Competition for government contracts tends to drive down prices for taxpayers. But when bidding requirements are narrowly-crafted, as the New York Times showed in an insightful piece Monday, competition may be stifled and operating costs pushed up.
The Times account concerned replacing presidential helicopters, all of them at least 30 years old, but the points it made can help reporters covering any level of government.
Reporter Christopher Drew opened his piece this way:
Wanting to clamp down on wasteful spending, President Obama halted a project to create new presidential helicopters four years ago, saying its soaring price was a symbol of government contracting “gone amok.”
But to the administration’s surprise, a new competition to build the helicopters much more cheaply is also running into trouble. Industry officials said that only one company, Sikorsky Aircraft, was likely to bid on the multibillion-dollar contract this week. And some of Sikorsky’s rivals are voicing an increasingly common complaint—that bid specifications are being written so narrowly they are driving away potential competitors.
Drawing up bid specifications that block competitors is a story not told often enough, even though it is richly documented in reports by inspectors general and auditors. Bookmarking the relevant oversight agencies, getting on their email lists, and setting up alerts for when they post new material are among the simple and easy ways reporters can take note of what the official watchdogs are doing. (A list of federal inspectors general with contact information is here, and a directory of state oversight agencies, such as inspectors general and state auditors general, is here.)
But purchase costs are only part of the government contracting story. Initial purchase expenses can be dwarfed over time by future costs for maintenance, repair, energy usage and replacement parts, known as life cycle costs—heating and lighting a new government building, for example, keeping toilets functioning or replacing carpets. Repairing and repaving roads, too, are life cycle costs, as is an expense that doesn’t appear on the books of government, but must be paid for by drivers: front-end alignments and accidents due to badly paved streets and highways.
The Times’s Drew took note of this concept, reporting that when it comes to new helicopters, “by putting more emphasis on price and being more precise in what it wants, the government could end up with cheaper bids, but could also be excluding equipment that might be more flexible or less expensive in the long run, experts in government contracting said.”
That reference to the long run is about life cycle costs, which add to the initial expense such operating costs as fuel, maintenance and repairs and even dismantling or disposing of the asset once its useful life has ended.
For more background on life cycle costing, the European Commission, for one, provides a simple three-page primer here. A somewhat more complex explanation, focused on buildings, is offered by the federal General Services Administration here.
Typically, government officials (and bidders for contracts) discount future costs such as repairs because they will occur over a period of years or even decades, meaning that an analysis is done for the time-value of money to reasonably compare money spent today with money spent in future years.
Officials should make such analyses using Net Present Value, which essentially reduces present and future costs to the equivalent of covering total costs today. This neatly takes into account that the expected value of a dollar in, say, 2023, is less than today and allows for apples-to-apples comparisons if the same values are used to calculate the equivalent cost today if all future costs were paid at the outset.
While it would be good to learn how Net Present Value or NPV is calculated (as well as Return on Investment or ROI), journalists do not need to be steeped in the theory or the formulas. What they do need to do is understand the concepts and ask government officials if they made such an analysis. (Hint: state and local officials often buy equipment without considering life cycle costs).
David a couple of comments.
Over specification becomes more prevalent when dealing with larger and larger entities an no entity is larger than the federal government. There is extreme risk aversion within large organizations and this aversion to risk in any form is what drives over specification of projects. I find this surprising considering the lack of single point accountability and authority within the management of these large projects. I executed several medium sized projects with the DOD and the DOE and was introduced to these issues first hand. Proactive managers who try to keep on schedule and budget are set up for failure as they have little real authority over their projects and are hamstrung by their bureaucracies. Their decisions can be easily undermined by parallel and even subordinates outside their respective organization structures. Managers are hired in the private sector (although the issues I described above are serious concerns in many large private companies) with the expectation that they will stake their reputation and compensation on their ability to use their judgment and experience to mitigate risk and execute projects in a timely manner.
They make “the good” the enemy of “the perfect” in an attempt to eliminate risk and anyone who has executed a project knows that risk cannot be eliminated it can only be mitigated and managed.
I don’t know what point you are trying to make about life cycle costs.
I have never worked on a project, either for the public or private sector that didn’t take into consideration life cycle costs as it has been SOP for the past 25-30 years. The same with the rest of your points … I haven’t worked on a project for the federal government where all the points you mentioned weren’t explicitly spelled out in a standard broadly used format.
#1 Posted by Mike H, CJR on Tue 30 Jul 2013 at 05:04 PM
Thanks, Mike H, for your note.
While you understand contracting well, many journalists do not. My columns are intended not just ti criticize or praise various news reports, but also to enlighten others so that we improve journalism.
And while life cycle costing is SOP at the federal level, many journalists cover state and local governments, which is why I included this parenthetical:
(Hint: state and local officials often buy equipment without considering life cycle costs.)
#2 Posted by David Cay Johnston, CJR on Wed 31 Jul 2013 at 09:42 AM