Progress Slow But Sure

utside the Washington Beltway, much of the American public thinks government business crawls along at a snail's pace. But among the group of people who manage contracts for Uncle Sam's civilian agencies, perceptions couldn't be more different. Contracting officers have seen reforms in recent years that have significantly changed the way deals are negotiated, structured and managed.

The major shift has been away from cost-based contracts awarded without competition toward competitively awarded, fixed-price contracts that hold vendors accountable for achieving specific goals for an agreed-upon price. The idea is to ensure that agencies get the best deals-in terms of savings and quality of work-and thereby make the most of taxpayer investments.

New Rules

Agencies have had more than a year now to start using new negotiating techniques encouraged by the rewrite of Part 15 of the Federal Acquisition Regulation. Part 15 governs only about 20 percent of federal procurement actions but applies to about 80 percent of the money spent. The revised rule encourages early and open discussion between agencies and prospective contractors. Knowledgeable contractors can even help agencies refine their draft requests for proposals before final versions are published. Through this process, agencies have a chance to better evaluate contractors' abilities before accepting a bid, while contractors get to better understand agencies' service needs.

Some agencies communicated this way with their contractors before the Part 15 rewrite, but others hesitated for fear doing so might violate regulations or give the unintended impression that they were playing favorites. The resulting lack of dialogue often led to misunderstandings that ultimately triggered cost and schedule overruns. Now that the FAR actually directs agencies to communicate openly with contractors, "they feel they have more freedom to negotiate," a Clinton administration official says.

Part 15 also requires agencies to consider contractors' past performance when evaluating bids to assess how well a contractor would be likely to carry out a given project. In 1998, this provision only applied to competitive acquisitions expected to cost more than $1 million. But since Jan. 1, the requirement has applied to all contracts over $100,000. Not all agencies are putting as much emphasis on the issue as the administration would like. Nevertheless, "past performance is taking hold out there more and more," the administration official says.

Pushing Performance

Also under way is the transition to performance-based service contracting (PBSC), which the Office of Management and Budget expects to yield significant savings over the long term. In a pilot project started in October 1994, 15 agencies converted 26 contracts valued at about $585 million-for such services as janitorial operations, computer maintenance and technical support-to performance-based versions. "The agencies reported an average 15 percent reduction in contract price in nominal dollars, and an 18 percent improvement in satisfaction with the contractors' work," boasted OMB's Office of Federal Procurement Policy in an October 1998 report, "A Guide to Best Practices for Performance-Based Service Contracting."

The process isn't easy, though. "People are struggling with defining their desired outcomes," an administration official says. Richard Hopf, deputy assistant secretary for procurement and assistance management at the Energy Department, agrees. Program and technical staff need significant training to adapt to the new processes, he says. "The critical skill gap is the ability to draft statements of work for highly complex work activities adequate to support a fixed-price contract."

The best-practices report includes tips on how to approach work statements, which are the foundation of PBSCs. "For example, instead of requiring that the lawn be mowed weekly, or that trees be pruned each fall, state that the lawn must be maintained between two to three inches or that tree limbs [should] not touch utility wires or buildings," the report says.

Because of the extra analysis required to write work statements, agencies are facing increased up-front costs for their PBSCs. But according to the best-practices report, "the resulting savings to the agency through the use of PBSC will quickly offset the initial up-front costs." If savings continue to be as great as those realized by the pilot agencies, then the payoff will indeed be significant.

While useful, the fixed-price performance-based approach may not work for all types of projects. For example, research and development projects by definition do not have precise goals. But even in these cases, performance-based contracting can be used in an "evolutionary" way, an administration official says. A project can be broken down, with each small segment contracted out via specific performance goals. This way, as the process moves forward, the project's overall risk is reduced. There may come a point when a performance-based fixed-price contract then makes sense for the entire project, he says.

Agency Buys

In fiscal 1998, the Energy Department, as usual, led civilian agency contract spending, with more than $14 billion in purchases under prime contracts of $25,000 or more. Among the contracts that were competitively awarded was a $1.4 billion, five-year pact for the management and operation of the Bettis Atomic Power Laboratory, whose facilities are divided between West Mifflin, Pa., and Idaho Falls, Idaho. The competition, which was the first ever for the laboratory, led to the transfer of duties from former contractor Westinghouse Electric Co. to Bechtel National Inc. Westinghouse had managed the site since it was opened in 1948.

Also competitively awarded in 1998 was a management and operating contract for DOE's National Renewable Energy Laboratory in Golden, Colo. A partnership led by Kansas City-based Midwest Research Institute and including Battelle Memorial Institute and Bechtel National won the five-year contract, the value of which could exceed $800 million.

Brookhaven Science Associates won a five-year DOE contract last year to do research and development, environmental management and other work at the Brookhaven National Laboratory in New York. The firm won the $2 billion award after the Energy Department revoked the contract of former site operator Associated Universities Inc. because of lax environmental safety and health oversight. The new contract incorporates safety and health performance goals.

NASA once again was the second highest civilian spender in fiscal 1998, with nearly $11 billion in prime contract awards, down slightly from the previous year. Among the agency's largest procurements was the $1.8 billion contract awarded to a team led by Lockheed Martin Space Operations Co. that also included Allied Signal, Computer Sciences Corp., GTE and Booz Allen & Hamilton. The contract-called the Consolidated Space Operations Contract-integrates 15 previous contracts and will manage NASA's data collection, telemetry and communications for missions.

Among individual contractors, Lockheed Martin Corp. continues to hold its position as the No. 1 civilian agency contractor, with nearly $6 billion in contract awards. Accounting for part of that is a 10-year contract with the Federal Aviation Administration awarded in December 1997, which could be worth as much as $1 billion over the contract term. The NASA contract described above accounted for another large chunk of Lockheed's civilian agency awards in fiscal 1998. However, the company suffered a disappointment early this year when it lost out to Computer Sciences Corp. in its bid to win the 15-year, $5 billion contract to manage the IRS tax systems modernization effort.

Perhaps the most significant change to the civilian agency top 100 contractors list from last year to this year was the jump of Bechtel Group Inc. from No. 22 to No. 9. The company's future looks bright. Just two months ago, a Bechtel-led consortium won a $3 billion contract from DOE to manage the Idaho National Engineering and Environmental Laboratory.