Time to read: 7 min
Government contracts are awarded based on merit, not on previous relationships or purchase history. As all acquisitions are publicly funded, the government needs to follow certain set procedures. This ensures that delays from public inquiry, such as protests, are limited. The government favors a competitive process for acquisitions to avoid speculation from the public about purchasing biases. There are two major concerns regarding government contracts:
- The government is the sole purchaser of certain products and services.
- The government customer is not the direct user or end user.
How Libertarian Economics Relates to Government Contracts
A theory in libertarian economics dictates that the quality and price of a product can vary greatly depending on whether or not you are buying for yourself and/or spending your own money. This may apply to the sole purchaser dilemma that the government experiences.
Buying for Yourself with Your Own Funds
When making purchases for yourself, you will tend to be rigorous about quality and aim to acquire the best product possible. As the end user and purchaser, you understand your own needs better than anyone else. This may lead you to waitfor sales or conductextra research to ensure you get the best value.
Purchasing for Yourself Using Outside Funds
This occurs when you are purchasing a product for yourself with someone else’s money. The quality of the product will remain high because you have the best understanding of your own needs. The price is less scrutinized and will tend to be higher, since you are not spending your own money.
Purchasing for Someone Else With Your Own Funds
When you purchase for someone else, product quality may suffer because you may not understand or appreciate what the end user needs. A common example of this is gift shopping. In this case, you may tend to search for sales and conduct due diligence to get the best price.
Purchasing for Someone Else Using Outside Funds
When you are buying for someone else with someone else’s money, both the quality and price may suffer. The product may end up being of low quality but high-priced. Unfortunately, all government acquisitions live in this section because the purchasing function is separate from the end user function. This is not to say all government contracts are poorly acquired; however, it is a point of contention when discussing whether taxpayers’ dollars are spent wisely.
It is very rare for the government to be purchasing something of which they are the end user. In most cases, government purchases are for an end user whose needs they may not be familiar with. Government officers need to pay close attention to the overall value of products or services when awarding contracts to vendors.
Sole Purchaser Dilemma
There is a reverse-monopoly problem here, as the government is the sole buyer of certain products—military equipment and tanks, for example. As the only purchaser for these items, the government has a direct hand in controlling the industry’s price and quantity of products. There is a high risk of any deals made by government agencies being viewed as unfair or a waste of taxpayer money.
When purchasing products or services with a direct commercial equivalent, the government can outsource the evaluation of quality and price to the market. The assumption is that the commercial market is more competitive and therefore offers higher-quality products of better value.The commercial market motivates companies to define and produce desired outcomes.Government contracts, on the other hand, define the input metrics required (such as credentials, experience, and equipment) to get the desired outcomes. The heavier focus on inputs is driven by the government’s oversight, designed to ensure fairness.
Funding Research and Development (R&D)
The sole purchaser dilemma leads the government to fund many R&D projects. It will frequently cover the cost of R&D for any bespoke product. Every month, the contractor conducting the R&D sends an invoice to the government based on the amount spent. The government is sensitive to any overcharging from contractors, because overcharging reduces the motivation to work efficiently. The government’s strategy for avoiding overcharging is to mandate hyper-specific accounting oversight. Contractors are required to document and adhere to policies around what to charge for things like facilities or lab technicians. Ultimately, costs related to compliance and oversight are simply passed back to the government by the contractor.
Low Price Technically Acceptable (LPTA)
Low price technically acceptable contracts mean the lowest price quoted will win the contract, assuming the bid meets all technical requirements. This removes any subjective judgment on the part of the evaluator and is the easiest type of contract to award. LPTAs are great for compliance, as they help reduce corruption. There have been high-profile cases of corrupt government officers awarding contracts to bidders with expensive prices, based on subjective factors.
End User Dilemma
Another concern with sole-purchaser contracts is that the purchaser is neither the beneficiary nor the end user of the product. This forces the government to be extremely prescriptive when outlining its needs. Requirements are specific to each industry, and each applicant must comply to be eligible to bid. For example, if the government needs cloud storage services, the contract would state every detail about the storage limit, the server, data protection, and more.
Competition pressures companies to offer better products and services at lower, more reasonable prices. This is great in theory; however, the competitive acquisition process can be extremely time-consuming, slowing down the decision-making process.
How the Bidding Process Helps Limit These Concerns
The government uses a competitive bidding process to limit the concerns outlined above. Bidding on government contracts is often perceived by new entrants as tedious and meticulous. But these processes are necessary for agencies to make sure they are purchasing the best possible products and services. Rates and pricing are compared to reduce concerns of corruption or careless purchasing, and to save taxpayers’ money.