OMB Circular A-11 Part 7.pdf

CAPITAL PROGRAMMING GUIDE

V 2.0

SUPPLEMENT TO

OFFICE OF MANAGEMENT AND BUDGET CIRCULAR A–11, PART 7:

PLANNING, BUDGETING, AND ACQUISITION OF CAPITAL ASSETS

JUNE 2006

CAPITAL PROGRAMMING GUIDE LIST OF ABBREVIATIONS

LIST OF ABBREVIATIONS

ACP Agency Capital Plan CI Commercial Items COTS Commercial-off-the-shelf ESPC Energy Savings Performance Contract EVM Earned Value Management FAR Federal Acquisition Regulation FARA Federal Acquisition Reform Act (Clinger-Cohen Act) of 19961 (Division D of

Pub. L. No. 104–106) FASA Federal Acquisition Streamlining Act of 1994 (Pub. L. No. 103–355) FRPC Federal Real Property Council GAO Government Accountability Office GPRA Government Performance and Results Act of 1993 (Pub. L. No. 103–62) IPT Integrated Project Team ITMRA Information Technology Management Reform Act (Clinger-Cohen Act) of 1996

Division E of Pub. L. No. 104–106) NDI Non-Developmental Item O&M Operations and Maintenance OMB Office of Management and Budget OFPP Office of Federal Procurement Policy, Office of Management and Budget PART Performance Assessment Rating Tool PIR Post-implementation Review RMO Resource Management Office, Office of Management and Budget SFFAC Statement of Federal Financial Accounting Concepts SFFAS Statement of Federal Financial Accounting Standards SIS Share-in Savings SSA Source Selection Authority SST Source Selection Team UESC Utility Energy Savings Contract

1 Together, the Information Technology Management Reform Act of 1996 (Division E of Pub. L. No. 104–106), with FARA (Division D of Pub. L. No. 104–106) are known as the Clinger-Cohen Act of 1996.

OMB Circular No. A–11 (2006) Page i of Capital Programming Guide

KEY INTERNET ADDRESSES CAPITAL PROGRAMMING GUIDE

KEY INTERNET ADDRESSES

The Capital Programming Guide and OMB Circular A–11, Part 7 http://www.whitehouse.gov/omb/circulars/a11/cpgtoc.html

The Federal Acquisition Reform Act and the FAR Implementation of the Federal Acquisition Streamlining Act can be found at the reference library for Acquisition Reform (ARNET) at:

http://www.arnet.gov.

The Information Technology Management Reform Act (now known as the Clinger-Cohen Act), can be found on the Chief Information Council Working Group web site at:

http://www.cio.gov/Documents/it_management_reform_act_Feb_1996.html

Office of Information and Regulatory Affairs—Evaluating Information Technology Investments, (November 1995) can be found at: http://www.whitehouse.gov/omb/inforeg/infopoltech.html

GAO—Assessing Risk and Returns: A Guide for Evaluating Federal Agencies IT Investment Decision Making, February 1997 can be found at: http://www.gao.gov/archive/1998/ai98110.pdf

GSA—Performance Based Management—Eight Steps to Develop and Use Information Technology Performance Measures Effectively, (December 1996) can be found at:

http://www.itpolicy.gsa.gov/mkm/pathways/pathways.htm

OMB Circulars, can be found on the OMB Homepage at:

http://www.whitehouse.gov/OMB/circulars/index.html

Chief Financial Officers Council guidance documents can be found at: http://www.cfoc.gov/

Federal Real Property Council guidance documents can be found on the OMB Asset Management website at: http://www.whitehouse.gov/omb/financial/fia_asset.html

The Government Accountability Office's (GAO) Information Technology Investment Management (ITIM) Stages of Maturity, as described in GAO's May 2000 Version 1 of the ITIM can be found at http://www.gao.gov/.

Chief Information Officers Council Value Measuring Methodology: How-to-Guide Issued By: CIO Council, Best Practices Committee—Posted: 04.15.2003 http://www.cio.gov/index.cfm?function=specdoc&id=416.

Value Measuring Methodology: Highlights Issued By: CIO Council, Best Practices Committee—Posted: 04.15.2003 http://www.cio.gov/index.cfm?function=specdoc&id=415.

Framework for Developing EVMS Policy Issued By: Best Practices Committee—Posted: 12.05.2005

Page ii of Capital Programming Guide OMB Circular No. A–11 (2006) http://www.whitehouse.gov/omb/circulars/a11/cpgtoc.html http://www.arnet.gov/ http://www.cio.gov/Documents/it_management_reform_act_Feb_1996.html http://www.whitehouse.gov/omb/inforeg/infopoltech.html http://www.gao.gov/archive/1998/ai98110.pdf http://www.itpolicy.gsa.gov/mkm/pathways/pathways.htm http://www.whitehouse.gov/OMB/circulars/index.html http://www.cfoc.gov/ http://www.whitehouse.gov/omb/financial/fia_asset.html http://www.gao.gov/ http://www.cio.gov/index.cfm?function=specdoc&id=416 http://www.cio.gov/index.cfm?function=specdoc&id=415

CAPITAL PROGRAMMING GUIDE KEY INTERNET ADDRESSES

http://www.cio.gov/index.cfm?function=specdoc&id=664.

Clinger-Cohen Act, February 10, 1996 Issued By: Congress—Posted: 02.10.1996 http://www.cio.gov/index.cfm?function=specdoc&id=319.

Responsibilities and Information and Technology Governance at Leading Private Sector Companies Issued By: GAO—Posted: 09.09.2005 http://www.cio.gov/index.cfm?function=specdoc&id=647.

OMB Circular No. A–11 (2006) Page iii of Capital Programming Guide http://www.cio.gov/index.cfm?function=specdoc&id=664 http://www.cio.gov/index.cfm?function=specdoc&id=319 http://www.cio.gov/index.cfm?function=specdoc&id=647

LIST OF FIGURES CAPITAL PROGRAMMING GUIDE

LIST OF FIGURES

Figure 1. The Capital Planning Lifecycle Figure 2. Planned Maturation of Agency Enterprise Architecture Figure 3. Component-Based Architecture Figure 4. Integrated Project Team Figure 5. Decision Tree for Analyzing Agency Programs and Investments

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CAPITAL PROGRAMMING GUIDE TABLE OF CONTENTS

TABLE OF CONTENTS

LIST OF ABBREVIATIONS.......................................................................................................... i KEY INTERNET ADDRESSES.................................................................................................... ii LIST OF FIGURES ....................................................................................................................... iv TABLE OF CONTENTS................................................................................................................ v

INTRODUCTION

The Guide's Purpose

I. PLANNING AND BUDGETING PHASE

Introduction

I.1) STRATEGIC AND PROGRAM PERFORMANCE LINKAGE

I.1.1) Strategic Planning I.1.2) Program Performance and Budgeting

I.2) Agency Enterprise Architecture (EA) is Key to Effective Planning and Budgeting for Capital Assets of All Types

I.2.1) Integrated Project Team

I.3) FUNCTIONAL REQUIREMENTS

I.4) ALTERNATIVES TO CAPITAL ASSETS

I.4.1) Answering the Three Critical Questions I.4.2) Frequent Use of Benefit-Cost or Cost Effectiveness Analysis

I.5) CHOOSING THE BEST CAPITAL ASSET

I.5.1) Evaluate Asset Options

I.5.1.1) Asset Availability I.5.1.2) Market Research Strategy

I.5.2) Develop a Program Baseline I.5.3) Select the Best Alternative: Benefit-Cost Analysis I.5.4) Develop an Acquisition Strategy I.5.5) Risk Management

I.5.5.1) Earned Value Management I.5.5.2) Planning for Contract Type I.5.5.3) Planning for Competition I.5.5.4) Planning for Acquisition Management I.5.5.5) Integrating Earned Value into Acquisition Strategy

I.5.6) Allow for Adequate Time to Evaluate Alternatives I.5.7) Plans for Proposed Capital Assets Once in Use I.5.8) Prioritize Projects within a Portfolio

I.6) THE AGENCY CAPITAL PLAN

I.6.1) Executive Review Process I.6.2) Purpose of the Agency Capital Plan I.6.3) Key Elements of the Agency Capital Plan

I.7) AGENCY SUBMISSION FOR FUNDING IN THE BUDGET YEAR

I.7.1) Agency Submission to OMB I.7.2) Criteria for Justification of Spending for Proposed New Capital Assets I.7.2.1) Basis for Selection of the Capital Asset

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TABLE OF CONTENTS CAPITAL PROGRAMMING GUIDE

I.7.2.2) Principles of Financing I.7.2.3) Strategies for Strengthening Accountability for Achieving Goals I.7.3) Using the PART When Budgeting

II. ACQUISITION PHASE

Introduction

II.1) VALIDATE PLANNING DECISION

II.2) MANAGE THE ACQUISITION RISK

II.2.1) Limiting Development II.2.2 Using Competition and Financial Incentives II.2.3 Using Performance-Based Specifications II.2.4 Establishing an Earned Value Management System

II.3) CONSIDER TOOLS

II.3.1) Modular Contracting II.3.2.) Advisory Multi-Step Acquisition II.3.3. Competitive Prototyping

II.4) SELECT CONTRACT TYPE AND PRICING MECHANISM

II.5) ISSUE THE SOLICITATION

II.6) PROPOSAL EVALUATION AND NEGOTIATION

II.7) CONTRACT AWARD

II.8) CONTRACT MANAGEMENT

II.9) ACQUISITION ANALYSIS

II.9.1) Contract Performance Evaluation II.9.2.) OMB RMO Review II.9.3) OFPP Assessment

II.10) ACCEPTANCE

III. MANAGEMENT IN-USE

Introduction

III.1) OBJECTIVES DURING MANAGEMENT-IN-USE

III.2) OPERATIONAL ANALYSIS IS A KEY TOOL IN MANAGEMENT-IN-USE

III.3) OPERATIONAL ANALYSIS PROCESS AND OUTCOME

III.3.1.) Continuous Monitoring III.3.2.) Operations and Maintenance III.3.3) Post Implementation Review and Post-Occupancy Evaluation

III.3.3.1) Post Occupancy Evaluation (POE) III.3.3.2) Post-Implementation Review (PIR)

III.4) ASSET DISPOSITION

III.4.1) The Decision Process III.4.2) Real Property Assets and Information Technology Considerations III.4.2.1) Real Property Assets III.4.2.2) Information Technology III.4.3) Decision Models III.4.4) Executing the Asset Disposal Plan

APPENDICES

APPENDIX 1

DEFINITION OF CAPITAL ASSETS

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CAPITAL PROGRAMMING GUIDE TABLE OF CONTENTS

APPENDIX 2

INTEGRATED PROJECT/Program TEAMS (IPTs)

APPENDIX 3

EXAMPLE OF EARNED VALUE CONCEPT AND COST AND SCHEDULE

VARIANCES FOR CAPITAL ASSETS

APPENDIX 4

ACCOUNTING FOR CAPITAL ASSETS

APPENDIX 5

RISK MANAGEMENT

APPENDIX 6

PRINCIPLES OF BUDGETING FOR CAPITAL ASSET ACQUISITIONS

APPENDIX 7

COMPETITIVE SOURCING AND OMB CIRCULAR A–76

APPENDIX 8

VALUE MANAGEMENT

APPENDIX 9

COST-ESTIMATING

APPENDIX 10

Disposition Decision Models

APPENDIX 11

Federal Sustainability

APPENDIX 12

Scoring Process to Rank Proposed Capital Assets

APPENDIX 13

JUSTIFICATION OF SPENDING FOR NEW CAPITAL ASSETS

GLOSSARY

OMB Circular No. A–11 (2006) Page vii of Capital Programming Guide

CAPITAL PROGRAMMING GUIDE INTRODUCTION

INTRODUCTION

The Guide's Purpose

The Capital Programming Guide was originally released in 1997 and this release, Version 2.0, is part of a continuing effort to more routinely update the Guide to remain consistent with new requirements and leading practices. This version reflects developments in capital planning since the publication of the original guide and provides updated base practices and lessons learned regarding more efficient project and acquisition management of capital assets. This guide does not establish new or alter existing policies articulated elsewhere (e.g. in OMB Circular A–11, Preparation, Submission and Execution of the Budget, or other OMB circulars). It does, however, expand the explanation of the concepts in the original guide that were not fully developed. An inter-Agency Capital Programming Guide Working Group, consisting of various agency representatives, was convened to author updates and identify examples for the revision.

Their invaluable additions, editing and hard work is commended.

Agencies must have a disciplined capital programming process that addresses project prioritization between new assets and maintenance of existing assets, risk management and cost estimating to improve the accuracy of cost, schedule and performance provided to management, and the other difficult challenges proposed by asset management and acquisition. The purpose of the Capital Programming Guide, herein referred to as the Guide, is to provide professionals in the Federal Government guidance for a disciplined capital programming process, as well as techniques for planning and budgeting, acquisition, and management and disposition of capital assets. At the same time, agencies are provided flexibility in how they implement the key principles and concepts discussed. We expect the Guide to be revised as agencies continue to gain experience and develop improved best practices.

The Guide is intended to assist Federal Departments, Agencies and Administrations (herein collectively referred to as agencies) effectively plan, procure and use these assets to achieve the maximum return on investment. The guidance integrates the various Administration and statutory asset management initiatives (including Government Performance and Results Act (Pub. L. No. 103–62), the Clinger-Cohen Act (Divisions D and E of Pub. L. No. 104–106, the Federal Acquisition Reform Act and the Information Technology Management Reform Act of 1996, as amended; popularly known as the Clinger-Cohen Act), Federal Acquisition Streamlining Act of 1994 (Pub. L. No. 103–355), and others) into a single, integrated capital programming process to ensure that capital assets successfully contribute to the achievement of agency strategic goals and objectives.

Agencies should use this Guide to help establish a capital programming process within each component and across the organization. Effective capital programming uses long range planning and a disciplined, integrated budget process as the basis for managing a portfolio of capital assets to achieve performance goals with the lowest life-cycle costs and least risk. This process should provide agency management with accurate information on acquisition and life-cycle costs, schedules, and performance of current and proposed capital assets. The Federal Acquisition Streamlining Act of 1994 (Pub. L. No. 103–355) (FASA) requires that Agency Heads manage the agency portfolio of major acquisitions within 90 percent of the individual investment's cost, OMB Circular No. A–11 (2006) Page 1 of Capital Programming Guide

INTRODUCTION CAPITAL PROGRAMMING GUIDE

schedule and performance goals. Project managers when developing the cost, schedule and performance goals on developmental projects with significant risk must, therefore, provide the agency Executive Review Committee with risk adjusted, most likely cost, schedule and performance goals. Without the knowledge of the risks involved managers at all levels—Agency, Office of Management and Budget (OMB) and Congress—cannot make the best decisions for the allocation of resources among the competing investments.

Managing the stock of Federal capital assets and planning, budgeting and acquiring assets is hard work, but it takes time and adequately trained personnel to do it successfully. Large sums of taxpayer funds are involved and the performance of the assets determines, to a large extent, how well the agencies are able to achieve their missions and provide service to the public.

Agencies have flexibility in how they implement the key principles and concepts of the Guide.

They are expected to comply with existing statutes and guidance (cited in the text where appropriate) for planning and funding new assets, achieving cost, schedule and performance goals, and managing the operation of assets to achieve the asset's performance and life-cycle cost goals. However the key principles and importance of thorough planning, risk management, full funding, portfolio analysis, performance-based acquisition management, accountability for achieving the established goals and cost-effective lifecycle management will not change. In general, OMB will only consider recommending for funding the President's budget priority capital asset investments that comply with good capital programming principles. This Guide does not discuss the entire strategic planning process, only that portion that pertains to the contribution of capital assets.

At each stage in the preparation of the Agency Capital Plan, the agency is encouraged to work with OMB's Resource Management Offices (RMOs). Early inclusion of RMO staff with the Integrated Project Teams, to be discussed further in section I.2.1, will facilitate a continuing review and dialogue regarding the agency's plan in order to avoid unexpected events. This is key in integrating the Planning and Budgeting Phases. The process of submission should be consistent with the annual guidance contained in the OMB Circular A–11, as well as with other current OMB guidance.

Definition of Capital Asset

Capital assets are land, (including parklands), structures, equipment (including motor and aircraft fleets), and intellectual property (including software) which are used by the Federal Government and have an estimated useful life of two years or more. Capital assets exclude items acquired for resale in the ordinary course of operations or held for the purpose of physical consumption, such as operating materials and supplies. The cost of a capital asset is its full life-cycle cost, including all direct and indirect costs for planning, procurement (purchase price and all other costs incurred to bring it to a form and location suitable for its intended use), operations and maintenance (including service contracts), and disposal. Capital assets may or may not be capitalized (i.e., recorded on an entity's balance sheet) under Federal accounting standards. Appendix 1 defines capital assets more fully.

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CAPITAL PROGRAMMING GUIDE INTRODUCTION

Threshold for Capital Programming

As defined in Circular A–11, Part 7, major acquisitions are capital assets that require special management attention because of their importance to the agency mission; high development, operating, or maintenance costs; high risk; high return; or their significant role in the administration of agency programs, finances, property, or other resources. Major acquisitions should be separately identified in the agency's budget. For small dollar investments relative to the agency's budget, the agency may wish to develop a less detailed programming process based on the basic tenets presented in this Guide. A stratified capital programming process involving more or less detail and review based on the size or strategic importance of proposed investments may be appropriate, particularly in large agencies. Agencies should have well documented thresholds clearly disseminated and implemented across the organization.

Capital Asset Management Infrastructure

A formal capital asset management infrastructure is a best practice used throughout industry and by many government agencies to establish clear lines of authority, responsibility, and accountability for the management of capital assets. An Executive Review Committee (ERC), acting for or with the Agency Head, should be responsible for reviewing the agency's entire capital asset portfolio on a periodic basis and making decisions on the proper composition of agency assets needed to achieve strategic goals and objectives within the budget limits. This committee should be composed of the senior operations executives and the chief information, financial, budget and procurement officers.

In addition to review by the ERC, each project requires an Integrated Project Team(s) (IPT) composed of a qualified program manager and necessary personnel from the user community, budget, accounting, procurement, value management, and other functions to be formed, as appropriate, to:

(1) establish a baseline inventory of existing capital assets;

(2) analyze and recommend alternative solutions;

(3) manage the acquisition if approved; and

(4) manage the asset once in use.

A sound financial management system is another key ingredient for sound decision making.

Agencies may choose to plan for capital assets agency-wide or by bureau or functional area.

Many agencies have started to redesign their planning approach for information technology (IT) capital assets by establishing an IT capital asset infrastructure in accordance with the requirements of the Clinger/Cohen Act, Sec. 5122, Capital Planning and Investment Control.

In addition, Executive Order 13327 of February 4, 2004, Federal Real Property Asset Management, establishes the Federal Real Property Management Council (FRPC) that tasks Federal Real Property Officers with improving real property asset management within their agencies.

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INTRODUCTION CAPITAL PROGRAMMING GUIDE

When one asset contributes to multiple programs, the linkage to each program should be described. In turn, the annual performance plan should include the performance goals for the procurement of the asset, as well as the program's performance, once the asset is operational.

Separate documents are not required.

Organization of the Guide

This Guide is organized to reflect the three phases of the capital programming process:

• Planning and Budgeting, Acquisition, and Management-In-Use. Each phase is composed of a number of Steps.

• Integration with guidance or source materials relevant to a particular phase and step, as well as a description of reporting requirements or formats, is also described.

• A Glossary and a list of Selected Capital Programming References are also included.

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CAPITAL PROGRAMMING GUIDE I. PLANNING AND BUDGETING PHASE

I. PLANNING AND BUDGETING PHASE

Introduction

The Government Performance and Results Act (GPRA) initiated program performance reform for greater service delivery and program effectiveness by encouraging greater accountability throughout the Federal Government. It encourages collaboration between OMB and the Agencies to develop outcome oriented, program specific performance measures. Administrators must now ask: Were program goals achieved within budgeted costs and established schedules?

Does the program have baselines and ambitious targets for its annual measures?

This Guide stresses the importance of all phases in the capital asset life-cycle. By linking planning and budgeting to procurement to the management of capital assets, the resulting all-encompassing roadmap encourages agencies to develop an Agency Capital Plan that provides for the long-range planning of the capital asset portfolio in order to meet the goals and objectives in the strategic and annual plan.

The Annual Performance Plans, which describe an agency's incremental progress toward achieving its strategic goals and objectives, should also clearly demonstrate how capital assets will contribute to this progress.

The program or project acquisition life-cycle starts with concept analysis, progressing through technology definition, requirements planning, acquisition and finally through operations and maintenance. Although terminology may differ, government and industry use similar processes. These processes typically include decision points in which executive boards review and approve a program's entry to the next phase or stage, based on satisfactory completion of exit criteria from the prior phase or stage.

In its 2004 report GAO-04-138, Agency Implementation of Capital Planning is Mixed, a report in which it evaluated the implementation of the Capital Planning Guide in several agencies across the government. It recognized that the planning phase drives the remaining phases in the capital asset's life-cycle. It found that agencies generally link their capital planning to mission driven goals. It recommends that agencies complete a long-term capital plan to further guide them towards comprehensive investment goals.

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I. PLANNING AND BUDGETING PHASE CAPITAL PROGRAMMING GUIDE

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Figure 1. The Capital Planning Lifecycle

I.1) STRATEGIC AND PROGRAM PERFORMANCE LINKAGE

I.1.1) Strategic Planning

Capital programming, as guided by GPRA, is an integral part of an agency's strategic planning process. The agency strategic plan includes:

• A comprehensive mission statement;

• Long-term goals, covering a six year period for the agency, and an explanation of how they will be achieved with justification for new acquisition funding;

• Schedule and resource implications of goal achievement;

• Description of the relationship between annual performance goals in the annual performance plan and the long-term goals in the strategic plan;

• Identification of the agency's performance gap and the resources needed to close it, and linking proposed investments to long-term planning goals; and

• Identification of external factors that could effect the achievement of long-term goals.

An effective strategic plan should anticipate changes in the agency's requirement for technological capabilities, identify major assets that are critical to implement the plan, and define the outcomes these assets will help realize. The plan should also be consistent with the level of future budgetary resources that will be available. See OMB Circular A–11, Part 6, Preparation and Submission of Strategic Plans, for detailed guidance on the requirements for strategic plans.

I.1.2) Program Performance and Budgeting

One current tool to evaluate program efficiency is the Program Assessment Rating Tool (PART).

Using this tool, programs are rated from Effective to Ineffective, and the ratings and specific findings produced are used to make decisions regarding budgets and policy. The tool assumes that a program that cannot demonstrate positive results is no more entitled to funding, let alone an increase, than a program that is clearly failing. PART is an important next step in changing the way federal managers think about capital planning. It places the burden of proving effectiveness squarely on the shoulders of the managers. With further improvement and use, the tool provides incentives for federal managers to make their programs more effective and takes the assessment results into consideration when planning for agency capital assets in support of mission needs.

For more information including yearly guidance and a further in-depth history see the PART website (http://www.whitehouse.gov/omb/part).

I.2) Agency Enterprise Architecture (EA) is Key to Effective Planning and Budgeting for Capital Assets of All Types

Agencies are formally developing an Enterprise Architecture, as defined in the Clinger-Cohen Act (see § 5125(d) of Pub. L. No. 104–106, Division E, Information Technology Management Reform Act of 1996, as amended) and in accordance with the guidance developed by OMB, One of the fundamental aspects of an Enterprise Architecture is the identification of current systems—their perfomance and their continued value with respect to agency missions, goals, and business functions.

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Figure 2. Planned Maturation of Agency Enterprise Architecture

Across the federal government, agencies have established EA programs, identified and associated assets to lines of business and are beginning to realize benefits as they transition to the target architectures. Key objectives now and in the coming years include expanding the types of assets currently managed by the EA and expanding the range and scope of decisions driven by information extracted from the EA.

A complete Enterprise Architecture consists of a set of interrelated "reference models" designed to facilitate cross-agency analysis and identification of duplicate investments, gaps, and opportunities for collaboration within and across agencies. Collectively, the reference models comprise a framework for describing important elements of an EA in a common and consistent way. Through the use of this common framework and vocabulary, agencies have improved the way they manage IT portfolios and capitalized on opportunities to leverage assets across government. Over the coming years we anticipate these same practices to grow in the non-IT arena.

Figure 3. Component-Based Architecture

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As agencies continue to utilize EA to model performance, business processes and services, decision makers must create clear line-of-sight relationships between investments in capital assets and specific components in the EA. For example, the business case for a capital asset must document the specific performance measures that are effected by the investment and how those measures are effected. The same clarity should exist for business processes, services delivered and data managed by a capital asset.

I.2.1) Integrated Project Team

Several acquisition disciplines are essential to planning and managing an acquisition through its life-cycle. The Integrated Project Team (IPT) is established to analyze the performance and capability of the portfolio of assets used by the program. The IPT will vary in size and acquisition disciplines depending on the phase of the program, but must always contain a qualified program manager and contracting officer. At initiation of a major acquisition, the team should consist of the individuals with skills in the following areas: Project Management (PM), Contract Oversight (CO), Cost Estimating, Risk Management, Sustainability, Scheduling, Users, Budget, Technical Experts, Information Resource Management, Value Management, and Earned-Value Management (EVM). Staff with other appropriate skill sets should also participate in the IPT. Agencies should strongly consider co-locating the IPT, especially the PM and CO who must work closely throughout the project to ensure that the requirements are clearly articulated into a statement of work and that adequate oversight of the contracted work is accomplished. The members of the IPT are the key functional team leaders under the leadership provided by a program manager. The key to success is organization, planning, estimating and budgeting resources and executing the plan. The IPT must also develop sound cost estimates based on the "Principles of Government Cost Estimating" in Appendix Nine and the GAO Cost- Estimating Guide.

Figure 4. Integrated Project Team

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The program manager should be given a charter, whether the work is to be performed by contract or by in-house resources, defining the scope of authority, responsibility and accountability for providing quality analysis to support senior management decision-making during all phases of capital programming. Such leadership by program offices is intended to ensure that capital assets will be designed and operated to improve the performance of the program staff who use them—a seemingly self-evident goal, but one many businesses and government agencies have failed to reach. For example, information systems often are developed by technology or finance specialists alone, without the benefit of an agency-wide review of the system's requirements and capabilities. Appendix 2 discusses IPTs in more detail.

Earned Value Management (EVM) and risk management are management tools used successfully in both the public and private sectors to mitigate risks in developing capital assets.

Agencies must develop a level of expertise with both tools that is appropriate to the size and nature of their capital asset portfolio. This expertise may take the form of a full scale EVM and risk program management office, a center of excellence, or a capability held by one or two focal points within the agency.

IPTs must devote the planning time needed to create an adequate Work Breakdown Structure (WBS) at program initiation and keep it current throughout the program execution. Program management use of EVM depends on a well-developed WBS to ensure that a program is completely defined. Program experts, in collaboration with experts in the areas of Cost- Estimating, Procurement, Risk Management, Scheduling, and EVM, need to develop a WBS as a common framework within a given program, but also among related programs and across an organization's portfolio.

Even if the preferred solution has not yet been determined, planning for a program WBS must begin promptly upon program initiation during the earliest stage of the Planning Phase.

Organizations that manage similar programs often use a standard WBS template to assist in program definition. The WBS when complete is an integrated family tree that defines all the products and services comprising the program. While some WBS elements are unique to each program, many are common, such as training, data and program management. The program WBS established during concept definition will provide the framework for estimating the program's cost and risk during the pre-systems acquisition planning and for developing the program schedule. The cost estimate and program WBS provide the basis for suppliers to extend the Contract WBS to achieve integrated cost, schedule and technical performance management using EVM during systems acquisitions.

I.3) FUNCTIONAL REQUIREMENTS

If current assets cannot bridge the gap between planned and actual performance, the IPT should define the gap in terms of performance requirements to be achieved. Depending on the depth of the analysis of program requirements during the first round of strategic planning, the IPT may wish to define more detailed requirements against which they can evaluate options for reducing the performance gap.

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Functional requirements should not be defined in equipment or software terms, but in terms of the mission, purpose, capability, agency components involved, schedule and cost objectives, and operating constraints. Mission needs are independent of a particular capital asset or technological solution. A needs-based approach allows the agency the flexibility to evaluate a variety of solutions with an open mind. The key is not to limit potential solutions by too narrowly defining requirements.

When developing functional requirements, the capabilities of other assets or processes with which the function must interact are a major consideration. Functional requirements should include the following elements:

• The performance criteria of the function being acquired, developed, built, etc;

• A definition of the common usages of the function;

• The ranking of each requirement in order of importance; and

• A decomposition of functional requirements into self-contained features (e.g., climate control for housing prisoners might have unique requirements that should be identified).

Internal agency users and external customers (e.g., airlines for air traffic control systems, veterans for new benefits processing systems) should participate in the requirements definition process. It is important to balance the internal user and operator needs with the requirements of the external customers. Other agencies that may have acquired assets to accomplish similar goals or objectives should be identified. Where feasible, large, complex acquisitions that are very difficult to manage should not be pursued on an individual agency basis. Instead, management should look for cross-agency or government-wide economies to avoid duplication of effort. As part of the requirements definition process, agencies must look at government-wide programs and systems to see if they will meet most or all agency requirements. To the degree a program or system does not meet agency requirements, agencies should consult with the program management office of the program or system involved to see if and how any unmet needs can be met. Agencies should also consult with any government-wide Lines of Business initiatives that may apply to their area of effort to coordinate planning with the Line of Business involved.

One acute danger during this phase is "specification creep," where requirements grow uncontrolled to meet future potential needs or to incorporate emerging technology that would be "nice" to have. Emphasis should be placed on core requirements needed to meet the mission needs. Once a solution meets the core requirements, additional functionality can be added in a later stage of the project, if cost-beneficial. These functional requirements should be documented in the strategic plan. Modular or spiral development acquisition should be pursued where possible to prevent "specification creep." Projects that are purchased in modules, where the scope is limited to what the market can provide quickly, rather than requiring significant new development efforts with uncertain cost, or delivery goals, can freeze the scope to provide an initial capability that improves the function, with subsequent modules providing for increased capability when the market is ready and scope, cost and schedule can be more clearly defined.

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I.4) ALTERNATIVES TO CAPITAL ASSETS

I.4.1) Answering the Three Critical Questions

With detailed requirements defined, management should answer the Three Critical Questions before planning to acquire capital assets. These questions are applicable to all major capital investments.

1. Does the investment in a major capital asset support core/priority mission functions that need to be performed by the Federal Government?

• If not, end consideration of the investment and eliminate or privatize the function;

• If so, is there a clear explanation of how the investment supports core/priority mission functions? Are performance measures provided that are included in the agency Strategic Plan, including baseline data and the expected improvement? Is there an explanation of how the investment will contribute towards meeting a goal? Information on program effectiveness can be found at: http://www.whitehouse.gov/omb/part/

• Is it clear that those functions are inherently governmental functions? IPTs can consult attachment A of OMB Circular A–76, Performance of Commercial Activities (May 29, 2003, as amended) to assist in deciding if a government activity is an inherently governmental function.

2. Does the investment need to be undertaken by the requesting agency because no alternative private sector or governmental source can better support the function?

• If not, consider devolving the function to state or local governments, sharing resources within the agency; with another Federal agency, a university, not-for-profit organization, or outsourcing to the private sector. For example, medical care can be provided through payments for care in non-profit or private hospitals, rather than directly by Federal agency hospitals.

• OMB Circular A–76 helps agencies decide through the use of public-private competition, whether taxpayers are better served though the continued in-house performance of highly commercial activities (such as software development) or alternatively, by the best qualified contractor. (See Appendix Six for further discussion of A–76).

3. Does the investment support work processes that have been simplified or otherwise redesigned to reduce costs, improve effectiveness, and make maximum use of commercial, off-the-shelf technology?

• If not, management should reengineer business processes first, then search for alternatives, or the agency may issue a very broad statement of the requirements in a solicitation to the private sector and allow the private sector to do the reengineering in proposed solutions.

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• Management should also improve internal processes by cutting red tape, empowering employees, revising or pooling existing assets within the agency or with other agencies, redeploying resources or offering training opportunities.

• GAO's April 1997, Version 3, Business Process Reengineering Assessment Guide outlines the Issues and attributes on which agencies should focus when assessing and reengineering their current processes.

Analyzing Agency Programs and Investments

Consider the kind of capital assets needed and how they will be acquired.

Ask Yourself… If the answer is “No” then…

Is the function of the program central to the Agency’s Mission?

• Send to other Federal Agency

• Direct to the private sector

• Send to State or Local government

• Terminate function

Can this Agency accomplish this function better than the private sector or other Federal Agency?

• Partner with State or Local governments

• Cross-service with other Federal Agencies

• Contract out to private sector

Have work processes been re-engineered to reduce costs to improve effectiveness?

• Introduce competition

• Find efficiencies

• Empower employees and put customers first

Figure 5. Decision Tree for Analyzing Agency Programs and Investments

If the answer to all Three Critical Questions is yes, management should still consider options other than new acquisitions to reduce the performance gap, such as:

• Meeting objectives through regulation or user fees;

• Using human capital rather than capital assets; and

• Applying grants or other means beyond direct service provision supported by capital assets.

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I.4.2) Frequent Use of Benefit-Cost or Cost Effectiveness Analysis

At many key decision points in the capital programming process, a benefit-cost or cost-effectiveness analysis could be used by senior management to help decide whether the best way to reduce the performance gap is through acquiring a new capital asset, undertaking a major modification on an existing asset, or by some other method. This analysis should follow the guidance of OMB Circular A–94, Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs.(October 29, 1992). Guidelines for pursuing alternatives other than a capital asset are not contained in the remainder of this Guide. However, if the alternative chosen is a service contract, many of the analytical techniques and processes suggested in the Guide would be appropriate (see Appendix 9 on Cost-estimating).

I.5) CHOOSING THE BEST CAPITAL ASSET

Once the decision to acquire a capital asset is made, comparison of the various available asset options is needed to ensure the acquisition of the best product for the job.

Agencies should not undertake planning before a project is funded merely for the sake of compliance.

They should plan because it results in better use of scarce resources and improves implementation.

I.5.1) Evaluate Asset Options

With the decision to evaluate the feasibility of acquiring a capital asset, management should provide the IPT with an estimate of the range of budget resources that may be available for an asset. The IPT should conduct market research to determine the feasibility of various capital asset alternatives that are available in the market to satisfy the requirements. Emphasis should be placed on generating innovation and competition from private industry and on the use of commercial items and non-developmental items to meet the mission needs. The IPT should determine:

• Availability. Can the market provide capital assets that partially or fully meet program requirements? How much of the need can be fulfilled without the need for developing new technologies or incurring other significant risk?

• Affordability. Are the assets affordable within budget limits? If the full requirement is not affordable, can it be divided into separate modules that are affordable? New technology should be subject to Technical Readiness Level (TRL) and Degree of Difficulty (R&D3) reviews to help determine the risk and potential necessary reserves.

• Costs & Benefits. For those alternatives that are affordable within budget limits, which are the most cost-beneficial, and should be among the portfolio of proposed assets that the agency head, the President, and Congress consider for funding? (Value management methodology can provide the "best value" alternatives to meet the functional requirements.)

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• Sustainable Design Principles. How much have the sustainable design principles been incorporated into the requirements identified for the asset? Has sustainability been considered in all aspects of the asset's life-cycle?

• Risk. In addition to applying risk management to the development of a Risk-Adjusted

Program Budget and Risk-Adjusted schedule, the agency must assess overall risk of an investment as it chooses the best capital assets to meet the agency's mission and strategic objectives. High risk should be accepted only if it can be justified by high expected returns, and only if a program failure can be absorbed by the agency without loss of service capability or significant effect on budget. Decision thresholds should be set for cost, schedule and performance expectations of development projects beyond which the return on investment becomes so low that the project should be canceled. Agencies can apply a variety of risk mitigation techniques, including limiting scope, contract type selected, and aggressive program management.

The process of choosing the best capital asset starts with the development of a strategy to review the market and ends with the development of an acquisition plan that outlines the best approach to acquire the recommended asset. Plans for asset evaluation, operation and maintenance, and disposal should also be developed, with the execution costs included in the Feasibility Analysis.

If funding for the proposed asset is approved at the end of the Budgeting Phase, these plans will be executed in the Acquisition and Management- In-Use Phases.

I.5.1.1) Asset Availability

A program manager supported by thorough market analysis is an educated consumer, and is more likely to complete a program successfully.

Availability is assessed by market surveillance and market research, ultimately producing a list of investment alternatives, accompanied with data necessary to assess affordability, benefits, and costs.

The establishment and use of a structured vehicle allocation methodology (VAM) by Federal agencies ensures that the agency vehicle fleets are not over-costly and both correctly sized in terms of numbers and appropriate for accomplishing agency missions. A VAM provides managers with a standard way to document the objective criteria of a vehicle fleet for a specific entity within an agency and make informed decisions in fleet acquisition, management and disposition.

Market surveillance is an on-going process, one that is not driven by a specific planned acquisition. The IPT technical staff should keep abreast of the latest capabilities and performance through trade journals, advertisements, sales brochures, etc. Market research is undertaken with respect to a specific planned acquisition; it is the proactive part of market analysis. In market research, the IPT seeks information through research of published information, talking to other agencies that have conducted similar market research, and/or going directly to the market for information.

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I.5.1.2) Market Research Strategy

Once a clear agency need has been identified, the IPT should begin with a plan to conduct both market surveillance and market research to ensure that as many alternative solutions as possible are identified for consideration. The plan should define the use of broad area announcements, requests for information, or requests for proposals to solicit information on alternative concepts from a broad base of qualified firms. When these documents are issued, contractors should be provided with mission performance criteria, life-cycle cost, and any other factors that the agency will use in the evaluation and selection of the solutions. Emphasis should be placed on solutions that are currently available (i.e., do not require significant development) with little risk in cost, schedule, performance, and technical obsolescence. This means commercial items (CI) or non-developmental items (NDI) where little or no development effort is required are preferred. However, contractors should be encouraged to provide any solution they believe will meet the agency's needs, including providing the capability contemplated through a service contract or lease. The key is to not restrict potential offers by specifying requirements too narrowly.

Agencies should encourage contractors to provide any solution they believe will meet the agency's needs. The key is to not restrict potential offers by specifying requirements too narrowly.

Agencies can, through market analysis, seek preliminary information on alternatives available in the commercial sector. If the information does not provide a clear indication that acceptable solutions are available, it may be necessary to award contracts to explore alternative design concepts. These contracts should be of relatively short duration and within defined dollar levels.

When market capability is not sufficient to fulfill the agency's entire performance gap, the IPT should carefully weigh the extent of increased capability that can be obtained quickly within budget limits against the delay in capability improvement, risk of failure, and costs of a development effort to achieve the desired capability. In many cases, evolutionary changes in capability over time are the most cost-effective approach. Timely technical reviews should be made of the alternatives to ensure the orderly elimination of those that are least attractive.

There may be instances in which several alternatives offer essentially the same benefits and costs. In those instances, it may be necessary to conduct comparative demonstrations, where the different alternatives are actually tested in the operational environment for a period of time, to determine the best product.

The IPT should engage potential suppliers in an advisory process in which the government provides a general description of the scope or purpose of the acquisition (such as a Request for Information, which could include a Statement of Objectives) and invites potential offerors to submit information that allows the Government to advise the offerors about their potential to be viable competitors. By doing this, the government enables potential vendors to more wisely use their internal resources, such as bid and proposal money or independent research and development funds, to come up with the best solutions for the government's needs.