Public procurement Vs private contracting

Sometime back the Times ran a nice article explaining how the economy of Washington benefited from the massive federal government contracting industry. But this, in particular, caught attention,

Washington’s economy did well under Reagan (added military spending gave it a boost), but the move to contract out more and more government work proved to be a crucial long-term change. In 1993, Bill Clinton announced a “reinventing government” initiative, which ultimately included cutting the federal work force by about 250,000 positions. The agencies winnowed their rolls, but over the course of the Clinton years, their budgets expanded, and in many cases, the work just went to contractors. Those contractors often came at a bloated cost, too. In a study released in 2011, the Project on Government Oversight found that using contractors can cost the federal government about twice as much as federal employees for comparable work. According to the study, the salary for a federally employed computer engineer would be about $135,000; a contractor might bill the government around $270,000 for similar work. 

This is the classic paradox. Conventional wisdom has it that public systems are both inefficient and expensive in managing service delivery. In contrast, the perception is that private providers can deliver the same service more efficiently and at a lower cost. But reality is that private provision of public services is more expensive than their provision by public providers. So what gives?

This apparent paradox arises from the differences in the quality of service delivered as well as differences in the nature of public provisioning and private contracting. Private contractors are notionally held accountable for delivering a bench-marked quality of service. This adds significantly to the total cost of provisioning by bringing in the need for higher quality of consumables, maintaining redundancies, preventive maintenance, adequate insurance and risk mitigation measures and so on.

Irrespective of whether they meet those requirements and deliver on the bench-marks, most likely not given the lackadaisical contract management by public managers, private contractors price their bids at the cost of the bench-marked quality of service. This also means that private contractors generally end up delivering more or less similar (bad) quality of service as public providers, but at a much higher cost. In case of public providers, the absence of any accountability to deliver a similarly bench-marked service means that the cost of delivery is anyways smaller.