Contracting conundrum

A Legal View: Defense agencies have less discretion than other agencies when it comes to outsourcing

OMB A-76, Proposed Revision

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As noted in my last column, a Defense Department agency trying to decide whether to outsource a function that a commercial entity could perform is limited by a unique statutory restriction that prohibits outsourcing unless doing so will reduce the cost to the government. Until recently, this was consistent with Office of Management and Budget Circular A-76 guidelines for public/private competitions, which apply to all federal agencies.

However, OMB is proposing to amend its guidelines to let agencies consider factors other than cost. Unfortunately, the proposal won't help Defense agencies, which will remain subject to the special statutory limitation. Until Congress changes the statute, DOD agencies have only a couple of alternatives.

In many cases, the best option for a DOD agency is using a cost-plus type of contract instead of the more common fixed-price type. When private- sector offers are based on a fixed-price contract, a DOD agency cannot consider anything but the offered prices, even when there are obvious differences in the offerors' proposals. In a number of private-sector offerors' protests, the General Accounting Office has found errors in their proposals or evaluations that were sufficiently clear to sustain the protest, but GAO was unable to provide any remedy other than reopening the competition or canceling the procurement.

With a cost-type contract, in contrast, the agency is required to conduct a cost-realism analysis to determine the real cost of each offeror's proposal. As part of its analysis, the agency must "normalize" differences in the offerors' assumptions about the job so that a meaningful comparison is made among the offerors. The agency is not limited to a consideration of the costs the offerors state. If an offeror or evaluator makes a mistake, it is easily correctable in most cases without having to start over. Notably, the only GAO decision in which it was able to determine that the private- sector protester was entitled to the award involved a cost-plus contract.

Another possible approach to the problem would have agencies identify the key "discriminators" between the best private-sector proposal and the government's proposal, and assign specific monetary values to each one in an attempt to quantify the noncost differences. Many "best value" procurements of information technology contracts were conducted this way in the early 1990s by agencies that believed their decisions to buy higher-cost solutions were being second-guessed in the bid protest forums.

The quantification of discriminators in best value procurements was quickly abandoned as too complex and error-prone. Agencies should be cautious about resurrecting the idea in the outsourcing context.

Of course, the best answer to this problem would be a repeal of the Defense statutory restriction. There is simply no reason that Congress should give Defense agencies less discretion than civilian agencies in this way

Peckinpaugh is corporate counsel for DynCorp in Reston, Va. This column represents his personal views.

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