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Obama's Government Procurement Reforms to Require Extensive Use of Fixed Price Contracting
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March 23, 2009
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By David Beck
Howrey LLP
President Barack Obama has signed a memorandum intended to reform the federal procurement process by eliminating wasteful and inefficient government contracts. With Sen. John McCain, his former rival for the Presidency, at his side, Mr. Obama announced: “It’s time for this waste and inefficiency to end. It’s time for a government that only invests in what works.” 1/
In 2008, spending on government contracts accounted for more than $500 billion of the federal budget, twice the amount that was spent in 2001. 2/ Mr. Obama has ordered the Director of the Office of Management and Budget to collaborate with the Secretary of Defense, the Administrator of the National Aeronautics and Space Administration, the Administrator of General Services, the Director of the Office of Personnel Management and other agency heads to develop a plan to repair what Mr. Obama referred to at his March 4 press conference as the “broken system of government contracting.”
Mr. Obama’s plan calls for reform and increased regulation in three areas: 1) award of government contracts; 2) management of government contracts; and 3) outsourcing of inherently governmental services.
Federal Acquisition Regulation Part 6.101 requires government contracting officers to “promote and provide for full and open competition in soliciting offers and awarding Government Contracts.”
Full and open competition enhances the government’s ability to negotiate price and generally results in more fixed-price contracts. In recent years, however, there has been a significant increase in the number of contracts awarded without full and open competition. That has led to an increase in the number of cost-reimbursable contracts in which the final contract price is indefinite and the risk of cost overruns is significant. Since 2000, federal spending obligations under cost-reimbursable contracts have nearly doubled from $71 billion to $135 billion annually. 3/
To reverse this trend, Mr. Obama reiterated the policy that agencies should not engage in non-competitive contracts except in limited circumstances and declared a preference for fixed-price contracts. Mr. Obama instructed the agency heads to promulgate rules and regulations that will maximize the use of full and open competition and that will provide appropriate oversight for all noncompetitive contracts.
Mr. Obama also directed the agency heads to develop rules that will increase and improve the oversight and management of private contractors. A GAO study of 95 major defense acquisition projects last year found cost overruns of 26 percent, totaling $295 billion. 4/ Mr. Obama believes that with increased oversight, including a process for ongoing review to identify wasteful and inefficient contracts, such cost overruns will be significantly reduced.
Finally, Mr. Obama wants to eliminate the outsourcing of services that are inherently governmental activities. The premise is that taxpayers will receive more value for their tax dollars when government agencies actually perform services within their area of responsibility. But, Mr. Obama has not defined what constitutes an inherently governmental service. Instead, he acknowledged that the line between what is inherently a governmental service versus one that is not, and thus appropriate for private competition, is a blurry one. Therefore, he called on the government agencies to specifically identify when governmental outsourcing for services is and is not appropriate. 5/
Mr. Obama estimated that the reforms he directed could save the federal government up to $40 billion a year. 6/
What is not clear, however, is the cost of implementing such regulations to both the federal government and private contractors. Because many of Mr. Obama’s proposals for reform already exist in one form or another in the Federal Acquisition Regulations, any new regulations could be as benign as enforcement mechanisms for rules already in existence. But, the new regulations also could be sweeping, imposing wholly new obligations on government contracting officers and private contractors alike.
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For more information about the issues covered in this report, please contact David Beck in our Washington office at 202-383-7491 or at beckd@howrey.com or contact your Howrey attorney. For more information about Howrey’s Construction Practice Group, click here.
ENDNOTES
©2009 Howrey LLP
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