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A Navy contract awarded two years ago with a creative performance-based pricing structure was poorly written and implemented, leading the government to pay too much for services and potentially making the contract more expensive than if the work had stayed in-house, according to a recent audit report.

In early 2005, the Navy completed a public-private job competition, resulting in a contract with Shaw Infrastructure Inc. to provide environmental services such as laboratory testing, waste water treatment and site remediation at the Public Works Center in San Diego. The contract uses firm fixed-price agreements for recurring work and task orders for one-time projects, and is performance-based. The Defense Department has backed performance-based arrangements as part of an effort to enhance accountability.

But in a Defense inspector general review, investigators found that poor implementation of performance-based clauses has left Navy officials unable to effectively monitor and manage the contractor's work.

Inspectors also found that the contractor's fixed payment structure is not aligned with variable reimbursements to the center based on actual services delivered. When the contractor workload in some areas turned out to be about half of what was expected, vague language left officials unable to negotiate better terms.

In addition, under task orders, the Navy paid labor rates higher than those originally negotiated, overpaying by about $1.4 million for the first 18 months. If the agency continues to accept the higher labor rates, the Navy will pay about $6.6 million more than was negotiated over the remaining three years of the contract, reviewers wrote, wiping out the cost advantage of using the private company rather than government employees.

The IG office made numerous recommendations to improve contract management and control payments, with which the Navy agreed.

Procurement experts are divided on the use of performance-based contracting. A panel of government and industry specialists, convened under the Services Acquisition Reform Act, found that in a sampling of contracts that were designated as performance-based, only 38 percent implemented the strategy well, while about 23 percent used some aspects of it and 40 percent did not use it at all. (The figures do not add up to 100 percent due to rounding.)

Based in part on that finding, the panel recommended that the Office of Management and Budget drop a quota that 40 percent of contract dollars be covered by performance-based agreements.

The IG's findings also raise questions for the review of other public-private competitions carried out under OMB's Circular A-76 rulebook. In an April memorandum, OMB directed agencies to validate the savings achieved from a sampling of competitive sourcing decisions. Those analyses could support critics' arguments that many work agreements, like this one, end up with unexpectedly high costs that eat into projected savings.

COMMENTS

• Prior to the announcement of the A-76 competition, the Navy Public Works Center Environmental Department was an award winning business that prided itself on excellent customer service at an competitive price. State-of-the-art process improvement methods were employed to monitor and adjust our performance. I would challenge any private sector environmental firm to have a more robust management plan. After the announcement, morale plummeted and cost of doing business increased due to the exhaustive labor requirements over the 2 year period required to develop an MEO. Then, our honest portrayal of our labor costs was undercut by a private company that historically never charged those low rates and obviously could not do so during the execution of the contract. Now, quality government employees had to find other jobs and I retired after the MEO was completed simply because what was once and excellent career had turned into a nightmare job. All of this mess was due to an A-76 process that is flawed and should be scrapped. Steve Sanford Posted November 30, 2008 3:30 PM
• Our agency went A-76 in 1988 first with a Cost-Plus contract to establish numbers. Since then we have been Fixed-Price. The savings have been substantial with an average of 42 percent. The quality is just as good or better and the reaction time is greatly improved. Not knowing how others operate their contracts, we have two QAS that are always looking over the contractor and they conduct weekly backlog meetings with the contactor managers. Maybe it does not work everywhere for one reason or another, but with us it does and releases more funds for scientic research. Richard Posted May 15, 2007 8:51 AM
• Interesting article. Not only does the IG report not find that the outsourcing has lead to higher costs, it also notes that the Navy has addressed the IG's concerns regarding transitional performance in the first 6 months of performance. Remember too that any discussion of A-76 savings needs to address the savings from baseline (pre-A-76) in-house costs to MEO and contract prices not just the difference between offers. Its easy, too easy to say that performance oversight of the contractor needs to improve. The oversight of performance quality of the in-house workforce was nothing like this - if it existed at all - prior to the competition. No, the savings are real as are the performance improvements - particularly from baseline. That would not have happened in the absence of the competition. Probably best to read the report not just the press release or just the headline. Washington Posted May 11, 2007 8:04 AM