Infotech and the law: Putting the 'share' in share-in-savings rules

Richard Rector

The federal government July 2 published a proposed rule to authorize governmentwide use of share-in-savings contracts for federal IT projects. A final rule likely will take effect in the last quarter of 2004.

The proposed rule would let agencies lower IT costs and improve service delivery without making large, upfront expenditures. Under a share-in-savings contract, the contractor pays for the initial investment in new technology. The contractor and the agency then share in the savings achieved through that investment.

Say a large agency, such as the Homeland Security Department, wanted to streamline its help-desk functions and establish a single, enterprise-level help-desk capability. Although the efficiencies of such an approach may be evident, the agency may lack the substantial, near-term resources to fund such a project through typical contracting methods.

The share-in-savings concept would address this type of funding problem by having the contractor provide the necessary IT solution by investing in the technology and services to implement the help-desk capability.

In exchange, the agency would pay the contractor a portion of future savings thus derived from the streamlined capability. In essence, the contractor would finance the enhanced capability for the agency, then get part of what the agency saved using the new capability.

In most cases, agencies would agree to pay the contractor only if savings are realized, and then only a portion of those savings.

A lively debate is ongoing in the procurement community over whether laws are needed to authorize share-in-savings contracts. Some experts believe government agencies have inherent authority to create such contracts, and various share-in-savings arrangements are already in use at the federal and state levels.

The new regulations, however, would provide clear authority for share-in-savings contracts on federal IT projects, as well as a uniform model for implementation across agencies.

Thus, contractors can expect to see more of these contracts, and more consistent terms and conditions, in coming years.

The proposed regulations state that share-in-savings contracts should be considered when three factors exist:

  • The project involves significant innovation or process transformation.

  • The agency's senior-level management supports the concept.

  • There is agreement that, because the contractor will bear an unusual risk, an open and collaborative environment is needed to mitigate that risk.

In my experience, the second factor -- buy-in and support from agency management -- is particularly critical.

It's easy for an agency to like a share-in-savings arrangement at the beginning, when the agency is getting something for nothing. It's tougher when the project matures and the agency must share its savings with the contractor.

Agencies have been known to develop "institutional amnesia" at this point. As the new capability and savings it provides become routine, the contractor's upfront investment fades in the agency's memory.

Uninformed critics -- often newcomers to the project or agency -- also can emerge and claim that the contractor is reaping a windfall at the agency's expense.

A well-drafted contract is the best defense against such misguided claims. The contract should outline explicitly the contractor's investment and the conditions for payment. Recovering costs in the event of termination or a fundamental change in the parties' assumptions should get particular attention.

Share-in-savings contracts can work well for both contractors and agencies, but all parties must honor the bargained-for risks and rewards.

Richard Rector is a partner in the Government Contracts Group of Piper Marbury Rudnick & Wolfe LLP in Washington. His e-mail address is richard.rector@piperrudnick.com.

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