Acquisition councils back share-in-savings contracts

Share-in-savings contracts, which generate nearly as much controversy as outsourcing itself, moved a step closer toward more widespread use last week.

The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council, two councils in charge of acquisition policy, signed off on a plan for new share-in-savings procedures and are preparing to send the proposals them to the Office of Federal Procurement Policy for approval, according to a CAAC member who asked not to be identified.

If OFPP accepts the plan, it will be sent to the General Services Administration and published in the Federal Register. Details were not available, but the plan would likely expand the use of share-in-savings contracts, which the 2002 E-Government Act currently limits to information technology purchases.

An Office of Management and Budget official confirmed Wednesday that CAAC and DARC approved the procedures, which should be published in early January. The official also said OMB is preparing a policy letter to agencies to clarify the share-in-savings process.

Share in savings contracts allow companies to finance purchases on behalf of agencies and collect estimated savings generated from their efforts up to a specified limit. Agencies pay small upfront fees, enabling them to invest in capital projects without having to get full funding through congressional appropriations.

Proponents argue that the government benefits from these contracts, because agencies are able to get the capital investments they need and much of the risk is shifted onto the private sector.

"That's the beauty of share in savings. It doesn't require a large capital investment," said Chip Mather, co-founder of Acquisition Solutions, Inc., which consults with federal agencies on acquisition issues. At the same time, he said, the contractor assumes much of the risk: "If there are no savings, the contractor doesn't get paid."

But opponents, who include former Bush administration OFPP chief Angela Styles and union leaders, say it's not that simple. Share-in-savings contracts enable agencies to circumvent Congress, they argue, and in the long term can be more expensive than the conventional contracting approach. For example, if a contractor provided equipment that saved the government $5 million a year for five years, the government could owe the contractor $25 million, when the original equipment may have only cost $10 million.

"You don't have to inform Congress through the normal appropriations process how much it will cost in the long run," said Jacque Simon, director of the American Federation of Government Employee's public policy department.

A recent article by Styles published in the American Bar Association's Procurement Lawyer publication said share in savings involves "shady financing and accounting techniques," largely because the amount contractors would be allowed to count as savings is not clearly defined. Legislation recently introduced by Rep. Tom Davis, R-Va., would make $240 billion worth of annual federal purchases eligible for share in savings contracting, according to Styles.

"There is no formula, no definition of savings, no guidance on how savings will be calculated and no limit to the taxpayer dollars that can be shared with contractors by defining something as 'savings,' " wrote Styles, who received funding from AFGE to write the article.

Much of the disagreement revolves around how the contracts would work in practice. Mather envisions a situation where many contractors would compete for bids and contracts would include strict limits on the maximum amount of savings that could revert to the contractor, with the agency keeping any additional savings.

Share-in-savings contracts, Mather said, would create incentives for contractors to reduce their costs. They send a potent message to contractors, he said: "You can make more profit by saving my money than by spending my money."

But share-in-savings contracts also create another incentive: To overestimate initial costs and later understate actual costs, because contractors' payments are a function of the difference, Simon argued. "This will just be a duplicitous kind of mechanism for enriching contractors at agency and taxpayer expense and deceiving Congress," she said.

Share in savings contracts, wrote Styles, "effectively would allow contractors to determine their own profit margins for government work."

Mather said he expects share-in-savings contracts to gradually increase in popularity. According to Acquisition Solutions, such contracts are most appropriate when projects have a high potential return on investment, the agency wants alternative funding and improvements can be directly attributed to the contractor.

But opponents say savings are hard to measure accurately. "Decisions are being made based on factors that aren't quantifiable or objective… How do you compare share-in-savings contracts when there are so many contingent factors?" Simon asked.