Lean budgets compel contracting changes

Tough budgets force agencies to reconsider all their options, including rarely-used types of contracts.

Tom Davis, who served as chairman of the House Government Reform Committee from 2003 to 2007, said federal agencies can no longer count on having money up front to do their work, because the cash simply isn’t there. Delivering the keynote address at the Coalition for Government Procurement’s Spring Conference March 17, Davis noted that Congress is in heavy debates about deep funding cuts throughout government, even deeper than what the Obama administration has proposed for fiscal 2012.

The circumstances will force agencies to look at new ways to continue their operations, said Davis, who’s now the director of federal government relations at Deloitte. Other veterans of federal contracting agreed with Davis' assessment.

“Simply put, the missions of government cannot be achieved if only traditional contract methods are used. There is not enough in the budget to make that happen,” said Larry Allen, president of Allen Federal Business Partners.

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Agencies may turn to all-but-forgotten kinds of approaches to accomplishing work, such as the share-in-savings contract, Davis said. In a share-in-savings contract, the contractor is paid — all or in part -- based on the savings the agency generates through the contract.

However, the share-in-savings contract has fallen by the wayside in recent years, nearly forgotten by the George W. Bush administration and attacked by watchdog groups, according to Steve Kelman, former administrator of the Office of Federal Procurement Policy during the Clinton administration and now professor at Harvard University. Kelman also writes The Lectern blog on FCW.com.

The share-in-savings contract puts the upfront costs for setting up or launching the project on the contractor, and as it’s used, the company earns the return on the investment.

However, this type of contract quickly gets complicated. It’s entangled in statute, appropriations, and protections for contractors’ investments, in case the government cancels the contract. The Federal Acquisition Regulation allows for the contract, particularly if a company can get the savings back within a fiscal year. For example, an agency may hire a company to look for unused cell phones or telephone lines, and the contractor would be paid by how many it finds.

It also does not absolve the agency of needing money on hand. For larger projects, agencies would have to set aside a large amount of money, as a protection for a contractor called a termination liability fee. If the contract continues for its full potential duration, the agency would get all the money back. (Learn more about share-in-savings from Kelman.)

At the outset though, that money seems like a big cost.

“It’s like sticker shock for an agency,” and it makes officials very hesitant to take the share-in-savings route, Kelman said.

Allen started work on expanding another type of contract to more than fixed assets like buildings. He said the savings-based Energy Savings Performance Contracts would help agencies get through their tough times.

With ESPCs, the government only pays the contractor if there is real, verifiable energy savings from a contractor’s solution, and the contractor is only paid from a percentage of these savings.

“I think that large IT energy users — like data centers — could have been a prime target,” he said.

The project died several weeks ago, though. ESPCs are currently limited to particular fields, and Allen and several industry leaders tried to form a coalition of companies to draft legislation to expand the ESPC’s reach.

No company would take the lead, although several were willing to follow, he said.

“I think this shows that many companies aren’t really looking outside the box for new federal dollar sources, despite the fact that budgets — and therefore traditional funding sources—are shrinking,” he said.

That’s why he said any company that thinks in innovative ways will have a leg up over competitors.

This type of circumstance pulls officials and contractors out of their comfort zones, where they have a better grasp of what happening. An attempt also would go against Obama administration officials who have frowned upon risky contracts and pushed for contracts with fixed prices.

“It will take a shock to the system — or an innovator not afraid to be a risk leader,” Allen said. Otherwise, both the government and companies will continue to look only at what’s right in front of them, even though they have less money.

That’s a catch though, Allen said. Someone has to go first. In a time of transparency and oversight, no one wants to run into the unknown.

Whoever goes first, wins big though.

“Agencies will save money and contractors will have found a new way to get government business, even in a time of tight budgets,” he said.