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By Steve Kelman

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Governmentwide contracting: In praise of duplication and overlap

A long-awaited GAO report on governmentwide contracting vehicles is finally out, and the verdict is a mixture of good and bad news.

The good news is that the report, titled "Contracting Strategies: Data and Oversight Problems Hamper Opportunities to Leverage Value of Interagency and Enterprisewide Contracts," does not recommend eliminating governmentwide vehicles, such as those run by NASA and the National Institutes of Health, that compete with GSA’s governmentwide acquisition contracts. Given the hostility in parts of Congress toward competition among governmentwide contracts, that’s good news, especially given that the Office of Federal Procurement Policy needs to decide soon on renewing the authorities for some of these vehicles. It is also sensible to worry about whether the government is getting good enough prices on these contracts, about lack of easily available and comparable data on the contracting shops, and about potential risks from these vehicles that they might dilute the government's buying power.

The big flaw in the report, and in many of the commentaries on these vehicles, is conceptual. Both GAO and several members of Congress criticize competing governmentwide vehicles for being duplicative or overlapping -- having duplicative administrative costs, for example. This is a conceptually flawed argument. It is the argument that used to be made in the Soviet Union for why there should only be one brand of toothpaste made by a giant government monopoly -- no need for separate corporate headquarters, duplicative research efforts, wasteful marketing, etc. etc.

But that also means no forces of competition for customers, to drive down prices and encourage innovation.

GAO auditors are concerned that they have located different prices for the same item on different governmentwide contracts. That is far better than the likely alternative in a governmentwide monopoly -- the worst price being the only price.

Sure, there can indeed be a tradeoff between customers leveraging buying power and suppliers reducing administrative costs (which both argue for fewer contracts), and gaining the benefits of competition. Mergers among competing firms in the private sector sometimes make sense. But I would guess -- though this is an empirical question -- that the size of contract that is needed to leverage the government's buying power is less than one governmentwide contract for the whole government.

And, sure, like GAO I would love to see better data on what prices the government is actually getting, performance measures for these contracts associated with price and contractor performance, and transparency across vehicles so that customers could easily compare prices and terms/conditions. But, to repeat a tired but appropriate phrase, let's not throw out the baby with the bathwater. I am all for duplication and overlap -- a.k.a. vigorous competition across a limited but greater-than-one number of governmentwide contract vehicles among which agency customers can choose.

 

Posted by Steve Kelman on May 27, 2010 at 7:26 PM


Reader Comments

Tue, Jun 1, 2010 Vern Edwards

It is not in the best interest of the government to do anything arbitrarily. According to the GAO report that Steve mentioned: "The total number of MACs and enterprisewide contracts is unknown, and existing data are not sufficiently reliable to identify them." That fact is not indicative of good procurement management or sound business practice. It makes competition ineffective to the extent that it increases contract award and administration costs and buyer search costs. Moreover, a considerable body of economic research on competitive bidding suggests that the quality of competitive bidding outcomes does not necessarily improve as you add bidders. There is an indeterminate optimal number of bidders for any procurement, at which point the addition of another bidder adds to process cost without yielding better prices or quality. Steve's "conceptual flaw" argument is itself conceptually flawed. The Soviet Union analogy is not apt. More is not necessarily better (or merrier). It might just be too much. Plans to renew or award more such contracts should be rejected unless supported by a strong and well-documented business case.

Tue, Jun 1, 2010 Tom

Arbitrarily limiting the number of government-wide contracts is not in the government’s best interest. While we may save on administration costs at the front end there are costs on the back end to contend with as well.
First, the barriers to entry in the federal contracting market are steep while the barriers to exit are small. Reducing opportunity for award will contract the pool of companies willing (or able) to serve the federal market.
Second, when the remaining large ID/IQ contracts are placed with 5-year (or more) performance periods, a single lost competition would not only mean the proposal costs are sunk, but losing firms must find another revenue stream for the performance period before they are able to compete again. Normally this is done by seeking inclusion on other contracts (as primes or subs).
This leads to the conclusion that very large firms and small-disadvantaged firms could still be successful, but medium-sized firms would be squeezed out of the market as the large firms invested more heavily in proposals and small/disadvantaged firms would still be guaranteed a share of the primary and secondary (subcontracting) market.
Net result: fewer firms in the federal space, decreased ability to respond to crisis or contingency (firms exiting the market are not guaranteed to return later), and ultimately increased costs as the remaining contracts consolidate in the hands of the few.

Fri, May 28, 2010 Steve Kelman

Having the different merchants on the same street in a single bizarre is just a way of saying there should be greater transparency and ability to compare the different vehicles in one place. I'm all for that. But there are people out there -- I am assuming from what he's saying that Vern Edwards is not one of them -- who believe there should be only one governmentwide contract in each area, to avoid "duplication." That's what I'm criticizing.

Fri, May 28, 2010 Vern Edwards

Soviet policy that there should be only one brand of toothpaste is not analogous to the argument against the proliferation of GWACs. No one is arguing that there should be only one brand of product. They are arguing that it does not make sense to build a bunch of state-run stores right next to each other in the expectation that sellers won't figure out that requisitioners develop preferences based on factors other than price and that busy buyers won't go into each store to make price comparisons. There is no basis for the idea that you can't get as much competition if you build only one outlet from which competing firms can sell. Reducing search costs will intensify price competition. You'll get as much or more competition among rug merchants if you put them all in the same street in a single bazaar.

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