Federal Times
July 28, 2003
Pg. 8

By David Phinney

The Defense Department may abandon a $346 million outsourcing contract with a Dallas-based company that was hired to take over the work of 675 federal employees in Cleveland and Denver.

The Defense Finance and Accounting Service (DFAS) will decide what to do with Affiliated Computer Services (ACS) after it receives an outside assessment of the performance-based contract. The Center for Naval Analysis is doing the assessment, which is expected in late August.

The company took over the Cleveland operation in January 2002 and now processes more than 2.5 million monthly retirement and annuity payments for military retirees.

"All legal business and operational options are being reviewed," DFAS spokesman Bryan Hubbard said.

Those options include leaving the contract as is, reversing the job competition, or recompeting the agreement.

Since it was awarded a year and a half ago, the DFAS contract has been highly controversial.

Earlier this year, the Defense Department's inspector general discovered that a $31.8 million accounting error had seriously flawed the 30-month-long job competition that ended in the work being contracted out to ACS.

The IG's investigation found that a consultant hired by Defense to assist in the competition, Alabama-based MEVATEC Corp., overestimated the federal employees' costs to do the work, which led to them losing the competition with ACS. Specifically, MEVATEC overestimated federal personnel costs and then incorrectly adjusted that sum for inflation based on a period of 10 years instead of one, according to the Defense IG.

As a result, DFAS laid off the government workers and awarded the work to ACS in September 2001 under the assumption that the private firm would save Defense $1.9 million a year. The error will end up costing taxpayers nearly $30 million more over 10 years, according to the investigation.

ACS took over the Cleveland DFAS operation on Jan. 28, 2002 and closed a Denver office. The private venture now employs about 535, including some former DFAS employees.

The inspector general investigated the contract award three times before discovering the error. Rep. Dennis

Kucinich, D-Ohio, and other lawmakers first complained almost three years ago that the competition included flawed accounting. The IG's first two investigations failed to find any significant errors.

Since the third IG study, member of the Cleveland-area congressional delegation have vowed to force the Pentagon to declare the ACS contract null and void. In the past, DFAS publicly rejected the demands.

Adding to the controversy are new revelations that the company is falling short on some of the contract's performance terms, prompting DFAS to reduce payments by nearly $500,000.

DFAS auditors withheld $497,752 from ACS for less-than-satisfactory customer service over the past year, according to the agency.

According to a July 19 report by Cleveland newspaper The Plain Dealer, internal records of Defense audits show that monthly ACS work performance repeatedly failed to meet a contract requirement that telephone operators answer 80 percent of all calls within 20 seconds. Auditors discovered that ACS workers answered 77 percent of incoming calls within 20 seconds during their best month of service and answered only 32 percent in the required time in their worst month.

Hubbard confirmed the newspaper report, but said that the quality of service ACS provides is similar to federal workers' past performance and that issues have surfaced because new business relationships take time before all the problems are ironed out.

"We have a dialog with the contractor," he told Federal Times. "There is give and take that is natural between a service provider and the customer."

ACS charged $5 million less than anticipated for last year's work, Hubbard noted.

The company has also been introducing new technologies to the operation that will better serve the program's customers, said ACS spokeswoman Lesley Pool. She said the withheld sums on the contract are in dispute.

"These aren't fines," she said. "They are short-paid invoices while definitions for certain performance standards are finalized [and] agreed to."

To date, DFAS has conducted six public-private competitions for work done by its employees. Those competitions are regulated by rules known as Office of Management and Budget Circular A-76. In all but the Cleveland operation, government employees were deemed to offer a better deal and able to retain their jobs.