Why 'cost comparisons' need a wide-angle lens

Joe Jordan

A significant difference in cost between private- and public-sector employees may support a switch, says OFPP Administrator Joe Jordan. (FCW photo)

The Office of Federal Procurement Policy is seeking input on cost comparisons between private-sector contractors and federal employees. The challenge, it seems, is in figuring out exactly what to compare.

OFPP officials are developing ways to better compare prices relative to the cost of performance and then figure out the most cost-effective option. They are dealing with current policies and possible new ways to save money and drive better results, according to a Federal Register notice from Feb. 15.

Pitting the private sector against the public sector can help agencies to buy smarter -- a key tenet of OFPP Administrator Joe Jordan's -- and also get one sector to lower prices to avoid losing work, officials say.

"Where the difference in cost between the public and private sectors for performance of the same task is significant, the comparison may support conversion of work from one sector to the other," Jordan wrote in the notice.

As the Office of Management and Budget requires, "agencies should perform a cost analysis that addresses the full costs of government and private sector performance and provides 'like comparisons' of costs that are of a sufficient magnitude to influence the final decision on the most cost effective source of support for the organization."

Jordan wants clear methods for handling cost comparisons, including the principles to guide how agencies conduct a cost comparison and any special considerations when a small business has the contract.

Cost comparisons that simply measure dollars and sense may not reflect the entire picture of a cost-effective option. The contract price is only one part of the cost, said Larry Allen, president of Allen Federal Business Partners.

"My concern is that the analysis will look merely at the price—notice, not cost—the government is paying a contractor to do a piece of work and then say, 'that's what it costs,'" he said.

Federal officials need a wider lens for an accurate picture. For example, a proper analysis should include an assessment of the value of allocating resources to a specific project, making them unavailable for another use.

"So, a strategic-level review is critical in order to know what's truly best for government," Allen said. "I would hope that this is the level of review OMB has in mind here and that they enter into this project with an open mind."

Similarly, Robert Burton, former deputy OFPP administrator, said projects under contract are often short-lived, and agencies must question the wisdom of hiring additional employees who may remain in government for decades after a project is completed. Agencies need to consider the cost of health and retirement benefits.

OFPP has kicked off an initiative to further cut costs as the Obama administration has decreased contract spending and told agencies to buy smarter. Fiscal 2012's total spending on contracts was $35 billion less than in fiscal 2009. To build on these efforts, OFPP is considering cost comparisons as another money-saving approach. The initiative is also tied to Congress's order to publish methods and procedures on their decisions to insource a contract from a small business. Lawmakers made the requirement in the fiscal 2013 National Defense Authorization Act, which President Barack Obama signed into law in January.

"OFPP is striving for consistency and uniformity" and it is a laudable goal, Burton said. Yet since 2008, Congress has blocked OMB A-76 competitions that could serve to find the most efficient organization to do the work. The decades-old policy allows federal agencies to outsource certain tasks if the private sector can perform them more cost-effectively than the government can.

A-76 saved the government $395 million in fiscal 2007 by forcing "agencies rethink how their commercial operations are currently structured and how greater efficiencies can be achieved through reorganization," according to an OMB report released in 2008. In the competitions, federal employees won 73 percent of the competitions.

"Competition—nine out of 10 times—guarantees lowest cost," Burton said.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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Reader comments

Mon, Feb 25, 2013 Jaime Gracia Washington, DC

Transparency and openness will be necessary to ensure a fair process for the taxpayers and small businesses. Given that organizations have already been successfully held accountable for misrepresenting insourcing decisions at the expense of small businesses, this can only be a good thing. Further, the opportunity to verify decisions will help small businesses work with their government counterparts to see what makes the most sense, where the best savings can be realized, but more importantly, what is the best workforce strategy for effective outcomes based on capabilities and skill sets. Regarding poor performance, undefined and poorly written requirements and objectives is often the culprit, given the lack of communications between government and industry. The government often does not know what it wants, and industry is trying to deliver on a moving target. Certainly ERP projects are nothing more than a money pit and a receipt for failure, but improvements in IT have to start with the basics and focusing on the possible.

Thu, Feb 21, 2013

Actually, IT is not a good place to use contractors, because of the institutional knowledge required to maintain complex DoD systems. If you're using contractors on a consulting basis for no more than 3 years to teach your staff how to use new IT tools, that's a good use of contractors. Writing ERPs to replace complex systems is not a good use; to wit the failure rate of ERPs. Even if the contractor succeeds in modifying off the shelf software successfully, it's no longer off the shelf software. Then you're tied into having the system maintained by the contractor and their personnel don't remain to work on your system 25 or more years. If you do have a contract worker, whom you're paying twice as much for, fully loaded, as a comparable civil servant over 25 or more years, what could you possibly be saving?

Thu, Feb 21, 2013

As one of those Feds, I think you have to keep in mind what the end goal is of a contract. If you're talking about services to build a new system, where there is a definite point of completion, then I think contractors are the definite route. When it comes to certain areas, contractors have the advantage because they are able to focus on specific talents and become experts that a government employee never could. My issue is with contracts where the services are expected to last indefinitely. My expertise for instance happens to include knowing all the military systems and how to use them in an integrated fashion. It's taken years of learning and contact development to reach this point (and still have a lot left to learn). And that's just one of many hats I wear. If I were a contractor, there is little chance I could stay in this role and the agency would lose my capabilites the second I left. The point is, government employees should be the norm when institutional knowledge and abilities are required to be maintained. Using a contractor would be like using one to replace a Sergeant Major. Contractors are best when you need expertise that is not inherent to a government role, with IT a great example. Contractors and civilians are two sides of the same coin. We both have a critical role in the mission but efficiency and continuity should be key drivers, not just cost.

Thu, Feb 21, 2013

I have provided software and services to federal agencies, off and one, for almost 30 years. During that time I have also done the same off and on for the private sector - some Fortune 500 and a great many mid-size companies. In my opinion, at least on the IT side, a good contractor's staff will outperform a good government team by a significant margin - significant. There are many reasons, ones I would be glad to dicuss with any governemnt official, at any time (but that would probably require divulging my name, and since I current provide services to government agencies, well....). My other observation is far too many contractors 'play' to an agencies flaws - for too risk averse; for too much oversight / oversight / oversight; promise whatever it takes to get the work, and worry about your underbidding later; don't innovate if it reduces contractor staff levels; etc. But, as much as I'd like to place the blame on those contractors, the government has totally failed to manage properly, look for innovation, be willing to take 'bounded' risks, and more. In closing, the notion that a government entity, of any sort, is even moderately capable of making value judgement is simply wrong. Worse is the attitude: more competition so we can lower contractor rates and prices. Geez..... the federal goverment already has institutionalized mediocrity of talent and performance; do you really think the way to improve performance is further lowering of rates and price. Good Luck - and given the incredibly low % of successful IT projects - on time and budget - in the federal government, is doing more of the same, just better, really the answer - with FTE's or contractors???

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