The Challenges of Contracting and Accountability Across the Federal System: From Ambulances to Space Shuttles

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1 The Challenges of Contracting and Accountability Across the Federal System: From Ambulances to Space Shuttles by Jocelyn M. Johnston, Barbara S. Romzek and Curtis H. Wood The University of Kansas Prepared for presentation at the 2003 National Public Management Research Conference Washington DC, October 9-11 PRELIMINARY DRAFT: Not for citation or quotation without authors permission

2 Introduction There is little question that government contracting activity has proliferated in recent decades. This trend applies to all levels of government in the American federal system. While the extent and style of contracting varies from the extensive reliance of the National Aeronautics and Space Administration (NASA) on private contractors that perform over 90% of the agency s work, to the unprecedented levels of contracting by states for social services (Dicke and Ott,1999, page 503), to continued experimentation with contracts for traditional local services such as trash removal and emergency services government administrators increasingly allocate time and financial resources to contract management and contractor accountability. The administration of contracts has become a fundamental component of public management. Contracting is viewed as a mechanism through which government can benefit from the efficiencies inherent in private markets. Advocates for the privatization of government services offer persuasive cases for shifting the production of government services to private producers, (Savas, 1982, 1987; Chubb and Moe, 1990), arguing that contracting may correct excessive government size and correct service delivery problems attributable to the absence of market discipline in a monopolistic bureaucratic state (Niskanen, 1971; Tullock, 1965). These arguments apply regardless of whether the service in question is offered by local, state, or federal government. Traditional market models of contracting models that influence many governmentcontracting decisions - assume that contractors will delivery high quality, cost-effective services. Under such conditions, government purchasers rely on the market and such forces as competition to ensure desirable contractor performance (Savas, 2000). Rival theories of privatization and contracting question the viability of the market model for the production of government services, arguing that for many services - especially "social services - no true private markets exist because of low numbers of potential service providers. For these services, transferring production to a non-competitive market offers limited - if any - economic benefits (Kettl, 1993; Donahue, 1989; Pack, 1987; Schlesinger et al., 1986). Yet other observers advocate contracting for these more complicated services because they view non-governmental organizations especially specialty nonprofits as simply capable of more effective service delivery. In this paper, we examine selected elements of contracting with the intent of discerning similarities and differences across levels of government. Our analysis focuses on contract structure, or the formal and informal mechanisms embedded in contracts to ensure quality contractor performance, and on the management of contract implementation and accountability. We make use of six in-depth cases, two at each level of government, to illustrate key dynamics of contracting. We conclude that despite differences in contracting contexts and constraints across governments, the public management functions of contracting effective contract structure, the management of contract implementation, the performance of contract oversight and evaluation are remarkably similar. And at all levels of government, we observe that contract management, oversight, and evaluation are a weak link in the contracting process. Accountability in Government Contracts The administrative challenge in government contracting is to capture the benefits of the contract relationship without losing accountability. Yet this challenge is not limited to the public 1

3 sector. The past decade has seen an extraordinary range of examples of mismanagement in the nonprofit world, including the United Way of America (Murawski, 1995), and the Foundation for New Era Philanthropy (Steklow 1997). Likewise, the past decade has included a long list of highly publicized examples of failures of accountability in the private sector, especially related to corporate finance And there have been potent accountability failures with private companies performing government work under contract. Tenet Healthcare (Eichenwald, 2003) and HealthSouth (Freudenheim, 2003) both face Medicare fraud charges related to operating on or admitting patients that did not meet Medicare criteria. An administrative law judge ruled that the El Paso Corporation, the largest supplier of natural gas in the nation, illegally helped to drive up prices for natural gas in California during the state's power crisis in 2000 and 2001(Oppel and Bergman, 2002). A former senior trader at the Enron Corporation pleaded guilty to engaging in a conspiracy that illegally manipulated the California power market during the state's energy crisis, driving up prices and generating millions of dollars in excess profits for his employer (Eichenwald and Richtel, 2002). 1 Clearly, accountability remains an elusive objective across levels of government and across sectors. In this context, the primary contracting and accountability dynamics we address in this paper relate to two questions. To what extent do key components of contracting differ across levels of government? And to what extent are the widely recognized difficulties of contract accountability shared by all levels of government? Similarities across governments Regardless of the level of government or the type of service, government purchasers of goods must be prepared for a fundamental shift in management focus (Kettl, 1993; Frederickson, 1997). Absence of a competitive provider environment requires particularly strict attention to accountability mechanisms because market discipline is lacking. It is no news that contracting in a non-competitive environment erodes many of the potential benefits associated with competition (Miranda and Lerner, 1995), including incentives for contractors to provide high quality services at minimum cost. As Schlesinger et al (1986) note, most critics... link inefficiency in government primarily to the monopoly possessed by many public agencies on the provision of services. Thus, monopoly transfer can engender many of the same performance issues associated with government itself. 2 In addition, incentives for innovation may be absent in a noncompetitive market. And as Milward (1996) notes, contractors may organize politically with clients to maximize the probability of winning in disputes with the government agency, thereby undercutting the oversight of the government purchaser. Several assumptions inherent in contracts apply at all levels of government. These include the notions that contracts can be more effective and better enforced 1) when they are well written and the contract structure is consistent with the contracting context, and when the contractor bears some level of risk associated with funding and delivering the service; and 2) when the contracting agency is prepared for the requirements of contract management, implementation, and oversight. At all levels of government, policymakers often take it for granted that contract management will be adequate that government agencies possess the resources, staffing, and retooling capability required to properly design and oversee contracts. Yet implementation complications, typically unanticipated, affect all governments. Transaction costs are particularly high in these less than ideal contracting circumstances. Building and maintaining contract oversight capacity, fostering effective provider competition, and correcting for the absence of market discipline require substantial investment in management infrastructure. Staffs must be 2

4 trained and organizational structure may need re-tooling in order to provide the capacity necessary for contract management. Public managers responsible for designing and managing these contracts face the challenge of reconciling competing perspectives and expectations reflecting differing logics of politics, administration, and markets (Klingner, Nalbandian and Romzek, 2002). In addition to these concerns, government agencies must be prepared to engage in extensive trust building and capacity-building with contracting organizations, especially when available alternative providers are scarce. Regardless of which level of government actually administer them, contracts associated with intergovernmental policies and programs are likely to be more complicated than those controlled by one level of government. When multiple layers of regulation and accountability i.e., intergovernmental and/or network dynamics are involved, all components of the contract process will be more challenging. Structuring contracts, contract implementation, and holding contractors accountable all will be more difficult to achieve when the contracted service is one that involves intergovernmental grants, requirements, and regulations. This suggests that states, which operate highly regulated intergovernmental social service programs programs that are also susceptible to problems of outcome measurement may have the greatest contract management difficulty. For instance, state Medicaid managers must oversee complicated, expensive contracts with HMOs, in-home care providers for the elderly, and other providers, while ensuring adherence at both the state and contractor level with the regulations associated with federal expectations. Our analysis suggests that across all levels of government, regardless of the type of good or service, contract monitoring is the weak link in the contracting process. In the cases we examined, monitoring was nearly non-existent at the local level, despite expectations that this level of government enjoys the most ideal contracting environment. The financial stakes and the nature of contracted programs at the state level lead to more emphasis on contract management and oversight, relative to the local level. And the federal level, where our cases involve programs with serious safety issues, monitoring is also problematic, both in terms of its intensity and effectiveness. Underinvestment in contract management infrastructure is a common theme at the local, state, and federal levels of government. Structuring effective contracts for purposes of clarifying roles and responsibilities, acquiring the expertise to decide whether and how to shift risk to the contractor, building staff capacity to implement and monitor the contract and to construct effective accountability strategies these tasks are all particularly difficult when management resources are inadequate. Differences across governments Because of the different types of services provided by different levels of government, many of the dynamics of contracting can be expected to vary across government levels. Local governments are particularly likely to contract with private providers (Stein, 1993; Dilger, Moffett and Struyk, 1997) because of the nature of the goods and services they provide. Many of these goods and services offer relatively high proportions of "private" benefits directly to the citizen e.g., each citizen directly benefits from trash removal. In addition, the outcomes of many local services are relatively easy to measure, are tangible and visible, and are observable in a relatively short time frame. For many of these services, it is not unreasonable to expect that multiple private providers can or do exist. Barriers to market entry are relatively low. 3 3

5 Governments also have important responsibility for the provision of goods that are more public. States often provide such goods through social welfare and education programs, and they have increasingly turned to contractors for service delivery (Dicke and Ott, 1999 ). The benefits of these goods or services exceed those derived by the private individual - that is, the goods or services generate positive externalities. Many contracting/privatization theorists question the validity of contracting for the provision of such public (sometimes called collective) goods (Donahue, 1989). The cost savings and adequate provider competition advocated by privatization advocates are more elusive in the area of social services. For example, Spann (1977) finds that contracting/privatization of traditional local public goods sometimes generates documented cost savings, but he finds no discernable cost differences between public and private hospitals and nursing homes. At the federal level, contracting is extensive for both types of services those with primarily public benefits, and those that more closely resemble local services in terms of measurability and tangibility of outcomes. We therefore might expect contract management to be more successful at the local level, relative to the state and federal levels, if only because of the relative ease of monitoring performance due to the measurability and tangibility of outcomes. Yet our data suggest otherwise. We find that local governments conduct comparatively little contract oversight, and allocate relatively low levels of resources for building contract management infrastructure. In addition, despite the types of services delivered at the local level, many of which should be comparatively easy to contract out, the vast majority of local contracting is concentrated in two services: trash collection and emergency services. Contracting Across the Federal System We used six contracting cases in local, state, and the federal level to examine and better understand similarities and differences across government levels with regard to contract structure and the management of contract implementation and accountability. At the federal level, we focused on analyzing the contract management experiences at NASA and in the newly created Transportation Safety Administration (TSA). The breadth of contracting at NASA is extraordinary. GAO identifies $12.7 billion is spent by NASA on contracts (GAO ). This figure constitutes about 90 percent of NASA s annual budget. NASA had significant problems with International Space Station development, resulting in $9 billion in cost overruns for the prime contract, as well as $986 million cost overruns (GAO , NASA). With these sums involved, contractor accountability and contract management clearly have high financial stakes. NASA s highly visible tragedies of the Challenger shuttle explosion in 1986 and the Columbia Shuttle accident in 2003 remind us that human lives are also at stake. The history of the TSA is brief. It was created in the aftermath of the terrorist attacks in the U.S. on September 11, 2003 to increase airline security and minimize the chance of another terrorist takeover of an airline. By the end of 2002, TSA had hired a work force of over 60,000 including passenger and baggage screeners and federal air marshals and was screening about 90 percent of all checked baggage for explosives GAO (Transportation Security: Post September 11th Initiatives and Long-Term Challenges (03-616T) [Statement of Gerald L. Dillingham, Director, Physical Infrastructure Issues] 2003). According to the GAO, the Department of Transportation and Homeland Security face long-term challenges that include among other things establishing effective coordination among the many public and private entities responsible for transportation security. Although the bulk of TSA workers are federal employees, the TSA has been experimenting with privatizing airport screening at 5 airports in the U.S. We will examine 4

6 issues of contracting at TSA as seen from the perspective of local airport administrators who are directly or indirectly involved in the process. The five airports chosen by the Transportation Security Administration to participate in the pilot program to test the effectiveness and efficiency of non-federal airport passenger and baggage screening are: Kansas City International, Jackson Hole Airport, San Francisco International, Tupelo Airport, and the Greater Rochester International in New York. These airports were chosen based on airport service size, security risk categories, and passenger-use travel. Airport screening at the other 424 commercial airports in the country are being staffed with federal workers. During the pilot program, Congress and the GAO will be evaluating the effectiveness of the federal and non-federal airport screening process. In November of 2004, airports will have the ability to participate in or opt out of either the federalized or non-federal program by making an application to TSA to that effect. At the state level, we examined the successes and failures in the area of contracting for two high-cost social services Medicaid and Foster Care/Adoption services, both in the State of Kansas. 4 Although Medicaid is a federal program, jointly financed with states, and administered by states primarily through contracts with non-government organizations. The two Medicaid services on which we focus in our case are Medicaid managed care, which delivers health services to low income populations through managed care contracts with HMOs, and Home and Community-based services (HCBS) for the elderly poor. In both instances, the federal government provides the direction, performance measures, and follow-up with states, and states are expected to adequately monitor their service providers to ensure quality services for beneficiaries. We also considered the experience with Kansas contracts with nonprofit and forprofit organizations for the delivery of foster care and adoption services. Kansas has been in the national forefront in privatizing foster care and adoption case management services; both the state and its contractors report learning significant lessons in their contracting experiences. The Kansas case indicates that low levels of provider competition, under-investment in contract management capacity, and a political environment that sometimes works against contractor accountability dominate the dynamics of contracting for social services. At the local level, we focused on how local governments in the Kansas City metropolitan area address contracting for trash collection and. Based on a survey of 46 cities in the Kansas City metropolitan area, we identify how cities delivered trash collection services; the survey was supplemented by in-depth interviews of city officials in Kansas City, Missouri, Kansas City, Kansas, and several other metro-area cities. to ascertain whether the cities did any joint contracting, monitored contracts, established performance measures, and evaluated the efficiency of the operation and the performance of the private contractors. 5 The survey also included information on how ambulance services were delivered. We paid particular attention to the events unfolding in Kansas City, Missouri because the city s ambulance service is a regional service that touches the lives of citizens in 15 other communities. Before 1980, ambulance services in Kansas City, Missouri were privatized. Collective action problems and high response times led to the creation of the public utility model (PUM) through which a non-profit agency created by the city became responsible for the billing, regulation, and monitoring of a private firm that operated the ambulance system. Last year, the non-profit agency, hoping to save money and improve performance, put the contract out to bid. The only bidder was the current contractor, whose bid was $5 million a year more than the current contract. The Board of Directors of the non-profit agency made the decision that they could operate the system at the current expenditure level and also improves quality of service. Consequently, they did not renew the contract and assumed the operation of the ambulance service. 5

7 Contract structure Within contract structure, two key characteristics warrant attention: the clarity and specificity of responsibilities and issues of risk shifting. Successful contracting requires wellwritten contracts that specifically define all parties roles and responsibilities (Dilger, Moffett, and Struyk, 1997). Well-written contracts establish clear, understandable, meaningful, and measurable performance goals, outputs, and outcomes and have realistic incentives or sanctions. Such contracts minimize the potential for misunderstandings during the implementation phase and allow the contractor some flexibility to decide how best to achieve the desired outcomes and goals. This simple characteristic of contract structure - a well-written contract - is actually a significant challenge in contracting. Often it is hard to make the contractual language specific enough when contracted products and services and their outcomes are difficult to specify and describe in written contracts. This can be especially true for complex governmental programs and services where quality and efficiency are hard to define and measure (Romzek, 1998; Behn and Kant, 1999). Behn and Kant (1999) suggest that contracts start with simple outputs that are easy to measure, understand and produce, but this is difficult to accomplish when the tasks are complex. A second key aspect of contract design is the degree of risk shifted to contractor organization. One of the incentives for privatization and contracting is cost-control (Boyne, 1998). Hence, many of the contract designs have an explicit intention to shift at least some of the financial risk to contractors so that the contractor has an incentive to contain costs. Explicit calculations of these risks are part of most contractors considerations before making a bid for a contract. When a contract inadvertently or unexpectedly shifts the risk and cost of implementing the contract to the contractor, and it can result in higher costs for the government and/or financial challenges for the contractor. Performance-based contracts, where the contractor is reimbursed only after accomplishing clearly specified and measurable outputs or outcomes, are examples of contracts that shift the risk to contractors. Managing contract implementation and accountability The management of contract implementation and accountability refers to the capacity of the state to build and maintain the management infrastructure necessary to monitor contractor performance, and to the strategies devised to enhance contractor accountability. Staffing and resource considerations are key to this process. Agencies contracting with other organizational entities for products or services need employees with specific skills related to contracting and privatization. These staffs must assess the efficacy of contracting, the government agency s capacity to prepare and bid out the service, and their ability to manage the contract and evaluate contractor performance. Such management capacities are not always readily available within the contracting agency s workforce (Brown and Potoski, 2003). Agencies need funds devoted to internal capacity building and staffing for contract assessment, monitoring, and evaluation of contractor performance (Frederickson and LaPorte, 2002; Keating and Frumkin, 2003). These skills themselves could be subject to contracting as well (i.e., the agency could contract for contract management staff with this expertise). Absent these resources, contracting agencies can experience the problem of hollow government, wherein the agency sheds the capacity to operate a given program, but often lacks the ability to evaluate the work it has contracted others to do (Milward and Provan, 2000). Brown and Brudney (1998) found that higher levels of contracting for information technology by local governments were associated with reduced internal management capacity; these findings which are consistent with the hollowing out thesis propounded by Milward and Provan. 6

8 Contract management affects existing government staff in two ways. First, it presents challenges in the management of the workforce transition as the contract presents new demands for the capacity to manage contracts, not just provide the services (GAO, 97-48). Second, it often affects the morale of employees who have not lost their jobs to contracting; they often fear that their jobs may be at risk during the next wave of contracting (Dilger, Moffett, and Struyk, 1997). This second dynamic is so pervasive that governments at all levels recognize the need to involve employees in the privatization process and to provide a safety net for displaced employees. An increasingly common technique that permits employee participation and competition with the private sector is managed competition, whereby public employees and public departments are allowed to submit a bid in response to an RFP along with private and nonprofit firms. This opportunity tends to be offered when public sector delivery is not presumed to be inherently inefficient (KCMO City Auditor s Office, 1996). The management of contractor accountability involves determining whether the contractor has met performance expectations and contract obligations. Contract accountability involves monitoring and oversight of contractor and subcontractor practices and performance as well as the more traditional interest in accurate and timely reporting of program costs. Accountability can range from straightforward checklists and financial audits to more sophisticated judgments and program evaluation. Contractual self-reporting of program activities and regularly scheduled audits are the norm for accountability in the contracting world (Bardach and Lesser, 1996). The degree of scrutiny involved in these audits varies widely. For example, some are intensely comprehensive, such as the Defense Contract Audit Agency (DCAA), the federal government's auditor of defense procurement (Prager, 1994). The DOD is authorized to impose penalties on contractors who do not properly screen unallowable costs; this is usually not the case for other agencies. Other federal agencies are less comprehensive in their audit functions. The federal government has more audits to conduct that it can manage to complete in a timely manner. For example, in 1991 the Office of Management and Budget reported a backlog of 13,000 audits involving $160 billion that they projected would take from three to five years to complete. The situation is similar at the state and local levels, with little monitoring (Prager 1994). Rehfuss (1989) found that only 25 percent of city and county managers could even estimate monitoring costs for their organizational contracting. DeHoog (1994) found comparable circumstances in social service contracting; local departments lacked adequate resources to monitor contractors and many jurisdictions were not interested in evaluating their programs. The 100 largest cities tended to use formal inspection and tracking of customer complaints as the most frequently used techniques for monitoring contract performance (Dilger, Moffett, and Struyk, 1997). Some cities recommended the inclusion of a nonperformance provision in the contract imposing a financial penalty on a contractor for failure to live up to the terms of the contract. The analysis of complex activities, such as wastewater treatment or the medical care of prisoners, can require analytical skills that go beyond compliance checklist-type reviews (GAO, 97-48). Such information is essential for the agency if it is to determine whether the contract is achieving the intended goals or whether contractor performance warrants the imposition of sanctions due to performance failing to meet expectations. It is not unusual for agencies to contract with experts for specialized analyses, resulting in contractors evaluating the work of other contractors. Another key component of contract and accountability management is the evaluation of contractor performance. GPRA requires federal agencies to report annually on their progress in achieving agency and program goals. The key elements of evaluation capacity are: an evaluation culture (regular assessments to inform program improvement), data quality (credibility, 7

9 reliability, and consistency), analytic expertise (knowledge of research methods and relevant subject matter), and collaborative partnerships (the sharing of resources and expertise among stakeholders) GAO (2003, May). In order to better understand how these elements of contracting are manifested, we now consider contract structure and the management of contract implementation and accountability issues in six contracting cases at the local, state, and federal levels of government. Local, State, and Federal Contracting Case Studies Local Ambulance and Trash Collection Services Although contracting is common at the local government level, especially in areas of vehicle towing, solid waste collection, building security, street repair, ambulance, printing, street lighting/signals, drug and alcohol treatment, employment and training, and legal services (Dilger, Moffett, and Struyk, 1997), the vast majority of local contracts are for trash removal and ambulance services. Local governments use both traditional models of contracting, but also make use of the managed competition model in which government departments are eligible to bid for the contract. If the rationale for contracting is to take advantage of the potential benefits, then government bids are legitimate additions to those received from the private and nonprofit sectors. Indianapolis (GAO97-48), Charlotte (Jurkiewicz and Bowman, 2002), Phoenix (Kansas City City Auditor s Office, 1996), Houston, Portland, and Lee County, Florida (Kansas City City Auditor s Office, 1996), have all employed managed competition, and report positive results from the practice. 6 We examine cases of local government contracting in the Kansas City metropolitan area that are similar to those found in the 100 largest cities studied by Dilger, Moffett and Struyk (1997). We focus on three contracting cases - ambulance service, trash collection, and management of a special events arena. The contracts represent a range of time spans for such contracts. The ambulance service contract, which operated with a private provider for 14 years, has just been reclaimed by Metropolitan Ambulance Services Trust, a non-profit agency created by the city of Kansas City, Missouri. Trash collection in most of the 46 communities we surveyed is either privatized (i.e., no longer provided by government) or contracted out to one or two firms that dominate the market. The City of Kansas City, Missouri, however, practices joint contracting, whereby the city provides trash collection services in one part of the city and Deffenbaugh, Inc. collects trash in another part of the city. Management of the municipallyowned special events arena in Kansas City, Missouri, is currently under final negotiation for a contract with Philadelphia based Global Spectrum (the world s second largest sports and entertainment firm), Anschutz Entertainment Group of Los Angeles, and the American Royal Association. Kansas City, Missouri administrative staff reports that there are no centralized written procedures/policies for assessing the feasibility of contracting out or privatizing a service, implementation of a contract, or evaluating contractor performance. Although performance measures and standards are typically specified for contracted services, contract performance is monitored and managed by the relevant line department, and not by the centralized management services department in the City Manager's Office. In 1996, the city auditor recommended a model contracting process that included managed competition and centralized contract monitoring, but the city council and the city manager did not officially adopt the model. 8

10 Ambulance Services In the early 1980's the ambulance companies in the Kansas City metropolitan area that provided the service and performed the billing for services had become selective about whom they served and whom they excluded. In response, Kansas City, Missouri (KCMO), created a not-for-profit agency, the Metropolitan Ambulance Services Trust (MAST). MAST contracted with a private firm, Emergency Providers, Inc. (EPI) to operate the ambulance service for residents of KCMO and citizens in many of the communities in the metropolitan area. As discussed above, a public utilities model (PUM) was used for the ambulance service. The PUM model is a two-organization system in which a lead contractor agency in this case, a nonprofit, retains some of the duties in-house and regulates the service across the relevant geographic area and a private sub-contractor provides the service to the greater part of the service area. The purpose of the PUM was to provide some independence and separation of functions and to ensure that one organization did not control all aspects of service delivery. The theory is that this separation of functions and diffusion of responsibility would minimize waste, fraud, and abuse, and would foster impartial and objective evaluation of program efficiency and effectiveness. This assumes the services are encompassed in well written contracts that have clear performance measures and goals, and there is minimal information asymmetry between contract parties. MAST was the lead agency in the PUM. As the lead agency, MAST owned the property and equipment and was responsible for managing the administrative and billing functions, monitoring the contract, regulating the for-profit company, and billing for ambulance services. MAST regulation of the ambulance services worked successfully for about 14 years. This case incorporated explicit contractual performance standards for ambulance service. 7 MAST could exact penalties if the company failed to meet performance standards. While performance standards and penalties for the private contractor were clearly stated in the contract, there was less precision in how efficiency would be defined. An operable definition of efficiency was not included in the contract. Nor did the contract require the contractor to provide MAST with pertinent data regarding the costs of operation, collections by payer, jurisdiction, or type of service. Problems with the contract arose due to ambiguity regarding efficiency standards. MAST argued that efficiency of the operation should be measured as the cost per trip, while the city auditor contended efficiency would be best measured as cost per hour. These conflicts led to an ambiguous and less than comprehensive contract which created doubt about the effectiveness of the ambulance service, ill will between the parties, and the inability of the city and the public to assess who should be accountable for service shortcomings. On July 1, 2003, MAST opted not to renew the contract with the private firm, Emergency Providers Inc. (EPI), and is now operating the ambulance service itself. MAST blamed the contractor and the federal government for its financial problems and for inherent systemic inefficiencies and duplication with the contractor. In turn, EPI and the city auditor assigned responsibility for failures to MAST and other entities. 8 The most recent round of RFPs for ambulance services attempted to shift risk between the principal (MAST) and the contracting agent. The RFPs increased service requirements over those in the existing contract and shifted costs and risks to the contractor by incorporating tougher penalties. As a result, the bid of the for-profit firm currently operating the system came in about $5 million more a year than the current contract price, and MAST had not anticipated the fiscal impact of such service changes. Rather than renew the contract with the private provider at the higher bid, MAST chose to take over the operation of the service, and has assumed the more rigorous performance standards it had planned to impose on a contractor.. 9

11 In terms of staffing and expertise, MAST faced challenges when it assumed responsibility for direct service provision. There was an immediate need to staff up for the new responsibilities. Not coincidentally, EPI (the former contractor) had about 400 highly trained and skilled employees it no longer needed. The executive director of MAST reported that 360 of the 400 EPI employees were hired by MAST, including many managers (Hoffman, 2003). Under the PUM, accountability and evaluation of the ambulance service took several forms, including MAST (contracting agency) oversight and monitoring of EPI (contractor), external audits by the City of both MAST and EPI, and clientele (stakeholder) satisfaction measures. The PUM made it more challenging for the City to hold either the nonprofit management or the contractor accountable. In a time-honored pattern of deflection, each party blamed the other for failures in performance. The city auditor, who works for the city council and not the executive branch, reported inadequate contract enforcement and performance appraisal of the ambulance contractor by MAST (KCMO City auditor s report July 2003), and highlighted disagreement between MAST and its private contractor over efficiency standards. According to the city auditor's report, citizen satisfaction with the ambulance service declined over the last two years (KCMO City Auditor s Office, July 2003). 9 Elimination of the PUM model now puts the onus of contract monitoring and program evaluation directly on the city. It is not clear that the city is prepared to perform such a role or incur such costs. The city ordinance states that MAST may only operate the ambulance service for one year. Unless the ordinance is changed, MAST must find another contractor in a year. This case demonstrates problems with contract structure due to conflicts over performance expectations, and with implementation and accountability management. Attempts to shift risk appear to have failed. And under the new delivery model, staff capacity for oversight appears to be insufficient. Trash Collection Services A survey of 46 cities in the Kansas City metropolitan region reveals that commercial trash collection is mostly privatized (i.e., no longer provided by government), that residential trash collection is typically contracted out to the private sector, and that only a very few residential collection firms dominate the market (Wood, 2004). The arrangements, and contract structures, vary substantially across cities. In North Kansas City, one firm has the exclusive contract for both residential and commercial property. That contract is renewed annually without a competitive bidding system. Kansas City, Missouri (KCMO) jointly contracts with a private firm (Deffenbaugh) to collect trash. The city is responsible for the central city (about 50 percent of the city s area) and the private contractor is responsible for the outer areas of the city (approximately 50 percent of the city s area). The city kept a portion of the service in order to retain backup capacity to the private firm and to provide competition.. The Acting Director of Environmental Management indicated that the cost and quality service of the contractor and the city are comparable. On the Kansas side of the metropolitan area, the Unified Government of Wyandotte County (UG, which includes the city of Kansas City, KS) and two adjacent cities jointly contract with the same private contractor (Deffenbaugh) to collect and dispose of residential trash and to operate a recycling operation. Commercial solid waste collection and disposal is totally privatized. The UG does the billing and establishes the fees for solid waste, 10

12 monitors citizens complaints, and manages the solid waste operation through the Solid Waste Coordinator position. Our survey of the cities of Kansas City, Kansas, Kansas City, Missouri, North Kansas City, Missouri, Lenexa, Kansas, and Overland Park, Kansas revealed that municipalities do not generally use performance measures nor do they monitor contractor performance or cost effectiveness. None of the cities that privatize trash collection monitor costs of the contractors, and only one of the cities (KCMO) that contracts out has performed a comparison of the cost per household for in-house versus the cost per household for the contractor. Very few cities conduct citizen surveys regarding their satisfaction with trash services. The most likely monitoring technique used by cities is keeping an eye on customer complaints. KCMO only monitors citizens complaints, and does not apply performance standards to either its in-house service provider or its private contractor. However, a city auditor's report (2003) did include citizen satisfaction results for trash collection. 10 The city administrator in North Kansas City is not aware of any complaints against the service and the city has not done any customer surveys to measure citizen satisfaction. In Overland Park, the city inspects the trucks and requires insurance, but other than that there is little city regulation of the privatized service. In Kansas City, Kansas and nearby Wyandotte County, Kansas, customer complaints are tracked. The contractual outcomes are very clear, and officials feel that it is not difficult to establish when the contractor has failed to perform the required service. The contracting governmental units are very satisfied with the service quality and the cost of the contract. However, neither citizen surveys nor audits have been used to enhance their understanding of contractor performance. And in all cities, resources devoted to enhancing the capacities of staffs to better monitor and/or improve the contracts have been minimal at best. Although this case performs better than the ambulance service case in terms of the clarity of contractor role, the two local cases together demonstrate that contract monitoring is not a high priority, nor have resources been allocated to monitoring or oversight of accountability. One firm provides trash collection service to nearly all governments in the region. Although it is entirely possible that the firm performs well, there is virtually no evidence used to understand performance systematically, despite the fact that the outcomes of trash collection are relatively easy to measure. State Medicaid, Foster Care, and Adoption Services Contracting at the state level has a long history, with highway construction being one of the most visible examples of state contracting with private firms. Yet states are increasingly contracting for services that differ fundamentally from those in the local government sector namely social services, which serve as our focus here. As states wrestle with expanded discretion in such policy areas as welfare, Medicaid, and child protective services,, they have been eager to pursue contracting as a way to innovate, capture expertise, and hopefully hold down cost growth. For example, Medicaid reforms, now well established in most states, have transformed Medicaid bureaucracies from bill payers for fee-for-service health care to purchasers, managers, and evaluators of costly contracts with managed care organizations (Fossett et al., 2000). In Florida and Texas, many (if not most) components of welfare programs are now delivered through contracts with private for profit and nonprofit agencies. And recent Kansas contracting innovations in the area of child welfare have been adopted by several other states. Many of the challenges in social services contracting relate to the difficulties in structuring contracts to clearly specify roles, responsibilities, and performance measures. A key 11

13 dimension is the states ability to develop and measure appropriate benchmarks and outcomes for performance. In terms of contract implementation and accountability management, many states struggle to find resources for contract management in a complex program environment, and to surmount the challenges of acquiring data on contractor performance, using that data to evaluate and improve performance and to hold contractors accountable for outcomes. For example, in a study of state contracting for social services, GAO found that in Georgia and Virginia the decisions to contract were influenced largely by how easily objectives could be defined and measured for monitoring purposes (GAO97-48). Freundlich and Gerstenzang (2003) found that state level privatization initiatives in child welfare meant that administrators had to struggle to develop benchmarks and outcome measures to assess actual performance, and that contracts for service provision tend to lack clearly defined roles, performance baselines, and performance targets. More often contracts were lengthy, ambiguous, unduly complicated, and overly focused on details (Freundlich and Gerstenzang 2003). While the relational contracting model recognizes the need for flexibility and regular adjustments to contract expectations, there is also a need for a clear and coherent contractual framework for the contractual parties, or partners, to use. The use of alternative service delivery systems is a commonplace design feature for many state social service contracts. These include the agency/multiple subcontractors model described in a recent study of Kansas, Florida, Maine, and Wayne County (Detroit), Michigan (Freundlich and Gerstenzang, 2003). Another frequently used alternative design is the managed competition model similar to that observed at the local government level, whereby government employees are permitted to bid on certain contracts that are open to the nongovernmental sector. Massachusetts, New York and Virginia have used made use of systems similar to the managed competition model (GAO-97-48). In the state social service arena, contracts often require complicated coordination among several service providers, e.g., education, health care, and individual psychological counseling services. This multi-faceted domain may involve complex social service provider networks that require intense management. Milward (1996) contends that networks are inherently weaker forms of social action and that networks are inherently unstable over time. Network complexity and instability lead to increased need for management efforts... negotiating, coordinating, monitoring, holding third parties accountable, and writing and enforcing contracts- all for organizations that are relatively independent of the funder (page 194). Agranoff and McGuire (1998) note that the more complex contractor networks offer flexibility, but they also require more managerial skill and time. The tasks associated with massaging and maintaining a service network altering incentives, mending relationships, etc., multiply as network size and diversity increase. In short, the transaction costs associated with managing social service contracts especially those that rely on networks are substantial (O Toole and Meier, 1999; Lynn, Heinrich and Hill, 2000; Meier and O Toole, 2001). Increasingly, state social service contracts are structured so as to shift some risk from the government agency to a contractor. Risk shifting adds complexity to the contracting experience. The most common form of risk shifting is the use of pre-established case reimbursement rates(mccullough and Schmitt, 2002; Freundlich and Gerstenzang, 2003). In many instances, this type of reimbursement mechanism has had dire financial effects on contractors because the actual costs of service often turn out to be significantly higher than originally estimated by the government and by contractors (Romzek and Johnston, 2002; Johnston and Romzek, 2001). Like all contracting initiatives, success depends upon strong leadership (or political champions) in the planning and implementation phases (Reason Public Policy Institute, 2000; Freundlich and Gerstenzang, 2003; GAO 97-48). For example, the governor s directive for 12

14 privatization in Kansas and the legislature s mandate in Florida were critical for success in those two states. However, in Kansas the privatization was imposed in a top-down fashion, and in Florida the legislative mandate for broad-based community planning and participation was a strong aspect of that state s privatization effort. The complexity of social service contracts requires well-trained staff and management, especially because agencies typically take on new monitoring and quality assurance functions and responsibilities (Freundlich and Gerstenzang 2003). Agencies that let contracts are often reluctant to add contract management staff because this runs counter to the motivation to reduce costs (Fossett, 1996). Van Slyke (2003, p. 308) found that in New York state repeated requests from public managers to their superiors to add staff for auditing and oversight functions continually [met] with resistance The administrative costs associated with privatization in developing competition and providing meaningful oversight is seldom figured into the costsaving calculus used to describe privatization successes. Such transaction costs inevitably are revealed through capacity investments or because of capacity gaps that are exposed when there is a tragedy. Investments are also required for the up-to-date and compatible management information systems that are key to successful implementation of contracting regimes. Freundlich and Gerstenzang (2003) found many states encountered difficulties in this area, reporting that the development of MIS was the most difficult implementation task program officials faced. GAO also expressed concern that many jurisdictions involved in contracted managed care initiatives were using multiple, incompatible information systems (GAO 98-8). Evaluation of contractors performance is one of the more important aspects of contracting yet one of the more difficult for states to effectively implement. States often use state auditing agencies (sometimes those affiliated with state legislatures) to monitor the performance of contracting government agencies and contractors, but they most often use those agencies to supplement existing internal monitoring systems. GAO ( 97-48) has noted that technical monitoring along with performance monitoring are typically the weakest links in state contracting for social services. A number of monitoring problems are observed across the states. To begin with, performance measures can be highly subjective. And while multiple measures are desirable, there are often too many outcomes specified in the contract to be effectively monitored, some of which may be outside the scope of the program. In other instances, there is a lack of uniformity that makes comparison and conclusions difficult. For example, Florida used different outcomes for different regions of the state, making it impossible to assess the overall performance of the program in the state (Freundlich and Gerstenzang, 2003). In other instances, contractor accountability relies on self-reports from contractors to monitor and evaluate contractor performance. Another widely used strategy is for state agencies to hire additional contractors to evaluate the work of the original contracts for service provision. In other words, contract monitoring either tends to be overdone or underdone. Freundlich and Gerstenzang (2003) found considerable variation among states in their requirements for monitoring outcomes, programs, eligibility, quality assurance and independent audits. In some cases monitoring was so extensive, aggressive, and pervasive that it presented serious problems. In other instances governments took more of a laissez faire approach. Those agencies that did not do much monitoring often had difficulties with contractor accountability because program goals or performance measures were ambiguous and unclear.. In the area of social services, states struggle to measure outcomes and benchmarks in ways that facilitate assessment of actual 13

15 performance Complete and accurate data are elusive at best. Yet the budgetary and legal ramifications of these contracts can be substantial. For instance, research on faith-based contracts found that states lack the resources to monitor for constitutional violations in the provision of welfare services (The Center For Urban Policy and Environment, 2003). 11 State Medicaid Programs Accountability of Medicaid programs presents unique problems because of the intergovernmental features of the program. While Medicaid is a federal program, considerable responsibility devolves onto the states. GAO (GAO ) reports that state oversight of Medicaid waivers is often decentralized and fragmented among a variety of agencies and levels of government. Although the state Medicaid agency is ultimately accountable to the federal government for compliance with the requirements of the waiver, it may delegate administration of the waivers to another state unit such as aging, mental health, or another department, thus creating yet another link in the extended chain of accountability. GAO has put the Medicaid program on its 2003 list of high-risk programs. The agency cites a number of specific problems, including inappropriate state leveraging of federal funds, state waiver programs that increase the liability of the federal government, and insufficient state and federal oversight to ensure the payments to health care providers are accurate. According to GAO, the Center for Medicaid Service (CMS) lacks policies and procedures to guide its own or states financial oversight activities and it has not provided consistent guidance to the states on appropriate payment practices. And there is evidence that CMS makes too little use of state-based program evaluations. The state of Kansas moved quickly to implement its HCBS for the frail Medicaid elderly. Neither the state nor the contracting organizations were prepared for the shift in responsibilities, in part because of problems with contract structure. The first two years of the implementation experience were characterized by organizational disruption, financial crises, policy-making on the fly, imprecise performance expectations, confusion over the allocation of state and contractor responsibilities, and problematic procedures for accountability (Johnston and Romzek, 1999; Romzek and Johnston, 1999). The legislation precluded competition by designating specific nonprofit contractors (Area Agencies on Aging, or AAAs) as the contractors of choice, each with an exclusive territory. The HCBS case management contract was designed to take advantage of the existing close working relationship between the AAAs and elderly Kansas residents to shift to a more streamlined system entry process and integrated case management for clients. The financial risk borne by HCBS contractors was moderate and related to whether the contractors could provide the services within the rate of reimbursement set by the contract. The initial reimbursement rate was inadequate to cover administrative costs and all the contractors experienced significant fiscal stress in the first year. Reimbursement rates for HCBS case management were re-negotiated during the first year of the contract. Contractors received an increase of nearly one-third the original reimbursement rate, but the AAAs bore the costs associated with start-up activity. The HCBS contractors faced substantial implementation challenges as they made the transition from very small, advocacy-oriented activities to highly regulated Medicaid reporting requirements. Implementation of the contracts was an iterative process; many aspects of the reform were worked out through negotiations among key agents as issues arose during the course of the contracts. These issues included the timeliness of documentation, interface with the management information system, quality and frequency of oversight and monitoring of case management decisions, and standards to be used for nursing home resident status reviews. The contractors (AAAs) had to make significant investments in new information infrastructures, and 14

16 they often had to overcome cultural barriers in the process. The contracts management complexity put severe strains on the both the state agencies and the contracting organizations (Johnston and Romzek, 1999; Johnston and Romzek, 2000; Romzek and Johnston, 1999) A state audit found that the state agencies performed satisfactorily in terms of monitoring the contractors implementation of the case management program. The few potential weaknesses noted related to lack of follow-up regarding resolution of minor problems, the validity of decisions to deny services, and the lack of spot-checks to ascertain why some clients received fewer services than were approved in their plans of care (Legislative Division of Post Audit, 1999). Other studies of this program indicated some over-monitoring by the state, as previous state-employed case managers took on the role of overseeing the performance of case managers employed by the contractor (Romzek and Johnston, 1999). In the case of Medicaid Managed Care, contracts with HMOs to provide health services for low-income families were fairly straightforward, with relatively clear understanding of the relative roles and responsibilities of the state and the HMOs. However, there was less clarity with regard to the relative roles of the HMOs, a nonprofit hired to provide some oversight of HMO performance, and a claims and enrollment management firm retained by the state. Implementation of the new Medicaid Managed Care systems was hampered by inadequate investment in management infrastructure. Like most other states, Kansas adopted Medicaid Managed Care partly to improve service delivery, but cost-containment was a critical objective due to double digit cost increases in the late 1980s and early 1990s. Little new staff was added and little training took place, despite the need to re-tool for the responsibilities associated with overseeing very complicated and costly contracts. Staffing weaknesses reduced the capacity of the state to monitor and evaluate the program. Oversight was further weakened by the fact that after the initial years of the reform, only one provider agreed to provide services. The absence of provider competition meant that the state had to tread carefully when dealing with HMO performance deficiencies. And performance problems, common to most states (Landon et al, 1998), hindered the ability of the state to evaluate and improve contractor performance (Johnston, 2000; Fossett et al., 2000). Foster Care and Adoption Services The initial impetus for contracting foster care services in Kansas was a lawsuit filed in 1993 by the ACLU alleging that the state had failed to provide adequate foster care services. As part of its negotiated court settlement, the state undertook comprehensive foster care and adoption (FCA) reform with relative speed. These reforms included contracting with non-governmental organizations for foster care and adoption case management. Strong support from the governor, cabinet secretary and legislature gave significant impetus to the reform (Shields, 1998; Allegrucci, 2000). This reform represented what external reviewers called the most comprehensive restructuring of a state [social service] system they had seen (James Bell Associates, 1999, p. 145). The state s RFPs included contract terms designed to encourage proposals by Kansas nonprofit contractors. All of the contracts were awarded to in-state entities, well established and highly respected nonprofit providers that had provided FCA services in the past, albeit on more moderate scales. The foster care contracts required contractors to shift their traditional core technology away from reliance on group homes to the use of family-centered foster care arrangements. 15

17 There were widespread difficulties in defining performance expectations for these contracts. Adjustments were frequent as the state and contractors modified benchmarks and other performance standards, based partly on the expertise and experiences of the contractors. The state specified performance outcomes for the small number of primary nonprofit contractors; these primary contractors then contracted with multiple subcontractors across the service spectrum. In addition, because of the complexity of the provider networks used for the state contracts and subcontracts, the roles and responsibilities of providers were not always clear. Competition for the FCA contracts was relatively moderate. From the beginning, the state recognized that there were few potential providers in many rural sections of the state. Contractor relationships have been subject to high levels of instability as the state changed primary contractors (in two of the five foster care regions), and contractors in all regions entered into and/or terminated subcontract relationships. 12 The state uses a managed care model and reimburses per case, with fiscal incentives consistent with the goal of family reunification or adoption. This arrangement entails significant risk shifting from the state to the nonprofit contractors. Compared to the Medicaid cases, the evidence suggests that contract management capacity for the FCA contracts was relatively strong. Because of the political and legal imperative that drove the reform, resources were allocated to bring in consultants and re-train staff to oversee these contracts. 13 And within the first years of the contracts, reimbursement rates were increased by nearly a third, partly because the legislature was relatively hospitable to the requests by the nonprofit contractors for increased compensation. Under the reform, contractors have had to create new ways of doing business and new professional norms to support these different approaches. Staffing problems plagued all of the foster care contracts; the state and its contractors failed to accurately forecast staff needs, resulting in compromised services during the transition phase (Shields, 1998). The costs of the FCA care services consistently exceeded predictions, partly because inadequate projections of caseloads, 14 unexpected costs associated with judicial intervention in individual client cases (Ranney and Rothschild, 2001, 8/30) and unanticipated levels of mental health needs. Due to fiscal strains on contractors, the state changed the pacing of reimbursements to contractors (from quarterly to monthly), the length of time between renegotiations (from a three-year cycle to annually), and the degree of advance notice to contractors about adjustments to contract terms (from three months to 10 days). The FCA case illustrates that the adoption of new core service technologies can be somewhat problematic, partly because of the large number of contractors and subcontractors, and the consequent need for high levels of technological and information coordination. Instability in the FCA contracts introduced new and sometimes destructive competitive forces into foster care networks and interfered with the collaboration that social service delivery networks need to best deliver services. Many of the contractors and service provider networks the entities to which the state turned to improve service quality experienced serious organizational and service delivery setbacks under the contracting regime. When the state contracted with non-governmental organizations to provide foster care, it retained responsibility for managing and monitoring the contract they let, as is true in most governmental contracting (Posner, 1999; Gooden, 1998). Although the state welfare agency itself underwent a dramatic downsizing and reorganization, its administrative concerns for program equity, quality of care, and accountability remained (Legislative Division of Post Audit, 2000). Yet, while the contractors are directly accountable to the state for these performance outcomes, 16

18 the state has no direct control over the service delivery systems or the extensive network of providers and subcontractors involved in the child s treatment. External evaluations of contractor performance conducted by James Bell Associates for the State of Kansas (James Bell Associates, 2000) regularly noted progress toward performance benchmarks, but there were significant shortfalls in performance under the contract. Kansas foster care contractors failed to meet contract specifications and performance benchmarks as well as meet their own expectations about the degree of fiscal and community support, autonomy, and scrutiny associated with their responsibilities (James Bell Associates, 1999, 2000; Legislative Division of Post Audit, 2000). The state has had to intervene in the FCA contract several times, typically to deal with serious financial problems that threaten either contractors or subcontractors. When a financial crisis emerged for a nonprofit FCA contractor, SRS lobbied against efforts to make the state responsible for the contractor s unpaid bills to subcontractors, arguing that the shortfall was a business matter between a contractor and its subcontractors (Ranney, 2001, 8/5). In essence, state contract administrators tried to keep their distance and not engage in direct network management. Yet when a similar circumstance arose later, the state did intervene. 15 Some FCA contractors in Kansas faced the ultimate corporate fiscal accountability - bankruptcy arguably because of the risk transferred from the state to the contractors. In one case, a nonprofit provider, unwilling to reduce service quality, depleted its endowment to offset what it saw as inadequate reimbursement by the state. In their study of child welfare in Kansas, Florida, Missouri, Hamilton County, Ohio, and Maine, Freundlich and Gerstenzang (2003) report that the jurisdictions used a number of approaches to protect private agencies from extreme levels of financial loss, including risk pools and stop-loss provisions on contracts. However, in some cases greater emphasis was placed on the design of these features rather than actual implementation. The state of Kansas continues with most of its social service contacting. Some of the enthusiasm for contracting has been tempered by the experience of the state and contractors with the difficulties of implementing such contracts and the recognition that contracting does not reduce costs. The state has discovered that contract management has challenges that are different from administering the programs directly. And the contractors continue to deal with the reality that although state contracts allow nonprofits to expand the reach of their services, the contracts present serious complications. The HCBS contracts with the AAAs are now firmly established and operating fairly smoothly. The state and AAAs continue to negotiate about state regulations that are not stipulated in the contracts but are nonetheless desired by the state. Medicaid Managed Care continues to operate with only one willing HMO health care provider, and under conditions of serious resource constraints. The FCA contracts remain highly visible, with frequent media stories about reimbursement and performance problems, the impacts of the new system on families, and continual calls for revisiting the managed care system and its risk shifting. For all three cases, the level of resources allocated to oversight agencies has hindered the development of monitoring and evaluation capacity, although this varies from program to program. The visibility of FCA means that of the three programs, it is best positioned in terms of oversight capacity. But for all three cases all intergovernmental and subject to the increased complications of accountability inherent in shared programs state administrators and contractors admit that monitoring and oversight remain a top concern. 17

19 Federal Space and National Security Programs The sheer scope of federal contracting is overwhelming and has grown substantially in the past decade. The Center for Public Center Report (2003) prepared by Paul Light notes that federal contracts and grants generated over eight million jobs in 2002, up from just under seven million in 1999, and 7.5 million in An additional 1.1 million off-budget jobs were added since 1999 under the George W. Bush Administration. This off-budget growth in jobs through contracts renders them nearly invisible to the American public, less amenable to government scrutiny, and potentially less accountable to the American public. 16 As a result, federal government contracting, like its state and local counterparts, faces challenges regarding contract structure, implementation and accountability. For example the GAO (January 2003) identified problems with the Department of Energy s (DOE) contract protocols regarding selection of the appropriate contract type, use of competition to award contracts, incorporation of performance-based measures, and contract features that minimize cost and schedule overruns on major projects. According to GAO, the DOE extends contracts noncompetitively even when contractors have had performance problems. Clearly, deficiencies in contract structure affect the quality of contractors performance. 17 GAO (January 2003) pointed out similar problems with the National Nuclear Security Administration (NNSA), which was created in March 2000 in part to improve security. By 2002 NNSA still did not have a fully operational structure but had taken on several contracts. Yet the lines of authority from headquarters through NNSA field offices to the contractors for security oversight had not been clearly laid out. There was confusion about roles and authorities of DOE and NNSA security offices. Some contractors and NNSA field staff told GAO they had received different guidance from DOE and NNSA security officers and did not know whom to follow. Risk shifting has been especially problematic at the federal level. It is difficult to get contractors to accept risk when they are developing new technologies, such as space shuttles and defense weapons. In these instances the federal government tends to write cost-plus contracts wherein the government absorbs nearly all of the risks and contractors are guaranteed payment of all costs plus an agreed-upon rate of return for their effort. Contract implementation and accountability challenges manifest themselves around issues of staff capacity to manage the contracts and monitor contractors performance. Federal workforce capacity has been an issue of considerable concern since the mid 1980s (National Commission on the Public Services, 1990). Federal staffing issues include the size and increasing average age of the federal workforce available to manage the contracts and the expertise of that workforce to monitor and evaluate contractor performance (Partnership for Public Service, 2003). 18 GAO designated strategic human capital management as a government-wide high-risk area in January 2001 and continues to designate it as high risk today. Plainly, the problem is not federal employees. Rather, the problem is the lack of a consistent strategic approach to marshalling, managing and maintaining the human capital needed to maximize our government performance and ensure its accountability (GAO , p. 4-5). Contract management capacity extends beyond staff to include other and resources, especially financial and information management technology. The range of federal agencies facing straightforward accounting (and accountability) tasks is broad. Reports generated by the executive and legislative branches have noted significant deficiencies in the accountability of federal agencies in their general operations, of which contracting is only a part. "Year after year, auditors studying the financial records of federal government departments find many of them so disorganized, even chaotic, that the agencies cannot account for tens of billions of dollars. What 18

20 is more, when many agencies realize that they have made major accounting errors, rather than looking back to see where the money went, they simply enter multibillion-dollar balance adjustments, writing off the money (Brinkley, 2002) 19 NASA, the Department of Agriculture, and the Agency for International Development were deemed non-auditable. NASA Spurred on by the Government Performance and Results Act of 1993 (GPRA), and the National Performance Review, managers throughout the federal government sought to make government more efficient by contracting out to the private sector. NASA led the way by giving primary responsibility for the Space Shuttle Program to the private sector. Beginning in 1995, NASA began consolidating the many Shuttle operations contracts under a single prime contractor to reduce redundancy and improve efficiencies. At that time, there were 86 separate contracts held by 56 different firms. The Space Flight Operations Contract was intended to streamline and modernize NASA's cumbersome contracting practices, thereby freeing up the agency to focus on research and development. During FY 2001 NASA paid about $2.7 billion for professional, administrative, and management support services contracts. In FY 2002, NASA procured over $13.3 billion in goods and services, accounting for more than 85 percent of their budget. All of this contracting has presented serious challenges for NASA, so much so that NASA is on the GAO high-risk list for contract management. GAO (03-114) identified four performance and accountability objectives for NASA: strengthen its human capital management, control international space station costs, reduce space launch cost, and improve contract management. The Inspector General for NASA echoed these concerns. Subsequent analyses by the Columbia Accident Investigation Board (CAIB) (2003, p. 118) found that transfer of responsibilities from NASA to its contractors complicated an already complex program structure and created barriers to effective communication regarding the space shuttle. The CAIB noted that in highly reliable organizations, such as the Naval Reactor Program, there are built in redundancies, checks and balances, and independent peer reviews of contractor recommendations; these were not present in NASA. The key challenges of contract structure - performance specifications, risk shifting, and competition - are interrelated for NASA. NASA s Office of Inspector General (OIG) found that the agency did not maximize opportunities to use fixed price contracting for routine administrative services. Instead NASA used cost-type contracts that minimize the contractor's incentive to control costs and perform efficiently and can be more costly and burdensome for NASA to administer due to more stringent contract reporting and review requirements. 20 A lack of absolute clarity in product specifications in NASA contracts may not be surprising given the exploratory nature of the agency s programs. However, independent reviews found that NASA contracts extend beyond what one could reasonably expect, to include an inadequate definition of requirements, changes in program content, and schedule delays (GAO , p. 12). NASA s history regarding the shuttle and the space station is one of heavy reliance on undefinitized contract actions (UCAs) to modify work or initiate new work on existing contracts. Such changes are unnegotiated and uncosted (GAO , p.3), 21 leading to cost overruns. Such changes present no financial risk for contractors; hence there is little incentive for contractors to restrain costs. As of March 31, 2000, NASA had about 186 UCAs totaling more than $2 billion. NASA acknowledges that UCAs are a risky way of conducting business because contractors perform work before they have reached agreement with the government on what the work will cost and that it increases the risk of cost growth. By November 2002, NASA had reduced the 19

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