The risky business of outsourcing essential government services

Britain to tackle doubts about outsourcing risks with new guidelines

Britain, which hires private firms to run parts of its health service, schools, prisons and public transport, has been rethinking how it awards contracts after the collapse of contractor Carillion just over a year ago. Carillion became the largest construction bankruptcy in British history last year, leaving creditors and pensioners facing steep losses and putting thousands of jobs at risk. Its demise reduced the number of big corporate bidders for government contracts and increased scrutiny of how the sector is run, driving down share prices of firms that provide outsourcing services, such as Babcock, Capita, Serco, G4S, Mitie and Compass.

Britain’s government will take measures to identify and reduce risks taken by private firms that provide public services, it will say on Wednesday, in a bid to encourage companies that have become increasingly wary of taking on new government business. “A more considered approach to risk allocation will make us a smarter, more attractive client to do business with,” cabinet office minister Oliver Dowden will tell business leaders at the Confederation of British Industry on Wednesday.

Guidelines, set out in the “Outsourcing Playbook”, will specify that “when designing contracts, departments must seek to mitigate, reduce and then allocate risks to the party best able to manage it”, Dowden will say, according to a text of his remarks released before delivery. The aim is to improve how government works with industry and deliver better public services by, for example, piloting services needed in advance and publishing details of work departments will require, so companies are better able to plan.

Public departments will also be required to say when it is best to deliver public services in-house or when there is benefit from drawing on private sector expertise.

Read this and other articles at the link(s) provided; I tend to slice and dice, rearrange, omit, paraphrase and pretty much destroy the integrity of the original work to try to create a teachable moment fitting the context of this blog.

Professor Steven L. Schooner, of the George Washington Law School, has asked, "what does your government hope to achieve through its government procurement law? It seems reasonable to attempt to describe general aspirations for a procurement system before drafting begins." In a paper he wrote, published in the Public Procurement Law Review in 2002, he identifies the principle of "risk avoidance" as one of nine particular desiderata often mentioned for a successful procurement regime.

It is difficult to describe a procurement regime without acknowledging the role of risk avoidance. Avoiding undue risk is a fundamental responsibility of any governing body. Conversely, improper obsession with risk avoidance can suffocate creativity, stifle innovation and render and institution ineffective. Further, there are infinite mechanisms available to control different types of risk.

No system can fully achieve all of the nine goals. Nor can a state expect that its objectives for its system will remain constant over time. Determining which goals are most important is a daunting, ever-evolving challenge. Because no system can achieve all of the goals, your desiderata entails important tradeoffs. Ultimately, each government must decide how much discretion or flexibility it wishes to delegate to its buyers.

Prof Schooner applied that principle of risk avoidance in testimony before the United States Senate, Committee on Homeland Security & Governmental Affairs, in 2007, commenting on "the benefits, challenges, and risks of agencies’ increased reliance on contractors to provide critical services". He noted:

The challenges associated with extensive contractor reliance include, among others: (1) planning, which includes understanding what outcome will be sought from the private sector; (2) both understanding and accurately describing that outcome (or task) to the private sector; (3) selecting appropriate, qualified contractors in a timely fashion; (4) negotiating cost-effective agreements and drafting clear contracts that contain effective incentives (or profit mechanisms) to maximize contractor performance; (5) managing the contractual relationship to ensure that the government receives value for its money; (6) providing appropriate oversight throughout the process to, among other things, avoid corruption; and, most importantly, (7) maintaining a sufficiently educated, experienced, and motivated government workforce (or augmented workforce) to take on these challenges.

These challenges can be difficult to accomplish because the combination of government recruiting policies, salaries, benefits, opportunities, and quality of work lag much of the private sector, particularly in high-demand career fields. Thus, the “market” reflects that the government undervalues critical skills.

By the same token, slavish focus upon the relative cost of contractor support is misguided. Specifically, it is not productive to criticize agencies for paying contractors “too much” without: (1) permitting an agency to hire additional personnel; (2) confirming that sufficient personnel are available in the marketplace and willing to work for the government; (3) comparing “apples to apples,” such as taking into account all of the costs of civil servants or members of the armed services; and (4) considering critical issues such as flexibility and surge capacity. For example, higher contractor salaries may be offset, at least in part, by long-run costs avoided. Indeed, a strong case could be made that, for short-term demands for additional resources, it makes sense to pay higher, and potentially significantly higher, amounts for contractor support.

Fundamentally, though, it is difficult to conceive of a higher priority for a heavily outsourced agency than to “assess program office staff and expertise
necessary to provide sufficient oversight” of its most important service contracts. And, empirical evidence is scant to demonstrate that government employees are more talented, committed, motivated, or honest than their private sector counterparts, and vice-versa. However, the private sector’s exposure to market forces, and the related corporate purpose of pursuing profit, permits (and, arguably, requires) a more diverse and potent arsenal of employee incentives and disincentives. These tools include compensation (salary, salary increases, bonuses, stock incentives), opportunity for advancement, and, of course, the risk of termination. While the Government can use similar tools, their impact (or the degree to which these tools can influence behavior) is at least perceived as far less dramatic, given a heavily constrained promotion and bonus regime and an impenetrable de facto tenure system. The private sector-government contrast is greatest at the extremes. The private sector offers far greater economic rewards for success and threatens more credible sanctions for less than desirable performance.

Ultimately, however, the debate between in-house services or privatized services is increasingly academic. The government today relies on the private sector because we have restricted the size of government or, more specifically, the number of government employees. The government currently has no short-term choice but to rely upon contractors for every conceivable task that it is understaffed to fulfill. It is not an option to consolidate its missions, jettison a number of its tasks, terminate contracts, and take on only those missions it is appropriately staffed to perform. Nor is it feasible to wait while it embarks upon an aggressive program to identify, recruit, hire, and retain an extraordinary number of civil servants.

Only serious, long term, far reaching personnel reforms can, in any meaningful manner, begin to reverse the current trend. Accordingly, the government must continue to expend its best efforts to achieve its mission with the resources available, acknowledge that it is a rather “hollow” agency, and invest significant energy and resources in improving its use of contractors to help it achieve its mission. This involves conceding that contractors will continue to perform what historically have been perceived as inherently governmental functions. But even that notion is becoming increasingly quaint, outmoded, anachronistic, or simply irrelevant. At least, that is, until our increasing reliance on contractors to perform services for core government activities is matched by the capacity of government officials to supervise and evaluate the performance of these activities.

As our procurement system has struggled throughout this decade, Congress has been quick to call for more auditors and inspectors general to scrutinize contracting. That’s a responsible gesture. But the corresponding call – for more contracting experts to perform the many functions that are necessary for the procurement system to work well – has been both delayed and muted. In order to serve the taxpaying public and meet the needs of agency customers, acquisition professionals must promptly and accurately describe what the government wants to buy, identify and select quality suppliers, ensure fair prices, structure contracts with proper monetary incentives for good performance, and manage and evaluate contractor performance. Accordingly, the contracting workforce – understaffed, under-resourced, and under-appreciated – desperately requires a dramatic recapitalization.

We have witnessed an explosive growth in what we refer to as body shop or employee augmentation arrangements. As the name implies, the government uses this type of contract to hire contractor personnel to replace, supplement, or work alongside civil servants or members of the armed forces. Civil servants work alongside, with, and at times, for, contractor employees who sit in seats previously occupied by government employees. Unfortunately, no one stopped to train the government workforce on how to operate in such an environment. Worst-case scenarios have arisen where contractors have performed work under an
open-ended contracts (e.g., with a vague or ambiguous statement of work) without guidance or management from a responsible government official.

More than fifteen years of ill-conceived under-investment in the acquisition workforce, followed by a government-wide failure to respond to a dramatic increase in procurement activity has lead to a triage-type focus on buying, with insufficient the resources available for contract administration, management, and oversight. The old adage – an ounce of prevention is worth a pound of cure – rings true. More auditors and inspectors general will guarantee a steady stream of scandals, but they’ll neither help avoid the scandals nor improve the procurement system. Conversely, a prospective investment in upgrading the number, skills, and morale of government purchasing officials would reap huge dividends for the taxpayers.

Risky business

Is government spending meant to be risky? Is it meant to facilitate "creative destruction"? Or, is it meant to minimize risk to a manageable, even prudent, degree?

Consider the following articles (which I've cut up, rephrased or otherwise hashed to my own end -- so read the article itself at the links for accuracy of its message).

Defense Spending Red Tape Endangers Cybersecurity

The Navy is using Windows XP because complicated spending rules have prevented a better upgrade. [I only quit using XP recently at home because my computer crashed -- and I couldn't buy a new one with it.   It was not a spending rule that prevented me; it was the industry that didn't want me to go there notwithstanding my serenity with what I already had.]

The Navy renewed its contract to operate its computers using Windows XP.  But, the Navy entered into a $9 million contract with Microsoft to continue to provide security patches for it. [What would the cost have been to upgrade its entire computer architecture to, say, Windows 8?]

The government is moving too slowly to fund and acquire the latest technology, which could not only waste taxpayer dollars but also endanger federal cybersecurity. A panel of experts on Monday noted that the conservative procurement practices of the federal government can't keep up with the high-risk culture of tech industry startups, which innovate at a rapid pace and are increasingly a target for acquisition by larger businesses.

Cybersecurity is one area in which agencies appear to have failed to take advantage of private sector innovation. “Products for IT get overlapped by new software within six months,” Erica McCann, director of federal procurement for the Information Technology Alliance for the Public Sector tech trade association, explains. Agencies like the Defense Department use outdated software because procurement rules at the General Services Administration require programs to be on the market for two years to be eligible for government use, she said.

“Selling to the federal government is so arcane that many companies opt out, especially start-ups or newer IT companies that are used to a much faster pace,” James Lewis, a cybersecurity researcher at the Center for Strategic and International Studies, says. “Funding for start-ups runs into problems over who owns the intellectual property. [Intellectual property] is the single biggest asset for most startups and federal rules can put it at risk, making it unattractive to do business with the U.S. government.” Startups have to be particularly patient when working with the government since receiving funding can take months or years, as can the process of meeting government regulations, he says.

“The political system is not good at making long-run investments with uncertain impacts,” Ben Bernanke, former chairman of the Federal Reserve said during the panel discussion. Michael O’Hanlon, a research director at the Brookings Institution think tank, said “the overall system is not fundamentally broken; there are parts of it that are broken, in my mind.” Congress and agencies, however, are working harder than ever to make it easier to buy products from the tech sector, McCann says.

Defense Secretary Ashton Carter has recently tried to attract programmers to work with the government to boost its IT staff instead of taking a higher paying job at a private sector firm. These efforts included opening a full-time DoD outreach office in Silicon Valley, called the Defense Innovation Unit Experimental.

Defense Department's New Definition of "Commercial Item" Will Save Money

The Department of Defense (DoD) is taking a major step in stopping the waste of taxpayer dollars. DoD sent a legislative proposal to Congress to narrow the definition of a "commercial item" to mean goods or services that are actually sold to the general public in "like quantities." This proposal is a huge improvement over the current definition, a broadly worded definition open to abuse because it includes good or services “of a type” that are “offered” for sale or lease.

Why does this matter? Once a good or service is considered “commercial,” the government has little to no information about the relative cost of a good or service, and has little ability to audit the numbers behind the cost that the government is paying. If the new definition becomes law, DoD will no longer have to buy C-17s, C-130Js, or billions of dollars of specialized weapons-related subsystems (see pages 8-10) as commercial items. This should yield savings for taxpayers, as it has in the past. In 2006, for example, the conversion of the C-130J from a commercial item, which caused the repricing of 39 aircraft, resulted in “institutional net savings of $168 [million]” — thank you, Senator John McCain (R-AZ, who was credited with the Air Force’s actions).

Our most recent recommendation to alter the definition of a commercial item came in 2011, when we asked Congress to re-establish the taxpayer-protection checks and balances that have been removed from the contracting system, including requiring contractors to provide cost or pricing data to the government for all contracts except those where the actual goods or services being provided are sold in substantial quantities in the commercial marketplace.

Unfortunately, many government commercial item purchases have been awash in wasteful spending based on the elasticity of the current definition. Items with little or no commercial market availability were easily labeled as commercial, and were purchased on a sole source basis (i.e., non-competitive contracting) with no objections by government acquisition staff or reviews by auditors. The “commercial item” definition was developed by industry and enacted into law in the 1990s (as part of so-called “acquisition reform”) precisely in order to prevent the contracting agencies from obtaining cost or pricing data when adequate price competition—which exists in real commercial markets—does not exist. The law should more accurately have been called the “sole source contracting without cost or pricing data act.”

Not surprisingly, the contracting industry is opposing DoD’s proposal, claiming that competition will suffer as certain companies won’t do business with the federal government because of stricter contracting rules. The benefit of the current definition—for contractors at least—is that it permits sole source without cost or pricing data. This is because once an item or service is labeled as “commercial,” (under an extraordinarily creative definition), the government is legally denied access to certified cost or pricing data which is used to ensure that the items or services being purchased are reasonably priced.

Years ago, a DoD Inspector General (IG) audit report about an $860 million contract for spare parts used on weapon systems found that “higher prices were paid for commercial items” because “there was no competitive commercial market to ensure the reasonableness of prices.” According to the report, the contractor, Hamilton Sundstrand Corporation, “refused to provide [Defense Logistics Agency] contracting officers with ‘uncertified’ cost or pricing data for commercial catalog items, and terminated Government access to the Sundstrand cost history system”; and “guidance on commercial items qualified any item ‘offered for sale … to the general public’ as a commercial item without clearly addressing commercial pricing concerns, particularly when DoD was the primary customer procuring significantly larger quantities than other commercial customers.”

The DoD proposal would put an end to the kinds of disputes highlighted in that report. In fact, DoD’s analysis states:

For example, GAO Report 06-838R dated July 7, 2006, cites “adequate pricing” as one of five key area vulnerabilities of the DoD. In part, the report states that “Also, DoD sometimes uses commercial item procedures to procure items that are misclassified as commercial items and therefore not subject to the forces of a competitive marketplace. While the use of commercial item procedures is an acceptable practice, misclassification of items as commercial can leave DoD vulnerable to accepting prices that are not the best value for the department.”

These amendments of the law would prompt commensurate adjustments of the Federal Acquisition Regulation and ensure that commercial goods and services are acquired by the DoD and other Federal agencies only at fair and reasonable prices consistent with comparable sales actually observed in the competitive marketplace.

Further reading:

GAO: Commercial Item Test Program Beneficial, but Actions Needed to Mitigate Potential Risks

the Coast Guard's Aviation Logistics Center used the test program for 139 of 370 new awards that fell within test program thresholds, whereas its Headquarters Contract Operations used the test program for only 3 of 164 new awards. Coast Guard officials explained that the commercial nature of the parts and services bought by the Aviation Logistics Center lends itself to using the test program, while the headquarters office used existing contracts, which can be another means to fulfill recurring needs for commercial supplies such as information technology services.

DOD: Commercial Item Handbook

DOD: Guidebook for the Acquisition of Services

GSA/DOD: Improving Cybersecurity and Resilience through Acquisition

The cost of not using basic cybersecurity measures would be a significant detriment to contractor and Federal business operations, resulting in reduced system performance and the potential loss of valuable information. It is also recognized that prudent business practices designed to protect an information system are typically a common part of everyday operations. As a result, the benefit of protecting and reducing vulnerabilities to information systems through baseline cybersecurity requirements offers substantial value to contractors and the Government.

The baseline should be expressed in the technical requirements for the acquisition and should include performance measures to ensure the baseline is maintained and risks are identified throughout the lifespan of the product or service acquired. Due to resource constraints and the varying risk profiles of Federal acquisitions, the government should take an incremental, risk-based approach to increasing cybersecurity requirements in its contracts beyond the baseline.

THE Department of Defense Cyber Strategy April 2015

Over the last ten years Internet access increased by over two billion people across the globe. Yet these same qualities of openness and dynamism that led to the Internet’s rapid expansion now provide dangerous state and non-state actors with a means to undermine U.S. interests. We are vulnerable in this wired world.

The Internet was not originally designed with security in mind, but as an open system to allow scientists and researchers to send data to one another quickly. Without strong investments in cybersecurity and cyber defenses, data systems remain open and susceptible to rudimentary and dangerous forms of exploitation and attack.

Governments, companies, and organizations must carefully prioritize the systems and data that they need to protect, assess risks and hazards, and make prudent investments in cybersecurity and cyber defense capabilities to achieve their security goals and objectives. Behind these defense investments, organizations of every kind must build business continuity plans and be ready to operate in a degraded cyber environment where access to networks and data is uncertain. To mitigate risks in cyberspace requires a comprehensive strategy to counter and if necessary withstand disruptive and destructive attacks.

To succeed in its missions the Defense Department must operate in partnership with other Departments and Agencies, international allies and partners, state and local governments, and, most importantly, the private sector.

The Future is Coming Much Faster than we Think, Here’s Why

Samsung Unveils The World's Largest Hard Drive, Boasting 16 TB In A 2.5-Inch Case

This is a pretty significant announcement. Flash memory is generally faster than its disc-spinning counterpart, although it generally doesn't offer the highest amounts of storage. This drive, however, offers much more than the largest conventional drives made by Western Digital or Seagate, which max out at around 10 TB.

So how is Samsung able to make such a large hard drive – its actual capacity clocks in at 15.36 TB? The secret is the company's new 256-GB NAND flash die, which is two times as impressive as the 128 GB NAND dies that were put into commercial use by storage makers last year. Samsung announced the new tech by showing off a server with 48 of these new hard drives at the summit in California. It is able to handle up to 2 million input/output operations each second.

The Flash Storage Revolution Is Here

You’ve likely heard about Samsung’s 16TB hard drive, by far the world’s largest. That is an eye-popping number, a large enough leap forward that it’s difficult to fully process. And the most exciting thing about that 16TB hard drive? It’s just a hint of what’s coming next.  It won’t be long at all, though, before they find their way into personal computers, even laptops. “I would expect in three to five years, for a 2.5-inch 16TB SSD to be in a workstation-class notebook,” says Patrick Moorhead, president and principal analyst of Moor Insights & Strategy.

Moorhead notes that despite our recent migration to the cloud, hard drives of that magnitude would obviate much of the need to borrow some massive, faceless tech company’s digital locker to stash our stuff. That amount of room could enable localized smart home solutions that offer more privacy and security than leaning on the cloud currently does.

Intel and Micron recently announced that they’re working on something quite similar, though they don’t expect to produce consumer devices based on the technology until early next year. Toshiba has dabbled in 3D NAND, with products expected by the end of next year. All of them have the systems in place to produce equally, if not more, impressive drives. Samsung left the starting block first, but that may not matter much in a race that will be measured in years.

The implications of storage breakthroughs like this go beyond data centers and laptops, though. “Memory and storage are the two things that are holding up huge innovations in biotech, in design, and for that matter even artificial intelligence,” Moorhead says. “They’ve become a fundamental building block for moving the industry forward. These big innovations at the top trickle their way down into cars, into phones, over a five to seven year period.”

As exciting as a 16TB SSD may be, it still represents an iterative step, a manufacturing trick that found new ways to stuff the same basic pieces into increasingly smaller spaces.

The potentially much bigger breakthrough? Intel and Micro’s 3D XPoint (pronounced “crosspoint”) technology, which completely rethinks the way we’ve been making memory for years. “I think the design change is more exciting,” says Moorhead. “It’s a radical, different design that nobody has, versus taking your memory to the next node, which is essentially Moore’s Law.”

Rather than rely on transistors to store information, as traditional flash memory does, 3D Xpoint deploys a microscopic mesh of wires, coordinated by something called a “selector” that can be stacked on top of one another.

The result is “non-volatile” storage, meaning it holds onto its data even when the power’s off, that’s 1,000 times faster than NAND flash, and 10 times denser than the volatile DRAM (dynamic random access memory) that PCs use to keep track of temporary data. In other words, it’s a single solution that can handle both memory and storage, and do both better, in most ways, than anything currently available. “Any artificial intelligence or object recognition you want to have on a device works a lot better with XPoint … The more you can put into that really fast memory space, the better your artificial intelligence is going to be,” says Moorhead.

Intel has said not to expect any 3D Xpoint products until next year, but when they appear they’ll be in a position to transform multiple industries, from the esoteric to the squarely consumer-focused.

Intel, Micron develop 3D XPoint as an eventual successor to NAND flash memory

This development comes at a crucial time during these early days of the Internet of Things. 3D XPoint, which can write up to 40 terabytes per day; SSD NAND, which can write up to 40 gigabytes in a day. 

Memory speeds were already proving to be a constraint on processor operations in 2013, when the world generated a total of 4.4 zettabytes, or the equivalent of 1,000,000,000,000,000,000,000 bytes.  By 2020, that annual global data generation rate is expected to climb to 44 zettabytes, an increase by a power of 10. By 2050, when it is expected that 50 billion devices will be outfitted with computing processors for digital services, the amount of data generated every year could skyrocket. , will be much more suited for that atmosphere than

Imagine the impact this will have on robotics (drones), holographics, down range autonomy and basic research and modeling, 3D printing, sending intelligent machines to the stars. And imagine how quickly that will make redundant whatever it is we buy today.  Anything we buy that's based on proprietary hardware or software is likely to be more ball and chain than progress.  Think Motorola.  

Government technology buyers must approach issues prudently, which means not betting the house on any one gambit.  Standardization perhaps should give way to some nodes of autonomous experimentation and incrementalism, however more expensive that may be in the near term. 

Virginia's road project got PPP'd on

How Virginia paid more than $250 million for a road that never got built

The problems help explain why top officials in Gov. Terry McAuliffe’s administration have recently increased scrutiny of public-private partnership deals, a sharp shift in tone in a state that has for 20 years been a national leader in pushing such projects. Transportation Secretary Aubrey Layne said this month that the I-66 project should not be ceded to private investors for “ideological” reasons, as might have happened in the past. Keeping the construction of toll and carpool lanes under state control could generate hundreds of millions of dollars for additional transportation projects, he said, and avoid a repeat of cases in which the state was left “holding the bag.”

Virginia officials are trying to get back tens of millions of dollars from a private company that was supposed to build a 55-mile toll road in southeastern Virginia. State officials had been sending the company multimillion-dollar installments each month to build the road. But the state lacked federal construction permits, so the road wasn’t built. And now the commonwealth is out about $256 million.

Virginia officials governed the project using the state’s Public-Private Transportation Act, which went into effect 20 years ago and gave officials extraordinary flexibility in pairing public projects with private firms. The idea was to try to tap the construction expertise, business acumen and cost-consciousness of private companies, with the benefits flowing to shareholders and state taxpayers. If Virginia officials didn’t have the stomach to set aside large sums to add long stretches of highway, they could lure private investors to put up much of the money. Companies would cover project costs and company profits with the decades of toll revenues they collected.

Among the critical problems, Layne said, was a sort of automatic payment plan, which sent millions to the firm monthly starting in early 2013. Those routine payments were in addition to funds sent to cover specific work that was completed. "Payments continued to go to the contractor for things they knew couldn’t possibly be accomplished, because they didn’t even have a permit,” Layne said. Del. S. Chris Jones (R-Suffolk), chairman of the House Appropriations Committee, said, “I can’t think of a worse contract that I have seen in my years of public service.” Jones said that the deal was rushed to avoid political scrutiny.

Layne said he was not seeking to disparage state representatives, but noted that they emerged from a more “process oriented” background within state agencies and lacked the entrepreneurial and negotiating experience and resources of private firms. Private negotiators had often been doing a much better job than their well-meaning state counterparts. “These guys are buying the best attorneys in the world.”

Layne said the company negotiated in good faith. It is the commonwealth’s responsibility to protect its interests, he argued. “I don’t think they’ve done anything that wasn’t allowed in the contract,” Layne said. But, “I’m not saying it was a good contract.” “I don’t blame them for taking the money. It was a negotiated payment schedule,” Layne said. “They didn’t ask to stop getting payments. . . . If I were them, I wouldn’t either.”

The initial concept was that a private firm would pay to build the toll road and control it for decades, a major undertaking with significant risk. The Public-Private Transportation Act allowed many of the state’s basic procurement rules to be bypassed, Layne said, a feature intended to give the state flexibility to find the best deal.

But private firms balked at taking long-term control of the road because traffic tallies and resulting toll revenues were projected to be too low. So state officials changed course. They decided they wanted to hire a company whose primary responsibilities would be to design and build the road. But in a quirk of the transportation act, the state’s basic procurement rules — which limit certain types of financing arrangements and require more rigorous oversight — did not kick back in, even after the nature of the project shifted radically.

State officials then failed to invite a wider group of firms to vie for the business. That left just the three groups that had been competing for the original public-private partnership, Layne said.

Officials “continued to negotiate with a group that was really set up to do something else,” Layne said, noting that only a few large firms had the needed financial heft and inclination to finance, design, build and operate the project as it was initially envisioned. “Had they opened it up, they would have had many more firms willing to bid on this particular project,” Layne said. “It was basically, ‘Build the road and turn it over.’ ”

And more competition could have brought a better deal, he argued.

Project executives with the two firms that make up 460 Mobility – Ferrovial Agroman, a major multinational construction and engineering concern with roots in Spain, and a Pennsylvania-based building firm now known as Allan Myers – declined to comment. “Our employees and contractors have been professional and accommodating throughout the commonwealth’s reconsideration of this project,” said Shannon Moody, 460 Mobility’s public relations manager.

Rolling out the (pork?) barrel

As a long time PC user, I forever wonder when the Windows operating system will finally be rolled out. Not to entirely blame the software writers, of course, because the platforms and end-uses are constantly changing but built on that first DOS code. The world of IT is not even planned obsolescence: it is intrinsic obsolescence. 

Yet, our expectations as users are based in now out-dated notions that we can make one production run of a uniform product from assembly line to market to consumer, like flooding the market with Hula-Hoops in time for the 1961 Christmas season sales.  

IT is just not that simple. Beta is now often marketed, but not market ready. As we find out with the roll out of the Affordable Care Act online market scheme.

The problem with IT in general, with my PC as much as with large institutions and new age weaponry, is that we rely on it too much. Given the cost and the proprietary nature of most of the software and hardware, IT "solutions" become mission critical to whatever the mission is.  IT "solutions", as we mostly know them now, hold a monopoly tollbooth on processes that just a generation or two ago were more decentralized, across many desks.

The whole internet, on which most IT solutions are reliant, is designed to spread out the flow, storage and delivery of information, across all platforms and all delivery systems.  But, once that information hits one of those IT monopoly tollbooths, it stops.  

As we look to the limitations of rolling out mass IT solutions, we might consider if our acquisition plans should be modified, to allow more open sourcing cross-platform arrangements that can be farmed out to more competitors, so that if there is a failure at any given point in the web of information delivery, the whole web process does not fail, and we do not pay a monopolist's price at the information tollbooth.

The risk of the mission, and the cost of the monopoly, seem to be unquestioned givens in IT solution acquisitions. Why?

Those are just random thoughts as I read about the political tut-tutting and point scoring surrounding the ACA "Obamacare" online roll-out, such as the following linked articles (please read the article at the link; I have only included bits without context).

Good enough for government work**? The contractors building Obamacare

as head-scratching continues about how a famously web-savvy administration could have flubbed its Internet homework so badly, an examination by the Sunlight Foundation shows the administration turned the task of building its futuristic new health care technology planning and programming over to legacy contractors with deep political pockets. Health and Human Services Department will not release a list of the estimated dozen or more companies tasked with building the site. But Sunlight reviewed contract award information from USASpending.gov and FedBizOpps.gov, and found 47 organizations that won contracts from Health and Human Services or the Treasury Department to manage, support or service the implementation of the Affordable Care Act. Among them were top contractors like Northrop Grumman, Deloitte LLP, SAIC Inc. General Dynamics and Booz Allen Hamilton. All five of those companies provided information technology services to either the Centers for Medicare and Medicaid Services or the Internal Revenue Service, the two agencies tasked with building back components of the health insurance exchanges.

Because the government provides brief, partial descriptions of contracts in USASpending.gov, it is not possible to say which of the contractors with information technology contracts or project management contacts were involved in building the 36 federally run health insurance marketplaces, a responsibility tasked to the Centers for Medicare and Medicaid Services, known by the acronym CMS, or those assigned to develop the federal data hub, which would allow applicants to have their income and family size immediately verified by the Internal Revenue Service. Sunlight's survey does not include awards to contractors that built the 14 state exchanges. For example, Xerox Corp. won a $72 million contract to help build Nevada’s exchange and one for $68 million to do the same in Florida. Not only is Xerox building the online marketplaces for some states, it's also offering insurers the means to “fully take advantage of the nearly 30 million new members that will be shopping for health care on these exchanges.”

Obamacare glitches: Gov't contract for troubled site has swelled; GOP targets Sebelius

The government contract for the company that built the glitch-prone website for Obamacare has ballooned to three times its original cost, and some Republicans are demanding the resignation of the cabinet secretary who oversees it. USA Today, citing technology experts, reported that the site was built using 10-year-old technology and may require constant fixes for the next six months and eventually an overhaul of the whole system. But Gail Wilensky, a former director of Medicare and Medicaid who is now a health care analyst, said that CGI was forced to deal with last-minute design changes ordered by the government, hampering CGI’s ability to test the site. Last June, a GAO report foreshadowed those problems, warning that the website might not be ready to go live, in part because of all the last-minute design changes.

Red Flags? Company behind ObamaCare site has checkered past

While the company behind the dysfunctional HealthCare.gov was virtually unknown to the American public until this month, critics say the Obama administration should have known this multibillion-dollar firm had a checkered history with other government contracts. In projects stretching from Canada to Hawaii, parent company CGI Group and its subsidiaries ran into complaints about its performance.

Meet CGI Federal, the company behind the botched launch of HealthCare.gov

Over the past few weeks, if you've been paying attention at all to the unfolding disaster of people trying and failing to sign up for Obamacare online, one name keeps coming up: CGI Federal, the IT contractor that has orchestrated most of the Healthcare.gov Web site. By most accounts, it's been a complete train wreck, for reasons both technical and bureaucratic. Here's what you need to know about the company at the center of it all.

CGI Federal is a wholly owned subsidiary of the Canadian firm CGI Group. Growing through scores of acquisitions, and providing outsourced IT services to massive companies such as Bell Canada and Quebec's provincial pension plan, CGI's business model depends on embedding itself deeply within an institution. CGI Federal is a relative newbie on the U.S. government IT contracting scene. It bought the U.S. contractor American Management Systems in 2004, but only started ramping up business after 2008, and accelerated in 2010 with the $1.1 billion acquisition of U.S.-based military IT contractor Stanley Inc. That sent its contracting work through the roof.

Back in 2009, the White House's Recovery Board retained CGI Federal to adapt a well-functioning system it had built for the U.S. Environmental Protection Agency into FederalReporting.gov, another very complex, public-facing and high-volume site that would handle all contracts granted under federal stimulus legislation. This one got built in six weeks, for much less money, and won accolades for its flexibility and reliability.

How did CGI land the Healthcare.gov contract? CGI Federal's winning bid stretches back to 2007, when it was one of 16 companies to get certified on a $4 billion "indefinite delivery, indefinite quantity" contract for upgrading Medicare and Medicaid's systems. Government-Wide Acquisition Contracts — GWACs, as they're affectionately known — allow agencies to issue task orders to pre-vetted companies without going through the full procurement process, but also tend to lock out companies that didn't get on the bandwagon originally. According to USASpending.gov, CGI Federal got a total of $678 million for various services under the contract — including the $93.7 million Healthcare.gov job, which CGI Federal won over three other companies in late 2011.

CGI is only the 29th largest federal IT contractor, with about $950 million in contracts in 2012, compared to number one Lockheed Martin's $14.9 billion. They also don't make high-profile weapons systems, but rather the guts of government Web sites that rarely bear their names.

That said, they've learned quickly, and see the U.S. federal government as their area of biggest growth.

CGI Federal landed the Healthcare.gov contract. Here’s how it fights for the ones it loses.

For CGI, the business of handling the low-income housing program started back in 1999, when the Department of Housing and Urban Development -- under pressure to downsize its in-house operations -- started outsourcing the job to public housing authorities around the country. The housing authorities would subcontract with IT providers like CGI Federal, which mopped up more than 25 percent of the $200-300 million or so in fees that came from HUD every year. CGI, the biggest of all the subcontractors, provides the infrastructure and support to route housing subsidies to landlords and monitor for compliance with HUD rules.

The relationship between contractor and subcontractor is very close. At the Assisted Housing Services Corporation of Ohio, California Affordable Housing Initiatives, and North Tampa Housing Development Corporation, many staff actually list themselves on LinkedIn as CGI employees. The Ohio group's state director, for example, identifies himself as a "Manager of Consulting Services in CGI Federal's Healthcare Compliance Group, focused on business process outsourcing for the Department of Housing and Urban Development." The California group's state director calls himself the same thing, adding that he has "quickly adapted staffing strategies to changing industry conditions in order to maintain and improve competitive position," and has experience "analyzing and interpreting Federal policy and managing the impacts on operations." The Columbus Metropolitan Housing Authority executive named as the Ohio group's contract administrator was a CGI director of consulting services until 2011. So while the "instrumentality" set up by the housing authority is a separate legal actor, it effectively functions as a joint venture with CGI.

In 2007 and 2009, however, HUD's inspector general found that contract administrators had been allowed to overbill the program by tens of millions of dollars. In 2011, HUD decided to rebid the contracts, setting a lower standard for the profit margin that recipients would be allowed to take and a cap on the number of units any one contractor could administer. When the new contracts were awarded -- with a savings of about $100 million, or one third over the previous set, -- many of CGI's partners lost out.

Instead of letting the awards stand, the losers complained en masse to the Government Accountability Office, prompting HUD to back off those awards and offer another solicitation. This time around, HUD got rid of the cap on the number of units a subcontractor could administer, but precluded out-of-state entities from landing a Section 8 contracts if there was a qualified local bidder, which cut into CGI's business model -- GAO ruled that the new process was a no-no. HUD decided to ignore the GAO. So the housing authority-affiliated entities appealed again, this time to the Federal Court of Claims. In April, HUD won. But the companies kicked it up yet another notch, to the Federal Court of Appeals, where arguments were held last week.

(Side note: Lydia DePillis, who authored the two prior articles, has become my favored jounalist du jour, with well researched, easily presented and understood writing in this complex and, well, boring, body of work.)

How federal cronies built -- and botched -- Healthcare.gov

It also doesn't help that many of the organizations involved are now distancing themselves from the whole project, which seems wise given the scale of this disaster. Compare that attitude with the pride many of them exhibited before Healthcare.gov went online, which was being trumpeted as a marvel of cutting-edge Web engineering. Now it's shaping up to be more an example of the efficacy of political connectedness.

CGI Federal: The Company Behind HealthCare.gov and the Insuing Blame Game

Contractors Assign Blame, but Admit No Faults of Their Own, in Health Site

Insight: As Obamacare tech woes mounted, contractor payments soared

The work on Healthcare.gov grew out of a contract for open-ended technology services first issued in 2007 with a place-holder value of $1,000. There were 31 bidders. An extension, awarded in September 2011 specifically to build Healthcare.gov, drew four bidders, the documents show, including CGI Federal.

That 2011 extension is called a "delivery order" rather than a contract because it fell under the original 2007 agreement for CGI Federal to provide IT services to the Centers for Medicare & Medicaid Services, the lead Obamacare agency. CGI Federal reported at the time of the extension that it had received $55.7 million for the first year's work to build Healthcare.gov.

CGI's original 2007 contract was of a type called Indefinite Delivery/Indefinite Quantity, federal records show. ID/IQ contracts allow the government "to write a laundry list of things they can order from the contractor," said Sarah Gleich, an attorney and government procurement expert at Gibson, Dunn & Crutcher. "They'll write incredibly broad descriptions of the work, like 'telecom services,' so you can't tell what they're ordering."

The advantage of an ID/IQ contract, said experts, is that it can be expanded almost indefinitely, without the government having to solicit new bids for additional work. Because "there are very strict regulations on sole-source contracts," an Indefinite Delivery/Indefinite Quantity agreement makes it easier for the government to avoid running afoul of those requirements, said Sajeev Malaveetil, a director at the Berkeley Research Group, a procurement consultant.

IT work is particularly suited to imprecise, open-ended contracts. "Agencies know that at some point they'll need IT services or system implementation," Malaveetil said. "ID/IQ contracts can often be for five or 10 years: the agency just keeps issuing delivery task orders, which fall under the base language of the contract."

CGI spokeswoman Linda Odorisio, there were three one-year options, bringing the total potential value of the contract to $93.7 million. By August 2012, spending on the contract was already close to that limit. This year, the bills skyrocketed. The government spent $27.7 million more in April, an additional $58 million in May and, in its latest outlay, $18.2 million in mid-September. According to the government records, that brought the total spending for CGI's work on Healthcare.gov to $196 million. Adding in potential options, the contract is now valued at $292 million.

"Why this went from a ceiling of $93.7 million to $292 million is hard to fathom," said Scott Amey, general counsel at the Project on Government Oversight, a Washington, D.C.-based watchdog group that analyzes government contracting. "Something changed. It suggests they ran into problems and knew last spring that they couldn't do it for $93.7 million. They just blew through the original ceiling. Where was the contract oversight?"

Obamacare website woes: another sign of out-of-control private contractors

Government outsourcing to private contractors has exploded in the past few decades. Taxpayers funnel hundreds of billions of dollars a year into the chosen companies' pockets, about $80bn of which goes to tech companies.

While the stereotype is that government workers are incompetent, time-wasters drooling over their Texas Instruments keyboards as they amass outsized pensions, studies show that keeping government services in house saves money. In fact, contractor billing rates average an astonishing 83% more than what it would cost to do the work in-house. Hiring workers directly also keeps jobs here in the US, while contractors, especially in the IT space, can ship taxpayer-funded work overseas.

The revelation here is that an overdependence on outsourcing isn't just risky in terms of national security, extortionate at wartime, or harmful because it expands the ranks of low-wage workers; it's also messing with our ability to carry out basic government functions at a reasonable cost.

If we're not going to insource work – presumably because anti-government types successfully peddle the useless bureaucrat stereotype – we should at least have a better process for picking contractors that benefit from taxpayer largesse to carry out public projects. It may be hard to believe in light of the Healthcare.gov experience, but there are examples of successful government outsourcing arrangements in IT. One key to their success, a Government Accountability Office study pointed out, is consistent communication with, and monitoring of, contractors. Penalties for cost overruns, failing to deliver by agreed-upon deadlines and other forms of mismanagement would help, too.

**  Good enough for government work?

James F. Nagle writes in his book, History of Government Contracting, that this pejorative term did not mean what you think it means.

In the early days of the US government, the federal government became dissatisfied with the products they were buying and decided to build them itself, and adopted and implemented strict  standards.  As Professor Nagle put it (p 114 of second edition):

"The rigorous inspection standards gave way to a saying still in use today but with vastly different meaning.  The saying was "close enough for government work."  Originally the saying was a boast by contractors to would-be commercial customers, that their products were so well manufactured that the government would accept them even with its known high standards."

Another government contracting feature of the day noted by Prof. Nagle (on the same page) was,

"an implicit understanding with all arms contractors that they had to share their inventions with the national armories on a royalty-free basis if they wished to continue receiving government contracts. This procedure, exemplifying the public service orientation of the Ordnance Department, allowed novel metal and woodworking techniques [i.e., "information technology"] that had originated in private armories to become part of the public domain."

Fair and Reasonable gross profit margins in war vs peace procurement

Supreme Owner Made a Billionaire Feeding U.S. War Machine

Chemical warfare and car bombings are just a few of the hazards working in war-torn countries such as Iraq and Syria. For Supreme Group BV, it’s the cost of doing business. The perilous business, where contractors dodge bullets fired by the Taliban and explosives set by insurgents, has made the company’s majority owner, Stephen Orenstein, a billionaire. Since the start of the war in Afghanistan in 2001, Supreme’s revenue has increased more than 50-fold to $5.5 billion in 2011.

The company’s largest contract -- an exclusive deal to distribute food to U.S. military personnel in Afghanistan -- has been riddled with lawsuits and accusations, including the Department of Defense’s assertion that Supreme overcharged it by $757 million. The U.S. military food contract has paid it $9.1 billion to date, according to data compiled by the DLA.

Orenstein disputes the U.S. overpaid for Supreme’s services. The company said it’s owed an additional $1.8 billion. “The Pentagon used the word overcharging and it’s not justified,” said Orenstein. “We agreed on preliminary rates. They decided to unilaterally apply new rates based on the costs as they see them, and tried to recoup the difference between the two.”

“By keeping the money flowing to Supreme through noncompetitive contract extensions, the Defense Department unwisely and unnecessarily put U.S. taxpayers on the hook”, said U.S. Representative John Tierney, the ranking Democratic member on the House Government Reform & Oversight Subcommittee on National Security, in a statement to Bloomberg News.

Accusations of Supreme overcharging the DLA first surfaced in a March 2011 audit report by then-Pentagon Inspector General Gordon Heddell. According to the report, the DLA overpaid Supreme $124.3 million for transportation and corrugated-packing boxes. In addition, Pentagon personnel had no assurance that billings for another $103 million in boxes were accurate or “even chargeable to the contract,” the report said. The company was also paid about $455 million for airlifting fresh fruits and vegetables from storage areas in the U.A.E. to Afghanistan, without the DLA ensuring the prices were “fair and reasonable,” according to the audit. Supreme was further said to be overpaid $98.4 million from 2005 to 2008 for transportation costs, in part because reimbursement rates “were significantly higher than the rates needed to reimburse the vendor for costs and associated profits,” the report said.

“The discrepancy in the amount Supreme and DLA claim to be owed is based on a contract modification regarding delivery to additional customer locations,” DLA spokeswoman Mimi said in an e-mail. “DLA and Supreme utilized different methodologies to calculate the appropriate price for transportation to these additional locations.”

I won't go into it in any detail, because I'm not qualified to do so, but there are many instances in federal contracting, including the making of contract changes and the awarding of non-competitive contracts, when the government is limited to making payments that are described, if not well defined, by the term "fair and reasonable". See generally FAR Subpart 15.4 and Selling To The Government: What 'Fair And Reasonable Pricing' Means, by Steve Charles, for a beginner's guide to the topic.

The takeaway in this post's context is that the determination of the fair and reasonable price is ultimately the government's, but the government must follow procedural and substantive rules to make that determination; it is thus a contestable determination. And Supreme is well staffed to bring it on. As the article states,

Orenstein confirmed that he and his family control 75 percent of the company. His partner, Michael Gans, holds the rest with his wife. Their first contract provided logistics services to the United Nations peacekeeping operation in Mozambique in 1993. “My strength has always been the execution and procurement, and Michael’s strength is in writing,” said Orenstein. Gans, who is a citizen of Luxembourg and lives in Baech, Switzerland, received a bachelor’s degree in political science from Vassar College in Poughkeepsie, New York, and a law degree from George Washington University in Washington.

GW is the home of the US' foremost procurement law education program.

There is another aspect to this article that I want to bring out:

According to its latest annual report, the company had earnings before interest, taxes, depreciation and amortization of $953 million in 2011 on revenue of $5.5 billion. According to its annual reports, Supreme had net income margins that ranged from 15 percent to 23 percent between 2008 and 2011.

“That’s a fairly large profit margin when it comes to federal government contracts,” said Scott Amey, general counsel for the Washington-based Project on Government Oversight. “Most contractors claim that their profit margins are zero to 5 percent.”

Orenstein confirmed that Supreme’s food distribution fee to the U.S. military in 2010 was “in the range of 18 to 21 percent” and could go as high as 50 percent, according to a transcript of testimony he gave in a 2010 lawsuit. He also testified that it was “very common that the percentage of total revenue, the service fee percentage, exceeded 75 percent,” when the distribution of food and other supplies flown into Afghanistan by airplanes and helicopters accelerated in 2006.

Including almost $1 billion in dividends he has collected since 2008, Orenstein has a fortune valued at least $1.1 billion, according to the Bloomberg Billionaires Index.

Normally, the higher the risk, the greater return that is demanded from market players. Conversely, the lower the risk, the lower the expectation of profits. Regular peacetime government contracting attracts contractors, especially in economically tight times, because governments are more likely to pay than stressed private buyers. The certainty of payment reduces the risk of buyer default, and profits are generally lower. 

But in times of war or disaster, operational risks tend to increase, which increases costs, and the expectation of profits. Even "fair and reasonable" costs may have an inelastic element that justifies higher contract payment, and profit margins. Canny contractors become attracted to war and disaster margins, and can make a motza.

Buying the unknown, pricing the unknowable

This article will likely confuse most of the procurement staff in local and municipal and probably state governments. It does not fit their typical need. Most things purchased, whether supply, service or work of construction, at local levels are standard commercial products. When you don't have to invent the wheel, there is no need to re-invent it either. Keep it simple and stick to what you know.

But, when developing new products, other acquisition paradigms come into play. No one size fits all and an inflexible means of achieving the acquisition will frustrate the goal. That is my take away from the following article, which I digest below, and which itself is a review by Sandra I. Erwin of a more extensive journal article by Frank Kendall, US Under Secretary of Defense for Acquisition, Technology and Logistics titled "Use of Fixed-Price Incentive Firm (FPIF) Contracts in Development and Production". You have the links, so pick your poison.

Pentagon Acquisition Chief Warns About Misuse of 'Fixed Price' Contracts

Kendall's latest policy guidance tells procurement officials to use "appropriate" contract types. "Unfortunately, sorting this out is not always easy," Kendall writes in the March-April 2013 issue of the Defense Acquisition University journal.

A shift toward fixed-price contract began during the second half of President Obama's first term. Pentagon officials had become increasingly frustrated as too many programs got started and “we find out later on that they were unaffordable,” Kendall says in a February 2012 speech. He cites fixed-price contracting as one of several contracting trends that are embraced and rejected in cycles. In the past two decades, he says, “We have been for-or-against fixed price contracting four or five times."

Kendall's rulebook, known as Better Buying Power, has been interpreted as a mandate to avoid "cost-plus" arrangements where the government agrees upfront to pay a vendor to design a product before it has determined its final price tag.

In the article, titled, "Use of Fixed-Price Incentive Firm Contracts in Development and Production," Kendall cautions buyers that there is no simple benchmark to select a contract type. "The choice of appropriate contract types is very 'situationally' dependent," he says.

Kendall suggests that even though fixed-price contracts do relieve the government from taking on all the risk in a program, if not used properly, such deals could backfire and lead to unneeded court battles.

"Fixed firm price development tends to create situations where neither the government nor the contractor has the flexibility needed to make adjustments as they learn more about what is feasible and affordable as well as what needs to be done to achieve a design that meets requirements," he says.

A fixed-price contract is basically a government “hands off” contract, he adds. "While we can get reports and track progress, we have very little flexibility to respond to cases where the contract requirements may be particularly difficult to achieve."

Shifting the risk to contractors should not be seen as the antidote to the Defense Department's poor track record in predicting costs, Kendall notes. The average EMD (engineering, manufacturing, development) program for a major defense acquisition over the last 20 years has overrun by nearly 30 percent. "Industry can only bear so much of that risk," he says. "It is unrealistic to believe contractors will simply accept large losses. They will not. ... Industry has a finite capacity to absorb that risk and knows how to hire lawyers to help it avoid large losses."

In most cases, says Kendall, there needs to be a "fair sharing" of the risk and rewards of performance. "For good reasons, I am conservative about the use of fixed-price development, but it is appropriate in some cases."

“The government rarely knows what it wants with sufficient specificity to support reasonable fixed prices for evolving, complex or sophisticated products to be delivered years later,” charges John Chierichella, a government contracting attorney at the law firm of Sheppard, Mullin, Richter & Hampton LLP.

He predicts the “latest federal fascination with fixed prices will end like the others — badly — with delayed fielding of the products, contractors deeply damaged by inadequate cash flow, increased claims and litigation, and focused “bail outs” in which the government decides which of the wounded contractors deserves triage.”