At what cost?

A New York Times report on presidential helicopters offers lessons for covering government contractors

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).

Another question reporters should ask, especially for complex systems with many moving parts—such as light rail cars, doors that open automatically, and air conditioning—is whether the bidders provided any design and engineering services. Companies that sell such systems often offer “free” design and engineering work, but what they really do is build those costs into the initial bid or the price of spare parts and maintenance, often in ways that favor their products over competitors.

Journalists covering any government contract for goods—from bridges and buildings to computer systems to swimming pools and tennis courts—should ask these (and other) questions about life cycle costs:

What is the projected life of the property?

What is the projected all-in cost over the life of the property?

How much will maintenance and repairs, energy (if any), cost over the life of the project?

How much downtime is anticipated during such work?

How much could life cycle costs be reduced by spending more upfront for better quality materials, a different design, etc.?

What are the projected costs of disposing of the property when its useful life ends?

What obligations does the vendor have to ensure that the project, building or goods perform as promised?

What clawbacks for underperformance are in the contract?

If Net Present Value was not analyzed, why not?

If government officials cannot answer those questions, that is a story—about spending taxpayer funds without knowing the total all-in costs taxpayers must bear.

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David Cay Johnston covers fiscal and budget matters for CJR’s United States Project. He is a reporter with 46 years of experience, including 13 at The New York Times; a columnist for Tax Analysts; teaches tax and regulatory law at Syracuse University Law School; and is president of Investigative Reporters & Editors (IRE). Follow him on Twitter @DavidCayJ. Tags: , , , ,