Cost Accounting in Local Government

Contracting: The Good, the Bad, and the Ugly

Given the renewed interest in contracting as a way to save money, it seems like a good time to review the experience of agencies that have tried this and learned hard lessons for the benefit of the group. There are two general categories of contracting: (1) Contracting for peak loads; and, (2) Contracting the entire function. Each is discussed separately.

PEAK LOAD CONTRACTING

The management concept is simple:  Staff for the basic demand and use contract help for peak loads. This approach is useful when you want to retain staff but want to eliminate idle time caused by the cyclical nature of demand. Since the departmental leadership remains intact, problems caused by contract staff performance can be addressed immediately. The only downside to peak load contracting is caused by the agency itself when it compensates for in-house staff disproportionately to the private sector. If direct costs are similar, the agency has the advantage as the contractor will have to charge more to cover profit and taxes.

CONTRACTING THE ENTIRE FUNCTION

There are three issues with this approach: (a) Infrastructure; (b) Loyalty; and, (c) Performance. Each is now discussed.

Infrastructure. Often an agency will divest itself of the infrastructure it used to provide the newly contracted service. For example, when contracting for police or fire services, the equipment and buildings might be turned over to the outside agency that will be providing this service. It makes sense to do this in order to avoid the costs of maintaining those assets. However, if there is any possibility that your agency will change its mind about contracting out this service in the future, KEEP the assets under local control. If you do not, the start-up costs to resume providing the service locally could be so high that it forces your agency to continue contracting the service.

Loyalty. When there is a local emergency (e.g. earthquake, fire, tornado), an agency can depend on all of its employees to be available to help.  Contract employees are paid by the contractor and will not be available unless the contractor is paid for their services. Either your agency will have to accept that there will be fewer boots on the ground, or it should include this option in the contract before it is needed.

Performance. In general, public employees are motivated by the desire to help their community and know that their continued employment depends on the quality of their performance. A contracted employee may not feel the connection between their performance and their paycheck. Most successful examples of contracted services stipulate an agency employee have the responsibility to monitor the performance of the contractor. This person should be someone both with experience in performing the contracted work and with the time to monitor the contractor’s performance. The nominal assignment of a department head as the monitor is often a waste of time as most department heads will look at contracting as a way to relieve them of work and not redefine it.

COMPARING LIKE SERVICES

An even more modern management concept than contracting is defining the service that your agency wants and letting agency staff bid to perform that service along with outside contractors. This insures that the agency, if it knows what it wants, is comparing identical levels of performance. An unnamed local city fired its tree maintenance staff and contracted with someone who trucked in unskilled laborers to whack the trees with chain saws. The result was obvious: money was saved and trees were damaged.

WHERE CONTRACTING MAKES SENSE

It makes sense to contract if:

  • Your agency is too small to hire staff with the expertise that is infrequently needed.
  • You do not need a full-time position but can share one with a similar, nearby agency.
  • Past agency managers have bloated staff salaries/benefits to the point where contracting is the only way to afford continuing the service.

 

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