To contract better, does government need more in-house experts?
I was recently interviewed by Raj Sharma, CEO of Censeo, which provides consulting services on procurement management in the public and non-profit sectors, in connection with a project he was working on for the Volcker Alliance, the good-government organization established by Paul Volcker. The Volcker Alliance wants to know more about key competencies government procurement officials need, and for the project Sharma is interviewing various procurement luminaries inside and outside government.
Prominent on my list was the ability to evaluate and negotiate contract modifications, known colloquially as "change orders." For any major contract, mods are a way of life, and a staple of contract management. For longer-term contracts, the modified contract often ends up bearing only a small relationship to what originally was signed.
And the content of those modifications has a huge influence on a contract's success. For example, does the mod water down the original terms of the contract due to the contractor contending performance was impossible? How is the modification priced? (There is a widespread view, captured in the phrase "buy in and get well," that aggressive pricing during source selection is often counteracted by generously priced mods.) And though I didn't mention it in the interview, I also should have added that an analogous key competency is evaluating the product or service the contractor submits -- since problems in that area can often lead to major modifications.
I was taken aback when Sharma told me I was the first interviewee to mention the ability to manage mods as a key competency.
This is just one example of the procurement system's general bias toward the front end of the process -- source selection and (to an extent) acquisition strategy -- at the expense of back-end contract management. This bias ties into the cultural predisposition to emphasize getting funds "out the door," compared to paying attention to what happens afterwards – a phenomenon that is especially apparent each fall as the fiscal year draws to a close.
I could be wrong (and please correct me if I err, as I would love to know I'm mistaken on this), but it is my impression that very little attention in writing or training about procurement is devoted to managing contract mods. What little there is, I would guess, centers on the bureaucratic and legal procedures for mods presented in Part 43 of the Federal Acquisition Regulation. And unlike, say Part 15 on source selection, Part 43 provides no specifics for how government folks should make decisions about the change order requests that contractors submit.
Toward the end of the interview, Sharma and I started talking about changes in recent year in what commercial firms contract for. And in his view, commercial procurement is moving closer to the patterns of buying in the government.
While historically much of commercial procurement involved buying raw materials and machinery for manufacturing (something the government hardly does), recently many industrial companies have started buying major subsystems, or even finished manufactured products (especially IT hardware) from contractors. Sharma also noted that the buying patterns of financial services companies, with heavy components of IT and professional services, are very similar to the government.
I bring up this part of the conversation because of its relevance to the broader theme of this blog: Sharma noted that an IT hardware company buying subsystems, or a financial services company buying IT services, would never think of entrusting management of the relationship with their vendors to employees who were not subject-matter experts on what was being bought.
And this brings me back to our procurement system, and to an issue I raised just last month: If government is going to do a good job contracting, it needs to move enough work in-house so that agency employees can develop sufficient subject-matter expertise. How could an IT hardware firm dealing with contract manufacturers designing and producing major subsystems get a good deal if their own in-house folks didn't have the knowledge to make good judgments about whether production delays were justified or not, whether specs needed to be loosened, or whether prices proposed by the vendor for changes the customer wanted were reasonable?
Yet my strong suspicion is that government officials dealing with contractors frequently lack these kinds of expertise. If true, it's a recipe for disaster. Successfully managing change orders (and evaluating the quality of contractor deliverables) may require some in-house "doer" work to get government folks sufficiently expert to manage.
To be honest, though, I feel fairly ignorant about what the state of practice in the government is here. Although this is something that is very much part of the real lives of many government officials, it seldom gets written about. I suspect the government's expertise in areas relevant to contract management varies widely; my intuition is that DOD weapons systems offices have relatively more expertise, as do those in GSA managing construction contracts, while in IT the picture is very mixed at best.
However, I am more and more feeling that we really need to get a discussion going in this important area. So with this blog I am announcing that I plan to stick with this issue, unless and until somebody persuades me my concerns are mistaken. I am going to try to learn some more from people in the trenches about the state of play in the bowels of government.
And I would really like to ask blog readers, particularly those on the frontlines of the system who actually have to deal with mods and with judging contractor deliverables, to submit comments for publication in the blog's Reader Comments section with your views of the issue I am raising. For example, what routines does your organization have for managing change order proposals from contractors? How could the system be improved?
Posted by Steve Kelman on Oct 01, 2015 at 4:34 AM