Challenges of Contracting Within the US Government

 

Challenges of Contracting Within the US Government

Table of Contents

Table of Contents. 2

Introduction. 3

History and Evolution of Privatization. 4

History. 4

Evolution of Privatization Policy in the US. 5

Policies and Rules that Apply to Private Contractors and Federal Workers. 6

Service Contract Act 6

Davison-Bacon Act 7

National Labor Relations Act 7

Executive order 11246. 8

New CBA Negotiation. 8

Government Reporting and Verification. 8

Defense Contract Audits and Cyber Security Protection Requirements. 9

Transparency, Drug-Free Environment, and Ethical Standards. 9

State Decision-making on Privatization. 10

Fixed Cost Federal Contracts. 10

Challenges of Fixed-cost Contracts. 10

Cost-up Federal Contracts. 11

Challenges of Cost-up Contracts. 11

Failures and Fraudulent Incidences Associated with Privatization. 11

The Randall “Duke” Cunningham Scandal 12

The Veteran Affairs Failure. 13

Cost-Effectiveness of Privatization. 14

Conclusion. 15

References. 16

 

Challenges of Contracting Within the US Government

Introduction

The increasing rise of globalization worldwide has led to the increased adoption and incorporation of privatization by world governments in attaining better productivity and improved economic wealth by creating healthy competition in the markets. However, to understand how privatization contributes to a country’s economy through increased healthy competitiveness, one must understand what privatization entails. Kosar (2006) defines privatization as a process through which individuals and private firms take up contracts with the government where there is a shift of ownership and control of state-owned enterprises (SEOs) to provide public goods and services. While privatization offers the advantage of reducing corruption, strengthening capital markets, and improving technology through infused capital into a country’s industries, private firms and civilians who venture into privatization in the US face challenges in getting contracts to provide public goods and services.

This paper will be divided into five parts that help address the situation of privatization in the US. The first section will cover the history and evolution of privatization into policy in the US. Secondly, the paper highlights the privatization process through which there will be a discussion on policies and rules that apply to private contractors and federal workers. Third, the paper discusses how organizations decide on what to privatize. Fourth, the paper discusses failures and fraudulent incidences that have led to increased contracting challenges for private firms in the nation. In closing, the paper will address the cost-effectiveness of privatization on specific programs and tasks.

History and Evolution of Privatization

History

The history behind global privatization dates back to Ancient Greece. In Ancient Greece, Megginson et al. (2001) explain that the Ancient Greek government-owned land subcontracted to individuals to farm to cater to the food needed to feed Greek citizens. Also, Megginson et al. (2001) add that during the Roman Dynasty, all state financial requirements were catered to by a group of individuals that created private financing companies, known as the publicani. The publican catered to the finances of the Roman Dynasty, where the Roman government used funds appropriated from these financiers to help fund arms races, buy food for Roman citizens, and ensure that government officials were well compensated for their service to the people. However, it was not until the Industrial Revolution of 1760 – 1820 in Europe and the United States that the private sector started gaining traction as producers of commercial goods and services.

Megginson et al. (2001) infer that the private sector had individuals who formed companies that supplied the public in Europe and the US with commercial goods during the Industrial Revolution while providing public goods and services. The individuals in the private sector made it a permanent mark as being the most important producers of commercial goods during the Industrial Revolution era. While many countries in Europe embraced these private sector firms and individuals, the US was adamant in involving the private sector in the government’s growth plans. However, the Great Depression and World War II changed perspectives.

During the Great Depression of 1929 – 1939 and the following Second World War of 1939 – 1945, Megginson et al. (2001) write that European governments opted for a limited involvement of the private sector in contributing to the national economic growths by taking up contracts to help in providing public goods and services. The limited involvement included European governments debating that private companies and organizations should get contracts for specific public goods and services while the governments retained exclusively over specific enterprises. The Thatcher administration in the UK led to the advocacy of the British government owning postal services, steel manufacturing, telecommunication services, electric utilities, non-road transportation like railroads and air transport, and defense production. It was not until the late 1970s into the early 1980s that the US adopted privatization as an option to national growth through Conservatives and Libertarian efforts to have privatization as a national policy.

Evolution of Privatization Policy in the US

Kosar (2006) explains that during the Reagan administration, Conservatives and Libertarians proposed in Congress the need for privatization as a national policy to help downsize the federal government and increase the production of public goods and services. In addition, conservatives and Libertarians argued that privatization would ensure economic freedom. Looking at it from the perspective of the free market economic theory, Kosar (2006) expounds that privatization would increase economic freedom by freeing the concentration of power from the US government to private firms and individuals. Therefore, as more individuals got involved in privatization, the government’s monopoly as the sole provider of public goods and services would decline, leaving only specific SEOs for government ownership through the diversification brought about by privatization.

Second, Kosar (2006) communicates that public bureaucracies would reduce through making privatization a national policy.  It was documented that state officials conducted self-interested acts of bureaucracy combined with unethical behavior and gross misconduct when providing public goods and services hiding behind the guise of conducting a public-spirited civil service. However, Kosar (2006) explains that privatization would reduce bureaucracy and unethical acts by state officials and increase transparency in the appropriation and public goods and services.

In support of this, Kosar (2006) denotes that the Congress, during Bush’s administration, enacted statutes PL 104 – 193, sec.104 and PL 106 – 154, sec.1 that sanctioned private organizations that included profit and non-profit organizations to seek out grants that would assist in subsidizing and championing social services that the government was responsible for. An example of such service includes counseling programs for substance abuse individuals. Therefore, through the federal government, private companies would get contracts to help in providing public services and goods; hence, privatization was made into a national policy. Furthermore, privatization into a national policy led to rules that apply to private contractors and federal workers.

Policies and Rules that Apply to Private Contractors and Federal Workers

Private agencies that obtain federal contracts to provide public services and goods should comply with the Service Contract Act, Davison-Bacon Act, National Labor Relations Act, Executive order 11246; comply with government reporting and verification, negotiation of new CBAs, uphold transparency, drug-free environments, and ethical standards, respect defense contract audits and cyber security requirements.

Service Contract Act

Under the Service Contract Act (SCA) Section 4c, successive private contractors awarded contracts by the federal government should comply with the employee wage terms and minimum fringe benefits terms set by the previous contractor in the collective bargaining agreement (CBA) (Kohler et al., 2020). The terms of the previous CBA should be honored within the first year before any negotiations can occur. The minimum fringe benefits accorded to employees include medical coverage, 401k plans, bereavement plans, uniform and shoe allowances, disability benefits, pension plans, military pay, life insurance, jury duty pay, paid holiday vacation days, severance pay, and paid sick leaves.

Davison-Bacon Act

The Davison-Bacon Act (DBA) oversees the requirements for private contractors awarded federal contracts to work on construction projects of public works and public buildings. For example, the private contractors could be working on building alterations, decorating, or painting these public buildings (Kohler et al., 2020). Therefore, the private contractor with over $ 2000 federal construction contracts should ensure that all workers are paid while maintaining records of each employee (Kohler et al., 2020). These records include employee names, social security details, address, fringe benefit contributions, employee hourly rates, employee wages paid with deductions, work classification, and daily and weekly hours an employee has worked (Kohler et al., 2020). In addition, while upholding the DBA, private contractors are urged to pay employees weekly and have a DBA poster at the worksite, visible for all to see.

 National Labor Relations Act

The National Labor Relations Act (NLRA) maintains the relationships between unions and employees. When new contractors hire employees from the previous contractor, they are obligated to carry out a duty of bargain with employees’ unions (Kohler et al., 2020). The duty of bargain is a process through which the new contractor will negotiate the employees’ wages with the unions to achieve a desired wage and benefits package for proper compensation (Kohler et al., 2020).  Failure to do this guarantees that employees follow the previous CBA from the previous contractor. Under the DBA, Kohler et al. (2020) explain that there should be no termination of employees from employment contracts without the knowledge of the respective unions.

Executive order 11246

The Executive Order (EO) 11246 expedites the need for new contractors to properly represent minorities and women in the workplace after getting a federal contract to provide public goods and services (Kohler et al., 2020). EO 11246 also necessitates that covered employers have a written affirmative action plan (AAP) that approves codes of practice and works with no discrimination against race or gender (Kohler et al., 2020). The AAP should have signed records by each employee under the new contractor signed for affirmation and consent to the non-discriminatory terms.

New CBA Negotiation

Once the first year of the new contract has ended, the new contractor can negotiate a new CBA. Therefore, in between the proposition of a new CBA, the new contractor can have a short-term bridge agreement (Kohler et al., 2020). Once a federal contract has been issued, the bridge agreement ensures that all differences in pay periods, benefit plans, and other employee contractual terms are addressed for the union to agree to the new terms. The bride agreement takes up the role of addressing these indifferences that do not coincide with the vision of employee-employer agreement that the new contractor has when it comes to the success and completion of the project.

Government Reporting and Verification

Every March 30, the private contractor should prepare EE0-1 and VETS-4212 reports that help with transparency on reporting on the project’s progress to completion after the federal contract award. Also, Kohler et al. (2020) add that the new contractor should agree to E- verification for employment eligibility. While in the E- verification system, the employer should affirm that all employers working under the federal contract are US citizens (Kohler et al., 2020). Also, the E-verification serves to verify that all people assigned to the federal contract are working on the proposed project.

Defense Contract Audits and Cyber Security Protection Requirements

For private contractors with defense contracts, Kohler et al. (2020) explain that the contractors should provide documentation for audits by the Defense Contract Audit Agency. Kohler et al. (2020) add that private contractors should present at least fifteen (15) cyber security requirements that help protect project data and classified information.

Transparency, Drug-Free Environment, and Ethical Standards

According to the 1988 Drug-Free Workplace Act (DFWA), federal contractors are open to investigations if found not offering drug-free environments for employees to work freely. Observing a drug-free environment works for federal contractors with contracts of the value of $100,000 and above, where the contract term stipulates that the contractor is acquiring commercial items (Kohler et al., 2020). In addition, the 2008 Government Funding Transparency Act (GFTA) maintains that contractors awarded contracts valued at $25,000 and above should provide names and compensation amounts of the top five most compensated officials on a contract. The presentation of this data helps with uplifting reviewing and monitoring processes that ensure all officials are accountable, opening up federal contracting to more competitive bidding.

While these are a portion of the rules and procedures to follow as private or federal contractors after being awarded the federal contract, understanding how the nation through the federal government awards contracts is insightful to successful bidding and contract award processes.

 

 

 

State Decision-making on Privatization

For the US Federal government to award contracts to private contractors, federal contracts are split into either cost-plus contracts or fixed costs contracts. Depending on which contract is available, contractors can vary from in-house federal contracting or given to private contractors, of whom can be either non-profit or for-profit organizations (Thornton & Lecy, 2019). Before opting for private contractors, Thornton and Lecy (2019) explain that the federal government considers if the products and services can be provided in-house, determine the cost constraint on the contract, and through proper vetting after competitive bidding, choose a valid third-party contractor.

Fixed Cost Federal Contracts

Fixed-cost federal contracts are awarded to in-house federal contractors over private contractors. With fixed-cost federal contracts, the public products and services have a fixed price with no adjustments to the costs incurred by the contractor. Federal contractors opt for these contracts as they will have a minimal administrative burden (Thornton & Lecy, 2019). However, the federal contractor will incur all the costs and risks of the product or service. Such contracts are suitable for the acquisition of commercial goods and services. According to FAR Subpart 16.202-2, contractors should conduct market research that promotes pricing competition and competitive bidding (Acquisition.gov, 2020). Therefore, federal contractors opt for these contracts to help manage uncertainties and take up all the risk as the federal government.

Challenges of Fixed-cost Contracts

Market changes may affect the profitability of fixed-cost contracts. Thornton and Lecy (2019) write that, considering these contract prices are usually fixed, any market changes on the commercial items will lead to incurred risks and reduced profitability.

Cost-up Federal Contracts

Cost-up federal contracts are a bit different when it comes to their acquisition. With cost-up contracts, contractors negotiate with federal agencies on pay (Thornton & Lecy, 2019). The reason behind this is, with cost-up contracts, contractors will take up the risk of the project with the uncertainty of material costs. Private contractors who bid for these contracts enjoy profits through increased performance costs (Thornton & Lecy, 2019). Cost-saving is guaranteed by the federal government, as competitive bidding incentivizes private firms to offer the lowest costs to get the contact while delivering quality work on projects given. Such contracts can be in defense contracts that private firms bid for and offer standard to top quality products and services to the government at lower costs.

Challenges of Cost-up Contracts

Thornton and Lecy (2019) explain that the biggest challenge to cost-up contracts is that the final budget cannot be set. First, as the price of materials is unknown, federal governments suffer from pricing that may shift depending on the cost of materials. Second, contractors do not enjoy marginal profits because of the shifting of initial project costs (Thornton & Lecy, 2019). Therefore, with fluctuating prices, work efficiency reduces cost. Third, government officials in charge of awarding the contract may push up the initial costs, leading to fewer private contractors while the federal government officials pocket the profits on providing the goods and services. These are some of the challenges that lead to the cases of failure and fraud when awarding federal contracts.

Failures and Fraudulent Incidences Associated with Privatization

When the federal government contracts public projects to private contractors through cost-up contracts, issues may arise with misconduct and increased unethical behavior amongst officials, leading to fraud during federal contracting or cases of failed projects.

The Randall “Duke” Cunningham Scandal

The Randall “Duke” Scandal is the biggest congressional scandal associated with federal contracting as an example of a fraud incident of cost-up contracting. Randall Cunningham was a veteran US Navy pilot; who was elected into the US Congress and later charged and found guilty of counts of bribery, financial impropriety, abuse of office, tax evasion, and congressional corruption (Patten, 2007). After pleading guilty to receiving $2.4 million worth of bribes in November 2005, Cunningham was sentenced to 100 months of prison.

As a decorated veteran US Navy pilot, Cunningham got the backing and election into the US Congress, part of the House Defense Appropriations subcommittee. With his background, Cunningham was put in control of a more considerable portion of the defense budget. During his tenure in the sub-committee, Brent R. Wilkes of the Automated Document Conversion Systems Incorporation (ADCS Inc.) and Mitchell Wade of MZM persuaded Cunningham to earmark a $ 5 million defense contract from the Pentagon to them (Patten, 2007). In exchange, Cunningham received different bribes from the two private contractors, amounting to $2.4 million. These bribes came in monetary bribes, a mansion, a yacht, a Rolls-Royce, and mortgage payments.

The Cunningham Scandal portrays a picture of political corruption by state officials that threaten national security, making the public lose faith in private contracting and the federal government. Patten (2007) denotes that when political corruption clashes with the transparency of the democratic process, the effectiveness of public action reduces. The public sees that the powerful men in government are excluded from the political process by undermining democratic principles (Patten, 2007). Therefore, there is an increased cynicism from the public and diminished public trust. The government should pass legislation that does not let such people off the hook with a slap on the wrist of a short jail term but increase punishment if found with such unethical behavior that goes against the public interest.

The Veteran Affairs Failure

The Veteran Affairs Department (VA) needed to modernize veteran electronic health records to help with improving care for veterans. However, instead of a successful one-off project, it ended up being a series of three failed separate contracted projects, misspending approximately $2 billion, as failed federal contractions (Konkel, 2018). Between 2011 and 2016, an audit on the VA highlighted a monetary wastage of $1.1 billion through two VA projects to help digitalize veteran health records. The contracted projects were Veteran Health Information System and Technology Architecture (Konkel, 2018). On a further investigation dating back to records between 2001 and 2010, there was a revelation of an extra $600 million wastage on the HealtheVet Initiative, awarded to Hewlett-Packard for software, hardware, and other IT service installations, as the star- up contracted projected towards modernized veteran health records (Konkel, 2018). The investigations revealed that monetary wastage was because of improper planning, poor management, and a lack of vision in executing the modernized strategy (Konkel, 2018). Notably, the HealtheVet Initiative transitioned between two administrations; the Bush and Obama administrations.

Consequently, Konkel (2018) notes that the public lost faith in the federal government on federal contracting processes. However, the federal government still has a fourth $16 billion attempt at digitizing veteran health records in place. The fourth attempt focuses on strengthening cyber security while investigating, assessing, and identifying significant areas of improving the VA healthcare system by modernizing healthcare records (U. S. Government Accountability Office, 2021). With such an amount, the public holds a more significant question of effectiveness after the last three failed attempts at the process, which may lead to more massive monetary wastage than the previous three attempts. Such issues bring rise to investigations on the cost-effectiveness of privatization in the US.

Cost-Effectiveness of Privatization

Dawkins (2020) and Eggers (2018) denote that privatization has improved lowered taxes by satisfying the public demand for goods and services. Although some government officials may seek private individual gains through unethical behavior regarding the federal contracting process, privatization reduces the cost of contracting services. Increased competitive bidding on cost-up contracts like prison construction improves government savings (Eggers, 2018). Therefore, new streams of revenue are created through the taxation of private contractors. Compared to government contractors, who do not pay taxes, private contractors pay licensing fees and taxes on contracts, increasing government revenue.

Second, service quality on products and services delivered is improved. Eggers (2018) explains that competitive bidding drives down the cost of contracts while ensuring that private contractors provide quality products and services. For example, through repairs, federal contractors will provide sub-standard products and services that incur more immense costs (Dawkins, 2020). On the other hand, private contractors do a one-off project that ensures sustainability and quality products and services at lowered costs.

Last, privatization improves innovation, efficiency, and market competitiveness. Through cost-up contracts by private contractors, operating costs are reduced, which simplifies procurement processes (Dawkins, 2020). In addition, competitive bidding improves the innovation and formulation of ideas on certain contracted goods and services (Eggers, 2018). This ensures the federal government effectively provides goods and services to the public while maintaining low operational costs and high profitability.

Conclusion

Globalization has improved privatization by increasing economic freedom by allocating federal contracts to private contractors. While this helps improve the nation’s economy through reduced operational costs and increased sources of revenue, contractors face challenges from a lack of faith from the public in privatization. Government officials like Randall Duke Cunningham have led to political corruption through bribery and tax evasion, while some contracted projects are unsuccessful. To build up public faith in adopting privatization, legislation should be passed with severe consequences to those who benefit from the public’s interests. The formation of legislation on proper punishment rather than an insignificant punishment will increase the public’s faith in the privatization endeavor by the federal government.

 

 

References

Acquisition.gov. (2020). Part 12 – Acquisition of Commercial Items | Acquisition.GOV. Www.acquisition.gov. https://www.acquisition.gov/far/part-12#FAR_12_101

Dawkins, R. (2020). Private Contracting and Citizen Attitudes Toward Local Government. Urban Affairs Review, 57(5), 1286–1311. https://doi.org/10.1177/1078087420918660

Eggers, W. D. (2018). II. Advantages of Privatization. Www.mackinac.org; Mackinac Center for Public Policy. https://www.mackinac.org/7294

Kohler, D. Y., Mitchell, L. A., Neifach, M. H., Peck, A. L., Perry, R. R., & Pryor, P. A. (2020). A Guide to Labor and Employment Obligations for Federal Contractors. The National Law Review, 11(287). https://www.natlawreview.com/article/guide-to-labor-and-employment-obligations-federal-contractors

Konkel, F. (2018, January 31). Veterans Affairs Wasted Closer to $2 Billion On Failed IT Projects. Nextgov.com. https://www.nextgov.com/it-modernization/2018/01/veterans-affairs-wasted-almost-2-billion-failed-it-projects/145626/

Kosar, K. R. (2006). Privatization and the Federal Government: An Introduction. In fas.org (pp. 1–55). Congressional Research Service (CRS). https://sgp.fas.org/crs/misc/RL33777.pdf

Megginson, W. L., Price, M. F., & Netter, J. M. (2001). FROM STATE TO MARKET: A SURVEY OF EMPIRICAL STUDIES ON PRIVATIZATION. Journal of Economic Literature, 39(2), 321–389. https://doi.org/10.1257/jel.39.2.321

Patten, J. N. (2007). Congressional Ethics: The Fox and the Henhouse. Politics & Policy, 35(2), 192–220. https://doi.org/10.1111/j.1747-1346.2007.00057.x

Thornton, J., & Lecy, J. (2019). Good Enough for Government Work? An Incomplete Contracts Approach to the Use of Nonprofits in US Federal Procurement. Non-profit Policy Forum, 10(3), 1–18. https://doi.org/10.1515/npf-2019-0037

1. S. Government Accountability Office. (2021, July 1). Veterans Affairs: Systems Modernization, Cybersecurity, and IT Management Issues Need to Be Addressed. Www.gao.gov; US Government Accountability Office. https://www.gao.gov/products/gao-21-105304