GAO: Share-in-savings contracts can be difficult

Share-in-savings contracting, which can be an effective tool in motivating contractors to generate savings for clients, can be especially difficult to do in the federal government, a new General Accounting Office report says.

Two congressmen asked GAO to look at how share-in-savings contracting is done in the private sector since they are rarely used in the federal government.

GAO studied four uses of the contracts, including one with the Texas Online Authority in which the compensation to contractor BearingPoint Inc. of McLean, Va., was linked directly to results. Under the contract, BearingPoint created a Web site to provide state and local government services to businesses and citizens. The contractor provided hardware, software and staffing at no cost to the state. BearingPoint will get 90 percent of the gross revenues from use of the site until it recovers initial costs. Then the company gets half of the revenue. BearingPoint determined that it would recover its costs by 2006 through fees levied to use the site.

GAO found that some of the key elements of successful share-in-savings arrangements may be difficult to do in government. One example: Calculating a baseline on an IT job can be challenging because the information necessary for calculations may not be available, or it may be difficult to isolate direct savings from a reduction in the time an employee spends on a new task that replaces an old task.

The GAO found that four elements were necessary for successful share-in-savings contracting:

  • A clearly defined outcome, such as savings by eliminating inefficient business practices or identifying new revenue centers.

  • Incentives for both client and contractor to use the technique, such as a lack of client funds and contractor confidence the financial results they produce will provide a profit.

  • A baseline and performance metrics to define the client’s costs and revenue before to the job.

  • Client commitment to implement contractor recommendations.

  • The Office of Federal Procurement Policy said that the report findings will be taken into account in devising future policy on using share-in-savings contracting, and that agencies wanting to do this type of contracting need to do thorough planning, secure management commitment and identify clear outcomes and measures agreed upon by both the agency and the contractor.

    The Clinger-Cohen Act of 1996 authorized pilot share-in-savings programs for IT solutions that would improve mission-related or administrative processes. The E-Government Act passed last year expands agency ability to enter into share-in-savings contracts in fiscal years 2003 through 2005 and gives incentives to federal agencies.

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