Policy or Politics?

Last week, John McCain proposed making government contracts exclusively fixed price contracts.

Barack Obama, meanwhile, has pledged to cut down on federal contract spending by 10 percent after our government spent $412 billion on such contracts in fiscal 2007. An Obama White House would also “end abusive no-bid contracts and minimize 'cost-plus' contracts, while hiring more contracting officers and increasing their training,” according to a supporting Obama campaign statement.

Just like Wall Street, the government contracting industry hates uncertainty. The real question is how much of this rhetoric is the politics of getting elected and how much will end up as procurement policy?

Senator McCain -

Can we contract for everything of a fixed price basis? From a Government buyer perspective, it is a more efficient contract, a known cost for the taxpayer and passes both performance and financial risk to the contractor. For contractors, since there is a higher risk profile in the contract, they should price in a higher profit margin. Sounds like a good deal all around, however, A fixed price contract is really only appropriate when there’s a clear scope of work. If I call a contractor to build a deck in my backyard, I want a fixed price, but the contractor still needs to know the design/dimensions of the deck, the timeframe it needs to be done and the materials I’d like him to use before he can give me a fixed price. However, when the scope of work changes after I’ve signed the contract, it leads to change orders driving up the final cost and defeating the very purpose of a fixed price contract. The Government has the same issue, if an agency wants to build a IT network and changes key elements – for example decides it needs to be run on Oracle versus Microsoft SQL Server, then it can expect to pay more money.

Senator Obama -

“End abusive no-bid contracts” – that’s a little too hokey for me – akin to saying “I’ll stop kicking my dog”. What is meant by that? No directed awards? Fewer contracts set aside for social policy reasons - veterans, minorities and women? I doubt the first African American president is going to offer less social contracting. He may, however, be on to something with his proposal to hire more federal contracting officers and train them better. Having specialized knowledge and talent within the Government community is essential to writing tight statements of work, managing contracts and protecting the Government’s interests.

Both candidates seem to pick on cost-type contracts – either indirectly or directly. Cost reimbursable contracting can work very well for many procurements to contain costs, limit contractor profitability, manage ambiguous statement of works and ensure the work gets completed satisfactorily. In addition, these contracts can also be audited - leading to more cost transparency and limiting the “unallowable” costs incurred by contractors.

In these uncertain economic times, I hope cool heads prevail. Clearly, taxpayers can’t afford government contactors to be the profit leaders in the economy, however a healthy and vibrant contracting community is one key to helping the Government operate in the most responsive and cost-efficient manner. Time will tell, but it should be an interesting few years.

What do you think about the proposed reforms of government contracting? Which stand the greatest prospects for success?