Following are excerpts from a recent Congressional Research Service report on recent policy guidance from the Obama administration on the issue of which jobs are subject to contracting out.

On September 12, 2011, the Office of Federal Procurement Policy (OFPP) within the Office of Management and Budget (OMB) issued its final policy letter on the Performance of Inherently Governmental and Critical Functions (“Policy Letter 11-01” or “final policy letter”). Scheduled to take effect on October 12, 2011, the policy letter represents the Obama Administration’s guidance for executive branch agencies on (1) identifying inherently governmental and critical functions; (2) ensuring that only federal employees perform inherently governmental functions or work that “otherwise needs to be reserved to the public sector;” and (3) managing functions that are closely associated with inherently governmental functions and critical functions. The policy letter was issued, in part, under the authority of the Duncan Hunter National Defense Authorization Act for FY2009 (NDAA’09) and President Obama’s memorandum of March 4, 2009, on government contracting. Section 321 of NDAA’09 tasked OMB with (1) reviewing existing definitions of “inherently governmental function” to determine whether such definitions are “sufficiently focused” to ensure that only government personnel perform inherently governmental functions or “other critical functions necessary for the mission of a Federal department or agency;” (2) developing a “single consistent definition” of “inherently governmental function” that would address any deficiencies in the existing definitions, reasonably apply to all agencies, and ensure that agency personnel can identify positions that perform inherently governmental functions; (3) developing criteria for identifying “critical functions” that should be performed by government personnel; and (4) developing criteria for identifying positions that government personnel should perform in order to ensure that agencies develop and maintain “sufficient organic expertise and technical capacity” to perform their missions and oversee contractors’ work. President Obama’s March 4, 2009, memorandum similarly charged OMB with clarifying when outsourcing is “appropriate.” OFPP issued a proposed policy letter in response to these requirements on March 31, 2010. However, the proposed policy letter differed from the final one in focusing on “work reserved for performance by federal government employees” and in other ways discussed below. This report supersedes an earlier report analyzing the proposed policy letter, CRS Report R41209, Inherently Governmental Functions and Other Work Reserved for Performance by Federal Government Employees: The Obama Administration’s Proposed Policy Letter, by L. Elaine Halchin et al.

Congressional interest in inherently governmental functions may persist notwithstanding the issuance of the final policy letter. The Commission on Wartime Contracting included recommendations based on perceived deficiencies in existing guidance on inherently governmental functions in its final report to Congress, and several Members of the 112th Congress have introduced legislation regarding inherently governmental functions (e.g., H.R. 1474; H.R. 1540; H.R. 1949; H.R. 2017; S. 709; S. 785; S. 991; S. 1253; S. 1254; S. 1546; S. 1573).

Final Policy Letter

The final policy letter articulates that it is the “policy of the Executive Branch to ensure that government action is taken as a result of informed, independent judgments made by government officials.” In support of this policy, the letter directs agencies to do three things. First, they must ensure that work that should be performed by federal employees is properly reserved for government performance. As discussed below, agency responsibilities under this requirement depend on whether the work involves an inherently governmental function, a function closely associated with an inherently governmental function, or a critical function. Second, agencies are directed to take steps to employ and train an adequate number of government personnel to administer contracts when work is contracted out, particularly when contractors engage in functions that are critical or closely associated with an inherently governmental function. Third, agencies are required, as part of strategic human capital planning, to dedicate a sufficient amount of work to performance by federal employees in order to build competencies, provide for continuity of operations, and retain institutional knowledge of operations.

The policy letter also directs agencies, when reviewing outsourced work for potential insourcing, to place a lower priority on reviewing work performed by small businesses that is not inherently governmental, particularly if the agency has not met its small business goals. Agencies are also directed to give small businesses preference when determining who performs the private-sector work that remains after related activities are insourced. Specifically, the letter tells agencies to use the “rule of two”—which generally requires that a contract be “set aside” for small businesses if at least two small businesses are capable of performing it at a fair market price—when deciding whether small or “large” businesses should perform the remaining private-sector work. The policy letter also imposes other requirements on federal agencies, including (1) implementing procedures to comply with the letter’s requirements and reviewing those procedures at least once every two years; (2) ensuring employees have regular training to understand their responsibilities; (3) conducting periodic reviews of internal management controls; and (4) designating at least one senior official as accountable for agency compliance with the letter.

Inherently Governmental Functions

As part of the requirement that certain work be reserved for federal employees, the policy letter directs agencies to ensure that contractors do not perform inherently governmental functions. The letter defines an “inherently governmental function,” in accordance with the Federal Activities Inventory Reform (FAIR) Act (P.L. 105-270), as “one that is so intimately related to the public interest as to require performance by Federal Government employees.” It goes on to explain that the term includes those functions requiring “the exercise of discretion in applying Federal Government authority or the making of value judgments in making decisions for the Federal Government, including judgments relating to monetary transactions and entitlements.” The policy letter establishes two tests for identifying inherently governmental functions. Under the “nature of the function” test, functions involving the exercise of U.S. sovereign power are inherently governmental due to their “uniquely governmental nature” and regardless of any “type or level of discretion associated with them.” Under the “exercise of discretion” test, agencies may not contract out functions involving an exercise of discretion that would commit[] the government to a course of action where two or more alternative courses of action exist and decision making is not already limited or guided by existing policies, procedures, directions, orders, and other guidance that: (I) identify specified ranges of acceptable decisions or conduct concerning the overall policy or direction of the action; and (II) subject the discretionary authority to final approval or regular oversight by agency officials. The policy letter also provides broad examples of the types of functions included in the definition of inherently governmental function, such as the interpretation and execution of federal law so as to bind the government to take or not take action; advancing U.S. interests through various means; and controlling federal employees or the acquisition and use of U.S. property.19 Additionally, the letter’s Appendix A lists specific examples of inherently governmental functions. The letter also explains that the definition would not typically include gathering information for or providing advice to government officials, or “ministerial functions” (e.g., building security, operation of cafeterias, housekeeping).

The policy letter requires that agencies take certain steps to ensure they do not contract out inherently governmental functions. Before issuing a solicitation, agencies are required to determine that none of the requirements are (1) designated as inherently governmental in statute, (2) listed among the functions included in Appendix A, or (3) qualify as such under either of the two tests described above. Agencies also must establish that the contractor’s role would not unduly limit the agency’s ability to consider options or alternative courses of action.

Ongoing agency responsibilities include reviewing contractor performance and agency contract management.22 If agencies find that contractors are performing inherently governmental functions, they are instructed to reestablish control over these responsibilities by strengthening oversight, insourcing the work through the timely development and execution of hiring plans, refraining from exercising options under the contract, or terminating all or part of the contract.

Functions Closely Associated with the Performance of Inherently Governmental Functions

As part of the directive that certain work be reserved for federal employees, the policy letter reiterates existing statutory requirements that agencies give “special consideration” to using government personnel to perform functions closely associated with the performance of inherently governmental functions. The letter also directs agencies to take care that contractors engaging in such functions do not cross the line into performing inherently governmental functions. The policy letter does not define functions closely associated with inherently governmental functions, but lists examples in its Appendix B. Under the policy letter, any agency contracting out a function closely associated with the performance of an inherently governmental function must determine in writing before issuing a solicitation that it (1) has given special consideration to having federal employees perform the work; (2) has the resources to give “special management attention” to the contractor’s performance and related issues; and (3) will comply with the agency responsibilities laid out in the policy letter’s Appendix C. Appendix C requires agencies do such things as (1) take steps to “limit or guide” contractors’ exercise of discretion; (2) assign a sufficient number of qualified government personnel to monitor contractors’ activities; (3) ensure contractors and their work product are reasonably identified when there is a risk that their personnel or work might be confused with those of the government; and (4) take steps to avoid or mitigate contractor conflicts of interest.

Critical Functions

The policy letter requires that agencies ensure “federal employees perform and/or mange critical functions to the extent necessary for the agency to operate effectively and maintain control of its mission and operations.” The policy letter defines a critical function as one “necessary to the agency being able to effectively perform and maintain control of its mission and operations.” As noted in the letter, the functions deemed to be critical will differ among agencies, as well as within each agency over time. Critical functions that are not inherently governmental may be performed by contractors provided the agency determines in writing, prior to issuing a solicitation, that it has “sufficient internal capability” (e.g., adequate number of trained employees) so that federal employees maintain control of missions and operations.33 The agency must also ensure it is cost effective to use private-sector contractors.34 Additionally, the letter requires that agencies monitor post-award performance of contracts involving critical functions and take steps to insource these functions (e.g., developing hiring plans, securing funding for in-house capacity) when internal control of mission and operations is at risk due to overreliance on contractors.