Many Recovery Act contracts fall into high-risk category

Cost-reimbursement agreements are prevalent, despite OMB’s warning about potential for waste and abuse.

More than half the Recovery Act contracts federal agencies have awarded are cost-reimbursement agreements, which the Obama administration has repeatedly described as risky and prone to abuse.

The Recovery Act states that "to the maximum extent possible," agencies are to utilize fixed-price contracts, in which the government generally pays a flat fee for a product or service. "Fixed-price contracts ... provide maximum incentive for the contractor to control costs and perform effectively and impose a minimum burden upon the contracting parties," Office and Management and Budget Director Peter R. Orszag wrote in a February memo to agencies regarding Recovery contracts. "These contracts expose the government to the least risk."

But it appears Orszag's message has gotten limited traction. As of Aug. 28, agencies had obligated $10.18 billion in stimulus contracts. Only $4.38 billion -- 43 percent -- are firm fixed-price agreements, according to figures on the Federal Procurement Data System Web site.

Comparatively, data shows agencies have spent $5.44 billion -- 53 percent -- on cost-type contracts, in which the government reimburses companies for allowable costs. Cost-plus award-fee contracts, in which the contractor is eligible for a bonus by meeting certain performance standards, accounted for $3.6 billion.

Other vehicles, such as time-and-materials and labor-hour contracts, represent a small percentage of the overall Recovery contracting total. The list did not specify a contract type for the other $13 million in obligations.

In a March 4 memo to federal agencies, President Obama noted excessive reliance on cost-reimbursement contracts "creates a risk that taxpayer funds will be spent on contracts that are wasteful, inefficient, subject to misuse, or otherwise not well-designed to serve the needs of the federal government or the interests of the American taxpayer."

That message was reiterated in a July OMB contracting memo that directed agencies to work aggressively to avoid using cost-type contracts and to mitigate the government's risk when they are deemed necessary. The memo described cost-reimbursement contracts as high risk because they provide no incentive for the contractor to control costs."

"The administration is committed to ensuring that agencies have the skills and capacity to plan effectively, award and administer contracts, and carry out programs funded by the Recovery Act," said OMB spokesman Thomas Gavin. "We continue to review the use of a governmentwide contingency contracting corps in limited circumstances. We are also encouraging agencies to use various existing authorities and options such as the direct-hire authority or coordinated interagency recruitment efforts. We will continue to ensure that contracts and grants are awarded with diligence and oversight."

Agencies often use cost-type contracts when uncertainties in the project make it difficult to estimate costs accurately, or when time constraints limit their ability to determine a firm fixed price -- a frequent challenge with the stimulus.

"With a fixed-price contract, the requirements need to be very well-defined. And, historically, the government has had a difficult time of doing that," says Robert Burton, who was deputy administrator of federal procurement policy at OMB during the Bush administration and now is a partner in the government contracts group at the Washington law firm Venable LLP.

The Recovery Act requires agencies to post summary information for all nonfixed-price contracts -- including why that method was chosen -- at Recovery.gov.

The percentage of fixed-price contracts likely will rise as state and local governments begin reporting their spending. A large share of nonfederal contracts will go to construction and public works projects, both of which rely heavily on fixed-price awards.

Of the more than $10 billion obligated since the American Recovery and Reinvestment Act was signed into law more than six months ago, roughly half are Energy Department contracts, predominantly for the management and operations of government-run laboratories, according to federal procurement data.

According to Government Executive reports, the majority of Energy's Recovery awards went to some of the largest government contractors.

Nonetheless, small businesses have earned $2.25 billion in prime contracts, just under the government's goal of 23 percent, the data shows. Small businesses also are winning Recovery Act funds through subcontracts, although that data is not yet publicly available.

These figures do not include contracts let by state and local governments, both of which will be available in September at Recovery.gov.

Through July 31, almost $24 billion in Recovery projects -- including federal, state and local spending -- was advertised for competitive bidding, with $14.7 billion already awarded, according to Onvia, a Seattle-based IT firm that tracks stimulus spending through its Web site, Recovery.org.

More than $50 billion in stimulus funds released by the federal government are allocated to projects that have not yet begun, Onvia said.

The Federal Procurement Data System shows encouraging signs about the level of competition for Recovery contracts. Agencies awarded $7.5 billion, or 73 percent, through full-and-open competition.

But competition data can be misleading. Most of the contracts awarded through full-and-open competition -- amounting to more than $6.3 billion -- were modifications of pre-existing contracts that were signed and competed before the stimulus became law, the data show. The practice of issuing new contracts or task-and-delivery orders on existing awards has been a method agencies use to gets funds out the door quickly without holding lengthy new competitions.

Another $1 billion was awarded through "full-and-open competition after exclusion of sources" -- most often for contracts set-aside for firms in small business categories. And competitive delivery orders on existing contracts accounted for $306 million.

Just under $950 million in Recovery contracts was categorized as either "not competed" or "not available for competition." For almost $200 million, contracting officers did not specify whether contracts were awarded competitively.

The Recovery contracting data in the government's primary contracting database, USASpending.gov, is out of date. On Monday, the site indicated that agencies had spent only $4.5 billion in stimulus contracts.

Administration officials acknowledge USASpending.gov is undergoing continuous upgrades to make it more timely and precise. "There are some chronic issues that remain unresolved, particularly with regard to the Web site's completeness and accuracy" OMB's Gavin said. "We are actively addressing those concerns, and there is steady progress."

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