This morning President Obama signed a presidential memorandum aimed at overhauling the federal procurement system. In an effort to save the federal government $40 billion a year and to fix what President Obama has called "our broken system of government contracting," the memorandum directs the Director of the Office of Management and Budget (OMB) to work with Cabinet and agency officials to draft new contracting rules before the start of the next fiscal year, and to identify and potentially cancel or modify contracts that are deemed "wasteful, inefficient, or not otherwise likely to meet the agency's needs."

The memorandum comes during a time of increasingly intense scrutiny of cost overruns on defense contracts. Yesterday, the Senate Armed Services Committee held a hearing on a bill that would create a powerful new Pentagon position responsible for reviewing cost analyses and estimates of major weapons systems programs. Sponsored by Sen. Carl Levin (D-Mich.) and John McCain (R-Ariz.), the Weapons System Acquisition Reform Act of 2009 would enable the Pentagon to end weapons projects with critical cost growth unless the Defense Secretary certifies that the program is essential to the national security and can be made cost-effective. Last year, the Government Accountability Office (GAO) issued a report that found that 95 major weapons systems have exceeded their original budgets by a total of $295 billion and are delivered almost two years late on average.

The memorandum is sweeping in its scope, criticizing "[e]xcessive reliance by executive agencies on sole-source contracts . . . and cost-reimbursement contracts," as well as the outsourcing of "inherently government functions" to contractors. It also establishes a "preference for fixed-price type contracts" and instructs agencies to use cost-reimbursement contracts "only when circumstances do not allow the agency to define its requirements sufficiently to allow for a fixed-price type contract."

The memorandum directs the following:

  • By July 1, 2009 - OMB shall issue government-wide guidance to assist agencies in reviewing, and creating processes for ongoing review of, existing contracts in order to identify contracts that are wasteful, inefficient, or not otherwise likely to meet the agency's needs, and to formulate appropriate corrective action in a timely manner. Such corrective action may include modifying or canceling such contracts in a manner and to the extent consistent with applicable laws, regulations, and policy.
  • By September 30, 2009 - OMB shall issue government-wide guidance to:

(1) Govern the appropriate use and oversight of sole-source and other types of noncompetitive contracts and to maximize the use of full and open competition and other competitive procurement processes;

(2) Govern the appropriate use and oversight of all contract types, in full consideration of the agency's needs, and to minimize risk and maximize the value of government contracts generally;

(3) Assist agencies in reviewing the capacity and ability of the federal acquisition workforce to develop, manage, and oversee acquisitions appropriately; and

(4) Clarify when governmental outsourcing for services is and is not appropriate.