This is one of those questions you feel you should know the answer to. Can anyone point to a well constructed study that answers the question, how much can be saved by competing?

By Anonymous2 on Friday, November 24, 2000 - 05:52 pm:

I do not know of any "well-constructed" study that answers the question that you have asked, "How much can be saved by competing," if what you are looking for is an average dollar amount or average savings percentage.

In economic theory, the "value of competition" lies in the promotion of efficiency in the allocation of economic resources: "As economists now know, an economy driven by perfect competition leads to an efficient level of allocation of inputs and outputs." Paul Samuelson and William D. Nordhaus, Economics, 12th ed. (1985). p. 46.

In theory, perfect competition would eliminate profit. Imperfect competition, which is what we really have, leads to inefficiencies in the allocation of economic resources, which is what makes profit possible. As Samuelson and Nordhaus put it, "When sellers are few, there are inadequate checks and balances to assure that price is determined by costs."

Government acquisition policy is based on the idea that competition keeps the price of a good or service close to the efficient cost of its production. It is based on the expectation that nobody can charge too much if somebody else is able and willing to charge less.

By joel hoffman on Friday, November 24, 2000 - 11:27 pm:

folks, I don't know of any study. I just know from experience. A great amount is saved - millions on multimillion dollar construction acquisitions, for example.... Happy Sails!

By Anonymous2 on Saturday, November 25, 2000 - 01:47 am:

It's helpful to make a distinction between competition as a marketplace condition and competition as a contracting procedure.

In the marketplace there is competition whenever there is rivalry among businesses for customers or markets. This kind of competition is at work even though buyers do not formally solicit competitive offers. It is at work when you go to buy a car even if you visit only one dealer.

In government procurement, competition is a procedure in which an agency solicits competitive offers. If the government solicits competitive offers it calls the procurement competitive even if only one firm submitted an offer.

In theory, a competitive procurement saves money, but it often unclear how much it saved in any given instance. Although it is often possible to prove savings in particular cases in which there is a purchase history, it is harder to prove significant marketwide savings when all market transactions and transaction costs are taken into account. It undoubtedly saves money in commodity buys, but many procurements are unique, one-time events, and it may be hard to determine how much money, if any, was saved in a particular competitive award process.

In most sole source procurements the parties negotiate, and if the agency's negotiator is astute the price he pays may be no higher than the price that he would have obtained through solicitation of competitive offers. If the price is higher it may be because it is more realistic and will produce less opportunistic behavior and conflict during performance.

Moreover, it costs money to conduct a competitive procurement, and this cost, whatever it may be, large or small, offsets the savings obtained from competition to some degree. We have plenty of evidence of the fact that government competitive procurements are often time-consuming and costly.

Another complication arises from the fact that more than one-half of annual contract obligations are for services. When buying services the government does not buy a well-defined product with quality attributes that are fully measurable ex ante. Offerors' promises about service quality may be complex, fuzzy, and difficult to verify. This makes it especially hard to make reliable claims about the savings obtained through competitive procurement, especially when the services were procured on a "best value" basis.

I am not saying that competitive procurement does not save the taxpayer any money, but we must be careful about making large claims in that regard on a marketwide basis. It may be that if a market segment is competitive and the buyer researches and negotiates effectively, she may do as well or better than she would have through a FAR Part 15 Source Selection.

There is no question that competitive markets are good. But the government's competitive procedures are a mixed bag. I know that competition is gospel in government contracting, and I'm talking blasphemy.

By joel hoffman on Sunday, November 26, 2000 - 11:59 am:

Anonymous2, you aren't talking blasphemy. You are correct that the Government's procedures don't necessarily produce the biggest bang for the bucks. We all must remember that the "Competition in Contracting Act" has more than one purpose. Perhaps the major purpose is to allow each of Senator Joe Blow's constituents to compete for a piece of Federal business, not to produce the most savings to the taxpayers. The entire process involves a multitude of compromises. Happy Sails! joel

By bob antonio on Wednesday, November 29, 2000 - 03:15 pm:

I can think of three goals of governments' competitive procedures. This covers state, local, and federal contracts.

First, competition provides opportunities for all citizens of a government. Any capable citizen should have a shot at it.

Second, competition helps avoid improper relationships between contractor and government.

Third and most important, competition can provide new ideas and competitive commercial practices to governments.

By Anonymous on Wednesday, November 29, 2000 - 09:02 pm:

Mr. Antonio:

Interesting. Are those the reasons that Congress articulated when it enacted CICA? Can you provide me with references?

By bob antonio on Thursday, November 30, 2000 - 06:02 am:

Anonymous:

The second item I gave is derived from an 1829 Attorney General decision in Volume 2 of those opinions. CICA's legislative history stretched from around 1977 to 1984. Somewhere in that mass of data you can probably find something close to the items I have posted. However, the items I posted are from my own ideas of the benefits of competition for all government organizations.

By bob antonio on Thursday, November 30, 2000 - 07:40 am:

Anonymous:

On the way to work this morning I was reading a court case and found the following.

"The first purpose enumerated by the district court--protecting the public from cronyism and collusion--is much too narrow. Competitive bid statutes are designed to protect against a variety of ills that might befall the government procurement process: sloth, lack of imagination or carelessness on the part of those who award public contracts; inadequate notice to potential bidders, causing contracting officers to act on the basis of ignorance or misinformation; and, perhaps most important of all, insufficient competition to assure that the government gets the most work for the least money."

Everyone has their own ideas. You can find the item at 813 F. 2d 922 @ p. 926.

By joel hoffman on Thursday, November 30, 2000 - 08:33 am:

That judge lived or lives in a pipe dream! He or she never obviously never directly worked with the Federal Acquisition system. When I got out of the Air Force, during the 1970's, I went ot work for a municipality and bid out all City work. I found our prices to be approximately 50-65% of those for the same work in the Air Force. Since I was the same designer, and the differences between the geographical regions were not a significant factor, I attribute the savings to the differences in the procurement systems.

We once combine HUD funded work with local funded work in the same contract, using two different bid schedules and two separate sets of contract clauses and conditions. We paid 100% higher unit prices for the HUD funded work - on the opposite side of the same street! Happy Sails! Joel

By bob antonio on Thursday, November 30, 2000 - 08:44 am:

Joel:

You are right. All the little and large things we ask for in our clauses come with a price. Contractors have to try and figure out if they are complying and and they must report on the compliance. The court case you identified and I posted from the Chicagoland area shows that our programs cost money. Some programs are worth the cost. Others may not be. However, they all add some cost.

By Eric Ottinger on Thursday, November 30, 2000 - 06:21 pm:

Anon,

This is kind of a rough answer. Back in the 80s, the management of DoD current at that time was very much in favor of dual-sourcing weapons systems.

Going in, I was very skeptical. Leader/follower arrangements are notorious for creating problems.

Also, the political appointees who were pushing this approach cited studies showing 10% cost reductions after a second source was brought in to compete with the original sole source. Since the Government could have had the same 10% reduction by sticking with a single source and letting the learning curve do its usual magic, I thought the argument was idiotic.

Given the up front costs and the reduced learning curve benefit that results when you cut quantities in half, I’m not sure that we came out ahead on any of these programs.

(Of course, with the end of the Cold War we went back to a single source for most of these systems.)

But we got some interesting feedback from our contractor counterparts. The concerted effort to rethink production processes to be competitive for a dual source item, invariably had good effects that went beyond the instant contract or that single system. Invariably, the entire plant became more productive and all of the products produced by that plant benefited from the improved production processes.

Looking at the big picture, we did come out ahead.

Eric

By Anonymous2 on Friday, December 01, 2000 - 09:46 am:

Eric's story about dual sourcing is interesting and is supported by some analysts. See Affording Defense by Jacques S. Gansler (1989: The MIT Press), pp. 185-188. Perhaps the most famous example of dual sourcing is the "Great Engine War" competition initiated by the Air Force between Pratt & Whitney and GE.

But others have pointed out that dual sourcing has resulted in higher overall costs to the government. See "Findings and Thoughts About Competition in the Procurement of Weapon Systems," by Michael N. Beltramo, in the Journal of Cost Analysis, Vol. 4, No. 2 (Fall 1986).