By Steve Kelman

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Steve Kelman, broken record: More on contracting cost savings

Yes, I know I have been writing and talking about this for a long time, but this really is serious. Really tight budgets are on their way, contracting should and will be asked to help out, and helping out reflects the pennypinching, deal-seeking features of the contracting culture.  (I mean this as a compliment.)
I participated in a panel on this topic at the recent National Contract Management Association government conference, and want to share the ideas I shared with the overflow crowd there. Since people have different levels of tolerance for being the first on your block to try something new, I am listing them in order from "nobody's ever done this before" all the way to "this is so old it is getting new again."
The "nobody's even done this before" idea is for the government to ask potential bidders on a contract during a draft request for proposals stage, before the contract (or task order) goes out for bid, to suggest ways the government could tweak the requirements to save significant money for little or no performance decrement -- and then to reward any bidders whose ideas are adopted in the final RFP with some number of evaluation points for each idea accepted. I discuss this idea in greater detail in an FCW column I just published.
Moving to ideas that a few have tried but haven't really taken off yet, I have two. One will be of no surprise to anybody who has followed my preaching on this for years -- look for opportunities for share-in-savings contracting, where a contractor is paid, all or in part, in the form of a share of the savings their effort generates. Needless to say, in a tight budget environment, this becomes even more attractive.

There are two things to keep in mind though. One is that a big barrier to these contracts has been the first-year funding of fees the government would need to pay the contractor if the contract is cancelled -- this is a big budget hit many agencies have not been willing to take. However, I believe that contractors may be willing to accept only nominal termination liabilities as long as their ownership of the intellectual property of the contract is clear. If they own the intellectual property and therefore if benefit realization will stop if the contract is terminated, it would be stupid for the government to terminate a successful contract. On the other hand, if the contract is unsuccessful, the contractor won't care if it is terminated (indeed, may prefer termination).

Secondly, this contracting method should be used in cases where genuine savings will be generated, not merely as a way to convert upfront capital costs into a water torture of long-lived annual operating costs that may not be a good deal for the government.
A second idea is using reverse auctions for the labor hour rate parts of complex RFP's, which a few agencies have tried. (Full disclosure:  I am on the Board of Advisors of Fedbid, a provider of reverse auction services to the government.) We would never want to subject complex jobs as a whole to a reverse auction process, because the government needs to evaluate quality. But the government can conduct a reverse auction where bidders bid discounts off their established GSA labor hour rates, as a way to establish the final price/cost bids for companies competing on a contract. These labor rates would then go into the evaluation process.

(Note that I am not saying the government should necessarily buy from the low bidder -- the government may well choose to buy from Quality Vendor, who has reduced their average labor hour price from $150 an hour to $120 an hour, over Body Shop Vendor, who has reduced it from $60 to $50. The point of the auction is to get the best deal possible at each price point.)

Moving to something that has now been used enough to be seen as at the cutting edge of mainstream, we should also see procurement contests -- usually seen as a way to encourage innovation -- as a cost-savings approach as well.  From a cost-savings perspective, contests have the virtue that they pay only for success. If nobody solves the government's problem, nothing is paid out. It may be that the government will need to pay more to a winner (that is, the prize amount will need to be larger) than in a conventional procurement, where you often get paid even for non-success, but you won't have to pay for failure. Furthermore, according to the CEO of Innocentive.com, which is the leading private-sector site for these contests, government contests that are linked to the public good often don't need to pay as much as similar contests from companies, because public-spirited innovators will work for less money.
Finally, in the "this is so old that it is new again" category -- for the truly risk-averse among us -- I recommend value engineering. This is a hoary technique, enshrined in the Federal Acquisition Regulation (Part 52), involves a contractor during contract performance making change proposals to the government to amend the specifications or something else in the contract in order to save money. The contractor and the government share any resultant savings. This can be used in construction, IT development, or other areas. When I presented this idea at the panel, Debra Sonderman, senior procurement executive of the Interior department, noted that last year Interior saved $100 million on a $1 billion construction budget with value engineering.
Remember that these are just examples!  Contracting folks, think up your own too.
PS. If any younger reader doesn't know what it means to sound like a broken record, ask your parents, a professor, or an older colleague. :p

Posted on Nov 28, 2011 at 7:27 PM

Reader Comments

Fri, Dec 9, 2011 Stilton

Steve, Buying less obviously galls you. But consider: do we all need to have: $700 Aeron chairs? Two really overblown new fighter planes? "Accepted" Medicare and Medicaid fraud levels of 20 percent? Ridiculous USDA subsidies? Extremely overstaffed and self-confusing elements of the DHS? There are a gazillion of these. The trick is having decision makers who are smart enough to fit their PDs and who have a pair to make the right decisions. The low-haning fruit is endless. Defending a no-cut position is to misread the strong thrust of public opinion.

Tue, Dec 6, 2011 Alan

Just three thoughts: (1) Buying less and buying well are not mutually exclusive, nor is buying less defeatist. For example, it is not defeatist when I disconnect my cable to economize, it is what a prudent person does when reacting to their financial situation. (2) Buying less is quantifiable and simple, while buying well is difficult to achieve consistently. Any system that requires excellence from every party is not robust enough to be reliable. (3) The Government's make vs. purchase decisions are corrupted by hideous transaction costs on both the make (HR rules, pension/overhead) and purchase (strict procurement rules)- See: Ronald Coase. However, since the Government cannot fail (even specific programs rarely fail), these transaction costs are very necessary to safeguard the taxpayer. Mr. Kelman- I am delighted I found the Lectern. I hope this continues.

Mon, Dec 5, 2011 Vern Edwards

Steve, of course I agree that we should use every method we can think of to cut costs. But I think that the real key to significant savings is austerity -- to buy less, and not just in terms of quantity, but also in terms of gold-plated requirements. When buying less we should also buy "smarter" when we are smart enough to know how. Contractual incentives, source selection "savings" bonus points, and other gimmicks may contribute if done well (a big if), but they will not yield the volume of savings we need in short order.

Mon, Dec 5, 2011 Steve Kelman

Vern, I think that saying the only way to cost savings is buy less is too defeatist -- though in this budget environment, the government will also need to buy less. You yourself suggest what you elsewhere disparage as a "gimmick" by suggesting savings from advance planning so cost-based contracting less necessary. I agree with your idea, and I would add that contracting professionals should be working on ways to save money by buying smarter, not only buying less -- don't you agree that's possible?

Mon, Dec 5, 2011 Steve Kelman

Thanks all for your comments! SPMayor, agencies are already asked, and in some cases required, to request discounts off of GSA "retail" (one unit) rates -- this is a way to make this approach more aggressive. I do think we need to make a distinction between buying the low bid and getting the best price possible at each price point. SanchecJB, I like your suggestion and think it's a good guide for contracting managers thinking about cost-savings priorities, though I think this should also be a bottom-up effort by each 1102, involving whatever they are buying.

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