Competing Objectives

The White House's ambitious agenda is running head on into its desire to cut contracting. Something has to give.

Within his first few months in office, President Obama signed the largest economic recovery package in a generation, significantly boosted government assistance to banks and auto manufacturers, and augmented the role of U.S. troops in Afghanistan. No matter your political affiliation, it is undeniable that these policies have expanded the missions of federal agencies, and by proxy, those of government contractors. History has shown that when the responsibilities of the federal government intensify-from the growth of Medicare to the creation of the Homeland Security Department-agencies must turn to the private sector for assistance. The result has been a steady uptick in procurement spending.

But the administration is vowing to buck that trend. In July, the Office of Management and Budget unveiled a bold vision for reshaping, and ultimately reducing, government's dependence on contractors. The guidance, authored by OMB Director Peter R. Orszag, calls for agencies to save 7 percent from their baseline contract spending-3.5 percent in fiscal 2010 and another 3.5 percent the year after.

Agencies also must reduce by 10 percent their use of high-risk procurements, including sole-source, cost-reimbursement and time-and- materials contracts. OMB expects these reforms to save $40 billion annually.

While Orszag offered ideas for maximizing savings-consolidated purchasing, better market analysis and enhanced upfront planning-agencies are left to determine the best approach. "We are telling them that it's the time to be innovative and to take some smart risks with trying to do things a bit differently to get better performance," says Jeff Liebman, executive associate director at OMB.

Skeptics see the administration's metrics as unequivocally arbitrary and its goals as unrealistic. "When you say you are going to cut contractors it means one of two things: you are either increasing the size of the government in terms of personnel, or you are going to provide less services," says Steven L. Schooner, associate professor of law and co-director of the government procurement law program at The George Washington University Law School. "And, neither one is an option right now."

An Uphill Climb

Putting the brakes on federal acquisition spending will take a herculean effort that defies recent history. Since 2000, government contracting has grown from a $200 billion industry to a record $529 billion in 2008-a pace more than twice as fast as any other discretionary federal spending.

OMB concedes that spending growth will persist, even if agencies find considerable savings. "We are going to continue to need the goods and the talents of contractors for us to be effective," Liebman says. "And I suspect the trend will continue to be up in terms of what we spend on contracts. But because this is a rising share of what the government does, it has to be something that we manage better."

The goal of the memo, Liebman says, is not to focus blindly on aggregates while ignoring the annual budgetary and policy fluctuations that cause procurement totals to change year by year. What is important to OMB, he notes, is that agencies show concrete evidence that their reforms are saving money relative to what would have happened in the absence of their actions. In other words, if contract spending was increasing at the Interior Department by $50 million per year, the agency would now be expected to slow that pace of spending growth so that by the end of the next two fiscal years it is 7 percent below where it would have been without the reforms.

"We issued guidance that was designed not only to save money but get better performance and to rebalance the decisions about which activities should be done inside so the government can keep control of its decisions, and which ones can deliver the best value to the taxpayer by being done outside," Liebman says. "The guidance encouraged agencies to work as hard as they can to achieve efficiencies."

But the administration appears to be sending mixed messages in terms of how it views acquisition. OMB has instructed agencies to be more cautious about how they use contractors while simultaneously offering guidance on how to rapidly spend approximately $60 billion in Recovery Act contracting funds.

"We are awarding contracts for a bunch of things we didn't even think of before," Schooner says. "And we are not spending more because the acquisition community has run amok. We're spending more money because the government's needs exceed the personnel available to perform those missions."

While much of the increase in contract spending during the past decade can be attributed to the wars in Iraq and Afghanistan, the formation of DHS and the cleanup of New Orleans after Hurricane Katrina, agencies are turning more to the private sector for essential mission-related functions. Contractors run government laboratories, clean up Superfund sites and manage veteran's health records. Despite a noticeable recent hiring spree of government workers, most contracting observers agree that the bulk of these tasks will not be brought in-house anytime soon.

"It's naïve to think the government is spending money for the sake of spending money," says Jaime Gracia, vice president of federal services for the acquisition consulting firm Concepts & Strategies Inc. "It's spent for a reason, and that reason has to change for money to stay inside the Treasury. Until you change the mission, you are not going to change the spending."

According to Larry Allen, president of the Coalition for Government Procurement, reducing total contracting spending is "a nice policy goal," but it fails to align with the administration's larger priorities. "It's not like this administration's strategic plan is for the government to do less," he says. "It would seem that a progressive agenda would lead to more government activity, one ancillary effect of which would be an increase in contracting."

While the memo cites a few examples of agencies that are terminating unnecessary contracts, administration officials say most of the proposed savings will come from making the acquisition system cost less and operate more efficiently. "The goal is to still buy 100 widgets," says Chuck Gherardini, acting director at the Environmental Protection Agency's Office of Acquisition Management. "Just do it 3.5 percent cheaper through better contracting procedures."

As it has in the health care debate, the administration is betting that widespread inefficiencies permeate the procurement system and streamlined and reengineered business practices can save taxpayers billions. But some fear the lack of concrete implementation guidance and accountability measures in the Orszag memo could lead agency officials to treat it as little more than a theoretical exercise.

"Agencies are going to play tricks and fudge numbers," says Raj Sharma, president of the Federal Acquisition Innovation and Reform Institute. "I don't think this guidance will lead to sustainable change and reduction." In September, the FAIR Institute sent a letter to OMB recommending that it lower its 3.5 percent savings requirement for fiscal 2010 so agencies have more time to conduct careful planning assessments. To compensate, officials say, the goals for fiscal 2011 could be increased. "It takes time to develop a savings and efficiency plan," Sharma says. "And without some flexibility we worry that there could be some unintended consequences."

Where to Start?

Rooting out 7 percent in inefficiencies could be easier said than done. For more than half a decade, agencies have employed chief acquisition officers whose primary goal has been to monitor the performance of contracts, to increase full-and-open competition and to manage procurement policy strategically. Some suggest the lowest-hanging fruit in terms of contract savings might have been plucked long ago.

David Drabkin, deputy associate administrator for acquisition policy at the General Services Administration, says potential savings will be unearthed without making "draconian cuts." But he admits it will require making difficult choices. "I don't think at GSA there is 3.5 percent of inefficiencies in overall procurement spending," Drabkin says. "As a whole, the government acquisition workforce are good stewards of taxpayer dollars. So, to achieve the 3.5 percent there will have to be some hard decisions." GSA, like other agencies that agreed to discuss the memo with Government Executive, has yet to finalize its contracting plan.

At EPA, officials are examining whether savings can be achieved by breaking large cleanup projects into smaller tasks and converting some cost-plus contracts to fixed price. "Taking the time to examine this is a very beneficial exercise for us," Gherardini says. "Whether we will find the 3.5 percent, I don't know."

The Homeland Security Department is taking a long-range view of consolidating and realigning its $15 billion annual contract spending. It is reviewing contracts as they come up for renewal to determine whether they should be continued, modified or canceled, according to a senior DHS official who asked not to be identified. The department also expects to accrue a large percentage of the $550 million it needs to save in fiscal 2010 through insourcing.

"A good portion of the strategy . . . will be the examination of the contractor workforce for the department and from a mission-critical or essential function standpoint [determine] what makes sense to bring back in house," the official says. In October, DHS announced it had identified roughly 3,200 contractor jobs that will be converted to federal positions.

Another key component will be aligning the services and technology throughout the 200,000-employee agency. DHS recently saved $52 million by moving to an integrated firm for its technology licenses, the official says. A similar enterprisewide strategy could be used to consolidate its eight financial management systems.

Edward Simpson, director of the Office of Procurement and Assistance Management at the Energy Department, agrees that agencies need to take an integrated view of the contracting initiative, incorporating the ideas of the chief financial officer and chief human capital officer. "If you do it just at the contract execution level, you are not going to get the type of savings that the OMB initiative expects you to get," he says.

Energy is looking at potential savings through optimizing its purchase card program, enhancing strategic sourcing on its large laboratory contracts and streamlining contracts with duplicative or unnecessary requirements. But Simpson is less confident that savings can be achieved by upgrading the performance of the acquisition system itself. "Improving the processes is tough because they are set out in statute and regulation," he says.

The largest scalpel will be used by the Defense Department, which spent more than $390 billion on contracts in 2008. Congressional cuts to major weapons programs and missile defense systems could generate some savings, but an increased military presence in Afghanistan-where the Congressional Research Service found contractors now outnumber troops-could temper those reductions. Pentagon officials said it was premature to discuss the details of their plan.

Agencies must submit their proposals to OMB by Nov. 2, in time to be included in the fiscal 2010 budget process. Those plans, Liebman says, will not be made public, although OMB expects to provide some level of transparency regarding what agencies have accomplished in their contracting savings.

At What Cost?

Sir Issac Newton said that for every action there is an equal and opposite reaction. Contracting is no exception. For example, an overall drop in contract spending governmentwide could have repercussions for agencies, such as GSA, that rely on fees for providing governmentwide acquisition services. Likewise, an increased reliance on fixed-price contracts, which necessitates that requirements be clearly defined upfront, could slow acquisition delivery and require additional government staffing.

Critics attribute some of the conflict to OMB setting short-term policy objectives when a multiyear strategy-such as dramatically increasing the size, talent and training of the acquisition workforce-is in order. "My fear is that contracts will be turned from cost-type to fixed-price contracts inappropriately," Gracia says. "There will not be diligence in the transition and there will be waste, fraud and abuse and poor outcomes in cost, schedule and performance."

Observers note that fixed-price contracts are not a panacea for reining in contract spending and actually can push costs upward in the absence of rigorous pre-award planning and risk assessments. Moreover, they say efforts to consolidate purchases through strategic sourcing could have devastating consequences for small businesses as large bundled contracts are placed out of their reach.

OMB is concerned about how its policy changes will affect small businesses. For example, the memo directs agencies to boost their level of contract competition in order to drive down costs. But officials working toward that goal are instructed to not target contracts that are set aside exclusively for small businesses. "Whatever techniques that agencies use to meet federalwide cost-savings or efficiency objectives cannot be excuses for underperforming in small business contracting," says Joe Jordan, associate administrator of government contracting business development at the Small Business Administration.

Even seemingly noncontroversial objectives, such as drumming up more competition on a contract, could backfire if not executed carefully-particularly when only one firm has submitted a bid. "Mandating a second, noncompetitive bid is not helpful," Schooner says. "What you want is meaningful competition. But if the whole point of this exercise is to jerk around the private sector and get bids from companies that have no chance of winning, that is not a useful policy."

Industry officials suggest that measuring the number of bids received on a request for proposal is not always a fair metric to judge competition. "You can't force qualified companies to respond to an RFP if they have sound business reasons for not doing so," says Allen of the Coalition for Government Procurement. "One of these may be that market analysis was done before the RFP went out and everyone except for one contractor looked at it and took a pass. That doesn't mean that competition didn't take place. It very much did. It only took place before the RFP was issued."

Administration officials concede that their acquisition reform efforts are complicated and will require difficult trade-offs. But the alternative, Liebman says, is much worse. "If we don't find a way to do these efficiencies there is no way we are going to be able to afford the various priorities, whether it's to rebuild our schools or infrastructure or to keep health care costs down," he says. "All of our key missions, whatever the priority, are going to be challenging. And unless we get more efficient, there is just no way we can afford to meet them all."

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