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White House Orders Federal Agencies to Reduce Contract Spending

August 24, 2011


Recently the White House ordered federal agencies to reduce contract spending for acquisition support, information technology development and other services by $6 billion over the next year.

Procurement officers are officially encouraged to seek “best value”. In theory, this does not necessarily translate to lowest bid price. However, as cost cutting becomes an increased focus throughout federal agencies, in many cases “lowest price” has become “best value”. This builds an even stronger case for SCA contractors to contribute the entire fringe portion of the prevailing wage to bona fide benefits programs in order to maximize savings on payroll burden and reduce overall bid costs. As the amount of funding available for SCA contracts decreases, competition will tighten. Companies that currently contract with federal agencies can help position themselves favorably if they can demonstrate ways to decrease costs.

Army Contracting Command executive director Jeff Parsons stated that a company’s past performance and technical ability are still important. He adds, however: “That doesn’t mean we’re going to pay a large amount of money for what could be a small increase in overall value.” Defense department entities are also being encouraged to explore more sole source contracts for longer durations.

Over the past 10 years contract spending on 15 different types of professional and management support services has increased four-fold from $10 billion in 2000 to $40 billion in 2010. The Office Of Management and Budget (OMB) has asked agencies to contract less, make larger department-wide or agency-wide bulk purchases in hopes of reducing costs, and review contract vehicles with an eye toward more firm fixed-price contracts – which translates to increased risk for contractors.

Currently only 26% of service contracts are fixed price contracts. The remainder are structured to reimburse contractor costs on a recurring basis, resulting in higher risk to the federal government. Increasing pressure to mitigate costs is driving a shift from reimbursable contract structures to fixed- price structures.

Given the emphasis on cost containment, contractors who use the entire fringe portion of the prevailing wage to reduce payroll burden will gain an advantage in an increasingly competitive environment. To succeed under these circumstances, service contractors must be willing to assume more contracting risk and seek out ways to drive down both direct and indirect costs.