government functions. Recommend the following changes:

a. Para. a. Modify Paragraph a. to state that all services can be contracted subject to determination by the responsible government party that these services are commercial in nature and not prohibited by definition as being “inherently governmental”. (The prohibition would only be applicable for services that are defined as those that are “Inherent Government Responsibility”. If defined as an Inherent Government Responsibility, that work can’t be contracted for. This guidance should clearly allow for all support which might lead the Inherent Government Responsible person toward a decision may be provided by contractors).

b. Para. b. Delete as there are personal service contracts for medical, consultants and experts can be awarded.

c. Para. c. Revise to reflect that Performance Based Work Statement (PBWS) provide the contractor responsibility to do the work and deliver results established and measured by the Government as part of the evaluation of contractor performance. Thus there would be no possibility for an employer-employee relationship established that would be improper.

d. Para. c (2). Delete, as noted above, the PBWS delegates “problem” resolution to the contractor; the contractor would have responsibility for performance within scope of the PBWS negating any perception of a Government supervisory role.

e. Para. d. Description of Elements. Delete. As long as there is a good PBWS, that passes the responsibility to the contractor to perform with metrics and a surveillance plan established by the Government, any services can be contracted for that is not defined as “Inherent Government Responsibility”.

IV. CONCLUSION:

Recommend revision of FAR clause 37-104 to the FAR council that would properly reflect current state of service contracts as for Inherently Government Services and not a barrier to good business practices and efficient management of contractor support services.