Magazine article National Defense

Bundling Offers Government Efficiency, Big Cost Savings

Magazine article National Defense

Bundling Offers Government Efficiency, Big Cost Savings

Article excerpt

Downside is that contracts consolidation can damage primes and leave subs out in the cold

The concept of consolidating two or more government contracts into one in order to create greater efficiencies and decrease expenses for the customer appears sound. Administrative costs of managing multiple contracts drops significantly Economies of scale lead to better price and term negotiations on equipment and supplies.

The opportunity to deliver higher quality results at lower prices grows. For the government customer, the benefits are obvious.

From the perspective of a company in the business of government contracting, the benefits-or detriments-are not so clear cut.

Within the past several years, a growing number of government agencies have looked for ways to increase the efficiency of projects while maintaining the quality results historically achieved though multiple contract awards. The practice of contract bundling, which evolved from this need for increased efficiency, has allowed agencies to combine the requirements traditionally filled through multiple contracts into one-thus, reducing costs, shortening procurement cycles, and improving results.

More often than not, much of this contract consolidation has lead to streamlined business processes that have saved the United States billions of dollars.

Bundling, as a business strategy, often makes a great deal of sense from both financial and time efficiency standpoints. When agencies are able to make purchasing decisions in bulk, it has a tremendous effect on their ability to negotiate savings. One clear illustration of the savings that can be realized through bundling was the focus of a recent empirical study of how the Defense Department purchased off-the-shelf software and electronics parts.

It was found that while the Defense Department overpaid for more small quantity purchases than commercial companies, it also saved more than commercial companies when making volume purchases found with bundled contracts.

On a dollar weighted basis, for example, the Defense Department paid an average 5.9 percent less than commercial companies when able to take advantage of volume discounts afforded through contract bundling. The Pentagon makes literally millions of purchases each year and cannot afford to miss the opportunity to take advantage of the economies of scale that bundling provides.

In order for bundling to work successfully however, it is important to consider the practice from a contractor standpoint as well. One of the greatest impediments to entry for contractors considering work on bundled contracts is cost. Unlike smaller jobs where the investment to bid is minimal, many bundled contracts require such an extensive commitment of capital and manpower before the job is awarded that the impact of a loss can devastate even large companies.

In such an all or nothing game it only takes a few losses before all but a few industry giants bow out of competition.

One of the ways contractors have attempted to address this problem is through joint ventures. When several companies band together to win a bundled contract it can take the pressure off of individual contractors who may be reluctant to front the necessary capital alone.

One of the drawbacks to entering a joint venture is that contractors lose their ability to allocate general and administrative costs. …

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