CHAPTER 15 ________________________________
Contracting for Services in State and Local Government

In only eight years (fiscal years 2000 to 2008), federal government spending on contracts has grown 152.7 percent, from $208.3 billion to $526.5 billion. While comparable data are not available for the 89,527 state and local governments in the United States, almost all aspects of state and local government, from waste management to correctional facilities, are touched in some way by contracting. The consistent argument for contracting out work is that doing business in the competitive marketplace reduces costs and improves quality.

Concurrently, the body of academic literature on contracting has grown. Such authors as Steven Cohen and William Eimicke; Phillip Cooper; John Donahue; Elliott Sclar; E. S. Savas; William Curry; Steven Smith and Michael Lipsky; Stephen Goldsmith; Carol Ascher, Norm Fruchter, and Robert Berne; Charles Brecher and Sheila Spiezo; and the American Federation of State, County and Municipal Employees and AFL-CIO have all published on the topic. Some of these authors believe contracting should play an increasingly important role in the delivery of government services, while others are more cautious about its use and resultant benefits.

There is also concern that contracting out government services blurs the public perception of the role of government: Is the government or the contractor responsible for these services? While the government is ultimately responsible for contracted services, the public’s uncertainty diffuses and confuses the role of government in society.

Elements of Government Contracting

This chapter addresses the state of the field of contracting for state and local government services, the most important recent research about contracting, and lessons for the future. To begin, government contracting should be considered a holistic process that comprises a number of elements, each important in its own right. The elements of government contracting are:

• The make or buy decision

• The contract document

• The solicitation and selection of contractors

• Contract administration, including the relationship with the contractor

• Evaluation of the contractor’s performance

• Using contractor performance information to make future contracting decisions.

Government contracting works best and achieves its goals—reduced costs and improved quality—when each of these elements is managed effectively. This means that a government should not focus on one or a couple of the elements at the expense of other elements. All too often, government concentrates on the solicitation and selection of contractors and devotes far too little attention to evaluating the performance of contractors. This is comparable to determining where to buy something and at what price but not paying attention to whether you are satisfied with the purchase. In the public sector, inattention to evaluating contractors’ performance implies that a government is unconcerned about whether it cuts costs, increases quality, and is accountable to its citizens.

The Make or Buy Decision

The make or buy decision, the initial step in government contracting, has often been approached from the perspective of political philosophy rather than careful analysis. This decision becomes an extension of the argument that smaller government is better government, and services can be delivered more efficiently and effectively by external for-profit or nonprofit organizations. This may be true for some government functions, but not for others. The determining factor in this decision should be analysis, not philosophy.

Another important question is whether the service being considered for contracting is a core competency of government. Invariably, core competencies are not meant to be contracted out, while the disposition of non-core functions is a business decision. Government is responsible for administering complex institutions, such as hospitals. The core function in hospitals is health care, not laundry services. In school systems, the core function is education, not the transportation of students.

The cost analysis to determine whether to contract should include as many of the costs and benefits as can be calculated. This analysis compares the potential new delivery system to the existing one. For the current system, the cost analysis takes into account the cost of staff salaries, fringe benefits, equipment, and overhead. For the new delivery system, this analysis includes the estimated costs charged by the contractor and government staff, as well as fringe benefits that will be required to manage the contract (a cost that is often overlooked, as are the skills that are required to manage a contract).

It is understood that for an initial analysis, the costs of contracting are estimated. However, information on contractor costs from other government entities should be used to create this estimate. A cost analysis provides the government with a realistic estimate of projected savings (if there are to be any) and the ability to decide whether to make or buy products or services from a cost perspective.

The Contract Document

The contract document presents the responsibilities of the government and those of the contractor. During preparation of the contract document, the focus is generally on ensuring that the requirements of the contract are stated in sufficient detail. For example, in a contract for foster care services, is it sufficient to state a field visit should be made with certain objectives, or should it also specify a minimum length of time for the visit?

The contract is also the record of government and contractor accountability—specifically, the metrics or indicators the contractor is required to achieve. The contract document indicates whether the contractor is obligated to achieve minimum performance levels for payment (i.e., a performance contract). The performance metrics can be based on input, output, outcome, or process measures. Without these benchmarks in the contract, government can hold the contractor accountable for only more general objectives, such as providing a “quality service,” but with no definition of how to measure quality.

While outcome measures have become the gold standard in the field of performance measurement, for some service areas, such as health care, education, and child care, which are very complex, it has been difficult to develop accepted outcome measures. Because of this, a combination of input, output, outcome, and process measures are used to assess performance and accountability. This is evidenced in home health care contracting: Government examines the credentials of the providers (input), the number of nursing visits made (output), the overall well-being of clients (outcome), and the time frames for the completion of tasks (process).

A contract, therefore, is not just the concern of government lawyers. It is the accountability document and the purview of program service specialists as well (e.g., contract officers, contracting officer technical representatives, etc.).

Solicitation and Selection of Contractors

Requests for proposals (RFPs) have allowed considerable progress in the solicitation of service contractors because they have standardized the solicitation process. There is a set format for the contents of an RFP, which establishes procedures the government and potential contractors will follow (for example, whether pre-bidding conferences will be held), how proposals should be submitted, and the confidentiality of the information submitted.

The first step in the evaluation process is determining whether each proposal is responsive to the solicitation and whether the proposer can be considered a responsible bidder (i.e., it is capable of performing the requirements of the contract). Evaluation of proposals should begin with establishing criteria and, often, determining the weights of each component of the proposal (such as the qualifications of the staff, the prospective contractor’s experience with similar contracts, the budget, and the program plan). The weights given to each part of a proposal are very important and can influence which contractor is selected. For example, placing more emphasis on experience with similar contracts will favor entities that fit this criterion and hinder those with less experience, even if they propose excellent budgets and program plans.

Individuals or teams can perform the proposal evaluations. Each team member may have different areas of expertise (e.g., financial, program). More than one team may evaluate each proposal to achieve balance in the process. These evaluations often yield numerical scores, which facilitate comparison of the proposals. One or more contractors can be chosen at this point if the goal is to select those with the highest scores that meet the service needs of the government. Alternatively, the government may choose, for example, the six highest-scoring proposers by setting a cut-off score, then taking further steps to select the winning contractor—interviewing the proposers, performing site visits at the proposers’ offices, and/or negotiating the cost and operation of the contract with each proposer.

All of the steps in the solicitation and selection processes are important and should be considered carefully by the government in order to recruit the organizations that will best be able to fulfill the terms of the contract.

Contract Administration and the Government’s Relationship with the Contractor

Contract administration requires more attention from governments. Too often, government does not provide the appropriate resources for this function. Governments seem to assume that once a contract is set, the contractor will fulfill its responsibilities. Also, when resources are provided for contract administration, the skills needed to perform this important responsibility are not adequately recognized.

Contract administration and the government’s relationship with the contractor are essential functions that help ensure that services are delivered according to the specifications in the contract document. Government should devote the resources needed to fund qualified staff in sufficient numbers for these functions.

A variety of skills are necessary to manage contract relationships under service contracts, including interpersonal skills, knowledge of the contract document and its requirements, knowledge of the service being delivered, organizational management, and financial management. While the contract administrator may not have all of these skills, he or she should have access to staff competent in these areas.

Effectively managed contract administration and relationships with contractors are especially critical for service contracts, under which there is usually ongoing communication between the government and the contractor regarding the clients receiving the government-funded services. Homeless shelters, foster care, and home health care are examples of government-run services that are often performed by contractors. In many cases, the government evaluates client service needs, then refers clients to contracted service providers. The government then communicates with the service contractor about each client’s status and needs.

Evaluation of Contractor Performance

Although evaluating contractor performance is part of contract administration, we highlight it here to emphasize its significance. Evaluating a contractor’s performance is the government’s primary method of keeping contractors accountable. Like contract administration, evaluation has not been given adequate attention and resources by government.

The government should state in the contract document the performance measures it will use. Different performance measures provide different degrees of confidence in the results. Some governments ask contractors to periodically self-report their performance data. This method requires fewer government resources because the contractor provides all of the performance information, but it necessitates that the government trust the contractor to provide accurate information.

Other government organizations visit the contractor on-site, interview contractor staff, and complete a random sample of records to measure performance. This is a more reliable performance measurement approach, as the contractor does not know which records will be examined or the government staff that will gather the information.

Still others combine the above methods. This is probably the most comprehensive and effective method for gathering performance information. In general, some metrics can be self-reported, such as input and output measures, while others need additional attention, such as outcome and process measures. Additionally, the mixed-method approach combining self-reporting and site visits enables the government to verify information the contractor has provided.

Using Contractor Performance Information to Make Decisions

Performance information is useful—if it influences government decisions. These decisions are principally of two types: managing poor-performing contractors and making future determinations about contracting. Many governments deal with poor-performing contractors by providing technical assistance that helps them—for example, modifying internal operating systems and record keeping systems. The government then monitors the contractor’s performance to determine if there has been improvement.

A contractor’s past performance should be one of the primary considerations when a government makes future contracting decisions, though other factors (such as competition from other vendors) may influence whether a contractor is retained for a new term. The re-contracting determination is one of the most important reasons for holding government accountable for its policies. Poor-performing contractors that have been given an opportunity, but have failed, to improve their performance undermine the reasons for outsourcing a government function—reduced costs and increased quality. When government does not react appropriately to negative performance information, it is not demonstrating accountability to its citizens in the use of tax dollars.

Conclusion

Contracting for services by state and local governments has become an increasingly important government function. This trend will probably continue, based on the conviction that contracting, through the market and competition, will allow government to reduce the costs and increase the quality of the services it provides.

The question at this juncture is: How can government perform the contracting function to ensure the best outcome for its citizens? The six elements of contracting described in this chapter represent a holistic approach to contracting that requires sufficient attention and resources from government. This is especially true for three elements: contract administration, measuring contractor performance, and using performance information to make future contracting decisions. Government will achieve its goals and be more accountable to citizens to the extent that it focuses on these essential elements.

Recommended Resources

American Federation of State, County and Municipal Employees and AFL-CIO. “Passing the Bucks: The Contracting Out of Public Services.” Washington, D.C., 1984.

Ascher, Carol, Norm Fruchter, and Robert Berne. Hard Lessons: Public Schools and Privatization. New York: Twentieth Century Fund, 1996.

Brecher, Charles, and Sheila Spiezo. Privatization and Public Hospitals. New York: Twentieth Century Fund, 1995.

Cohen, Steven, and William Eimicke. The Responsible Contract Manager: Protecting the Public Interest in an Outsourced World. Washington, D.C.: Georgetown University Press, 2008.

Cooper, Phillip. Governing by Contract: Challenges and Opportunities for Public Managers. Washington, D.C.: CQ Press, 2003.

Curry, William Sims. Contracting for Services in State and Local Government Agencies. Boca Raton, FL: CRC Press, 2009.

Donahue, John. The Privatization Decision: Public Ends, Private Means. New York: Basic Books, 1989.

Goldsmith, Stephen. The Twenty-First Century City: Resurrecting Urban America. Lanham, MD: Rowman & Litchfield Publishers, 1999.

Savas, E. S. Privatization in the City: Successes, Failures, Lessons. Washington, D.C.: CQ Press, 2005.

Savas, E. S. Privatization and Public-Private Partnerships. New York: Seven Bridges Press, 2000.

Sclar, Elliott. You Don’t Always Get What You Pay For: The Economics of Privatization. Ithaca, NY: Cornell University Press, 2000.

Smith, Steven, and Michael Lipsky. Nonprofits for Hire: The Welfare State in the Age of Contracting. Cambridge, MA: Harvard University Press, 1993.

U.S. Census Bureau. “Federal, State, and Local Governments: 2007 Census of Governments.” Washington, D.C., 2007. http://www.census.gov/govs/www/cog2007.html (accessed September 18, 2009).

USASpending.gov, http://www.usaspending.gov/.