Traditional Contracts

At one end of the spectrum, with little or no collaboration, are contracts that we identify as classic or traditional. This form of contracting has three defining characteristics: (1) contracts are complete, in that they specify the rights and obligations of the involved parties across future contingencies (Gietzmann 1996; Tirole 1999); (2) they are transactional, in that the terms of the relationship are clearly spelled out in writing or clearly understood in the transaction (Cooper 2003; Savas 2000); and (3) they are usually short-term agreements, one-off exchanges or contracts for a discrete, definable item such as constructing a building. Examples include contracts for basic materials and commodities that governments routinely use, such as office supplies, automobiles, computers, and concrete. Often a purchasing department establishes central state- or government-wide contracts for these types of goods with one or more vendors. Government departments buy from those lists with the designated vendors. There is no collaboration. It would be the same as if an individual went to Staples, Office Depot, or Best Buy to make a purchase. In return for an agreed-to (or negotiated) dollar amount, we receive the good that we want. Our interaction is momentary. While the purchase itself is “voluntary,” there is no “sharing” of resources, risk, or the other attributes of a true collaboration. These are sometimes referred to as spot or on-the-spot transactions.

Another example of a short-term classic or traditional contract might be the construction of a governmental office building. There is an ongoing interaction between the parties to the contract during construction, but that interaction is largely defined by the legal contract. There is little collaboration in the terms we have discussed in chapter 1, for example, no sharing of decision making and limited sharing of risks. Of course the private contractor assumes the risk of not completing the project within the agreed-to budget or time frame, and failure may lead to penalties depending on the contract.

In traditional or classic contracts, the focus is on the formal legal documentation and the requirements and remedies detailed in the contract that govern how both the government and the contractor will act. In a competitive, contracting-out approach, government dictates the terms and conditions for service production and delivery. The government agency (the purchaser) defines what it needs, specifies the desired product or service, and then issues a request for proposal (RFP) to allow those in the private or nonprofit sector to bid on the good or service being sought. Potential vendors are invited to offer proposals for providing the good or service in the most cost-effective or efficient manner, given the constraints and specifications imposed by the government in the RFP.

Collaborative Contracts

At the other end of the spectrum, representing true collaboration, are contracts that require ongoing interaction between government and representatives of the sector organization receiving the contract. These complex modes of contracting generally adhere to one or more of the following characteristics: (1) they involve incomplete specifications of expectations, as the involved parties modify their requirements over the course of the exchange (Brown, Potoski, and Van Slyke 2008, 2009, 2011); (2) they are relational, as they involve aspects of governance that stretch beyond the formal or written terms of agreement (Bertelli and Smith 2009; Zaheer and Venkatraman 1995); and (3) they are generally long term in nature, with repeated interactions (Johnston and Romzek 2005; Gazley 2008). An illustration of such a contract is a state social services agency contracting with a local nonprofit to deal with a particular social problem—perhaps child care, sheltering battered women, or teaching basic parenting skills. The government might contract with the nonprofit not knowing the best approach to address these issues, instead relying on the nonprofit’s local knowledge and mission to achieve success. The approach of the nonprofit and procedures in the contract might evolve gradually as both the government and nonprofit adapt to changing circumstances. This type of contract is often referred to as relational because both the nonprofit provider and the government need significant discretion to adjust services to meet the needs of the population identified (Sclar 2000; Van Slyke 2009).

Similarly, government might want to contract for something not yet in existence (the ultimate in an “incomplete” specification), yet it feels that if the private sector could produce something like it was envisioning, it would be beneficial for government. For example, the US Defense Department saw the need for a stealth bomber without having a very good idea of what it would look like, how much it would cost, or how to make it. A contract with a defense firm to produce such a weapon necessarily required ongoing dialogue and coordination to achieve a successful outcome. This type of contract is sometimes referred to as an incomplete contract because government cannot specify in advance the final product; therefore, the success of the contract hinges on good collaboration between government and the private contractor (Van Slyke 2009). The nature of the product or service delivered by a contractor in these kinds of complex agreements is often asset specific. There is a mutual dependence in the relationship since government would be at a loss if the contractor exited the agreement, and so would the contractor since the product is so specific to the needs of this one purchaser (Lonsdale 2005; Domberger and Jensen 1997; Brown and Potoski 2003).

This chapter provides a framework for analysis and management of government contracting—both traditional and collaborative—from the perspective of a public manager. We start with a definition of basic terms, then provide a rationale for contracting, and offer a brief history of contracting in the United States.

Definitions

Often there is some confusion between the terms contracting out and outsourcing. While some authors use the terms interchangeably, there is a subtle distinction between the two terms:

• Outsourcing refers to the transfer of a function or service from government to the private sector. Government turns over the control (or ownership) of the process and simply tells the supplier what products or services it wants to receive and makes the purchase in the private marketplace. Outsourcing has been a key area of governmental reform under the theory that governments should not do functions that are commercial in nature and could easily be provided by the private sector. Targets for outsourcing have included areas such as printing, lawn and building maintenance, auto maintenance, and cafeteria services. These activities are readily available in the commercial marketplace, and there may be no need for government to duplicate those services; instead government should purchase them from the lowest qualified bidder. Many studies report that this saves government substantial funds (Savas 2000).
• Contracting out is a government decision to have a private or nonprofit sector organization produce something (or an input into something) that is essential to a government function and therefore should be controlled by government. Government has a far stronger stake in the specifications, the process, and the outcome of such a contract. An example might be the construction of an aircraft carrier, where government is interested in the capabilities of the ship, or contracting out data processing, where government needs the output of that processing to fulfill critical missions.

Managed competition is another term used in conjunction with contracting and outsourcing and has a specific meaning. It is a defined process through which government decides whether to outsource or contract a given function or service.² In managed competition, government workers, currently producing a good or service (but perhaps not as efficiently as some would prefer), are given the opportunity to compete with private sector bidders to see whether the government or private sector can more efficiently and effectively provide that good or service. Managed competition was introduced during the presidency of Bill Clinton and supported by Vice President Gore’s National Performance Review (1993) and has waxed and waned with various national administrations. The Obama administration currently is not a supporter of the concept, but the process is still widely used in state and local governments and widely advocated by Indianapolis’s mayor, Stephen Goldsmith (Sclar 2000). The federal Office of Management and Budget concluded during the presidency of George W. Bush that the process had saved the national government significant dollars, including over $7 billion from 1,375 competitions during a five-year period from FY 2003 to FY 2007. Government savings occurred even when public sector employees won the competition, which they did in over 70 percent of the competitions in FY 2007 (US Office of Management and Budget 2008).

Rationale for Contracting

By contracting, public managers acknowledge that a private or nonprofit organization can be more efficient or effective than government in the production of some good or service. This may be due to potential vendors’ greater experience and expertise; they may have invested in equipment and technology that is more productive than that used by the government; they may use management processes that are more efficient; or their total labor costs (including health insurance and pension benefits) may be lower than those of the government.

Commercial activities are usually better performed in the private sector because competition and ownership drive innovation and cost reductions. This certainly is the case in most spot transactions, as well as activities where there is a large commercial presence, such as office maintenance, auto repair, or other common commercial activities.

Government may also lack the in-house capacity for some critical functions and, even if politically possible, it may not be cost-effective to build those capacities within government. Specialized types of expertise, such as computer security, may be a skill that is difficult for most government agencies to develop through a government workforce. Government does not have the ability to pay the same salaries as the private sector or provide the same range of professional challenges that might exist in a larger private computer security firm.

Contracting also may reduce the principal-agent problem in certain cases where competition forces the contractor to reveal the most cost-effective way to achieve a certain outcome. Critical to this result is good design of the request for proposal (the RFP), the criteria for selection of the contractor, and the ongoing government-contractor relationship.

Contracting in the United States

Contracting has a mixed history in the United States, dating from the time of the Revolutionary War, when George Washington complained about the poor quality of arms, food, and clothing received by the Continental Army and condemned the “mercenary Spirit” of those supplying his troops (Mayer 1999). The Continental Congress formed committees to look into the supply problems, including the waste, fraud, and abuse of contractors to the army, a problem that would plague contracting practices throughout the nation’s history, especially during wartime. The term shoddy derived from contracting in the Civil War and referred to material that looked like cloth but consisted instead of pressed cloth scraps (Cooper 2003, 30).

The Continental Congress contract to create a postal system revealed another common issue with contracting: price versus reliability. There was no requirement that the contract go to the lowest bidder, and the question soon arose as to how to prevent price gouging and at the same time ensure that service could be provided effectively by the low-priced bidder (Cooper 2003). Price overruns also plague contracting. The now-famous ship the USS Constitution (known as Old Ironsides) was one of six ships contracted for in 1796 under the new government of the United States, but only three were completed at the agreed-to price. They were excellent ships, but a question that would plague military and defense contracting is whether contractors and their military overseers opted too often for a “Cadillac” approach rather than focusing on price effectiveness.

The national government used contracts not just to secure public goods and services but also to support new industries, including rail and airlines, which received contracts to transport the nation’s mail. The interstate highway system established during the Eisenhower administration resulted in a massive increase in infrastructure investment in the United States, most of it provided by the private sector through contracts with government.

Contracting reform is an issue that has received constant attention throughout the nation’s history, especially during the Progressive movement of the late nineteenth century. Reform efforts were aimed primarily at requiring open, transparent processes, avoiding corruption through checks and balances and conflict of interest statutes, and preventing cost overruns. Many of the reform efforts began at the local level of government, led by such organizations as the National Municipal League and the International City/County Management Association.

The balance between public production and private production through contracts has always been an issue. Out of necessity during World War II, the United States largely shifted from government-produced armaments to the use of the private sector for the research, development, and production of the war machine. The success of such programs as the Manhattan Project, by which the United States became the first nation to use atomic power, was the result of the use of private contractors working under broad federal direction. At the close of the war, a deliberate decision was made to continue to use contractors, both private and nonprofit (such as universities), for federal activity. The increasing success with contracting led presidents from both parties to declare that “commercial activity” and anything not “inherently governmental” should be contracted to the private or nonprofit sector.

As the outside contractor force blossomed, some urged caution that the blurring of the boundaries between public and private raised troubling questions about the constitutional premises of our government (Bell 1962; Price 1965; Guttman 2000, 2002). Following President Eisenhower’s 1961 warning of a growing military-industrial complex, various concerns were identified in a 1962 cabinet-level report to President Kennedy. The Bell Report warned that without corrective action, a brain drain from government into the contractor workforce would result.³ However, political leaders saw contracts as a way to reward friends without building up the federal bureaucracy.

Starting with President Reagan and continuing through the administrations of President George W. Bush, reliance on outside contractors has accelerated. Between 2000 and 2010, federal contracts grew from about $200 billion to over $550 billion with virtually no growth in the federal contracting and acquisition workforce. This growth in contracting has been undertaken with political camouflage to give the impression that the federal government remains “small” while federal activities continued to expand. While contracting was initially confined to purchasing commercial activities or major weapons systems, many contractors now sit side by side with the federal workforce in government offices, often outnumbering that workforce, and perform functions that are among the most important core functions of government. The military even relied on a private contractor, MPRI, to prepare a manual to govern the employment of contractors operating in the battlefield (Moten 2010).

Collaborative Contracting and Public Managers

The most collaborative type of arrangement has been labeled a complex or relational contract. This type of contract is based not on a detailed set of standards, processes, and specifications, but on a relationship of trust and collaboration between the parties. The explicit terms of the contract are just an outline or framework of the collaboration, which is built on ongoing interactions, not just a one-time transaction. A variety of implicit terms and understandings determine the behavior of the parties and the actual production of the contracted good and service. According to Van Slyke (2009), relational contracting does not happen by default; rather “it is a deliberate decision about contract design and management” (148).

Public managers engage in this type of contracting when it is difficult, if not impossible, to describe the specific output or quality of services desired or when they have developed a level of trust in the contractor. The advantage of a contract that contains less detail is that the parties can have an ongoing dialogue concerning the best approach to the service or issue. The disadvantage is that only the specifics in the contract are legally enforceable. Relational contracts place more responsibility on the public manager to have regular discussions with the contractor as to how the service is provided and what is occurring in terms of results.

Relational contracting is often used when the parties to the contract have a mutual interest in an ongoing relationship. An example might be a contract between a state human services agency and a local nonprofit organization whose mission is to provide certain social services to a needy population. There is an advantage to both parties to develop a collaboration of trust rather than try to spell out every possible detail or contingency in the contract. In these types of arrangements, “reputation, trust and custom can play an important role in ‘completing’ a contract, especially longer term and repeated contracts where parties have an incentive to develop a reputation for fair dealing” (Petrie 2002, 120).

A collaborative contract in some ways resembles a partnership with the aspects described in table 3.1. Such contracts tend to be more results oriented, with less detail on process and specifics. There often is ongoing negotiation as to the specifics of the performance. Public managers are more concerned with the results of the contract, whether the contractor is meeting the needs of the population being served, and whether the public perceives that it is receiving good value for the contracted funding.

There are some important differences, however, between a collaborative contract and a partnership. For example, in most cases, the contractor is not assuming any significant risk (other than the contract not being renewed). Nor does the contractor finance the project, as might occur in a partnership for developing public infrastructure. In addition, most governmental contracting relationships leave most of the significant decision making to the public agency. There are good reasons for this. It is the public agency that is responsible for ensuring the success of the contract and its consistency with the public interest. In contrast, partnership success is the responsibility of both partners.

No contractor, however public spirited, will have the same level of attention to the public interest as a public manager. At the same time, allowing some independent decision making by the contractor may result in a better outcome than if the public manager tries to micromanage the process. As the private or nonprofit contractor assumes more risk and decision making, the contract begins to resemble a partnership instead of a simple principal-agent relationship. Partnership issues are discussed in more detail in chapter 4.

Clear Expectations

Contracts often fail at the very beginning of the process, when a government agency decides to outsource or contract out a function. If public managers cannot clearly articulate what they want, they are not likely to assess options effectively or develop good criteria for the contract—essential for attaining a “good deal” for government. This is important in developing the RFP that defines what it is that government desires to contract for. When there is uncertainty, it is worth the up-front planning to clearly define the governmental need. One approach in such uncertainty is to issue a request for information (RFI) and allow potential vendors to explain options and potential solutions to particular problems or needs. This was the approach one of us used during Utah’s development of a new telecommunications system for state government. Although the state had some idea of its needs, the options available and what might best serve the current and future interests of the state were unclear. The RFI produced a variety of potential solutions, with various features and options. From this information, the state was able to craft an RFP with more specific features, both mandatory and optional, that provided vendors with clear expectations of the state’s needs and desires.

This also is the time to decide whether the contract will be “complete” or whether an ongoing dialogue is necessary with the successful bidder, creating a more collaborative contract. Thinking about that process and the nature of the likely collaboration is critical at this stage. As government agencies engage in strategic planning, contracting should be part of a larger strategy about the role of contracting in relation to their agency human resources within the context of the mission of the agency (Walker 2002; Bryson 2011).

Assessment

Once they have a clear sense of the product or output desired, public managers need some process to assess whether government should do this in-house (make) or contract for it in the marketplace (buy). There is no perfect assessment methodology: the one we look at is based on an analysis of a number of authors, under the heading of COMPARE before contracting out a function (the acronym is spelled out in table 3.2). The list of illustrative questions in the table provides a framework to assess the pros and cons of in-house production versus contracting out. Of course, in some cases, the need to contract out is clear, as it was in the case of the new telecommunications system for Utah. Even in this case, however, going through an assessment tool may reveal issues or problems that will have to be addressed during the purchase.

Since efficiency is often the primary reason for contracting, an assessment of the costs and benefits of contracting versus in-house production is essential, though not always easy to conduct. The true costs of a function to government are not always clear because of a number of factors (Sclar 2000):

• Some employees perform more than one function or may support another function. For example, emergency medical personnel may also support firefighters, or an army cook who also is trained as a soldier.
• Overhead costs are not easily allocated. Looking at marginal costs and the use of activity-based accounting may assist in appropriately costing a function.
• Political interference and contract modifications can result in higher contractor costs than originally anticipated.

Contracting is often sold on the expectation that competition will drive down cost; however, in many areas, especially military systems and hardware, there may be a limited number of potential vendors with the skills necessary to bid on the contract.

All of these illustrative questions could easily consume several pages of discussion and analysis, which is beyond the scope of this chapter. In addition to the cost issue, however, there is one other critical threshold question: Are there any functions that are inherently governmental and should not be contracted out, no matter whether it might be more cost-efficient to do so? The federal Office of Management and Budget (2011) defines an “inherently governmental function” as one that “is so intimately related to the public interest as to require performance by Federal Government employees.”

In the United States, the Supreme Court has ruled that government has the authority to contract, but cannot contract out certain basic governmental powers or functions. Various federal administrations have attempted to interpret this mandate, and it is incorporated into federal regulations and circulars, but defining the terms has been problematic. The federal Office of Management and Budget’s current list of “inherently governmental” powers and “critical functions” powers is fairly narrow and is summarized in the box.

This is a much debated area. Nationally we have contracted out prisons, security for ambassadors, and even security for our troops overseas. We have contractors who draft testimony for public officials testifying before Congress and contractors who sit side by side with federal employees drafting regulations that affect businesses and individuals. As noted earlier, the military even relies on a private contractor to prepare a manual to govern the employment of contractors operating in the battlefield. All of these arguably fall under the inherently governmental functions in the latest OMB Policy Letter (2011), and yet federal agencies contract out these functions because they have not been given authority to hire the number of federal employees necessary to carry out their missions. While federal officials might be nominally in charge to ensure “regularity,” the reality might be quite different (Guttman 2000).

It is at this stage that the decision must be made as to whether the contract will be a competitive or a sole source one. Since a major reason for contracting is to take advantage of competitive market forces, it would seem that most contracting should involve multiple bidders. But there may be important reasons to approach only one or a few vendors. The expertise desired may be very specific, with few firms able to provide what is desired. In US Department of Defense contracting, we now have an oligopoly with few vendors for most defense systems. At a state or local level, contracting may entail working with local nonprofits or faith-based organizations that have particular access to the client population that government wants to support. In these cases, a full, competitive sourcing may not make sense. Since competition is a major factor in reducing costs to government, there must be other counterbalancing advantages to contracting if competition is not present.

Criteria

At the heart of good contract design are the criteria government develops to make the selection and measure the success or failure of the contract. Selection criteria enable the public manager to make the best choice among competing contractors. In traditional contracting, government states exactly what it wants and then selects solely on low price—that is the main reason governments decide to buy in a competitive market. However, contracting has moved beyond price considerations to a broader list of criteria that include both cost and various measures of value, such as past performance, reliability, flexibility, and the ability to take on risks that normally government might bear.

It is also critical for public managers to specify what constitutes success. There must be a clear specification of the goods or services to be delivered and the performance standards expected, providing for accountability. In short, what are the measurable results, outputs, or outcomes anticipated in the contract, and how will the government measure whether they have been met? If a certain quality of the product or service or if public satisfaction will determine whether the contract is successful, then those measures should be built into the criteria for selection. There has to be a relationship between the choice of a particular contractor and how to determine whether the contractor was a success.

Criteria might include design or other specifications (how the contract is fulfilled) or could primarily be based on performance (what the contract is to achieve). Traditionally government has relied heavily on design specifications, and those specifications, even for the simplest item, have pages of detail that draw derision from critics. It is now generally felt that performance criteria offer the best method of selection, as ultimately that is what government is trying to achieve. Sometimes a public agency might include both types of measures, where a certain design approach might be viewed as necessary or in the public interest.

Even in cases where a contractor is viewed in some respects as a collaborator, the core of the relationship is the contract itself, an enforceable document that sets out the responsibilities of both parties to the contract. As Cooper (2003) notes, “The contract relationship is, after all, a legal relationship” (95). Thus, public managers must recognize that no matter how collaborative the contract is, the only measures that managers can hold the contractor accountable for are those specified in the contract itself. In order to ensure impartiality, selection should be made by a team of analysts and not just the judgment of one person.

An important area is how the prospective contractor will be compensated. The two most common methods today are fixed price or cost reimbursement. In a fixed-price contract, the contractor bids a price that it is paid based on the delivery of a stated product or service. This may be used in either a competitive or sole-sourcing contract and might be adjusted with change orders or other specific factors in the contract (e.g., general inflation). In a cost-reimbursement contract, the vendor is paid for all legitimate direct and indirect costs to achieve the product or service in the contract. In addition, vendors are generally paid a fixed fee award in addition to the costs to provide the firm with a profit margin. Past practices of cost reimbursement plus a percentage of costs are no longer in use because of the obvious incentive for the contractor to increase base expenditures.

A key area of contract negotiation is how the public manager ensures good contractual success—that is, what types of incentives (for superior performance) or penalties (for lack of performance) are built into the contract and what performance benchmarks are used to make those decisions. So-called performance contracts are the latest manifestation of this issue. In one sense, of course, all contracts should be performance contracts. But it may well be that contract design can lead to a win-win superior performance by the contractor. An oft-cited example is the State of California’s contract award to restore its infrastructure after a major earthquake, which included major performance bonuses for successful early restoration and penalties for delays. The freeway opened seventy-four days early and netted the contractor a bonus of more than $14 million—almost equal the original contracted amount (Cooper 2003). While some complained about the largess of the bonus, the savings to state residents and commercial firms in reduced delays likely exceeded the additional cost to the state.

Transparency

The clearest way to avoid contract fraud and abuse and promote integrity in government is transparency throughout the process of contracting. The federal government and most states have developed statutory procedures to improve the process of contracting, including publishing bid requirements and selection criteria, keeping all bidders informed throughout the process, an open selection process based on the criteria, and the ability of aggrieved parties to appeal to some independent arbitrator, such as the General Accountability Office in the case of the federal government. Transparency often is an issue in developing nations that do not yet have a legal system that supports fair and impartial contracting. The box provides a list of some of the more important factors in contract transparency that will assist public managers to avoid corrupt practices.

From this list, it is obvious that developing nations will have difficulty in meeting the second and third items in the box to avoid corruption. One of the ironies of effective cross-sector collaboration is that governments often involve the private or nonprofit sector because of government failure, and yet effective contracting requires a government that has strong legal protections and due process—an area that many developing nations find problematic.

Monitoring

Contracts are not self-executing. Public managers often spend more time on selecting a contractor than they do on the operations or execution of the contract. This lack of effective government contract compliance, at least at the federal level of government, has resulted in the Government Accountability Office’s consistently listing contract management as high risk (2011). Even when the contracts are well designed, it still is essential to monitor for compliance to contractual terms and specifications. Monitoring primarily includes an examination of the legitimacy of the costs of the contractor (in cost-reimbursement contracts) and the performance in achieving the results anticipated in the contract.

Good contract administration is a balance between developing good working relationships with the contractor and effective oversight to meet government expectations. Some agencies begin contract operations on major projects with a joint retreat designed to build an effective relationship between contract managers and contractors. The relationship does not have to be (and should not be) adversarial, but it also should not be so cordial as to risk the manager’s cooptation by the private sector. Developing a trusting, collaborative relationship, however, will facilitate contract administration because it reduces transaction costs of repeated site visits or audits. Building on work by Hardin (2002) and Sako (Boston 1994) we identify three levels of trust:

1. Contractual trust—adhering to the legal agreement. There is little collaboration in this trust level. The public manager trusts that the contractor will complete the task according to the contract. Hardin refers to this as “encapsulated interest”—the contractor’s interests align with the government’s because it is in the contractor’s interest to complete the contract according to terms. In many cases, nonprofits are dependent on the resources provided by the government contract, and the resource interdependency allows the public manager to have confidence that the contractor will fulfill its part of the bargain.
2. Competence trust—belief in the competence of the contractor. In this level of trust, the public manager recognizes the special expertise or local knowledge of the contractor and allows discretion within the confines of that competence area. This may come from past interactions with the contractor and may gradually grow with repeated collaboration. Although this is not yet a partnership, there is genuine collaboration and a respect for each party’s expertise and judgment.
3. Goodwill trust—confidence that the contractor will go beyond the contract minimum in order to achieve mutual objectives. As a result of repeated interaction and collaboration, the public manager now views the contractor as a true collaborator in delivering a public good or service. The contractor will have considerable latitude on how to proceed and on daily decision making. The public manager focuses on the results of the relationships without the need for ongoing audits or detailed reporting and monitoring.

Public managers must recognize the tension that exists between developing trust with the contractor and holding the contractor accountable. Whatever the level of trust, it remains the public manager’s responsibility to ensure that the public interest is met in the contract execution, and that requires monitoring the contract. The frequency and level of monitoring often depend on the level of trust that exists between the public agency and the contractor.

Sometimes contractors fail partially or totally. The fault may or may not be the contractor’s. Conditions may change. The government itself may find that its initial needs assessment is no longer accurate. Thus, the contractual agreement must include mechanisms for both contract modification and, if necessary, termination. In some types of contracts (e.g., facility construction) contract modifications almost always generate additional costs; however, there may be cases where new technologies will give government an opportunity for more cost-effective solutions. A contract should not be so inflexible that it prevents such an accommodation.

Some contracts are not simple purchases but involve interdependent relationships between a government agency and the contractor. Many defense contracts fit this definition. In this case, government will often have a program manager that works on a regular basis with the contractor counterpart. A major problem in defense contracting has been cost overruns, a result not of a lack of monitoring but a lack of holding defense contractors accountable for the cost overruns (Kelman 2002).

Dispute resolution also is a necessary part of the contractual relationship. Ideally mechanisms in the contract allow low-level discussion and agreement on areas of concern. In the final analysis, the contract is a legal document, so disputes can be taken to the courts. However, it is always better to build into the contract arbitration approaches that might avoid lengthy and costly legal actions.

Evaluation

Evaluation during and at the conclusion of the contract should be a norm in contract administration. The key to good evaluation is the development of good criteria, performance benchmarks that can be monitored, and an after-contract review of what worked and what did not work well in the arrangement, so that the public managers can learn from successes and failures and can improve on the contracting function in the future. We spend more time discussing evaluation in chapter 10.

US Environmental Protection Agency, Cyber Security Software

In July 2012, the US Environmental Protection Agency (EPA) decided to renew maintenance of its cybersecurity software. It put out a notice in the form of an RFQ on a public forum, GSA eBuy. The quote with the lowest price would be the winner. In this case, the government used a form of competition reserved for the purchase of commercial products: a buyer that gets three quotes can choose the one with the best price or can justify using the next lowest quote if there is a solid reason—perhaps the brand is better suited to the existing system and information technology staff are comfortable using it. The procurement was initiated as a firm fixed-price transaction, and there were no negotiations for the procurement, which put the bidders on notice to give their best and final price offer up front.

Services Provided and Award

The RFQ listed the following specifications: one-year maintenance renewal of a specific cybersecurity software brand and version or similar product, for between twenty-five thousand and forty-nine thousand end users. Bidders were required to provide maintenance and support for each end user consisting of upgrade patches and security patches without further charges to the government and also to provide telephone and e-mail technical support from a source located in the United States. The award was made to Guidance Software for a one-year period, from August 2012 to August 2013.

Choosing Contracting Out

The EPA had a clear sense of what it needed, and it knew it did not have the technical capabilities in-house; thus, it chose to continue to contract out the activity—in this case, cybersecurity software maintenance. Because of the sensitivity of this function, it might be argued that the EPA should develop its own workforce to maintain its software. However, hiring, training, and keeping software engineers is difficult and costly for government. The private sector is able to pay larger salaries and has a diverse group of clients that provides new challenges for their workforce. The EPA does not have this ability.

Kettl’s concern about a “smart buyer” remains an issue with this procurement. If the EPA does not maintain some in-house analytical capability, how will it know that it is getting a good deal on the contract or that the contractor will deliver in an effective and efficient manner? Good contract management and the establishment of measures of contract performance become critical components for this choice.

Kansas Foster Care and Adoption

State governments in the United States have used collaborative or relational contracting for many years, primarily in the social and human services delivery areas. Such contracts include health maintenance organizations for Medicaid managed care (the joint federal-state program of health care for low-income populations); employment services as part of state programs under the 1996 welfare reform (the Personal Responsibility and Work Opportunity Reconciliation Act); and a variety of individual social services such as child care and preschool programs. The Kansas foster care and adoption program (FCA) is an example of one such program that put the state on the cutting edge of foster care reform but also generated controversy (Freundlich and Gerstenzang 2002).

In 1996–1997, Kansas became the first state in the nation to fully privatize its adoption, foster care, and family preservation services. Its Department of Social and Rehabilitation Services (SRS), previously the state’s largest provider of adoption and foster care services, now is strictly a purchaser of services and contract monitor with respect to child welfare services (Foster Care Kansas 2013). The Children’s Alliance of Kansas plays a critical role in the process by contracting with the state to serve as the initial point of contact for foster and adoptive parents. The Children’s Alliance assists with matching families with agencies that are in their area.

Assessment

Johnston and Romzek (2005) examined several case studies of Kansas collaborative contracting, including the FCA, along three dimensions: contract specification, contract design, and accountability design. These dimensions are somewhat similar to three elements suggested in this chapter: clear expectations, criteria, and evaluation (though accountability is somewhat broader; we discuss this issue in chapter 10). They rated FCA as fairly high in terms of clarity of relationships and suitability of performance measures, obligations, and deliverables—all critical factors in thinking through what government desires out of a contract. However, they rated FCA low on contract design because it used five principal contractors for foster care services, and those contractors in turn substantially dealt with a variety of subcontractors, thereby blurring lines of accountability. They also viewed this approach as high risk for government because of the cost volatility of some services provided by FCA, such as mental health services. Furthermore, the state relied on technology to monitor the data from the private contractors, but contractor capacities in this area varied widely. However, FCA was rated high on its accountability designs, including legal, professional, and political accountability.