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For Government Contracting, Defining “Inherently Governmental” is Inherently Difficult

By Dennis D. McDonald, Ph.D.

True story:

“We only had 4 days to respond. They wanted a fixed price bid,” my colleague told me over the phone, sighing.

A week before I had responded to his hasty proposal text request in the middle of developing a report for one of my own Federal clients. I hadn’t heard from him since.

“So how did you estimate the price?” I asked. The RFP had been vague. I had dismissed responding on my own, given the fixed price requirement. I figured it was wired for someone else with more insight into the fixed price requirement.

“I padded it,” he admitted. “What else could I do?”

Fixed Price Contracts

That’s one of the basic problems with fixed price contracts on service or development type contracts where detailed requirements aren’t provided. You can end up bidding defensively, balancing various risk management considerations ranging from the implications of lowballing to being rejected outright because of price.

That’s one of the reasons I’m concerned about how President Obama’s proposed changes to Federal procurement rules might tip the scales even more in favor of the issuance of fixed price contracts in situations where insufficient detail on requirements and available budget aren’t readily available to potential bidders.

Other Contracting Reform Challenges

This concern and others were voiced recently in a meeting between contractors and OMB, as reported by Government Executive. In addition to concerns about inappropriate use of fixed price contracts in situations such as complex research-and-development efforts, contractors also mentioned:

* Sole-source contracts still have their place in situations where emergency time pressures exist.
* The lack of trained and experienced government contract managers can lead to overruns and mismanagement.
* When considering what governmental functions should be “insourced,” no widely accepted definition of what constitutes an “inherently governmental function” exists.

These issues were addressed recently in a white paper by Raj Sharma, President of the Federal Acquisition Innovation & Reform (FAIR) Institute, a non-profit whose mission is “…to innovate and reform the federal acquisition system.” Sharma’s white paper The Move to ‘Insourcing’…Proceed with Caution contains the following statement:

The Federal Acquisition Innovation and Reform Institute (FAIR) supports efforts to “insource” critical positions and personnel so that the government possesses adequate organic capability to address the challenging and daunting tasks ahead of us. However, we recommend that the administration, Congress, and agencies proceed with caution, through a deliberate and systematic approach to insourcing based on facts and analysis. Agencies should also adopt realistic time lines for recruiting and integrating new personnel as well as developing new business processes, if required.. Rushing to undo what has been in the making for years, perhaps decades, will be counterproductive. We must also take into account the retirement “tsunami” that makes merely maintaining the current size of the workforce a challenge.

It’s hard to argue against careful planning and analysis, especially when we’re dealing with important public services that cost billions of dollars. According to Sharma, the Federal Government needs to carefully define what it means by “inherently governmental” positions. It also needs to define the “core competencies” that go with such positions.

Sharma’s paper touches on both questions. He suggests an approach to defining core competencies (he suggests “value stream analysis”) and to determining when long-term contracted positions should be brought into the government (he suggests the need for a 5-year time boundary, honest cost-benefit analysis, and realistic public-to-private sector wage comparisons).

Costs Need to be Understood

While I believe it will be impossible to ever completely remove politics from decisions about what constitutes an “inherently governmental responsibility” — just look at how jerked around government regulations can become in response to changes in Administrations — I do think there has to be a basic understanding of how much it costs to do work inhouse versus how much it costs to outsource. That won’t always be easy. But there should be ways to do cost comparisons that don’t encourage “gaming the system.”

The Impacts of Information Technology

One area should receive some attention in the analysis of Federal staff versus contract staff is how work is impacted by information technology. Some tasks require frequent face to face meetings and proximity. Others can be distributed to staff performing work remotely. Still others require access to expertise that cannot be located within a single geographic area.

Workers are increasingly able to collaborate electronically via networks that support network based audio, video, file sharing, and real time communication and data access. Some implications of this are the following:

* Will the ability to manage a geographically distributed workforce provide more flexibility in, for example, the ability to hire and retain staff with specialized expertise?
* What impact should the ability to work remotely have on the decision of whether a job should be performed “inhouse” or by a contractor?
* What impacts will the U.S. Government’s ballooning deficits have on whether or not work is done inhouse or by contractors?

Does Excessive Outsourcing Reduce Efficiency?

In a previous post I wrote about how, in my view, excessive outsourcing of contract management and procurement lead to inefficiency both for the government and for contractors. In that post I suggested that greater transparency in the procurement process and more extensive use of collaboration tools for sharing information, especially at the front end of the procurement cycle, could speed up procurement and make contracted work more responsive and efficient.

One implication of taking a more collaborative approach to work performance is that it becomes more difficult to distinguish specifically what is the Government’s responsibility and what is the private sector’s responsibility. Especially in development type contacts, the “give and take” that can occur early in the procurement process, when more collaboration is encouraged, can result in a blended view of responsibility.

DHS SECURE: An Example of Public/Private Sector Collaboration

An example of this is the DHS SECURE (System Efficacy through Commercialization, Utilization, Relevance and Evaluation) Program, which is one of DHS’ “…Private sector outreach efforts [that] focus on notifying the private sector about opportunities that exist for partnership and business development to address the needs of the Department and its stakeholders.”

A core element of SECURE is DHS’ working to establish public statements describing DHS technical requirements and market size estimates, then working with private sector organizations via a dedicated process to develop and bring those requirements’ products to market.


Programs like SECURE involve a different approach to procurement than developing requirements and “throwing them over the door to the other side.” Instead they involve collaboration between public and private sector individuals and organizations in nontraditional ways that make the public/private sector distinction more fuzzy than ever.

Such innovative approaches to procurement will need to be considered when developing definitions of what “inherently governmental” means.

Copyright (c) 2009 by Dennis D. McDonald. Contact Dennis via email at [email protected] (This post was originally published June 23, 2009 in Dennis McDonald’s Web Site.)

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Great post. From my perspective, I think there needs to be more training on contracting from all sides from program managers to contract officers on all the possibilities and strenghts/weaknesses in approach. If you talk to a truly seasoned CO or a PM who has been around, they know tons of tricks to get a great contract out and get great performance. Much like how I feel with the pay system in government, there are some problems but often we could also perform better and utilize the system we have better than we currently are.

Dennis McDonald

In the old days, experienced staff could be relied on to provide the expertise and insight you suggest is necessary to manage a successful contract. While attrition through retirement and under-staffing may be removing the expertise needed in contract management, what other factors are at play that may be preventing the Government from bringing appropriate skills to bear on the problem?

Christopher Parente

Good post Dennis. From my admittedly outside perspective, I think the revolving door effect may inhibit more transparency. The most experienced government employees can jump to a contractor, greatly increase salary and work the process from outside. If the procurement process changed greatly, their knowledge wouldn’t be as useful.

I’m not trying to be overly cynical here (please don’t flame me Steve!), just saying it may be a factor.

Daniel Daughtry-Weiss

Contract management and procurement skills take years to develop. Training programs help, but it is day-to-day experience that fosters skills. I would imagine mentoring combined with frequent and inter-agency assignment rotation would be an even better approach to nurturing these skills in the next generation of government workers. There are so many different types of contracts each with different tricks.

Daniel Daughtry-Weiss

Yep. My only reservation is that “apprenticeship” to me sounds something that would be applied only to early career individuals. Mentoring, however, can be applied regardless of where you are in a career. Recruit individuals with 10-20 years of experience in contract management and give them the space to be available to those coming behind them.