Infotech and the Law: If the shoe fits, it still may not be for you

Jonathan Cain

The Defense and Civilian Agency FAR Councils issued two sets of proposed regulations in July that promise significant long-term changes in federal IT procurement, although they may have only modest immediate impact.

On July 2, proposed rules for so-called share-in-savings IT procurements were published, followed July 21 by proposed rules requiring expanded use of performance-based contracts for services, including IT services.

Share-in-savings contracts are a new twist in federal IT procurement. The theory behind this kind of contracting is that the government gets a twofold benefit: It can obtain goods or services without making a large upfront investment, and the contractor gets an incentive to be efficient, because the more the contractor saves in performing the work, the more the contractor earns.

Defense and civilian agencies have used share-in-savings contracts for years on energy and water conservation improvements in federal facilities. The contractor provides the conservation improvements at its own cost and is paid a share of the utilities' cost savings over the life of the contract, usually 10 years. Efficiency improvements are not done unless both parties are confident that the resulting savings will more than pay for the cost of the project, including all financing.

It is not so clear that the government will see similar benefits in IT procurements. The rules provide that the savings in which the contractor will share are calculated by subtracting the estimated total cost to the government to implement the share-in-savings contract from the estimated total cost to the government of simply buying the same IT project in the normal course.

The difficulty for the contractor is that it must finance the government's acquisition at the contractor's cost of funds, which is always going to be greater than the government's own cost of funds.

Another problem arises when the government decides to terminate a share-in-savings contract. Added to all the usual costs of contract termination are the costs of paying off the contractor for its investment in the project that it won't be able to recover through participation in the projected savings. This makes a significant disincentive for the government to terminate a problem contractor or cancel a project that is no longer required. Solutions to these problems will emerge from the crucible of experience. The authorizing legislation limits the number of share-in-savings contracts to 10 over two years, unless funds to cover premature terminations are specifically appropriated. All share-in-savings contracts must be performance-based contracts.

It is a statutory requirement that agencies contract for results that describe their needs in terms of what is to be achieved, not how the contractor is supposed to achieve it. In service contracting, this requirement is ignored as often as it is honored.

The rules proposed last month require using performance-based deals to the maximum extent practicable to acquire services. Performance-based contracts and task orders are required to specify performance objectives and outcomes for the services and measurable performance standards, rather than describing how the contractor is supposed to obtain the objectives.

Contracting officers are to include performance incentives and disincentives, both monetary and other types, in service contracts, along with quality assurance monitoring plans. This should challenge government customers to define their objectives with more specificity, and to develop quantifiable measures of success or failure of a project.

It also could encourage the use of more small, sharply focused services contracts and task orders with well-defined objectives. If properly employed, performance-based service contracts can provide improved competition and more opportunities for new entrants. n

Jonathan Cain is a member of the law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC in Reston, Va. The opinions expressed in this article are his. He can be reached by e-mail at jcain@mintz.com.

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