Infotech and the Law: Share-in-savings IT contracting: It's not happening

Jonathan Cain

Two years ago, Congress gave a new IT contracting vehicle a boost by including it in the E-Government Act of 2002. Share-in-savings contracts were supposed to revolutionize government IT procurements by unleashing contractor creativity and entrepreneurial spirit.

Government agencies supposedly would benefit, because contractors would exchange part of the up-front contract price for a share in the projected cost savings that their creative technological solutions would deliver to government agency customers.

Contractors would finance acquisitions by avoiding the need for an agency to use appropriated funds for information systems improvements. They were supposed to benefit because they would earn larger fees as the government savings mounted.

But share-in-savings contracts haven't lived up to their hype. Whether because government IT contractors aren't as entrepreneurial as once thought, or because agencies have been unreceptive to changing the typical contractor-customer relationship, not one IT share-in-savings contract has been signed.

Government has long experience with share-in-savings contracts outside of IT procurements. Agencies have purchased energy conservation projects this way for many years.

When the Congress began looking at share-in-savings IT contracting in 2001, it asked the Government Accountability Office for a review of energy conservation programs. At that time, GAO reported it could not provide a reliable analysis of share-in-savings contracting benefits, because it was difficult to measure whether any cost savings had been achieved.

In December, GAO released another, more comprehensive report of share-in-savings contracts. Among GAO's principal conclusions was that in every case it studied, share-in-savings contracts cost the government more for improvements than if the agency had simply bought the same improvements using appropriated funds and a conventional acquisition contract. In the contracts GAO studied, contractors received between 8 percent and 56 percent more than if improvements had been paid for by appropriations.

Two reasons are cited for the higher agency costs of share-in-savings contracts: Private financing always costs more than government appropriations, and there is administrative expense to monitoring share-in-savings contracts for performance.

The question now is whether to expand opportunities for IT share-in-savings contracting in the hope of proving its benefits, or to scrap the program. There are strong advocates of both views.

Among the champions of continuation and expansion of IT share-in-savings contracting opportunities is the General Services Administration, which for the past year has unsuccessfully promoted the concept.

In the winter 2005 edition of The Procurement Lawyer, a publication for public contracts lawyers, two GSA lawyers argued that significant operational savings can be achieved and shared with contractors by using IT to consolidate duplicative systems, to collect revenue in fee-based programs, and to recover expenditures made for erroneously billed services through automated audits. Such programs are easy to evaluate, proponents say, because the "savings" to be had over the "do nothing" alternatives are clear.

That is the wrong challenge, say opponents to share-in-savings contracts. To make financial sense, share-in-savings contracts should be required to demonstrate lower costs than are available via standard methods, not just superiority over a "do nothing" alternative.

Opponents contend that a share-in-savings solution can rarely, if ever, outperform a standard acquisition, because a contractor cannot achieve a cost of the capital needed to implement the technical solution that approaches the government's cost of capital.

The House Government Reform Committee leadership, which asked GAO to study share-in-savings contracts, said it will press for expanding share-in-savings IT contracts this year, notwithstanding questions raised by GAO. 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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