By Steve Kelman

Blog archive

Is the government getting aggressive on vendor prices? (Round Two)

During the economic crisis of 2008-2009, I wrote a number of blogs and columns (and also discussed at speaking engagements) the need to urge the government to seek price reductions in existing contracts and to be more aggressive about seeking discounts when new contracts were awarded. In one column, that I must admit went over like a lead balloon, (one commenter asked what I had been drinking when I wrote it), I urged defense contractors to accept a temporary 1 percent reduction in prices for weapons in production and 10 percent for spare parts. In general, I think the government response to this suggestion was underwhelming.

Look, what I was proposing was exactly what was happening at the time in the commercial world, in deals between private buyers and sellers.  A good Washington friend had commented to me that bids for renovating his apartment declined noticeably after the economic crisis set in.  The media at the time was filled with stories about big companies seeking to re-open lease rental rates and other prices. I remember myself at the depths of the crisis going from counter to counter at an airport rental car center seeking discounts off best published rates – and ended up getting discounts negotiated on the spot. This is not “anti-vendor,” or anti-good relations between government and industry, it is part of how the world works. (When the economy is tight, do vendors hold back from being aggressive on price in the name of industry-government cooperation?)

At any rate, I see from a story in this week’s Federal Times, with the in-your-face title “Agencies Press Vendors to Cut Prices – Or Else,” that this issue has re-emerged, now in the context of the budget deficit and shrinking agency budgets. The article began with the brief anecdote:  The Equal Employment Opportunity Commission had been paying $800,000 last year for hundreds of BlackBerry smart phones. Then the commission’s IT budget was cut by almost 15 percent. The agency pressed Verizon for some concessions it needed to maintain the service, and the company agreed to bundle cell phone minutes, scrapped underutilized phones from the plan, and moved employees to voice and data plans that would accommodate their phone use.  The EEOC cut its costs by $240,000 for this fiscal year.

The article goes on to cite other examples, all driven by budget cutbacks where the agency simply doesn’t have the money any more to buy what it was buying at the same prices, of mid-contract renegotiations and greater aggressiveness on re-competes.

Of course this isn’t pleasant. In some situations, industry profit margins are already cut to the bone, so, like everything else, this shouldn’t be one size fits all. (My guess is that hourly labor rates for some labor categories may be a fairly ripe target for discounting, especially since the discounting off of General Services Administration schedule rates or Indefinite Delivery, Indefinite Quantity contracts can be temporary.) If agencies do this, they should also be giving significant past performance credit to vendors who are willing to understand the government’s situation and step up to the plate – this shouldn’t be punitive, and should provide an opportunity for vendors to show their support for their government customers.

The bottom line is that this is something contracting offices should be looking at aggressively.

Posted on May 16, 2012 at 12:09 PM


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