Jerry McGinn serves as a specialist leader in Deloitte’s Department of Defense consulting practice and wrote this piece exclusively for GovCon Exec.
The quest for short-term savings may lead to greater performance risk, inferior quality, and higher lifecycle costs.
Given the fiscal pressures facing the U.S. government, it’s natural and appropriate for agency purchases to fall under increasing scrutiny. The Office of Management and Budget, for example, recently directed federal agencies to reduce spending on managed support services by 15 percent. Agencies are looking for efficiencies and savings wherever they can.
This emphasis has prompted a trend toward lowest price technically acceptable (LPTA) contracting approaches in acquisition competitions, including those involving complex technical services. While LPTA contracting plays an important role, federal procurement officials need to take care so efforts to wring out short-term cost savings don’t result in longer-term performance problems and cost overruns.
Section 15.1 of the Federal Acquisition Regulation (FAR) describes the source selection process—with LPTA at one end of the “best value” continuum and cost/performance tradeoff at the other.
The Best Value
Until recently, most solicitations for complex technical services—think engineering and maintenance for such mission critical systems as nuclear facilities or support services for aircraft system integration—were conducted using a tradeoff approach. In so doing, federal procurement officials make qualitative judgments between price and non-price factors, such as technical risk and past performance of competing proposals, to determine the overall best value to the customer.
LPTA approaches, conversely, have been used almost exclusively for the provision of commodities such as fuel and lower-end services including security guards, janitorial services, snow removal, and the like. Under LPTA, competitors must be rated as “technically acceptable,” on a pass/fail basis, for a series of capabilities outside of price. All bidders who meet the technically acceptable threshold are then evaluated on price, with the lowest winning.
Against strong budgetary headwinds, government procurement officials increasingly are turning to LPTA approaches in the acquisition of higher-end services. This trend has created, in the words of one company CEO, an “LPTA mindset” that has spread across all sectors of government contracting.
LPTA also simplifies and reduces subjectivity in the source selection process. As agencies attempt to deploy increasingly scarce acquisition professionals, it becomes significantly easier to structure competitions under an LPTA approach. LPTA competitions, moreover, essentially “bulletproof” decisions from potential protests with less subjective source selection criteria.
At What Cost?
The challenge is that LPTA competitions inevitably lead to what former Undersecretary of Defense for Acquisition, Technology, and Logistics Jacques Gansler and others have called a “race to the bottom” on price. Though acceptable for lower-end services, LPTA discourages the very innovation needed to address agencies’ toughest problems. LPTA, for example, tends to place an inordinate amount of creative energy into pricing strategies, inevitably reducing attention devoted to other areas.
As one COO has noted, the LPTA environment forces incumbent companies to reduce or eliminate the discriminating value-adds that made them successful to maintain contract positions. The point here is not incumbent protection, but that when companies cut corners to reduce costs, it inevitably decrements the quality of service offered to agencies. This approach may garner nominal savings, but it could lead to greater performance risk, inferior quality, increased support costs, and, ultimately, higher lifecycle costs.
LPTA also raises retention issues. To win on price, companies looking to retain their incumbent position on a contract may have to cut salaries as much as 15 percent or 20 percent, according to one vice president for business development in a defense services company. Conversely, in successful efforts to unseat incumbents, companies have been known to offer salaries in the mid-$30,000s for positions requiring postgraduate degrees in the Washington metro area.
“This situation creates high staff turnover among contractors as they struggle to retain personnel paid well below their market value,” noted Lee Dougherty, lead attorney for General Counsel PC’s government contracts practice group. The end result: program instability and a lower service quality for the government customer.
While cost-savings goals are commendable, federal agencies may want to reconsider their current LPTA mindset. LPTA has its place as a contracting strategy. But in areas requiring significant intellectual property and domain expertise, the government should move back up the best value continuum.
Focusing on outputs such as contractor performance rather than strictly on inputs or price will enable government customers to achieve better performance and efficiency by structuring competitions that garner the true best value for their acquisition dollar. GCE
In a 2010 Drug Enforcement Agency solicitation for worldwide linguists, one company was excluded from the final competition because procurement officials judged its price to be unreasonably low. The company filed a successful pre-award protest with the General Accountability Office (GAO) and ultimately won the $309 million contract.
Despite qualitative ratings for which the incumbent company was judged to have a superior proposal in almost all non-price categories, the source selection authority concluded it was not in the government’s interest to pay a significant price premium unless the “technical benefits conferred by the premium Offeror are enormous or the lower-priced Offeror is not able to perform the work.”
The incumbent filed a post-award protest, which the GAO denied on the grounds that the DEA “reasonably determined that the awardee’s comparatively low extended pricing did not pose an unacceptable risk” in performance of the contract. The lesson many companies have taken from this and similar cases is that price is the sole criterion on which they ultimately will be judged—no matter how the competition is structured.