In a recent Federal News Network report on May 13, our favorite reporter Jason Miller reported on comments by the General Services Administration regarding their aggressive search for additional contract cost savings by pursuing various consulting and service providers for better terms.
In the article, “GSA expands efforts to reshape federal consulting contracts,” Miller quotes an unnamed GSA official as follows:
“You should also strongly consider a ‘shared savings’ model for the pricing of each project such that it results in the work paying for itself, with you as contractor having ‘skin in the game.’ If necessary, provide a rationale for those cases, if any, where in your view ‘outcome based’ or ‘outcome based with shared savings’ pricing is inappropriate. In sum, we expect significant discounting compared to current pricing.”
For those of us with more grey hair than we care to acknowledge, the focus upon performance-based contracting ideas like shared in savings brings back memories of when Steve Schooner, the Nash & Cibinic Professor of Government Procurement Law at the George Washington University Law School, had more hair than beard.
Share-in-savings (SiS) contracts, where the government contracts with companies to implement cost savings initiatives and pays them a portion of the savings realized, have the potential to produce significant cost savings. This approach, however, has never been broadly embraced by government agencies.
By providing contractors a reasonable portion of the actual savings they generate, SiS contracts motivate contractors to identify and implement significant cost savings initiatives on government programs with relatively low government risk.
Such contracts are low risk because the government’s initial investment is minimal and the contractor bears the risk of generating cost savings, without which the contractor will not be paid. SiS contracts offer a seemingly ideal tool to help address current budgetary challenges.
SiS contract approaches primarily reside in the form of energy savings performance contracts. Even when specifically authorized, however, government agencies have been reluctant to widely adopt SiS contracts. One of the biggest reasons for such reluctance is the lack of clear statutory authority to share savings with the contractors that generate the savings.
Another key problem is that the government and industry can’t agree on the initial baseline costs to then determine how much money is saved. The government tends not to have this breakdown of costs, because things like the cost of buildings or electricity or other similar costs aren’t based on each specific program, but the entire building or agency. Contracts for utilities — like electricity and water — obviously don’t have this problem.
The Clinger Cohen Act of 1996 authorized limited pilot programs of SiS contracts for information technology. As far as we can tell, only one SiS contract was awarded under the original Clinger Cohen Act by the Education Department — and this was in 1999!
The contract involved consolidation of several legacy IT systems under the Student Financial Aid program. Education realized nearly $40 million in savings and paid the contractor a share of those savings. The contractor assumed the risk of generating savings by making the upfront investment for the IT consolidation. Despite the success of the Education contract, no other government agency adopted SiS under the original Clinger Cohen Act.
The E-Government Act of 2002 amended the Clinger Cohen Act and authorized SiS contracts more broadly where a contractor would provide government agencies with an IT solution to (1) improve the agencies’ mission-related or administrative processes, or (2) to accelerate the achievement of agencies’ mission.
As an additional incentive, agencies were permitted to keep the savings from a SiS contract to use toward other IT projects. Such contracts were permitted for up to 10 years, “even if funds are not made specifically available for the full costs of cancellation or termination of the contract if funds are available and sufficient to make payments with respect to the first fiscal year of the contract.”
This share-in-savings provision in the E-Government Act was intended, in part, to address any remaining doubts regarding potential violation of the Antideficiency Act. Unfortunately the authority of this legislation expired at the end of fiscal 2005, and despite the additional incentives, a July 2005 Government Accountability Office report found that no SiS contracts were entered into under this authority.
GAO took an initial look at SiS in 2003. In its report, GAO reviewed commercial use of share-in-savings arrangements, and concluded that such arrangements could “be a highly effective contracting technique to motivate contractors to generate savings and revenues for their clients.”
GAO identified four key conditions for SiS success:
Clearly defined expected outcomes such as generating savings from revising inefficient business practices;
Both client and contractor had incentives to use SiS contracting;
A baseline and performance metrics could be established to measure savings; and
The client’s management committed to support the project, including implementing recommendations.
SiS arrangements have worked quite well in the past when properly structured. Maybe DOGE should consider legislation to reup their use? Maybe it’s time to go back to the future?
Richard Beutel is a senior researcher at the George Mason Baroni Center for Government Contracting and the founder of Cyrrus Analytics LLC. As a congressional staffer, Rich was the original author of the Federal IT Acquisition Reform Act (FITARA) and is a nationally recognized expert in IT acquisition management and cloud policy with 25 years of private sector experience and more than a decade on Capitol Hill working on IT acquisition issues.
The post Here’s an idea for DOGE: The time for share-in-savings has finally come first appeared on Federal News Network.