Wagner: The cost analysis muddle

Government needs to get a better handle on its overhead and contracting costs

I believe in benefit/cost analysis, and this may put me in the minority in Washington. I think of benefit/cost analysis as a tool for making better decisions. Too many people see it as a tool to justify things they already want to do. Let’s take a look at a simple case — the make-or-buy decision — to see why a good analytical framework would be helpful.

In a make-or-buy decision, people  compare the cost of doing something in-house with the cost of getting it from outside. The benefit is the money saved by going to the cheaper alternative. You can also use the monetary difference to evaluate whether other benefits are worth the additional cost.

Let’s take some examples. Recently, an inspector general criticized a federal agency for using the General Services Administration to manage its task orders under an indefinite-delivery, indefinite-quanity contract. The IG said the money paid to GSA for the work was wasted. This is a classic make-or-buy situation, so any wasted money would be the difference between the amount paid GSA to do the work and the cost of doing it in-house.

In this case, the agency’s evaluators estimated their internal acquisition costs to be zero when they compared the direct cost of salaried employees with the fully burdened rate of contractors.  However, such an analysis assumes that the government has no overhead. Having worked in government for 30 years, I can assure you that the government has overhead. It just  doesn’t measure it.

And that’s the problem: Whoever keeps the worst accounts wins. This is a recipe for stunning misallocation of federal resources. The much maligned A-76 process at least tries to estimate the loaded costs of the internal and external choices. Interestingly, Congress is starting to address the same question for interagency contracts. The current version of the Accountability in Government Contracting Act of 2007 includes a requirement to use fully burdened costs when comparing internal sourcing with interagency contracting.

Let’s not wait another decade for a governmentwide activity-based cost accounting system and rules for overhead allocation. Let’s start now by recognizing that not knowing what something costs
doesn’t make it free. At least, we need to estimate those unknown costs. We also need to recognize that being cheaper on paper may not mean we have the capacity to do the work. Lots of work is contracted out because agencies don’t have the ability to do it internally.

Finally, many of the most important issues in interagency contracting or outsourcing involve far more than simple cost comparisons. They involve strategic questions about core capabilities or the ability to manage a function. The benefits side is every bit as important as the cost side.

I prefer good decisions, so I am going to stick to my belief in the value of using good analysis to make decisions. I also don’t want to be embarrassed by someone pointing out that I can’t do arithmetic.

Wagner (marty.wagner@us.ibm.com) is a senior fellow at the IBM Center for the Business of Government. In 2007, he retired after more than 30 years in government, serving for a time as the acting commissioner of the General Services Administration’s Federal Acquisition Service.

The Fed 100

Save the date for 28th annual Federal 100 Awards Gala.

Featured

  • computer network

    How Einstein changes the way government does business

    The Department of Commerce is revising its confidentiality agreement for statistical data survey respondents to reflect the fact that the Department of Homeland Security could see some of that data if it is captured by the Einstein system.

  • Defense Secretary Jim Mattis. Army photo by Monica King. Jan. 26, 2017.

    Mattis mulls consolidation in IT, cyber

    In a Feb. 17 memo, Defense Secretary Jim Mattis told senior leadership to establish teams to look for duplication across the armed services in business operations, including in IT and cybersecurity.

  • Image from Shutterstock.com

    DHS vague on rules for election aid, say states

    State election officials had more questions than answers after a Department of Homeland Security presentation on the designation of election systems as critical U.S. infrastructure.

  • Org Chart Stock Art - Shutterstock

    How the hiring freeze targets millennials

    The government desperately needs younger talent to replace an aging workforce, and experts say that a freeze on hiring doesn't help.

  • Shutterstock image: healthcare digital interface.

    VA moves ahead with homegrown scheduling IT

    The Department of Veterans Affairs will test an internally developed scheduling module at primary care sites nationwide to see if it's ready to service the entire agency.

  • Shutterstock images (honglouwawa & 0beron): Bitcoin image overlay replaced with a dollar sign on a hardware circuit.

    MGT Act poised for a comeback

    After missing in the last Congress, drafters of a bill to encourage cloud adoption are looking for a new plan.

Reader comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above

More from 1105 Public Sector Media Group