How to Buy It

How to Buy It

Scott Thompson, NASA's director of contract management, says the first step usually is to assess a project's risks.

The conventional wisdom at some agencies is that contracting is done by the contracting folks, planning by the planning and program folks, and IT by the techies.

But such a clear division of work leads to poorly written and feebly executed contracts, according to both government and industry experts. Projects such as modernization require an interleaved process of development, of which contracting is one part.

To close the gaps, they say, the planning for a modernization contract must involve every stakeholder, top to bottom, especially when a multiyear system modernization is at stake.

Experts agree that a good contracting process leads to success'that is, a project that meets all of its objectives and is finished on time and within its budget.

A contract that goes wrong, on the other hand, can lead to ruined careers and the loss of credibility with Congress and other stakeholders.

'All too often, procurement is just seen as acquisition, but it actually starts when you define your requirements,' said Chip Mather, a partner with Acquisition Solutions Inc. of Chantilly, Va., which helps agencies implement acquisition reform. 'All parties need to be focused on the agency's goals and objectives and not just their little part of the process.'

And defining requirements is not just a part of the acquisition strategy. It's a means to help the agency achieve its overall mission.

Mather, who worked for 20 years as an Air Force contracting officer, and other government and industry experts said the steps to success include:

  • measuring the risk associated with the project

  • placing monetary or additional-year incentives in the contract to spur vendor performance

  • making the contract rigid enough to hold vendors to the project's goals, yet flexible enough to allow the agency and contractor to use the best tools available to them.

    Thomas Thoma, director of acquisition, logistics and facilities for the Defense Information Systems Agen-cy, followed this outline when his agency in October awarded the $3 billion Defense Information Systems Network Global Solution contract to Science Applications International Corp. of San Diego and SETA Corp. of McLean, Va.

    The DISN contract is a five-year indefinite delivery-indefinite quantity award with four award-term periods.
    Thoma faced a situation common to agency procurement heads: an acquisition staff that disagreed on how to construct the contract.

    The staff debated whether to update the expiring contract, or scrap it and totally rewrite it using a performance-based approach. After much research'which included using other agency projects as benchmarks'and debate, DISA settled on a performance-based contract gave the agency flexibility in writing task orders.

    In performance-based contracting, an agency describes the work in terms of results rather than level of effort or highly detailed specifications. Vendors are asked to meet a specific goal but are not told how to achieve it. The Commerce Department's Commerce Information Technology Solutions (COMMITS) and the Transportation Department's Information Technology Omnibus Procurement (ITOP)'both governmentwide acquisition contracts'are examples of performance-based contracting vehicles.

    Non-performance-based contracting'which includes almost all contracts'details exactly how the vendor must achieve a result.

    President Bush is pushing the performance-based approach, asking agencies to use it for at least 25 percent of all contracts this year. The Defense Department also has a goal of making 50 percent of all service contracts performance-based by 2005.

    Third try

    While it is too early to measure the success of the DISN contract, it followed the path many experts recommend.

    For its massive modernization effort'and its third try since the 1980s'the IRS is using a two-tiered approach. Its Prime contract is with Computer Sciences Corp., which the agency holds accountable for the myriad task orders.

    But for each task order under Prime, CSC conducts a competition among several other contractors. These include IBM Corp., KPMG LLC, Lucent Technologies Inc., Northrop Grumman, Science Applications International Corp. and Unisys Corp. According to Stephen Kalish, the president of CSC's Federal Sector Civil Group, each of the partners can bring in any supplier it wishes as subcontractors.

    While it might seem as if having, in effect, a general contractor would add cost to the IRS, Kalish said the reverse is true.

    'As we hold the competitions we drive down costs,' Kalish said. 'We have saved IRS enormous amounts of money.'

    There is no template for writing the perfect contract; too much depends on the agency and the project. 'The contract vehicle and strategy stems directly from your overall acquisition strategy,' said Stan Soloway, president of the Professional Services Council and a former undersecretary for Defense acquisition reform. 'Agencies must take a broad approach that includes buyers, management, users and requirers all working together to meld the requirement.'

    NASA, one of the agencies Thoma used as a benchmark, has been a leader in acquisition strategy.

    The agency has solidified the methods by which it puts contracts together, using incentives such as award fee provisions.
    Award fee incentives can give vendors the opportunity to earn more money than the contract's profit margin by performing well above expectations. Or, an award fee could stay within a vendor's profit margin and use performance measures to determine how close the vendor gets to 100 percent of the potential profits.

    NASA also is known for bringing all parties to the table at the beginning of the acquisition planning process. By doing this up front, the agency ensures that the contract covers mission-critical aspects.

    NASA's first step usually involves measuring the project's risks, said Scott Thompson, director of contract management.

    Risk, rewards in balance

    Implementing a new system poises security, safety, cost and technical risks, Thompson said.

    'If we focus our discussion on how to mitigate those risks up front, it brings the whole team together to see the big picture,' he added.

    Renato DiPentima, president of the consulting and systems integration group for SRA International Inc. of Arlington, Va., said performance-based contracting is another way to lower the government's risks while also providing flexibility, incentives and perhaps getting better technology.

    DiPentima, a former Social Security Administration deputy commissioner of systems, said incentives such as award fees promote success because they make good performance in the best interest of both the agency and the contractor.

    'I remember one contract at SSA where the award fee was tied directly to the contractor's profit margin,' he said. 'We measured performance on a quarterly basis, and the contractor and [the agency] always knew where the project stood. We always got the message across to the contractor that they must have very good people working on the contract to receive the full award fee.'

    Of course, even if the right contracting method is chosen, the request for proposals must be written properly, or no one will bid. That's what happened to Soloway on a system re-engineering project for the Defense Finance and Accounting system.

    Soloway said the solicitation was performance-based but the statement of work included 1,500 pages of specifications about the existing system. Vendors saw that as too specific, giving them little leeway to develop a new system. No one bid for the contract, Soloway said.

    The long haul

    Many of the experts said they preferred using multiple-award IDIQ task-order contracts over longer periods of time, such as seven or eight years.

    They like task orders because they promote competition among contract holders, which means lower costs for the agency. Long-term contracts also create stronger bonds between an agency and its vendors because of the continuity of work.

    Modular contracting is another approach that has met with some success. Agencies break projects into separate sections that can stand alone but enhance the overall system. When finished, all the modules should constitute an integrated system.

    Some large-scale modernization projects, such as the Treasury Department's Customs Bureau modernization contract, awarded last April, use modular contracting because it was easier to sell each module to agency heads and Congress, and each added value to the current system. The IRS also is taking this approach with its Prime contract.

    No matter the contract type, the work that goes into it'before and after the award'will make or break a project.

    'The government is too focused on contract award as the ultimate milestone,' Mather said. 'They need to spend just as much, if not more, time after the award on achieving the mission's objective.'

    Choose your contract carefully ...
    Contract typeHow it worksProsCons
    Fixed PriceGovernment agrees to pay a fixed amount of money for a product or serviceGovernment knows how much it will spend on a projectHigh risk because agency and contractor agree to pay a specific price no matter what the real cost turns out to be; too much risk could scare off bidders
    CostGovernment pays for all allowable costs and in most cases includes some kind of fee structureGovernment assumes the risk, so more vendors will compete for contractCost could rise if project takes more time than expected; agency must perform a lot of oversight; very risky
    Time and materialsGovernment pays the cost of employees, usually at an agreed-upon per-hour rate, and the cost of materials neededAgency fulfills its needs quickly; has a lot of flexibility Like cost contracts, the agency has heavy oversight responsibilities; must negotiate the contract carefully because time includes both fixed and variable costs; the Federal Acquisition Regulation says this is the least desirable type of contract
    Labor hoursGovernment pays for the cost of employees over an agreed-upon number of hours for a project; does not pay for materialsA responsive contract vehicle with a lot of flexibilityRequires a lot of oversight from agency; contractor does not have incentive to control the number hours it takes on a project

    ... then find the best approach for modernization
    ApproachHow it worksProsCons
    Performance-basedThe government dictates the final outcome without going into specifics on how to accomplish it; Bush administration is pushing for more of this approach
    Government takes on little risk
    Agency control is limited
    Share-in-savingsRather than paying directly for work, the agency and contractor split the savings from a project
    Agency pays nothing up front for project
    Limited control over contractor
    Modular contractingUsed on larger projects, where agency completes project section-by-section; each section is funded by itself and can stand alone as an enhancement if no other modules are finishedAgency receives a upgrade no matter how much of the entire project is finished; this makes it easier to sell a project to agency chiefs and Congress
    Hard to administer because the agency must manage each module; no guarantee funding will be available for an entire project

    Three incentives that get the best from contractors
    IncentiveHow it worksProsCons
    Award fee
    Could be a separate pool of money or part of contractor's profit; the contractor receives part or all of the fee depending on its performance, based on subjective or objective metrics
    Provides a lot of incentive for contractors, who don't like to leave money on the table; has flexibility because the agency can change criteria on each task order, define what criteria are and how much money is put in for each period
    Agency must have extra pool of money, have experience in managing this type of contract and perform extensive oversight
    Award term
    Agency offers contractor extra years on the contract if the contractor performs exceptionally well
    The prospect of a contract extension provides incentive for the contractor
    Agency must review the contractor's work often, and have an alternative plan in case of poor performance
    PerformanceGovernment defines performance parameters; used on development contractsProvides incentive for contractor to achieve higher level of performance, requires less administration because the agency need only define the parameters and see if they are met
    It can be hard to define levels of performance; the agency risks setting a performance standard that cannot be met; agency must define the benefits of each increment of performance
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