Agencies reduce use of noncompetitive, high-risk contracts

Federal agencies are making significant progress decreasing their reliance on sole-source contracts and other "high-risk" procurement approaches, according to data the Office of Management and Budget released on Wednesday.

In March 2009, President Obama instructed federal procurement officials to trim their use of noncompetitive acquisitions, as well as cost-reimbursement and time-and-materials contracts by 10 percent. And while agencies have yet to reach all those goals, they appear to be well on their way.

During the first two quarters of fiscal 2010, from October 2009 through March, contracts awarded without competition dropped by 10 percent compared with the same period in fiscal 2009, OMB's data shows. In a somewhat less encouraging sign, use of contracts with only one bid declined by just 2 percent during that same time period.

Altogether, 15 of the top 24 procuring agencies cut their use of sole-source or one-bid contracts by at least 10 percent, OMB said.

Noncompetitive contracts have been a lingering problem in the acquisition community. From fiscal 2000 through fiscal 2008, sole-source contracts leapt from $73 billion to $173 billion. Contracts with one bid, meanwhile, skyrocketed from $14 billion to $67 billion, the report said.

"We not only halted this increase, but actually reduced the rate of growth in these wasteful contracts," OMB Director Peter R. Orszag wrote on Wednesday on his blog.

Another top priority for acquisition leaders has been clamping down on the use of cost-reimbursement and time-and-materials/labor-hour contracts, which rose significantly during the George W. Bush administration. Obama officials prefer fixed-price models, which are considered safer because costs can be better controlled.

In the first half of fiscal 2010, time-and-materials/labor-hour contracts -- in which the government pays a vendor for the number of hours actually required to perform the service -- dropped by 7 percent compared with the same period in fiscal 2009, according to OMB.

Cost-reimbursement contracts, which provide for the payment of allowable incurred costs, dipped by 6 percent, Orszag wrote. Seventeen of the top purchasing agencies cut their use of the two contracting types by at least 10 percent.

"Agencies are achieving these reductions through the implementation of sound contracting practices such as peer reviews and contract review boards that bring seasoned contract and other experts together to help contracting and program offices identify and address high risk practices," the report said.

Among the agencies making big changes is the Environmental Protection Agency, which has relied on cost-reimbursement contracts for the remediation services of its Superfund sites. Last year, the agency moved a contract for the cleanup of an abandoned pesticide manufacturing facility in Florida to a fixed-price model and saved more than $5 million -- a reduction of 65 percent, compared with acquiring the services on a cost-reimbursement basis, OMB said.

Obama's March 2009 directive also called on agencies to trim 7 percent from their baseline contract spending -- 3.5 percent in fiscal 2010 and another 3.5 percent next year, for a total savings of $40 billion annually.

But OMB officials concede they do not necessarily expect the total federal contracting spending to decline, but rather that the growth will slow by 7 percent. Between fiscal 2000 and fiscal 2008, contract spending climbed by an average of 12 percent annually. In fiscal 2009, agencies reduced the growth rate to 4 percent, according to the data.

In December, agencies submitted plans to produce $19 billion in acquisition-related savings in fiscal 2010. Orszag said agencies are on track to meet the savings goal for 2011 using a variety of strategies, from eliminating contracts to stronger implementation of strategic sourcing.

For example, the Defense Department recently announced it would save $300 million during the next five years on its Military OneSource contract, which provides resources and support to service members and their families. The Pentagon worked with the Interior Department's Acquisition Services Directorate to re-compete the massive contract, which had not been subject to bidding since it was established shortly after the Sept. 11, 2001, terrorist attacks. The new contract has a number of cost-saving measures, including paying for call center services based on monthly call volume, rather than a single fixed price.

The Homeland Security Department, meanwhile, is making increased use of reverse auctions, in which vendors bid lower prices to win work. In fiscal 2009, DHS conducted more than 2,500 reverse auctions for about $340 million in off-the-shelf products, resulting in savings of more than $40 million, OMB said.