Share-in-savings contracting regulations at least a month away

Regulations implementing a law that gives agencies limited authority to enter share-in-savings contracts are expected to be completed less than a month before that authority expires.

Final rules for using share-in-savings agreements to procure technology, as allowed by the 2002 E-Government Act, likely will be issued in September, said David Safavian, administrator of the Office of Management and Budget's Office of Federal Procurement Policy. The law required regulations to be published in September 2003.

In the absence of final regulations, agencies have been hesitant to enter into share-in-savings contracts--in which companies agree to make large upfront investments in return for a cut of savings generated down the road--the Government Accountability Office found in a recent report. This is costing taxpayers, said Rep. Tom Davis, R-Va., a proponent of the procurement technique and chairman of the House Government Reform Committee.

The committee is exploring options for extending the E-Government Act authorities, either by introducing stand-alone legislation or attaching a rider to a larger bill, said Drew Crockett, a Davis spokesman.

Share-in-savings contracts are "in essence, turbocharged performance-based contracts" that reduce costs and improve service delivery, Davis said in a statement on the GAO report. "It's extremely frustrating that the regulations still have not been issued," he said.

But Safavian said the regulations should not be rushed. "We have been careful in dealing with the innovative and complex nature of share-in-savings," he said. "Our goal has been to do it right, not simply to do it quickly."

Agencies used an online program built by the General Services Administration to identify 15 projects that would be likely share-in-savings candidates, the GAO report (GAO-05-736) stated. But as of March, agencies had yet to use the technique for any of those projects, the auditors found.

The difficulty of calculating baseline costs from which to measure savings, lack of employees trained in the contracting technique, and the need to find money to cover cancellation fees if a contract has to be terminated, also have given agency officials pause, GAO stated. The release of final regulations could alleviate some of these concerns, the auditors said.

The civilian and defense agency acquisition councils began drafting a regulatory policy shortly after President Bush signed the E-Government Act, and published a first draft in October 2003. The councils updated that draft in July 2004 and were set to issue final regulations several months ago.

But OMB decided to hold off to ensure that the rules adequately addressed such areas as funding of termination costs, retention of the government's share of savings and submission of business cases to justify use of share-in-savings agreements. "Effectively working through these complexities has taken longer than expected," Safavian said.

The delay has been caused by disputes within OMB over "very technical" issues that would affect how restrictive the policy is, said one observer who asked to remain anonymous, adding that some budget-side people oppose the share-in-savings concept because agencies could effectively spend money that has not been appropriated.

"It really involves how broadly or narrowly one interprets budget statutes," the observer said. "[Safavian] wants to move [the regulations] forward and move them forward in a way that will allow share-in-savings to proceed."

It's not surprising that agencies have so far proven reluctant to use the contract vehicle, said Jacque Simon, public policy director for the American Federation of Government Employees. "They're extremely expensive, and expensive in a way that's almost completely uncontrollable," she said.

The union is concerned about share-in-savings contracts because the agreements could be used to federal employees' disadvantage in public-private competitions, Simon said. In-house teams lack the resources to offer large upfront investments in return for future savings that may or may not materialize, she has said.

The practice also has budgetary implications, Simon said. "If an agency is bankrupting itself through one of these ridiculous programs, what an agency has to spend on programs and salaries is affected," she argued. "That would have a negative impact on our bargaining units. We're interested in good government."

Former OFPP administrator Angela Styles is also critical of the contracting vehicle. In an article written for the American Bar Association's fall 2004 Procurement Lawyer newsletter, she argued that financing costs could make share-in-savings acquisitions much more expensive than outright purchases.

But "there's not really that much interest out there anyway," Styles said Friday. The arrangement could be risky for both agencies and contractors, she said.

"Most agency officials we interviewed said an obstacle . . . would be not having a potential savings pool large enough to provide contractors an appealing return on investment," GAO noted in its report. GSA and Defense officials determined that the savings-to-investment ratio would need to be at least three to one to make such arrangements attractive, the auditors said.

Steven Kelman, OFPP administrator under President Clinton and now a professor at Harvard University's John F. Kennedy School of Government, said he hopes share-in-savings will catch on. Such contracts are a "great thing for government" if they're used for nonconventional purchases where savings aren't guaranteed, he said.

"I'd like to see a less restrictive interpretation of the law consistent with congressional intent," Kelman said.

Bill Woods, director of acquisition and sourcing management at GAO and author of the recent report, said he feels regulations could be written that address agencies' concerns. "I think it's possible to work through these issues," he said.

Meanwhile, OMB is talking to several agencies about potential share-in-savings opportunities, Safavian said, and will let them run pilot initiatives "if they submit business cases for approval."