TechAmerica: State and locals must revise procurement regs

State and local governments are increasing costs and discouraging competition for their information technology projects by including too many nonstandard clauses and seeking broad indemnity, according to a new white paper from TechAmerica.

At a time when the demand for innovative IT systems is high, it is crucial that states and localities adopt commercial terms and avoid provisions that can raise costs and create barriers for prospective bidders, the paper states. TechAmerica, a trade association for IT contractors, released the paper March 24.

“Too often, contract terms required by state and local government customers go beyond merely contracting out performance of a project to attempting to outsource the entire risk of the initiative,” the paper states. “This is reflected in non-standard liability clauses, indemnity provisions and extraordinary warranties that are not commonly seen in commercial contracts.”

In light of such provisions, IT companies might choose not to bid on a project rather than take on unreasonable risk, TechAmerica said.

“Responsible companies cannot bet their future existence on one project,” the paper states. “While IT companies are certainly willing to accept the risk of their performance and reasonably compensate the customer where they fail to deliver, they cannot accept the entire risk of the project’s success.”

State and local governments are increasingly seeking to modernize and improve their IT systems through outsourcing. The market is expected to grow to $72 billion by 2011, according to Input Inc., a market research firm in Reston, Va.

TechAmerica officials said they hope the white paper will initiate a dialogue and encourage state and local governments to revamp their procurement processes to avoid onerous, non-standard clauses.

“IT contractors have become increasingly concerned that overly prescriptive generic contract terms that are not well-suited to complex IT projects are driving competition and innovative solutions out of the [state and local government] market and are unnecessarily driving costs up,” the paper states.

The following types of contract provisions are of greatest concern:

• Risk balancing. TechAmerica said contracts should set limits on a company’s liability and avoid assigning unlimited liability.
• Performance bonds. Such provisions are problematic for IT contractors because there are fewer performance bonds available to them.
• Intellectual property rights. TechAmerica said IT firms must be permitted to protect their intellectual property.
• Other indemnification clauses. TechAmerica said such clauses are problematic when public-sector customers offer terms and conditions that seek to have contractors agree to a broad indemnity that rises to the level of strict liability.
• Most-favored public entity. The association advises against such clauses for several reasons, including their impact on effective cost pricing.
• Warranties. TechAmerica said government buyers should assess their warranty requirements based on the needs of the particular project and not go beyond those goals.
• Liquidated damages. Properly constructed liquidated-damages clauses can be a legitimate tool for encouraging quality performance, but TechAmerica officials are concerned about rigid and inflexible clauses that attempt to set damage amounts unilaterally.