FCW Forum | Contracting strategies

Partner or patsy?

The economic downturn gives agencies a tool for negotiating contract discounts — if they use it

I recently had a conversation with a longtime friend whose house burned several months ago. Before the fire, he had been planning some renovations. Now, with the interior of the house largely destroyed, he is undertaking the original renovations and then some.

When my friend spoke to the same service providers about work he had gotten bids on a year ago, he found that the costs are now lower, sometimes by as much as 30 percent. The reason, of course, is the terrible economy. It’s happening all over. The New York Times reported that Starbucks is renegotiating contracts with its suppliers. And I recently agreed to do some outside teaching for 20 percent less than I received for the same teaching a year ago.

Agencies should pay attention to this. Contracting can make an early contribution to lowering government costs. Of course, in a world of trillion-dollar deficits, any short-term contributions would make only a small dent. But it’s important to think about discounts because they provide a chance for contracting folks to show how they can contribute to meeting the government’s needs.

One suggestion I have made is that agencies should be more aggressive in seeking discounts when they are taking time-and-materials bids on new task orders. Companies list their labor rates on the General Services Administration's information technology services schedules, but smart contracting officers know that those are starting points for bargaining, not fixed prices. Many task orders are relatively short, and new ones are awarded all the time. Labor rates on the schedules are explicitly presented as maximums, and even in normal times, agencies are encouraged to seek discounts for larger orders.

And these are not normal times. In this economy, as the examples above indicate, suppliers need to be very aggressive on price to attract customers. If there is ever a time to seek discounts on labor rates, this is it. Last year, the government spent about $1.5 billion on time-and-materials task orders using GSA IT services schedules. A 10 percent savings would be $150 million, while 30 percent — like my friend’s contractors were offering — would be $450 million. A nibble at the deficit? Yes. But there is no reason not to do this.

I don’t think the government should be shy about sending a signal to vendors that it wants them to be especially aggressive on price these days. When the economy was booming, contractors reminded the government that it couldn’t expect much in the way of discounts, given the tightness of the labor market. I am as much in favor of good government/industry relationships as anyone, but we need to distinguish between being a partner and being a patsy. And IT vendors are not suffering as much as firms in the rest of the economy because the government, unlike many others, is still buying.

I spoke with a young contracting officer about this idea. He liked it but said contracting folks at his agency weren’t thinking about the economic situation’s implications for how they handle contracting. That’s an unfortunate sign of the current environment: Nothing in the rules requires this, so no one feels compelled to do it. Frontline contracting and program folks might need a signal from senior leaders — maybe the incoming director of the Office of Management and Budget? — that there is an expectation government should be doing this.

About the Author

Kelman is professor of public management at Harvard University’s Kennedy School of Government and former administrator of the Office of Federal Procurement Policy. Connect with him on Twitter: @kelmansteve

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