In the past decade, the Government's use of contractors has increased exponentially. In the Department of Defense (DoD) alone, the percentage of private contractors making up the Pentagon's workforce has increased from 21% to 39%. As the Government's use of service contractors has blossomed, Congress has grown increasingly uneasy with what is perceived as an "overreliance" on service contractors to execute agencies' missions; in particular, they have expressed alarm at the prospect that private contractors may be performing "inherently governmental functions." As a result, Congress and the President have mandated that agencies take a closer look at the use of support contractors generally to determine whether the contracted tasks are more properly performed by Government employees. However, there is a growing concern from the contracting community that agencies may overreach in the rush to fulfill Congress' and the President's "in-sourcing" mandates.

This article will outline (1) the recent statutes, regulations and policies related to the in-sourcing initiative; (2) the recent Office of Federal Procurement Policy's (OFPP) proposed policy letter; and (3) the options available to challenge an agency's decision to in-source work.

Recent In-Sourcing Statutes, Regulations and Policies

In recent years, Congress has passed several statutes with provisions designed to shift the Government's focus from out-sourcing to in-sourcing, with DoD being the primary focus of initial in-sourcing efforts. Section 324 of the National Defense Authorization Act (NDAA) for FY 2008, Pub. L. No. 110-181, required DoD to establish procedures to ensure that it considers in-sourcing functions currently performed by contractors. See 10 U.S.C. § 2463. In April of 2008, DoD implemented procedures requiring DoD Components to meet certain requirements when making in-sourcing decisions. One important requirement is that a DoD Component must perform a cost analysis to account for the "full cost of manpower" to determine whether in-sourcing would result in the Government being the low-cost provider of the targeted services.

Additional DoD guidance followed in 2009 and 2010. On May 28, 2009, the Deputy Secretary of Defense, William J. Lynn, issued a memorandum (the Lynn Memo) titled "In-sourcing Contracted Services-Implementation Guidance." The Lynn Memo directed DoD Components to "review all contractual services for possible in-sourcing," and it set a deadline for the DoD Components to submit individualized in-sourcing plans. As we detailed in a previous article on June 29, 2009, the centerpiece of the Lynn Memo is a "decision tree," by which DoD Components are to evaluate contracted services and, if necessary, determine whether certain functions can be performed by DoD civilian employees more cost effectively than a contractor. On January 29, 2010, DoD further clarified this "cost analysis" requirement in Directive-Type Memorandum (DTM) 09-007, which elaborated on the requirement that DoD Components must estimate and compare the full costs of civilian and military manpower versus contract support when making in-sourcing decisions.

As the Obama administration has made in-sourcing a focus of its cost-conscious acquisition reform policy, Congress has acted to apply the in-sourcing rules beyond DoD. In March 2009, Congress enacted Section 736 of the Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, which requires civilian agencies to devise and implement guidelines for in-sourcing new and existing contracted-out functions. Accordingly, on July 29, 2009, the Office of Management and Budget (OMB) issued a Memorandum titled "Managing the Multi-Sector Workforce," and instructed each agency to consider the use of federal employees "to perform new functions and functions that are performed by contractors and could be performed by Federal employees." Similar to the guidance provided by DoD, OMB directed that this analysis should "include a cost analysis that addresses the full costs of performance and provides 'like comparisons' of relevant costs to determine the most cost-effective source of support."

The OFPP Proposed Policy Letter-"Work Reserved for Performance by Federal Government Employees"

On March 31, 2010, the OFPP issued a proposed policy letter (OFPP Letter) to clarify when work must be reserved for federal employees. The OFPP Letter makes the following policy proposals:

  • The various definitions of "inherently governmental function" would be replaced by a single, government-wide definition-one previously used in the Federal Activities Inventory Reform Act (FAIR Act) of 1998, Pub. L. No. 105-270. Section 5 of the FAIR Act defines an inherently governmental function as "a function that is so intimately related to the public interest as to require performance by Federal Government employees."
  • The OFPP Letter retains and endorses the list of examples of inherently governmental functions currently in FAR 7.503(c), such as commanding military forces, determining foreign policy and awarding or administering contracts.
  • For all other functions not specifically identified as inherently governmental, the OFPP Letter proposes that agencies use two tests when determining whether a function is, in fact, inherently governmental.
    • The first-the "nature of the function" test-would ask agencies to consider whether the direct exercise of sovereign power is involved in the task; such functions are inherently governmental and should be performed exclusively by Government personnel. Examples of these functions are an ambassador representing the United States, a police officer making an arrest and a judge sentencing a person convicted of a crime.
    • The second test-the "exercise of discretion" test-would ask agencies to evaluate whether a contractor's exercise of discretion associated with the function would have the effect of committing the Government to a course of action, effectively preempting the Government's decision-making authority.
  • The OFPP Letter also identifies criteria for determining when positions dedicated to performing "critical" functions must or should be reserved for federal employee performance. The OFPP Letter defines a critical function as one that is "necessary to the agency being able to effectively perform and maintain control of its mission and operations." Functions that would not risk causing mission failure if performed by contractors are not critical.

Interested parties from both the public and private sectors are invited to provide comments, which will be considered in the formulation of the final policy letter. All comments should be submitted via the federal regulatory portal http://www.regulations.gov, faxed to 202.395.5105 or mailed by June 1, 2010. See 75 Fed. Reg. 20397 (Apr. 19, 2010) (Correction to submission address). After public comments are considered and the policy letter is finalized, the FAR will be amended accordingly.

While the OFPP Letter proposes much needed guidance on inherently governmental functions, many questions remain. Will agencies take a measured approach when implementing these tests and performing cost analyses, or will they move beyond inherently governmental and "critical" functions into other areas in which contractors are currently providing excellent, cost-effective support? For a contractor facing the uncertainty involved with the in-sourcing process, perhaps the most important question is: In the event that an agency decides to cancel a solicitation or take your work in-house, what can be done?

Legal Challenges to Agency In-Sourcing Decisions

There may be several potential options available to contractors who wish to challenge an agency's in-sourcing decision. In addition to a protest directly with the agency, there are three fora where a contractor may potentially challenge the agency's decision to in-source work: (1) the Government Accountability Office (GAO); (2) the Court of Federal Claims; and (3) the Federal District Courts.

GAO is an attractive forum because a timely protest will require the Government to stay performance of the work pending GAO's resolution of the protest. Although GAO recently declined to hear a protest challenging an agency's decision to cancel a solicitation and perform the work in-house, the decision was founded on a narrow ground and does not preclude challenges on other bases. See Aleut Facilities Support Services, LLC, B-401925, Oct. 13, 2009, 2009 CPD ¶ 202. In Aleut, GAO held that the protestor failed to state a valid basis of protest based on 10 U.S.C. § 2463 because that statute, relied on by the protestor, does not require a cost comparison between the agency and outside contractors. However, a similar statute-apparently not cited to or considered by GAO-provides that the DoD "shall consider . . . the advantages of converting from one form of personnel (military, civilian, or private contract) to another for the performance of a specified job" and provide a "complete justification for converting from one form of personnel to another." 10 U.S.C. § 129a. (emphasis added). The Lynn Memo notes that the justification necessarily requires a "cost analysis to be conducted to determine whether DoD civilian employees or the Private Sector would be the most cost effective provider." As of the date this article was published, a protest at GAO under 10 U.S.C. § 129a remains an option.

At least one judge on the Court of Federal Claims has held that the court has jurisdiction to hear an incumbent contractor's challenge to an agency's decision to take the contractor's work in-house. See LABAT-Anderson, Inc. v. United States, 65 Fed.Cl. 570 (2005) (noting that the plaintiff alleged that the agency violated 10 U.S.C. § 2463 by failing to perform a cost comparison). In addition, a recent decision by the Federal Circuit supports the argument that the court has jurisdiction over challenges to agency in-sourcing moves. In Distributed Solutions, Inc. v. United States, 539 F.3d 1340, 1345 (Fed.Cir.2008), the Federal Circuit held that Tucker Act jurisdiction over "procurements or proposed procurements" "extends to all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout." (Emphasis added).

Finally, a recent case demonstrates that Federal District Courts may be an appropriate forum to challenge an agency's decision to in-source work previously performed by contractors. In Rohmann Services, Inc. v. Dep't. of Defense, an incumbent small-business contractor performing a contract for audiovisual services at Edwards Air Force Base, CA, brought suit in the Western District of Texas (No. 10-CV-0061) under the Administrative Procedures Act seeking to enjoin the Air Force from in-sourcing its contract. The plaintiff argued that the in-sourcing decision-and the faulty cost analysis the Air Force used in support of this decision-was arbitrary and capricious. The Air Force subsequently decided to withdraw its in-sourcing decision and extend the contractor's contract term, thus rendering the action moot.

In anticipation of the possibility that work may be in-sourced, the wisest policy is to maintain detailed cost records so that you can demonstrate to the agency that your performance of the contract is more cost effective than if they brought the work in-house. In the event that the Government decides to take your work in-house or cancel a solicitation to perform the work itself, early consultation with counsel is critical. DoD and OMB will likely have more to say on this subject, and Wiley Rein will continue to keep you updated on any significant statutory or regulatory changes.