Share-in-savings on life support

Congress fails to renew authority for acquisition method

The agency councils that propose procurement rules have withdrawn a measure that would have set parameters for share-in-savings contracting, according to a recent Federal Register notice. The move throws the future of share-in-savings contracting into doubt.

The rule, initially proposed by the Federal Acquisition Regulation Council and the Defense Acquisition Regulation Council would have set parameters for share-in-savings contracting, authorized by the E-Government Act of 2002. Under such contracts, companies receive payments based on the amount of money they save federal agencies rather than a fee based on cost plus a fixed profit margin. Congress did not renew the statutory authority, which expired in September 2005.

Larry Allen, executive vice president of the Coalition for Government Procurement, said the expired authority and the withdrawal of the rule don’t necessarily spell the end for share-in-savings contracting in the government. However, the concept did suffer from the latest developments, he said.

Innovative agencies might continue with share-in-savings contracting without the rule in effect. However, letting the authority lapse shows the government’s growing aversion to risk, Allen said. Recent changes in procurement have leaned toward oversight and a more precise adherence to regulation instead of innovative approaches, he added.

“The climate right now of fear discourages innovation,” said Ken Buck, who recently resigned as director of the General Services Administration’s share-in-savings contracting program. He said innovation is seen as a danger to compliance with regulations.

Alan Chvotkin, senior vice president and counsel at the Professional Services Council, said he was frustrated by the lack of guidance for share-in-savings contracting.

“I would hope that the withdrawal of the rule does not signal the federal government’s dissatisfaction with share-in-savings contracts,” Chvotkin said. He added that the organization supported share-in-savings as an option for some contracts.

Rep. Tom Davis (R-Va.), chairman of the House Government Reform Committee, was disappointed that the contracting authority was not included in the Department of Defense Authorization Act for fiscal 2006.

“That said, I have not given up and will explore other options to renew this authority. I remain convinced that [share-in-savings contracting] can be a valuable tool in helping modernize our government in this era of tight budgets,” Davis said through a spokesman. He has introduced new legislation to reinstate the concept.

Early on, many administration officials were not satisfied with share-in-savings contracting. At a congressional hearing in 2003, Angela Styles, a former administrator of the Office of Federal Procurement Policy at the Office of Management and Budget, said OMB opposed expanding the E-Government Act’s authority for share-in-savings contracting. That authority allowed agencies to end contracts without fully paying the termination costs, she said.

“Agencies should account fully for the government’s obligations when they enter into contracts,” she said.

Buck said the lack of administration support hurt the contracting approach.

A July 2005 Government Accountability Office report states that agencies shied away from the contracts because of the lack of specific rules and a general belief that the contracts don’t offer worthwhile returns on investment. As a result, share-in-savings contracting remained largely unused and untested.

Selfish politics and ill-founded technical appropriations law caused share-in-savings contracting to fail, said Steve Kelman, a professor at the Harvard University Kennedy School of Government and a columnist for Federal Computer Week. He called the rule’s withdrawal “a sad event for innovative government contracting.”

Share-in-savings contracting was the “ultimate in pay-for-performance contracting,” said Kelman. If the vendors did not save the agency money, they didn’t get paid.

It's all about riskThe Government Accountability Office found that until 2005 no agency used share-in-savings contracting. Through such contracts, the money companies make on a contract is tied to the amount they save the government.

Experts say risks in share-in-savings contracting have hindered its widespread use. “It’s all about risk,” said Neal Fox, a former General Services Administration official and now a consultant.

The agency and the private contractor must be able to calculate the baseline cost to determine the amount the government saves and the contractor earns.

Here is an example of how share-in-savings contracting might work in the construction field: A contractor would fix a building by installing new windows, a high-efficiency furnace and an air conditioner. Those improvements would result in lower utilities bills; thus, a measurable amount of money is saved. The contractor would get paid based on a negotiated percentage of the savings, and the government would have a smaller utility bill to pay.

Information technology services are more complex because many factors make it difficult to calculate a simple baseline cost, Fox said. That makes it a risky proposition.

“If the baseline is not accurate, the savings calculations are off the mark,” Fox said. “Couple that with the criticism that contracting personnel get if they do anything wrong, and you see what doomed this good idea.”

— Matthew Weigelt


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