DFAS officials rethink outsourcing deal

Public/Private Competition for the Defense Financing and Accounting Service Military Retired and Annuitant Pay Functions

Defense Finance and Accounting Service officials are re-evaluating a 2-year-old outsourcing contract after an audit detemined the work could have been performed more efficiently in-house.

DFAS officials awarded a contract, potentially worth $346 million over 10 years, to Affiliated Computer Services Inc. (ACS) 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.

According to the IG report, "a calculation error" made the in-house 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 contract was awarded to ACS based on the perception that the vendor's proposal would cost $1.9 million less.

DFAS officials argue that employees and retirees both benefited in the long run from the contract. "In the first year of operation, America's military retirees and annuitants indicated that their customer satisfaction improved, according to a customer service survey independently conducted by the Office of Personnel Management," said DFAS spokesman Bryan Hubbard. "Also in the first year of operation, DFAS also spent about $5 million less than anticipated in the cost comparison on our contract with Affiliated Computer Services."

Hubbard said everyone from the Cleveland facility who was displaced either accepted an early retirement package, went to work for ACS, or both.

Stan Soloway, president of the Professional Services Council, said the IG's report was "incomplete and inadequate" and that the numbers have been correct all along. He said the consultant who evaluated the two bids acted properly by factoring in wage increases for federal workers' bid, but not for ACS' bid.

"This was a fixed-price, fixed-labor-rate bid that ACS submitted," Soloway said. "At no time are the employees from ACS entitled to wage increases for work performed on this contract. But the government does increase its workers' wages every year. So whether by intent or default, they did get the number right."

Lesley Pool, a spokeswoman for ACS, said the company is happy with the level of service it has provided to DFAS and expects to remain on the contract.

The IG report urges DFAS to reevaluate the award to see if the situation can be rectified or if it can save money by bringing the process back in-house.

DFAS officials have said they will evaluate "all available options and will be conducting an independent analysis."

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Timeline

June 2001 — The Defense Finance and Accounting Service announces its intent to award a contract to Affiliated Computer Services Inc. (ACS).

September 2001 — DFAS awards the contract to ACS.

January 2002 — The Defense Department's inspector general announces an audit of the contract award. ACS begins the contract's first option year.

March 2003 — The IG reports that the contract could have been performed more cheaply in-house.

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