Government
Are contractors wasting public money? We don't know
Public works projects in the United States cost far more than they should. From subway lines to light rail to roads and bridges, the price tag on projects is huge, while other countries get infrastructure for much less.
Photo by doctorwonder on Flickr.
Much of the pushback against the $7 billion Union Station master plan came from people incredulous that, even with all of the smaller projects rolled up in that report, the price tag would still come out so high. I argued that we shouldn't be afraid to spend that kind of money on good public works, but neither should we spend that kind of money if we can get the same for much less.
Stephen Smith makes a persuasive case that US taxpayers often pay several times more than other countries for projects that take longer to complete and deliver less benefit to the public. Smith puts the blame on agencies overusing consultants and contractors:
A huge part of the problem is that agencies can't keep their private contractors in check. Starved of funds and expertise for in-house planning, officials contract out the project management and early design concepts to private companies that have little incentive to keep costs down and quality up. And even when they know better, agencies are often forced by legislation, courts and politicians to make decisions that they know aren't in the public interest.Some blame public employee unions, but projects even cost far more here than in heavily unionized nations like Spain.
US agencies rely more and more on contractors, and there are advantages. Sometimes they can get something done faster and more efficiently. It's hard to hire public employees, and even harder to fire them if they turn out to do a bad job.
Another advantage of hiring contractors is less transparency and therefore less bad press. The Washington Examiner's local reporters have been relentlessly FOIAing documents on spending at agencies like WMATA and the Metropolitan Washington Airports Authority (MWAA). Sometimes, these FOIAs turn up a serious misuse of funds, like Liz Essley's series on MWAA giving contracts to former board members. Other times, they turn up some expenses that maybe could have been a little less, but they might not, like a WMATA trip to Japan.
Meanwhile, the reporters have almost no way to tell if a contractor is spending funds wisely. To build Beltway HOT lanes, Fluor-Transurban is getting $409 million directly from Virginia, $585 million in loans from the Federal Highway Administration, $586 million in subsidized bonds and $349 million in private equity. They also will get all of the money from driver tolls on the lanes. Are they making any sweetheart deals? How much are they spending on travel? Since they are a private entity, FOIA doesn't apply.
This sets up a perverse arrangement. Virginia can give a huge payoff to Fluor-Transurban, and we don't know all the details of how funds will be spent. After the dollars are awarded, taxpayers are still paying but without the visibility of public agencies. While the total dollar figure gets a lot of press, most people can't really evaluate it; a number in the hundreds of millions doesn't mean much intuitively.
Some argue that private entities don't need the same level of scrutiny because they had to bid competitively for the contract and are accountable to shareholders. While true, that doesn't mean a contractor is being frugal. Smith writes:
The MTA must continue to award contracts to the lowest- price bidder, and without the ability to hold bad contractors accountable, Littlefield said, the agency turns to "writing longer and longer and longer contracts, expressly prohibiting every way it has been ripped off in the past." The byzantine contracts that come out of this process drive entrants away, limiting competition and pushing up costs.As for shareholders, they reward a company for profit, not low costs. Shareholders would actually reward a company for successfully overcharging taxpayers. Plus, shareholders, like the public, don't have a lot of visibility into a company either. If shareholders really held companies accountable, why do many private companies spend so lavishly on executive perks that aren't necessary?
When some functions happen in public agencies and some in contractors that just get payment from public agencies, the public has oversight of one and not the other even though both might have waste. Given the sky-high cost of projects in the US, we can only guess that there must be waste by contractors. Until agencies and the public can successfully oversee contractors and hold them accountable, the US will be unable to build the infrastructure needed to support a growing economy.
 | David Alpert is the Founder and Editor-in-Chief of Greater Greater Washington and Greater Greater Education. He worked as a Product Manager for Google for six years and has lived in the Boston, San Francisco, and New York metro areas in addition to Washington, DC. He loves the area which is, in many ways, greater than those others, and wants to see it become even greater.   |
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US Governments often act like amateurs, and are easily outwitted by professional contractors.
by Jasper on Aug 28, 2012 10:56 am • link • report
A good example of this is asking a technologically-inept person to buy new computers for a business. They know they need new computers, but don't know anything about them so they go to the manufacturer and ask, "We want to do X. What kind of systems will we need?" And, of course, the manufacturer is all too willing to provide a "complete technology solution" that just happens to up-sell everything.
I think that's what Stephen's saying, except that instead of buying computers, the public's being upsold on public infrastructure projects. I don't think unions, the people actually building these projects, have anything to do with it.
by Adam L on Aug 28, 2012 11:11 am • link • report
They've got themselves a 99 year loan -- unavailable for public entities -- and are able to charge rates to pay that back in 40 years.
Free money, really.
by charlie on Aug 28, 2012 11:14 am • link • report
Does it work that way? Probably not. But realistically, what options does a government agency have?
by Tim on Aug 28, 2012 11:21 am • link • report
You are just trying to villianize a group of people (like what NYTimes does). Its the same contractors across different countries.
It is not like the other countries have FOIA on the government agencies or contractors.
by MW on Aug 28, 2012 11:26 am • link • report
The federal government's entire system of procurement needs an overhaul because there's too many perverse incentives for contractors to act inefficiently.
by Fitz on Aug 28, 2012 11:30 am • link • report
You might want to go back and revisit Gunn's anaylsis-for-WMATA:
http://www.wmata.com/about_metro/news/pressroom/attachments/DAVID%20GUNN%20PRESENTATION%282%29.pdf
Look at the way that for example WMATA IT expenses have ballooned under "capital" and "consultant" costs in the past couple of years. Also cross-check against all the contractors named in WMATA's IT expenditures at a different internal audit. http://www.wmata.com/about_metro/docs/peoplesoft_audit.pdf And keep in mind... none of those projects has anything to do with actually BUILDING anything. It's all about internal contracting under capital "improvement" projects.
by B.O. on Aug 28, 2012 11:34 am • link • report
Competition for public contracts takes place through the political realm. Contractors donate money through legal, semi-legal, and sometimes illegal means and develop ties with politicians and bureaucrats. They spend large amounts of money on lobbyists. They use these ties to ensure that RFPs and contracts are written in such a way that privileges their firm. The technical merits of their proposals, and their cost-effectiveness, are secondary. The outlays on gaming the political system are recouped through government contracts on which they knew there will be little oversight and lots of room for pushing the margins.
by Dizzy on Aug 28, 2012 12:27 pm • link • report
However, since that party has nothing to say in DC, it can not be concluded it is all their fault.
by Jasper on Aug 28, 2012 12:29 pm • link • report
incentiveinefficient...by Jasper on Aug 28, 2012 12:30 pm • link • report
Our problem is systemic, but it starts and ends with the people in charge.
When you have some inexperienced rube with a fresh MBA degree on the wall given oversight over a 50 million dollar infrastructure project, they are going to be taken advantage of through the entire process.
The enter into a contract for design, yet being inexperienced the fail to build any slack into the contract later for changes, nor do they establish unit costs. So when the design is "completed" a year later and suffers from the inescapable scope creep (because the rube didn't understand that while the design was technically sufficient, it would fail to meet (insert goal here, expandability, flexibility etc).
So the thing gets redesigned 2 or 3 times at 2 or 3 times the original cost.
Moving on, now you contract it out. The rube sees a stack of design plans on the desk he can't read, let alone understand and couldn't do a constructability analysis if his life depended on it. Some things are over design, some under, both cost money to fix. He simple doesn't know what a yard of concrete or a truck of rebar costs, doesn't understand standard labor rates etc.
Now we get into construction and the change orders start to fly. "We need 5 million to change the alignment because we didn't know there wasn't available bedrock under this one". Gee, you mean you paid 6 million for design and never bothered to do a geotech? Sure it it may not be "required" by code but anyone other than the rube would have known from past experience you need to do these to save your ass later.
So work comes to a halt, GC gets paid idling damages. Geotech is complete, and yes you need to reroute an entire section.
More and more CO's come in, mostly for things that were preventable or predictable during design, but the PM was some simpleton who spent all his time showing up at meetings with a clueless look on his face and never knew the right questions to ask, so didn't ask any at all.
I could go on, but yeah...I don't know about being triple priced but I can certain see double.
7 years ago a residential developer had to (via proffer) build a section of the expanding Loudoun County Parkway that of course had to abide by all VDOT standards, as if VDOT had built the road themselves.
It cost that developer 45% less per linear foot than it did VDOT to build the section connecting to it.
The differnece, the developer had a guy, a PE with 20 years in civil contruction managing the job, VDOT had a 25 year old kid with a undergrad business degree and taking Construction Management courses on Phoenix online.
by anon452 on Aug 28, 2012 12:47 pm • link • report
by Rich on Aug 28, 2012 1:02 pm • link • report
The arguments presented are the following:
1. US public agencies are underfunded and therefore first they don't have the staff to do things in-house, and second they don't have the money to retain top talent (who move on to higher-paid contractor jobs).
2. The fact that they are underfunded, under-staffed, and under-experienced means that public agencies turn to contractors to do much of the work for them.
3. The contractors (which are often separate for designing and building) have less incentive to plan for every contingency, since they know the public will pony up once the project is underway, leading to lots of the problems anon452 points out. This is compounded by the fact that the contractors have little oversight, because the public has no FOIA ability and the public agency does not have the resources for oversight.
4. All of these things lead to higher costs.
The other problem many of us have and that David is making here is that those with an anti-transit and anti-government in general agenda (such as the GOP and the Washington Examiner) constantly complain about "bloated" public agencies and advise that we should be cutting budgets and contracting everything out because the private sector is so much more efficient. They use FOIA as a weapon against public agencies and use that information as "proof" that public agencies waste money, while providing zero due diligence on whether the private contractors waste money directly (which everyone who has worked at a large private sector office knows they do), or whether separating out all these project functions creates massive inefficiency that leads to higher overall project costs (which it does). Instead they moan that labor costs (unions) must be the problem, as if people in Europe get paid third-world labor prices to do this work.
As for your point about the "paradox," low-bid contracting makes costs higher because experienced companies bid at a price they can actually build something for, while inexperienced companies underbid in the hopes of winning the project and then proceed to completely f*** things up - witness the Silver Spring Transit Center.
How can we measure speed and quality? Set deadlines and goals and impose penalties on companies who fail to meet them, instead of just digging deeper into the public pocketbook when things go wrong.
by MLD on Aug 28, 2012 1:31 pm • link • report
Change a few words in his story and it would aptly describe large government IT projects.
Government absolutely lacks the right people, processes, and systems to manage contractors effectively. It's not that government can't develop these capabilities, but government's ability to ramp up on a new way of doing things greatly lags the speed with which increasing amount of work have been outsourced to contractors.
by Falls Church on Aug 28, 2012 1:33 pm • link • report
This is a particularly expensive symptom of a much bigger problem that pervades government at all levels in this country. Everything has to be done the absolute cheapest way possible at that moment. People get in trouble (with their bosses, with the media, with legislators) when they buy the gold-plated widget or the more expensive employee, even if doing so lets them save a ton of money on the back-end. Fixing that would require a broad cultural change that I don't see happening anytime soon.
by JW on Aug 28, 2012 1:34 pm • link • report
I'd agree the criticism (from certain circles) is just evidence of a policy bias, but we have a serious problem with goverment contracting in this county.
And I doubt DA's end state (force more details from private contractors) is really going to help.
by charlie on Aug 28, 2012 1:38 pm • link • report
by dcrepublican on Aug 28, 2012 2:03 pm • link • report
It's a good thing in many ways that governments in the U.S. are more responsive to citizen concerns than in most other countries. But there can be a very high price for that.
by jimble on Aug 28, 2012 3:09 pm • link • report
Even today TVA and the Army Corps of Engineers do remarkable work for moderately low cost.
When you start using contractors and consultants and procurement specialists you start getting $400 toilet seats.
by Tom Coumaris on Aug 28, 2012 3:32 pm • link • report
The type of contract makes a huge difference -- for a time-and-materials contract, the government pays for everything and assumes the risk; for a firm-fixed price, the contractor takes the risk, which is built into the (increased) price. For road-building contracts, there are often rewards and penalties for early and late completion.
Contract biding and implementation is done by the contracting officer, who then generally appoints a representative to oversee the contract. The former is a basically a specialist on contract law; the latter is (or should be) a someone with technical competence. The issue is the contracting officer sets the rules that may or may not live in harmony with the technical challenges -- that is where the money is lost.
From the contractor's point of view, you underbid the work and live for the contract modification -- the things that were not foreseen when the contract was negotiated.
by goldfish on Aug 28, 2012 4:14 pm • link • report
1. Federal/State regulation. While they're (usually) good ideas, govt. standards/regulations increase construction prices dramatically, compared to an environment where they're non-existent. For instance, take the ICC/MD200. If there were no environmental damage mitigation requirements and on top existing of state and federal highway standards, plus a whole host of other regulations, the price tag for the road would probably be less than half of what it actually was.
2. Imperfect contracting/bidding system. First of all, if only a few manufacturers or even just a single one (as was the case for the Air Force's new tanker when Northrop Grumman dropped out of the picture) willing to contract for a government project/purchase the price will always be higher than in the case when actual competition is involved. The ongoing monopolization/oligopolization of most American industries will ensure that govt. contract prices continue to increase into the future.
There are a number of other flaws and inefficiencies with this system, including minority-business contracting requirements.
3. Labor. Manual labor costs in this country is much, much higher than nearly every other country in the world, including other developed nations. Unlike manufacturing or customer service labor, construction labor can simply be outsourced to China. Actually labor costs are actually lower than they should be (economically speaking) thanks to illegal immigration.
4. Lack of oversight/penalties. For government work contractors can often get away with shoddy work, construction/manufacturing delays, and cost overruns. While there are efforts to incentivize timeliness and penalize delays and poor quality work, there's such limited oversight that these efforts don't always make that much of a difference.
Government in general is slow to respond to contractor ineptitude and averse to law suits. In the private sector there are swift and severe penalties for poor workmanship. Just look at the Silver Spring Transit Center and look at the many high-rise apartment/condo projects popping up around DT Silver Spring.
by King Terrapin on Aug 28, 2012 4:36 pm • link • report
1. We're comparing US construction costs to Europe, is there really more regulation and environmental regulation here than in Europe?
3. Are labor costs really higher than in Europe? Again, we're not talking China here. See: http://www.bls.gov/news.release/pdf/ichcc.pdf
I agree with 4 and agree with 2 partially and would add that lowest-cost bidding means you get people underbidding just to win and counting on the overruns (4) to cover the difference.
by MLD on Aug 28, 2012 4:51 pm • link • report
In addition to MLDs points, I would be careful to note that 'government' is not monolithic. Much of the complexity/corruption and lack of oversight in (2) and (4) appear to not be so much willful on the part of the contracting agencies, but instead a dysfunction at the political level. They're symptomatic of a political system which is simultaneously enamored of "private enterprise" and hostile to the sort of effective concentrations of government staffing and expertise which would make good management and enforcement more likely. The Bloomberg article also cites courts as loathe to ever hold private contractors responsible when their client is the government.
PS: It's beside the point, since as MLD pointed out it probably doesn't make much difference in relative costs, but environmental and other regulations are there for a reason. The whole point of the environmental regulations in the first place is to reduce costs, albeit overall social and non-market ones: just because silting up a stream with construction debris doesn't show up on your bottom line immediately doesn't mean it isn't enormously damaging or expensive own the road or to some other party. Similar points can be made for other regulations, like worker safety or construction standards.
(Certainly in some cases a particular regulation or regulatory approach might be counterproductive, but simply observing that, e.g., "this project would be nominally cheaper if we didn't have to worry about all that environment junk" doesn't even begin to make the argument.)
by jack lecou on Aug 28, 2012 5:56 pm • link • report
I don't think the objections to environmental laws and regulations has to do with the actual protections of the environment, but rather the endless process that many of those laws open up. That feeds into the points about the legal system driving up costs.
by Alex B. on Aug 28, 2012 6:12 pm • link • report
You bring up some good points.
An additional contributing factor here in the US is the cost of "citizen input". Especially the "citizen inout" from opponents who know how to game the system and abuse the environmental review process. We've seeen a lot of that right here in the metro DC region.
It's fair to assume the costs of large infrastructure projects in this region have has been significantly increased by the perceived need to indulge opponents especially highway opponents who game the system by demanding - and getting - seemingly endless "studies" - and additional studies and lawsuits when they don't like the findings.
These tactics drive up the costs with consulting fees, legal expenses, and the lost opportunity costs (labor, materials, and the cost of borrowing increase over time) caused by delays.
The ICC is a case in point. Opponents' delaying tactics increased the final cost of the project significantly. The road could have been built as recently as 1996 for a fraction of its final $2.4 billion cost.
by ceefer on Aug 28, 2012 6:37 pm • link • report
Yeah, the article may have been talking about Europe, but I was comparing the US to other countries in general. I'm sure there is more stringent regulation for major projects in most Western European nations than there is here.
@ jack lecou
I agree with your comment, particularly the second half. Environmental regulation is an absolute necessity. Increased spending on environmental damage mitigation (if done properly and practically), actually increases net social benefits, as you mention. The article however, states costs in nominal, monetary, terms and I was speaking in that context.
by King Terrapin on Aug 28, 2012 6:49 pm • link • report
Totally agree. NIMBY's, and even worse, private businesses with deep pockets, are a major pain in the *$$ for any major infrastructure project. The Silver Line is a prime example, with TysonsTunnel almost derailing (pardon the pun) the line. The Purple Line has been facing similar problems with some self-important users of the CC Trail and the Columbia Country Club.
by King Terrapin on Aug 28, 2012 7:15 pm • link • report
Second, European employers have to contribute large amounts of money to workers' benefits. In France, for every euro a firm pays an employee, it has to throw in an additional 50 cents for a national pension system; in the US, the comparable FICA figure is 7.65. On top of that, add-on health insurance is a standard employee benefit, though it's far cheaper than in the US. And finally, workweeks are shorter than in the US.
by Alon Levy on Aug 29, 2012 4:43 am • link • report
I believe most US projects are built under firm-fixed price contracts, where the contractor takes the risk. This doubles the price. If the government assumed the risk by using a time-and-materials contract and hiring an experienced project officer, the cost would decrease. This explains the cost difference on the LC Parkway described in anon452's comment.
by goldfish on Aug 29, 2012 8:25 am • link • report
by lou on Aug 29, 2012 4:29 pm • link • report
(hat tip to Matt Yglesias for reminding me of this interview)
https://twitter.com/mattyglesias/status/240918153973084162
http://la.streetsblog.org/2012/07/24/the-villaraigosa-interview-i-building-a-new-transportation-system/
The LA Mayor: "they’re telling me I have to do a CEQA process on bike lanes"
Granted, that's the CA state law, but the principle still applies.
by Alex B. on Aug 29, 2012 7:02 pm • link • report
by goldfish on Aug 30, 2012 9:39 am • link • report
The EU has very elaborate bidding regulations. However, governments in the US are not as scattered as in the US.
Whereas the US has completely separate county, state and federal governments, EU countries tend to have a more unified government (excepting crazy Belgium, Germany's states and the UK where you have the odd situation that Scottish MPs get to vote on English affairs because the UK parliament doubles as England's parliament). But the Netherlands for instance is working hard to make sure its entire government works as one. Cities and provinces are just the local affiliate of the national government. France has an incredibly strong centralized national government. The EU itself works entirely through national governments.
The result is that you do not have infinite fights like over the Silver Line where everybody agrees that the thing needs to be built, yet it never happens because some party wants to pay their fair share (Loudoun, or VA in the case of the Silver Line).
Another benefit of a large government is that the government is more competent. Ministries of Transportation do actually have experienced people on board that can push back against contractors that keep growing projects. Except when they start dreaming big.
More centralized government means less internal conflict. You don't have a DOT fighting with an EPA, or DHS sticking its nose in everything. Once a decision is taken to do something (and that might take a while), generally orders come from high-up to make it happen.
Finally, lobbying works very differently in EU countries. For starters, political campaigns barely depend on donations.
Does that make the EU perfect? Hell no, just look at how efficiently they're dealing with Greece...
by Jasper on Aug 30, 2012 2:38 pm • link • report
This is, of course, exactly the outcome which government-hating "privatizers" want -- they want to loot the government treasury for private benefit. They're doing very well at it.
The only alternative is to develop *in-house* expertise, which requires spending *more money* on *permanent government employees*. Spending enough, in fact, that they will be loyal to the government rather than angling for a future private sector job.
by Nathanael on Aug 31, 2012 11:07 pm • link • report
Does this lead to padding? Oh, yes. The construction company I used to work for was a major defense contractor. They padded everywhere. Nothing could be billed to overhead; it all had to go to a project. Staff meeting? Mention a project and bill the whole 2 hours to that account. The company got caught outright stealing many millions of dollars on Afganistan contracts, but they weren't even barred from getting future contracts.
I'm not sure whether we would be better off without cost-plus, because at least the work isn't dangerously shoddy. But maybe it should be tweaked so that, for instance, if a project stays under a certain budget the contractor gets a higher percentage. That way you don't incentivize bloat.
by Alex on Sep 7, 2012 4:36 pm • link • report
by William on Sep 11, 2012 6:09 pm • link • report
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