Focusing on the Cookies (as Opposed to the Oven They Were Baked In): Assessing the Defense Department's Shift to Performance-Based Contracting

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ABSTRACT

In this article, the Department of Defense's shift to performance-based contracting for services - which are increasingly comprising a larger and larger portion of total federal procurement dollars - is examined. This shift away from fixed-price and labor hour contracts has been characterized as nothing less than a paradigm shift in the way federal contracting operates, forging new possibilities for partnerships between the public and private sectors for improving overall government service delivery. However, the transition is also fraught with problems stemming from a lack of both agreement and awareness of just what makes contracts performance-based. In this article, an examination is offered of the development and definition of performance-based contracting, along with an overview of some of the criticisms of the concept.

Today's budget constraints on all levels of government will only heighten the focus on producing results and getting more "bang for the buck" from federal spending. Nowhere is this more true than in the Department of Defense, where contracted services play a strategic role in enabling the military to carryout its all important mission in a dangerous global theater.

INTRODUCTION

According to the General Accounting Office (GAO, 2002), in Fiscal Year 2001, the federal government procured services totaling $136 billion. By far, the Department of Defense (DOD) contracts for more services than any other federal agency. In FY2001, DOD spending on services contracting was approximately $59 billion, and for FY2003, the Pentagon's proposed budget calls for this amount to rise to $68.7 billion (Sherman, 2002).

Within the Department of Defense, spending for services is accounting for an increasingly large share of the total procurement budget. Over the decade of the Nineties, the Defense Department's annual budget for procurement of goods-such as aircraft-actually decreased from $59.8 billion to $53.5 billion (Friel, 2000b). As can be seen in Figure 1, over 1/6th of total DOD spending has shifted from the procurement of materials to the acquisition of services in the last ten years. The size and scope of services contracting is growing rapidly in the military realm, as DOD contracting actions worth more than $100,000 increased by 28 percent in that same time span.

Much of the focus today is on information technology (IT) spending for hardware, software, and increasingly - services. As can be seen in Figure 1, federal spending for all categories of IT is expected to grow by over two-thirds over the next five years - to over $60 billion annually.

While services constitute a significant portion of IT purchases, the government in fact buys a wide spectrum of services. The Department of Defense clearly outweighs all other federal agencies in services spending, both in terms of the number and dollar value of procurements. This can be seen in data reported by the Federal Procurement Data Center (2002) in just two representative areas of service spending: research and development (Table 1) and construction (Table 2).

In her testimony before the U.S. Senate, the Administrator of the Office of Federal Procurement Policy, Angela Styles, recently observed that: "Significant portions of the military budget go not to 'war-fighting' but to infrastructure and overhead. The logistics that keep our armed forces housed, trained and mobile are essential to our success on the battlefield and maintaining and improving 'non-war-fighting' capabilities" (United States Senate, 2002, n.p.). As Balk and Calista (2001) point out, by contracting out more of their activities on the periphery, agencies are able to better concentrate on their core missions.

Always - and especially in the post-September 11th environment of today, no federal agency's mission is more important than the Department of Defense. Yet, as Sherman (2002) observed in Defense News, DOD acquisition rules, aimed at governing primarily the procurement of goods, rather than services, have severely lagged behind this transition in the acquisition environment. …