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Blog: When Churn Doesn’t Produce Butter

posted The Coalition for Government Procurement FAR and Beyond Blog, 30 Nov 2018

By Ray Bjorklund, President, BirchGrove Consulting

We've recently endured the year-end procurement churn for federal FY 2018. The perennial experience is indeed hectic. While some companies bring churn on themselves by not planning adequately or not knowing their customers well enough, many federal buying activities contribute to the chaos too. Some agencies create more havoc than others.

By initiating a procurement (even as late as September) and then cancelling that procurement in the last days of the fiscal year, an agency can increase the future cost of acquiring services and products. To estimate these increased costs, we can analyze publicly-accessible information posted to FedBizOpps and reported to FPDS. (We don't have full access to the content of e-commerce portals like GSA eBuy or Amazon Business, so those purchasing methods are underrepresented in this analysis.)

This is not a critique of the agencies who fund the procurement—the authors and keepers of the requirements. Instead, this analysis looks at the offices that cut the deals—the contracting activities.

Certainly there are hundreds of federal offices who cancel few or no procurements late in the fiscal year. Usually that's a positive indicator of good acquisition planning. But the dozens of offices that stop a purchase late in the year create havoc and incur unnecessary costs.

Over 500 procurements started and then vanished in the fourth quarter.

During the month of September 2018 alone, federal agencies cancelled over 1,000 unique procurements—a 10 percent increase in cancellations over September 2017. Nearly 730 of the September 2018 cancellations were product procurements ranging from commercial commodities to complex systems. The remainder were procurements for services—mostly contracts for non-complex services.

Remarkably, there were over two dozen departments and independent agencies that started more than 500 procurements during the three months of the fourth quarter and then cancelled them in the month of September. That leads to substantial havoc.

Some cancellations make perfect sense, particularly when the buying activity is simply seeking information about available offerings and the marketplace through a "pre-solicitation" RFI posted in FedBizOpps, to better frame an upcoming procurement. But the majority of the cancellations are due to circumstances that could be reasonably anticipated by the buying activity with better planning.

Contracting agencies are often vague about the rationale. Stating "The cancellation is in the best interest of the Government" is not very illuminating. In the eleventh-hour September cancellations (and all cancellations for that matter), we would like to see more transparency about stopped procurements so contractors can be aware of business risks. This analysis categorized the rationale for the 1,000 September 2018 cancellations into six bins: Availability of resources (5% of the total), Modified acquisition approach (5%), Procurement process shortcomings (5%), Changed requirement (3%), Requirement no longer valid (3%), and Unspecified reason (78%).

Availability-of-resources includes changes in funding priorities, lack or loss of appropriations, or insufficient staffing to continue with the procurement. Modified-acquisition-approach may include migration to a different contract vehicle, changes to the purchasing or solicitation method, or application of different socioeconomic criteria. Procurement-process-shortcomings can include incorrect processes or factual errors, failure to comply with policy such as socioeconomic set-asides or mandatory sources, disparities between offeror pricing and government estimates, or lack of responsive offers. Changed-requirement includes revision to specifications, scope changes, unforeseen site conditions, or other contract underpinnings. Requirement-no-longer-valid is the thing that regularly frustrates a contracting activity; a requirement may be withdrawn, unauthorized, or on a path to a different solution. We don't know all the reasons that are obscured in the biggest bin of Unspecified-reason.

Some contracting activities cancelled dozens of procurements.

During September 2018, VA cancelled 33 publicized product procurements and 22 services procurements. Apart from the 33 that were cancelled for Unspecified-reason, the next largest category of reasons was Procurement-process-shortcomings (9 cancellations). While these 55 visible cancellations in a single month from one department are significant, we have to look at them in context. During September 2017, VA awarded over 12,250 product contracts and over 3,800 services contracts. (Due to delays in FPDS reporting, the 2018 year-end data is incomplete so we use 2017 FPDS data as a substitute.) So the ratio of cancelled procurements to awarded procurements is very small.

The Army (including the Corps of Engineers and the National Guard Bureau) cancelled 440 procurements during September 2018. Over 70% of the cancellations were for product purchases. Apart from the shadowy Unspecified-reason, most of the cancellations were due to Availability-of-resources. Among all federal government sub-agencies, the Army ranked in the top 10 when measured by a ratio of cancelled product procurements to total product procurements in September. The other 30%, for services, were cancelled by the Army for similar reasons.

According to 2017 FPDS data, federal agencies awarded over 32,000 competitive contracts for non-complex services during the last month of the fiscal year. The number of offers submitted for those new contracts was generally between one and six, with the median number of offers being three. And the median total value of those contracts for non-complex services was about $32,800. Assuming the B&P costs for a non-complex services proposal are 1.5% of the contract price, an offeror would spend about $500 per proposal.

Multiply that times the range of one-to-six offerors times the 290 cancelled procurements for non-complex services during September 2018, and you have between $145,000 and $870,000 in aggregate sunk B&P costs incurred by industry to respond to these cancelled services procurements during the last month of the fiscal year. Of the 290 cancelled services procurements posted in FedBizOpps by all agencies, at least 178 (more than 60 percent) were set-asides for small or disadvantaged businesses. Ouch.

The government will likely pay the price for the havoc they create.

What do we mean by asserting that future procurement costs will be greater as a result of this havoc? A vendor of commercial items may incur B&P expenses but lose the opportunity to compete. Since most of the procurements we're analyzing here are for commercial items under fixed-price arrangements, the incurred B&P costs cannot be easily assigned to a G&A overhead pool which would entitle the vendor to receive some future consideration for its B&P costs under cost-reimbursement arrangements. Instead, the vendor can attempt to raise prices to recoup cost of sales, provided the vendor doesn't run afoul of price controls set by a government contract. Alternatively, the vendor can accept reduced margin or profitability in its cost structure. If that income-limiting scenario isn't acceptable, the vendor can exit the federal market. The downside of an exit is reduced competition and the potential for facing higher price increases.

Companies who regularly sell quantities of commercially-available commodity products are affected, but the economic impact is to them not as large. On the other hand, small and disadvantaged businesses often find it more difficult to spend B&P funds, only to have the solicitation rug pulled out from under them.

And in this analysis, we're only addressing procurements cancelled during one month of the year. Think of what happens over 12 months—over 7,500 procurements were cancelled in fiscal 2018. Think of the impact for the very large and complex procurements where acquisition milestones are repeatedly delayed.

What can be done about this lack of awareness?

Government contracting officials, positioned to be "business advisors" to the requirements holder, typically do not internalize the fact that the fruitless B&P expenses often get passed on to other federal customers.

Federal purchasing activities (and the schools that train acquisition people) should be encouraged to illustrate the hidden costs of doing business—learning the consequences of poor planning and poor decisions. And purchasing activities should be encouraged to avoid poor procurement planning by systematically using FAR Part 7, realistic procurement lead times, and measures of fiscal readiness.

On the other side of the table, federal contractors should be more selective as to which agencies they choose to do business with, or at least what procurement processes they are willing to participate in, within an acceptable level of risk while spending their B&P budget.

Churn can be reduced.

©2018 The Coalition for Government Procurement. Used by permission.