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Project on Government Oversight

Share-in-Savings Contracts Circumvent Congress' Appropriations Authority and Hide Behind Contractor Proclaimed "Savings" to the government

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August 31, 2004 | By: Scott H. Amey, J.D.

Submitted via e-mail: farcase.2003-008@gsa.gov

General Services Administration
Regulatory Secretariat (MVA)
1800 F Street, N.W. Room 4035
ATTN: Laurie Duarte
Washington, D.C. 20405

RE: FAR Case 2003-08

Dear Ms. Duarte:

The Project On Government Oversight ("POGO") provides the following public comment to proposed rule "Federal Acquisition Regulation; Share-in-Savings Contracting" published in 69 Federal Register 40514 (July 2, 2004). The proposed rule would amend the Federal Acquisition Regulation ("FAR") to implement Section 210 of the E-Government Act of 2002 (Public Law 107-347), which authorizes government-wide use of share-in-savings ("SIS") contracts for information technology ("IT").

Under SIS contracts, the government pays a contractor a small portion of money owed for work and the contractor provides the remaining up-front capital financing (i.e., an interest-bearing loan). Over the term of the contract, the risk assumed by the contractor is repaid in the form of a large percentage of savings or revenues that resulted from their IT work.[1] In other words, the government awards an unappropriated contract in which it commits to pay the contractor a portion of what would otherwise be appropriated for the procured activity.

The proposed rule would expand a troubled pilot program. POGO opposes the proposed rule, concluding:

  • SIS contracts may violate the U.S. Constitution, federal regulations, and limit congressional oversight;
  • SIS contracts require uncertain projections;
  • SIS contracts will increase direct spending by $450 million; and
  • SIS contracts will create a non-competitive contracting environment.

POGO investigates, exposes, and seeks to remedy systemic abuses of power, mismanagement, and subservience by the federal government to powerful special interests. Founded in 1981, we are a politically-independent, nonprofit watchdog that strives to promote a government that is accountable to the citizenry.

DISCUSSION

I. CONSTITUTIONALITY AND OVERSIGHT OF SIS CONTRACTS

Under government's normal checks and balance system, agencies create budgets and make requests to Congress for funding. After debate, Congress determines where and how much money it will appropriate to those agencies. The E-Government Act (the "Act") circumvents the appropriation process, authorizing agency heads to enter into SIS contracts with unappropriated funds. POGO avers that SIS contracts usurp congressional authority and, despite 31 U.S.C. § 1341(a)(1)(B) (which allows agencies to spend unappropriated funds if they are "authorized by law"), may be unconstitutional.

The Appropriations Clause, U. S. Constitution, Article I, Section 9, Clause 7 states: "No money shall be drawn from the treasury, but in consequence of appropriations made by law." Simply stated, Congress decides where taxpayer money goes. The Appropriations Clause is a check and balance, ensuring that government agencies are dependent on the will of American taxpayers as expressed through elected Members of Congress. The U.S. Supreme Court has stated that the Appropriations Clause's fundamental purpose is "to assure that public funds will be spent according to the letter of the difficult judgments reached by Congress as to the common good and not according to the individual favor of Government agents[.]" Office of Personnel Management v. Richmond, 496 U.S. 414, 428, 110 S. Ct. 2465, 110 L. Ed. 2d 387 (1990). The Court has also said that the Appropriations Clause "was intended as a restriction upon the disbursing authority of the Executive department.... It means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress." Cincinnati Soap Co. v. United States, 301 U.S. 308, ___, 57 S. Ct. 764, 81 L. Ed. 1122 (1937) (emphasis added).

The SIS contracting vehicle cedes one of Congress' most fundamental duties to the Executive branch, allowing agency heads to spend unappropriated tax dollars. The deviation from the checks and balance system also raises concerns with contract oversight. Because Congress did not appropriate the funds, it may be limited from its normal oversight function, which would prove fatal in protecting taxpayer interests.

In addition, the SIS program allows agencies to retain funds saved and not paid to contractors. "Because agencies get to retain funds saved and not paid to contractors, the proposal creates an environment for off budget financing of operations." Testimony of Robert J. Lieberman, Deputy Inspector General Department Defense to the Subcommittee on Technology and Procurement Policy House Committee on Government Reform, State for the Record on The Services Acquisition Reform Act (SARA) of 2002, March 12, 2002, p. 4. As a result, the proposed rule creates an agency "savings" slush fund that Congress has handed over to the Executive Branch.

II. DIFFICULTY IN PREDICTING FUTURE SAVINGS AND HOW IT WILL COST THE TAXPAYER

SIS contracts also create the inherent problem of determining current and future costs to establish a baseline for future savings. As evidenced by astrology and daily horoscopes, predictions rarely come true. The reliability of predicting savings with any certainty is a major concern with SIS contracts.

The proposed rule amends 48 C.F.R. § 16.401 by including SIS contracts as incentive contracts. Incentive contracts, however, should only be used when "firm-fixed-price contracts are not appropriate" and when the agency can establish "reasonable and attainable targets that are clearly communicated to the contractor." 48 C.F.R. § 16.401(a)(1) (emphasis added). The proposed rule adds section 48 C.F.R. § 39.309(2), stating that "[b]efore award of a Share-in-Savings contract, the agency senior procurement executive shall determine in writing that the terms of the baseline clause are quantifiable and will likely yield value to the Government." Government employees have opined that SIS contracts rarely, if ever, can establish "reasonable" targets or baselines from which saving can be realized.

Robert Lieberman, Deputy Inspector General Department Defense, has testified:

We also have concerns because the DoD does not yet have the ability to determine the actual current costs of operations with any certainty. The contracting officer needs a good cost baseline for calculating improvements against which benefits can be calculated. Determining the cost of operations is why public/private competitions often require 2 or more years. Until the pilot programs currently authorized are completed, and lessons learned developed, we do not support the [SIS] proposal.

William T. Woods, Acting Director, Acquisition and Sourcing Management GAO, testified before Congress that "[g]athering reliable baseline data can be difficult." Testimony of William T. Woods before the Subcommittee on Technology and Procurement Policy, Committee on Government Reform, House of Representatives, Contract Management: Taking a Strategic Approach to Improving Service Acquisitions, GAO-02-499T, March 7, 2002, p 7.

The Government Accountability Office ("GAO") confirmed in a report the difficulty of predicting accurate IT baselines in 2003, stating:

By its nature, SIS cannot work without having a baseline and good performance measures to gauge exactly what savings or revenues are being achieved. Agreement must be reached on how metrics are linked to contractor intervention. For some services, such as energy management, they are relatively easy to define. For more complex services, such as those in the information technology industry, this can be a much more difficult task.

GAO, Contract Management: Commercial Use of Share-in-Savings Contracting, GAO-03-327, Jan. 31, 2003, p. 8-9. If accurate baselines cannot be established, the government cannot be adequately assured that taxpayer dollars are not being paid to contractors in the form of "savings" rather than being returned to the government.

Furthermore, contractor cost and pricing data for commercial transactions is not available to the federal government for audit purposes. Therefore, the proposed rule does not allow the agency awarding the SIS contract to confirm or audit the contractor's projected "savings." SIS contracts that do not include an audit provision is another example of the fox guarding the henhouse.

Additionally, any multi-year contract awarded on a non-fixed-price basis should include what is called a "Limitation of Funds" or "Limitation of Costs" clause that restricts the public's exposure to the amount that is appropriated. Without a limitations clause, a contractor may walk away with $20 million for $10 million of goods and services because an agency decided not to request a direct appropriation. No matter the contractor's up-front capital outlay, taxpayers dollars should not be so freely forfeited. Angela Styles the former Administrator for federal Procurement Policy in the Office of Management an Budget, has publicly stated that her "office never found or received evidence of any savings realized through [SIS] financing schemes."

The difficulty with establishing a "reasonable" baseline was best illustrated in the Department of Education's Inspector General's report on updating the Federal Student Aid ("FSA") program. The report said:

During the course of our review, we reported that [Federal Student Aid] needed to use more accurate baseline information and maintain documentation that showed that it considered alternatives to the share-in-savings type contract. Accurate baseline information is crucial to the success of share-in-savings contracting. We also reported that FSA did not provide documentation supporting a consideration of alternatives to the share-in-savings task order for the Central Data System (CDS) simplification.

* * *

We found that, even though FSA's payments to the Modernization Partner were made in accordance with the terms of the contract, the $20.3 million baseline used to measure the contractor's performance and to calculate contractor payments for the share-in-savings task order was overstated by about $5.4 million.

U.S. Department of Education, Office of Inspector General, Audit of FSA's Modernization Partner Agreement, Final Audit Report, ED-OIG/A07-B0008, Nov. 2002, p. 10-11. The student aid program's response was that the baseline was only overstated by $1.3 million rather than the $5.4 million. The IG considered the agency's "response and additional cost information and [saw] no reason to change [its] recommendations." Id. at 11. This dispute illustrates the inherent problem with SIS contracts – baselines are difficult to estimate.

An additional problem with SIS contracts is that long term contracts of five to ten years, which provide job security for contractors, lock the government into obsolescence providing no incentive for contractors to upgrade technology. The DoD IG explained:

The 10-year length of the contract is unnecessary and may actually impede further savings. The periodic expiration of a service contract should provide an occasion to spur competition and permit the Government to obtain a better deal or better technology than offered by the incumbent. For example, by year 10 [of a SIS contract] the technology offered by the incumbent can be 7 years out-of-date but still cheaper than the original Government operation. A 10-year contract may provide little incentive for proposing significant improvements after the initial proposal to win the contract.

III. INCREASE IN DIRECT SPENDING

SIS contracts are also distressing considering the federal government's financial climate. "CBO estimates that expanding the use of SIS contracts would increase direct spending by $80 million over the 2004-2008 period and by a total of about $450 million over the 2004-2013 period." Congressional Budget Office, Cost Estimate for H.R. 1837, Services Acquisition Reform Act of 2003, July 29, 2003, p. 1. With many other federal programs being cut and the escalating bills for the war on terrorism, an increase in direct spending will have to be offset by an equivalent amount of direct spending reductions, revenue increases, or a combination of both, which the government has not considered.

IV. AN ENVIRONMENT OF LESS THAN FULL AND OPEN COMPETITION

A final concern with SIS contracts pertains to the non-competitive environment that they will create. This contracting vehicle creates a risk for contractors thereby prohibiting small and medium-sized businesses from competing for the contract. Many, if not all, small and medium-sized contractors do not have the up-front capital necessary to enter the SIS contracting world. Instead, SIS contracts will reward large contractors that can wait five to ten years to receive the return on their investment. By eliminating small businesses and mid-sized contractors (which receive a large percentage of government contracts), the federal government is unlikely to receive the best price that the commercial market can offer, thereby costing the American taxpayer.

V. CONCLUSION

In addition to being unconstitutional, share-in-saving contracts are analogous to the shopper who arrives home with a bag of clothes, excitedly explaining that they saved so much money because everything was "50% off." That shopper fails to consider their purchases from the perspective of the money spent. SIS contracts create that same false impression.

Rather than entering into a firm fixed price contract with incentives for efficient and effective work, the government is attempting to circumvent Congress' appropriations authority and hide behind contractor proclaimed "savings" to the government. SIS contracts are advertised as being risky for contractors and a windfall for agencies, which cannot obtain financing from Congress for new and improved informational technologies. SIS contracts, however, hide the cost to the federal government behind smoke and mirrors, offering end-loaded payoffs for goods or services that potentially could cost the government more than their value had Congress provided a direct appropriation.

Thank you for the opportunity to provide public comment on this important contracting issue.

Sincerely,

Scott Amey
General Counsel
Project On Government Oversight
666 11th Street NW, Suite 900
Washington, DC 20001
(202) 347-1122
Fax: (202) 347-1116
Email: scott@pogo.org
http://pogoarchive.pub30.convio.net

1 The proposed rule subsection 39.301 defines "savings" as "[m]onetary savings to an agency" or the "[s]avings in time or other quantifiable benefits realized by the agency, including enhanced revenues (other than enhanced revenues from the collection of fees, taxes, debts, claims, or other amounts owed the Federal Government)."



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