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Executive Summary #1452es

June 25, 2001

June 25, 2001 | Executive Summary on

Executive Summary: Improving Government Performance Through Competitive Contracting

During his campaign for the presidency, George W. Bush promised to "Open federal positions involving commercial activities to competition from the private sector wherever possible." Once in office, President Bush made good on his commitment by requiring each of the federal departments to fulfill ambitious competitive contracting goals. As has been demonstrated throughout the world, and at all levels of government in America, competitive contracting allows the public sector to lower costs and improve services.

In competitive contracting, government solicits bids from qualified private-sector businesses to perform a specific service currently being performed by the employees of a government department. If any of the bids received are lower in cost than what the government is currently paying, money can be saved by shifting the performance of the particular service from public employees to private business operating under contract to government.

To implement the program, new Office of Management and Budget Director Mitchell Daniels informed all agency and department heads that the Administration's new performance goals and management initiatives would include competitive contracting under OMB's A-76 guidelines and a renewed effort to provide more accurate FAIR Act inventories. "A-76" refers to the long-standing OMB circular that establishes the procedures, rules, and guidelines for federal competitive contracting, while "FAIR Act inventories" refers to the Federal Activities Inventory Reform Act of 1998.

Under the provisions of the FAIR Act, federal agencies are required to provide OMB with an inventory of all of the commercial positions within their department. In early 2001, federal agencies estimated that as many as 850,000 of their employees were performing commercial-like functions commonly available from the private sector.

Although neither the FAIR Act nor the Clinton Administration's implementation of it required agencies to do anything more than compile an inventory, the Bush Administration intends to require federal departments and agencies to compete these jobs with private-sector providers. In March 2001, OMB announced that agencies will be required to develop a more accurate list of all commercial activities and, next year, subject no less than 5 percent of the commercial positions on the list to competitive contracting, utilizing the A-76 process as appropriate.

If the Administration succeeds in implementing the program and getting agencies to cooperate, the potential savings could be quite significant.

The Department of Defense (DOD) has used competitive contracting very aggressively over several decades, and its long record of activity provides an extensive measure of performance. In March 1996, the DOD reported to Congress that competitive contracting had resulted in an annual savings of $1.5 billion and that more than 600,000 civilian and uniformed positions could be subject to competitive contracting in the near future in order to free additional resources to bolster defense capabilities.

In a detailed review of DOD's contracting history, the CNA Corporation, a private, nonprofit research organization, conducted a study of 2,138 separate A-76 contracts completed by the DOD between 1978 and 1994. The CNA found that these contracts, covering a total of 98,348 jobs, provided savings that averaged 31 percent over costs incurred before the A-76 review. Significantly, nearly half (48 percent) of the competitions were won by the in-house staff, which submitted the winning bid in competition with private companies. Contracts won by restructured in-house operations averaged savings of 20 percent, while contracts won by private firms averaged savings of 38 percent.

Based upon savings estimates derived from DOD's performance, if OMB can get all the agencies combined to raise their FAIR Act inventories to 1,000,000 employees from the FY 2000 estimate of 850,000, and apply the A-76 process or equivalent to the 5 percent target, the federal government could achieve annual savings of between $1 billion and $1.4 billion for every 5 percent of the list subject to competition. These savings will accumulate year after year. If 50 percent of FAIR Act list positions are competed within five years, as some recommend, annual savings will amount to between $10 billion and $14 billion. No other spending restraint option now under consideration offers Congress or the Administration a level of budgetary savings of this magnitude with no reduction in the level or availability of government services.

The favorable contracting experience at the federal level has been matched by similar activities in many state and local governments. Over the past several decades, communities around the country have achieved cost savings and service improvements by contracting out such functions as wastewater treatment, water supply, school bus fleet operations, trash collection, recycling programs, janitorial services, highway maintenance, operation of prisons and jails, welfare caseload oversight, school maintenance and food service, oversight of child support payments, data processing and information technology, airport management, special education instruction, nursing home operations, public school building, grounds keeping and park maintenance, management of public housing, parking meter coin collection, and operation of public transit programs. For the most part, savings appear to be on the order of those achieved at the federal level: between 25 percent to 30 percent.

Although the opportunities for using competitive contracting for significant savings and service improvements abound, opposition to the effort will be intense as entrenched interests--largely the existing workforce and managers--defend the status quo and the benefits it provides them. But by making a positive case for reform to the public, and by ensuring that existing workers and managers will be treated fairly and encouraged to participate in the competition, the effort will succeed.

Ronald D. Utt, Ph.D., is a Senior Research Fellow in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow