Federal Contract Law: Taking full advantage of share-in-savings contracting

Joseph J. Petrillo

One of the goals of the E-Government Act is to encourage the use of share-in-savings contracts. These are performance-based contracts where the contractor is paid a share of the money it saves the government.

Last year [GCN, Nov. 10, 2003] I wrote that good metrics are critical for this type of deal and Office of Management and Budget business cases could help develop them. The E-Government Act addresses another flaw in the share-in-savings program: the budget surplus conundrum.

Private-sector businesses are profit-driven, as we all know. Government institutions, however, are budget-based. They can't overspend their appropriated funds, but spending less than the amount appropriated is just as much a problem. Congress will conclude that an agency doesn't need the money and will cut next year's budget.

Thus, share-in-savings contracts, like all cost-cutting moves, create a new problem. The agency must obligate the saved funds before they are lost, not only in the current fiscal year but for future years as well.

The act addresses this issue by letting an agency retain any savings realized after paying the contractor its share. These funds are available without fiscal-year limitation, so there is no pressure to spend them before Sept. 30.

There are three restrictions.

First, an agency doesn't get to keep savings gained by reducing the number of federal employees, an obvious concession to civil-service unions.

Second, an agency must first apply savings to unfunded contingent liabilities for the program'basically, contract termination costs.

Third, any remaining savings go to pay for IT.

A draft subpart of the Federal Acquisition Regulation to implement this part of the act appeared in the July 2 Federal Register. The proposed rules remind agencies that they are still obligated to do acquisition planning and obtain appropriate competition.

Another proposed section makes 'best value' the basis of any contract award. Consideration of savings requires an analysis of lifecycle return on investment, calculated on a net present value basis. This process is similar to the comparison of lease and purchase options under the old Brooks Act procedures.

The E-Government Act also authorizes payment of cancellation charges if a project is dropped because Congress fails to appropriate funds. This eliminates one risk that might discourage the private sector from investing in a share-in-savings deal. Also, up to 10 share-in-savings contracts per year won't require full funding for this contingency.

Another recurring topic addressed in the act and other new regulations is data security. A recent revision to Defense FAR Supplement Subpart 239.71 beefs up coverage in this area (69 Fed. Reg. 35533, June 25, 2004). The drafters wisely avoid a one-size-fits-all approach. Instead, they list the major policies and procedures in the area, such as Directives 8500.1 and 8500.2. How much security each system needs is decided on a case-by-case basis.

The regulation specifies inclusion of security requirements in solicitations and contract documents. I suspect this advice is directed less at contracting officers than security officials, who sometimes ignore contract language in their zeal to improve safeguards.

Reading emanations

Revised DFARS 239.71 also continues the venerable TEMPEST program, which prescribes rules to limit 'compromising emanations' by highly secured systems. This prevents eavesdropping by reading the electromagnetic radiation thrown off by a computer system component such as a monitor.

The new share-in-savings provisions should help solve some of the problems in fielding this program. Now, if Congress can funnel some of the savings back to agency employees in the form of bonuses, it might really take off.

Joseph J. Petrillo is a lawyer with the Washington law firm of Petrillo & Powell. E-mail him at jp@petrillopowell.com.

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