Share-in-savings contracting policy to be unveiled next week

A much-anticipated policy implementing provisions about share-in-savings contracts in the 2002 E-Government Act is complete and is due out next week.

The policy, developed by the Civilian Agency Acquisition Council and Defense Acquisition Regulations Council after considering feedback on draft rules published in July, aims to mitigate risks that the controversial contracting vehicle poses to agencies. "Through a properly structured share-in-savings contract, agencies may lower costs and improve service delivery without large upfront investments," the policy, obtained by Government Executive, states.

If "done right," such agreements, under which contractors offer technology or other products at little initial cost to agencies in exchange for a cut of savings produced down the road, could serve as the "ultimate performance-based contract," said David Safavian, administrator of the White House Office of Federal Procurement Policy.

"Clearly there are appropriate and inappropriate uses of share-in-savings authority," Safavian said. "The challenge is to use sound baselines so that we can identify just exactly what amount-if any-is saved from the investments our vendors are willing to make."

But critics said that the acquisition councils' final rules will do little to address potential pitfalls in the contracting approach. Share-in-savings agreements fail to save money in the long term and allow agencies to enter spending commitments that aren't subject to congressional oversight, opponents charge.

The E-Government Act permits limited use of such agreements for IT purchases. A senior General Services Administration official confirmed that the Office of Management and Budget has signed off on the rules implementing the law, and said the final policy will be published in the Federal Register in a "matter of days."

The final policy includes a handful of modifications to the draft version. Changes include an emphasis on the need for open communications between government and industry, and the addition of past performance, financial capability and cancellation costs to the criteria that agencies must consider when selecting the proposal offering the best value. The completed rules also provide more details on when agencies can use the share-in-savings authorities.

Agencies can only take advantage of the authorities if they are able to clearly define the expected outcome of a contract and quantify baseline costs, projected baseline costs under the agreement and the difference between the two, the rules note. Agencies also must show a direct link between savings and the use of this contracting vehicle.

In an article written for the American Bar Association's Fall 2004 Procurement Lawyer newsletter, former federal procurement chief Angela Styles, a vocal critic of share-in-savings contracts, argued that there often is no such link.

The equipment acquired, rather than the contracting approach, should be credited for savings, Styles wrote, noting that: "The efficiency savings would be achieved without regard to whether the purchase was made with a direct appropriation or was financed by the private sector through a share-in-savings contract."

Styles also expressed concerns that agencies might attempt to use share-in-savings contracts to circumvent the public-private job competition process required when considering whether to outsource jobs held by federal employees that are considered commercial in nature.

The final rules seek to address that possibility by requiring agencies to follow guidelines in Circular A-76, the rule book on competitive sourcing, when a share-in-savings contract would affect in-house jobs.

"Share-in-savings contracts do not necessarily impact federal employees," the policy states. "However, some acquisition strategies may suggest the replacement of federal workers by contract workers. In this case, Office of Management and Budget Circular A-76 would apply."

This language, however, does little to resolve worries that federal employees have slim chances of winning a share-in-savings contract, said Jacque Simon, public policy director for the American Federation of Government Employees. In-house teams don't have the option of offering to make large, upfront investments in return for future savings, she noted. Any investment an in-house team proposes must be backed by appropriated funds, she said.

"Share-in-savings is all about promises, promises that may or may not be met," Simon said.

To run public-private competitions for share-in-savings contracts, agencies would also need "more instructions on how to assess costs in a consistent and realistic way," Simon added. There are ways "share-in-savings [contracts] can be presented as less costly then they are," she contended.

The senior GSA official, who spoke on the condition of anonymity, said that such instructions are outside the scope of the rule implementing the E-Government Act provision, and would need to be added to Circular A-76.

"At this point, we don't see the need for changes to the costing requirements of the Circular to conduct public-private competitions involving share-in-savings," Safavian said. He noted that in-house teams would likely "require access" to agency contracting officers who could help in entering share-in-savings subcontracts. The discussion is entirely theoretical at this point, he added, as OMB has "not seen any examples where the concept of share-in-savings intersects with competitive sourcing."

The House Government Reform Committee, chaired by share-in-savings proponent Rep. Tom Davis, R-Va., considers the contracting vehicle "A-76-neutral," said spokesman Drew Crockett. "We are not sure how [share-in-savings contracts] might be involved in a competitive sourcing study," he added.

The acquisition councils' rules implement an E-Government Act provision permitting agencies to enter into share-in-savings agreements for certain technology purchases. Under the provision, which sunsets at the end of fiscal 2005, agencies must demonstrate that they have the money to pay for the first fiscal year of the contract and to cover any termination or cancellation costs that ensue.

Davis would like to extend the authority past the sunset date. He is also pushing to expand the use of such agreements to non-IT purchases.