Unshared Savings

Cash incentives to get companies to foot project costs fizzle.

The slow death of federal share-in-savings programs continued in January with a Federal Register notice announcing that proposed rules to refine the controversial contracting strategy-in which companies agree to assume upfront costs for a project in exchange for a cut of the savings later-had been dropped. Share-in-savings already had suffered a body blow in September 2005, when Congress failed to reauthorize a provision that had encouraged agencies to try the novel approach for information technology investments.

But blood was drawn before that, in July 2005, when Government Accountability Office officials said they couldn't gauge the technique's effectiveness because no agency had picked up on the invitation to test it, an option offered by lawmakers in the 2002 E-Government Act. The law gave agencies an incentive to try out share-in-savings by allowing them to keep the government's portion of cash saved, to be used on other IT investments.

In an assessment of why agencies hadn't gone for the idea, GAO cited several factors, including: uncertainty about how to establish baseline costs from which savings would be tallied; concern that some appropriations still would have to be wrestled from Congress to cover potential contract cancellation costs; and the Office of Management and Budget's delay in issuing guidelines which, just two months before the provision was set to expire, remained unpublished.

It would almost appear that the split savings idea is completely dead. But since the late-January announcement that acquisition rules would not be revised, proponents have been quick to point out that agencies still have the authority to undertake these partnerships with private firms, albeit without the incentives and backing offered under the IT law.

Contracting officers might hesitate to embrace a strategy for which the authority is in limbo, however, and it doesn't help that OMB officials are decidedly mum on the idea-the procurement office has no published position on its use, and said only that it supported this "as well as other incentive-based contracting vehicles."

With congressional overseers setting their sights on procurement misdeeds and auditors flooding the post-Katrina Gulf Coast region, agencies might be more inclined to lie low until the fight plays out.

Ironically, it could be in the realm of energy efficiency savings, one of the first areas where share-in-savings gained momentum, that a successor strategy appears.

Last summer, the U.S. Postal Service announced the award of new overarching contracts for its Shared Energy Savings program. Under those competitively bid regional arrangements, companies will perform audits of postal facilities at their own expense and propose energy-saving upgrades. Postal Service officials then will select which recommendations to follow up on with more in-depth audits and, potentially, financing arrangements with the energy services companies that would do the work.

Julie Rios, executive director of energy initiatives for the Postal Service, says projects will be paid for directly out of the agency's budget, or financing will be arranged based on actual project costs. USPS will retain the right to buy out its future payments and avoid further financing fees. Rios says her agency still is crunching the numbers to determine which projects to self-fund and which to finance.

The setup should avoid one tangle of the share-in-savings model, in which agencies' payment obligations rely on sometimes sketchy baselines and theoretical avoided costs. A major difference in the models could sap support from the Postal Service's approach, though. Under the straight financing plan, contractors don't have the incentive to maximize savings that they would have had if they had been in line for a cut.

But for the Postal Service, the arrangement still spells access to new technologies that otherwise might have been missed. "They don't have to use any capital dollars, which is a real benefit for them," says Jim Dixon, vice president of energy services with ConEdison Solutions, one of the awardees. He said the arrangement is much like one the company offers its commercial customers that want to develop cost-saving technologies.

That should be music to the ears of those who, like the authors of the now defunct share-in-savings provisions, see commercial practices as the key to cheaper, better buying.