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The challenges of contracting and accountability across the federal system: from ambulances to space shuttles.

There is little question that government contracting has proliferated in recent decades among all governments in the American federal system. The extent and style of contracting varies--from the extensive reliance of the National Aeronautics and Space Administration (NASA) on private contractors for more than 90 percent of the agency's work, to the "unprecedented levels" of contracting by states for social services, (1) to continued experimentation with contracts for traditional local services such as trash removal and emergency services. Local, state, and federal administrators increasingly are challenged to allocate time and financial resources to managing contracts and ensuring contractor accountability.

Contracting is viewed as a mechanism through which government can benefit from the efficiencies inherent in private markets. Advocates for the privatization of government services offer persuasive cases for shifting the production of government services to private producers, arguing that contracting may limit excessive government size and correct service-delivery problems attributable to the absence of market discipline in a monopolistic bureaucratic state. (2)

Traditional market models of contracting--models that influence many government-contracting decisions--assume that contractors will deliver high quality, cost-effective services because market forces such as competition will ensure desirable contractor performance. Rival theories of privatization and contracting question the viability of the market model, arguing that for many government services, no true private markets exist because of low numbers of potential contractors. For these services, transferring production to a non-competitive market offers limited--if any--economic benefits. (3) Yet other observers advocate contracting for these complicated services because they view non-governmental organizations as simply more capable of effective service delivery.

This study focuses on two questions related to government contracting. How are key components of contracting similar or different for city, state, and federal governments in the United States? To what extent do the three levels of government share the widely recognized challenges of contract design and contract management?

CONTRACTING IN THE AMERICAN FEDERAL SYSTEM

The American federal system provides a "natural experiment" within which dominant contracting theories can be viewed and assessed. While many of the challenges of contracting and contract management are likely to be found at all levels of government, the unique roles played by the various governments in the federal system, and the allocation of responsibilities across those governments, may yield different contracting experiences. Contracting dynamics can be expected to differ because prevailing service types and contracting environments vary in a federal system. Those variations may offer insights into how contract design, service delivery, contract management, and accountability can be made more effective.

Local governments are particularly likely to contract with private providers because of the nature of the goods and services they provide. (4) Many of these goods and services offer relatively high proportions of "private" benefits directly to the resident (e.g., each resident directly benefits from trash removal). The private nature of these services suggests that an adequate number of providers will exist, and that a competitive environment will facilitate contracting. In addition, the "outcomes" of many local services are comparatively measurable, tangible and visible, and are observable in a relatively short time-frame. (5) Local services, therefore, meet many of the criteria outlined by contracting advocates, and local governments may enjoy the most "ideal" contracting conditions in the federal system. The comparatively strong potential among the local governments for adequate competition and measurable outcomes should foster service quality and contractor accountability.

In the American federal system, states have much of the responsibility for social welfare programs, which are delivered increasingly through contracts. For these "social" goods or services, benefits and outcomes can be relatively difficult to observe and measure--at least in the short term--and the cost savings and provider competition envisioned by privatization advocates are sometimes elusive. (6) State contracts for social services often entail extensive coordination among multiple providers. Child welfare systems, for example, depend on relationships among courts, mental health providers, social welfare professionals, foster and adoptive families, and others. Increasingly, states are using sophisticated techniques such as shifting financial risk to contractors to enhance performance and accountability. In addition, state social welfare programs can be viewed as the ultimate "federal" programs because they are in fact delivered jointly with the federal government through formal agreements; therefore, they are subject to extensive regulation. These conditions--lower levels of competition, more difficult outcome measurement, the nature of the services delivered by states, and the intergovernmental context--suggest that, compared to the local government of our federal system, achieving contractor accountability in state government will be more difficult.

For the federal government, contracting is extensive for both types of services--those with primarily public benefits, such as space exploration, and those that more closely resemble local services in terms of measurability and tangibility of outcomes, such as airport-passenger screening services. The features of these two service types indicate that for federal officials, challenges will be more variable depending on the type of program under contract. The scale of service delivery for the federal government also differs substantially from state and local government.

These differences in contracting environments suggest that contract management may be most successful in the local government, relative to the state and federal governments, if only because of the relative ease of monitoring performance due to the measurability and tangibility of outcomes. More specifically, we expect that local administrators, compared to their counterparts in the state and federal governments, will be more effective in managing contracts and ensuring contractor accountability. In order to assess this expectation, and to better understand whether and to what extent contracting dynamics differ across governments, we will compare and contrast six contracting cases, two each for the local, state, and the national governments. In the next section, we discuss the challenges faced by government purchasers as they try to hold contractors accountable. We then provide background for the components of contracting that will guide our comparative case analysis.

ACCOUNTABILITY IN GOVERNMENT CONTRACTS

Regardless of level of government, the administrative challenge in government contracting is to capture the benefits of the contract relationship without losing accountability. This challenge is not limited to the public sector. The past decade has seen an extraordinary range of examples of mismanagement in the nonprofit world, including the United Way of America and the Foundation for New Era Philanthropy. There have also been high-profile accountability failures of private companies, including several performing government work under contract. Tenet Healthcare and HealthSouth both face Medicare fraud charges related to operating on or admitting patients that did not meet Medicare criteria. (7) An Enron Corporation senior trader pleaded guilty to engaging in a conspiracy that illegally manipulated the California power market during the state's energy crisis. (8) A former Halliburton employee testified recently that the company, currently under investigation for overcharging the U.S. Department of Defense for its post-war work in Iraq, had made no effort to find low-price vendors because of its cost-plus contract arrangement with the federal government. (9) Clearly, contractor accountability (e.g., ensuring that contractors deliver high quality, cost-effective goods and services) remains an elusive objective.

Government purchasers of goods and services must be prepared for a fundamental shift in management focus. (10) In the absence of a competitive provider environment, particularly strict attention to accountability mechanisms is required. It is no news that contracting in a non-competitive environment erodes many of the potential gains associated with competition, including incentives for contractors to provide high quality services at minimum cost. (11) As Mark Schlesinger and colleagues note, "most critics ... link inefficiency in government primarily to the monopoly possessed by many public agencies on the provision of services." (12) Thus, contracting in a non-competitive environment can engender many of the same performance issues associated with government itself. In addition, incentives for innovation may be absent in a non-competitive market. When there are few potential providers, contractors may organize politically with clients to maximize the probability of winning in disputes with the government agency, thereby increasing the need for oversight while simultaneously undercutting its effectiveness. (13)

Several assumptions inherent in contracting apply to all governments. These include the notions that contracts can be more effective and better enforced when they are well written and the contract structure is consistent with the contracting context, when the contractor bears some risk associated with funding and delivering the service, and when the contracting agency is prepared for the requirements of contract design, implementation, and oversight.

Policymakers often take it for granted that contract management will be adequate-that public agencies possess the resources, staffing, and re-tooling capability required to design and oversee contracts properly. Yet transaction costs are particularly high in these less-than-ideal contracting circumstances. Building and maintaining contract oversight capacity, fostering effective provider competition, and correcting for the absence of "market discipline" require substantial investment. (14) Staffs must be trained and organizational structure may need modification. Public managers responsible for designing and managing these contracts must reconcile competing perspectives and expectations reflecting differing logics of politics, administration, and markets. (15) In addition to these concerns, government agencies must be prepared to engage in extensive trust building and capacity-building with contracting organizations, especially when available alternative providers are scarce. (16)

Regardless of the government responsible for administration, contracts associated with intergovernmental policies and programs are likely to be more complicated than those controlled by one government. When multiple layers of regulation and accountability are involved, all components of management will be more challenging, (17) and this will apply to contract management as well. This suggests that states--which operate highly regulated intergovernmental social service programs susceptible to problems of outcome measurement--may experience comparatively high levels of contract management difficulty. For instance, Kansas state child-welfare managers must oversee complicated, expensive contracts with multiple providers while ensuring the adherence of both state and contracting agencies with both state and federal regulations.

To compare and contrast contracting dynamics across governments, we focused our analysis on what we view as key components of ensuring contractor accountability: contract structure, which encompasses the actual design of contracts in terms of division of responsibilities and the allocation of risk among contractual parties, and the management of contracts, focusing on management capacity and on assessing performance through monitoring and oversight to ensure contractor accountability.

Contract Structure

Within contract structure, two key characteristics warrant attention: (1) the clarity and specificity of responsibilities and (2) the allocation of risk. Successful contracting requires well-written contracts that specifically define all parties' roles and responsibilities, (18) establish clear, meaningful, and measurable performance goals, outputs, and outcomes, and incorporate realistic incentives or sanctions. Such contracts minimize the potential for misunderstandings during the implementation phase and allow the contractor some flexibility to decide how best to achieve the desired outcomes and goals. This simple characteristic of contract structure--a well-written contract--is actually a significant challenge in practice. It can be difficult to compose contractual language for complex governmental programs and services where "quality" and "efficiency" are hard to define and measure. (19)

A second key aspect of contract structure is the degree of risk shifted to the contractor organization. One of the motives for privatization and contracting is cost-control. (20) Hence, many contracts have an explicit intention to shift at least some of the financial risk to contractors to create incentives to contain costs. Potential contractors must calculate and consider these risks before bidding for a contract. Performance-based contracts, which reimburse contractors only after clearly specified and measurable outputs or outcomes are delivered, are examples of contracts that shift risk to contractors.

Managing Contracts for Accountability

Contract management requires building and maintaining the capacity to implement the contract. Effective contract management also depends on the establishment of monitoring strategies designed to assess contractor performance and hold the contractor accountable for that performance. (21) The importance of management capacity to governance and the delivery of quality government services--including services through contracts--is highlighted in recent empirical studies. (22) Staffing and resource considerations are critical to this process. Agencies that decide to deliver services through contracts need employees with specialized skills that are often not readily available within the agency's workforce. (23) In fact, it is not unusual for agencies to contract with experts for specialized management and analysis, which gives rise to contractors evaluating the work of other contractors. Without adequate contract management, contracting agencies can experience the problem of "hollow government," wherein the agency sheds the capacity to operate a given program, but lacks the ability to evaluate the work it has contracted others to do. (24)

Consequently, the requirements of contract management typically necessitate a workforce transition from service provision to monitoring and oversight. (25) While program expertise is a valuable component of contract management, the skills required for monitoring and oversight do not always come easily to program staff with a history of client advocacy and service. (26) The purchasing agency therefore must deal not only with the requirements of a new management infrastructure, but also with the potential resistance of staff in transition from program operation to contract management.

Ensuring accountability requires monitoring to determine whether the contractor has met performance expectations and contract obligations. Monitoring activities can include formal and informal assessment of contractor practices, performance, and costs. Oversight can range from straightforward checklists and financial audits to more sophisticated judgments regarding client outcomes through formal program evaluation. The level of analysis required for many monitoring strategies is often difficult to achieve in government agencies, due to the high cost of staff with appropriate analytic skills, and to the desire to avoid layoffs by reserving these monitoring positions for staff previously assigned to delivering services.

ANALYZING THE DYNAMICS OF CONTRACTING IN A FEDERAL SYSTEM

To better understand the dynamics of contract structure and of managing contracts to achieve accountability, we explored six contracting cases. The objective was to compare and contrast key contracting components to discern contract structure and management patterns across the three levels of government. Because contracting conditions appear to differ to some extent in the U.S. federal system, the aim was to identify differences and similarities that might provide insights about whether and why contracting might be more effective for any one level of government.

This comparative case approach relied on two primary data sources. First, we conducted numerous interviews with key contracting officials in government and in contract agencies. (27) Second, we reviewed a wide variety of documents such as evaluations and other reports on contracts and services, contract documents, and legislative and press reports. Our approach is similar to that used by Brinton Milward and Keith Provan, who also look for common patterns across a small number of cases to help explain effective service delivery. (28) While the cases may not meet the criteria of comparability in terms of service type and other factors, that is due in part to the different service emphases by different governments.

Among municipalities, we focus on contracts for trash collection and ambulance services. The state cases consist of two high-cost social service programs that make extensive use of contracts--Medicaid Home and Community-Based Services (HCBS) for the elderly and foster care and adoption (FCA) services. Both of these programs are intergovernmental; the federal government provides the direction, performance measures, and follow-up with states, and states are expected to monitor their contractual providers to ensure quality services for beneficiaries. The intergovernmental and social welfare aspects of these cases provide us with the variation we believe is critical to understanding how contracting challenges might differ across the federal system.

For the federal government, we explore contract management experiences at NASA and the newly created Transportation Safety Administration (TSA) with regard to airport screening. NASA provides an example of an increasingly "hollow" agency. The TSA delivers services somewhat similar to those provided by local government.

The TSA case--a reform implemented quickly in the face of a crisis, with potentially disastrous consequences in the event of contractor failure--resembles the FCA case, also quickly implemented in response to an ACLU lawsuit and designed to reduce child abuse and death in the child welfare system. Indeed, a common theme of local ambulance services, of foster care and adoption services and Medicaid services for the elderly in state government, and of NASA and TSA in the federal government, is the potential for high human costs when performance is inadequate. The section below briefly describes the key contracting dynamics identified in each case. Following these case details, we provide a summary table and discussion of our findings.

LOCAL CONTRACT FOR AMBULANCE AND TRASH COLLCTION SERVICES

For local government, we focus on government contracts in the Kansas City metropolitan area for trash collection and ambulance services. Although contracting is common among local governments, the vast majority of local contracts are for trash removal and ambulance services. (29) Local governments follow several models of contracting, including the "traditional" model and the "managed competition" model in which government departments are eligible to bid for the contract. (30)

Ambulance Services

In the early 1980s, contractual ambulance companies in the Kansas City area began to exhibit selection bias in serving the city's residents. In response, Kansas City, Missouri (KCMO) created a nonprofit agency called the Metropolitan Ambulance Services Trust (MAST) to oversee services. MAST contracted with a private firm to operate the ambulance service for residents of KCMO. The objective of this public utility model (PUM) was to provide independence and separation of functions and to ensure that one organization did not control all aspects of service delivery. The model allowed the city to outsource the contract management and oversight functions. As the lead agency in the PUM, MAST owned the property and equipment and was responsible for managing the contract with the private provider and for ensuring contractor accountability. The PUM was in place for about 14 years, but is currently undergoing serious scrutiny due to escalating performance and cost problems.

Structure. MAST's recent contracts with Emergency Providers, Inc. (EPI), a private ambulance service, incorporated explicit performance standards and penalties for failure to meet those standards, but there was less precision about the definition of "efficiency"--a term which became important because, as it turned out, key problems with the contract arose due to ambiguity regarding efficiency standards. These conflicts led to a somewhat confusing and less than comprehensive contract that created doubt about the effectiveness of the ambulance service, ill will between the parties, and a lack of accountability for service shortcomings. MAST argued that efficiency of the operation should be measured as the cost per trip; the city auditor contended that efficiency would be best related to cost per hour. To further complicate matters, the contract did not require the private ambulance contractor to provide MAST with pertinent data regarding operational costs or collections by payer, jurisdiction, or type of service. A recent city performance audit faulted MAST for failing to meet its contractual responsibilities for contract management and oversight, for poor financial management decisions, and for its inability to determine the true costs of operating the ambulance system. (31)

The most recent request for proposals (RFPs) for ambulance services attempted to shift risk away from MAST by increasing service requirements over those in the existing contract and transferring costs and risks to the private contractor through tougher penalties. As a result, no new bids emerged, and the EPI bid came in about $5 million more than the prior contract price. MAST had not fully anticipated the fiscal impact of the new requirements. Rather than renew the contract with EPI, MAST chose to take over the operation of the service in 2003, and has assumed the more rigorous performance standards it had planned to impose on EPI. That decision created the need for immediate staffing up to meet the new responsibilities. (32)

Management. Under the PUM, monitoring and evaluation of the ambulance service took several forms, including MAST oversight and monitoring of EPI, external audits by KCMO of both MAST and EPI, and client satisfaction measures. The PUM made it more challenging for the city to know whether to hold the nonprofit entity or the contractor accountable. In a time-honored pattern of deflection, each party blamed the other for failures in performance.

MAST's assumption of direct ambulance service provision in 2003 puts the onus of contract monitoring and program evaluation directly on the city. It is not clear that the city has the capacity to perform such a role or that it is willing or able to make the necessary investment to build such capacity. The city recently extended the one-year limit on MAST's direct provision to avoid expiration in the summer of 2004, and current deliberations by the city council indicate that the PUM model will be restructured. That restructuring is likely to include requirements for more competitive procurement in order to correct MAST's relatively non-competitive bidding process. In addition, the city will require tightened standards for MAST's financial administration and more stringent MAST oversight of private providers. (33)

Trash Collection Services

Residential trash collection in the Kansas City metropolitan area is usually contracted out to the private sector. A very small number of residential collection firms dominate the market. (34)

Structure. Contract structures and arrangements vary substantially across the metro cities. In North Kansas City, one firm has the exclusive contract for both residential and commercial property, and the contract is renewed annually without competitive bidding. KCMO jointly contracts with a private firm (Deffenbaugh) to collect trash. The city retains responsibility for the central city (about 50 percent of the city's area), and the private contractor is responsible for the outer areas of the city. The city kept a portion of the service in order to retain backup capacity to the private firm and to provide competition. On the Kansas side of the metropolitan area, the newly consolidated Unified Government of Wyandotte County and Kansas City, Kansas, and two adjacent cities jointly contract with the same private contractor (Deffenbaugh) to collect and dispose of residential trash and to operate a recycling operation.

Contractor financial risk is minimal because cities bill and collect fees from residential trash customers. Cities then compensate the private contractor based on a negotiated cost per residential unit.

Management. Metro area municipalities do not generally use performance measures for trash collection services, nor do they monitor contractor performance or cost effectiveness. None of the cities that contract actually monitor service costs, and only one--KCMO--formally compared in-house collection costs per household to contractor costs. The contracting cities express satisfaction with the service quality and the cost of the contract; yet for the most part, neither citizen surveys nor audits have been used to enhance their understanding of contractor performance. In all cities, resources devoted to enhancing the capacities of staffs to better monitor and/or improve the contracts have been minimal at best. Except in the two central cities (Kansas City, Kansas, and Kansas City, Missouri), personnel do not specialize in contract management and monitoring. The most common monitoring technique is tracking customer complaints.

These two examples of local government contracts demonstrate some common complications. In the case of MAST, problems with contract structure generated conflicts over performance expectations, which spilled over into the areas of contract implementation and management. Attempts to shift risk appear to have failed, and staff capacity for oversight appears to be insufficient. Although the trash collection service contracts seem to perform better in terms of the clarity of contractor role, the two local cases demonstrate that contract monitoring and the oversight of accountability are not high priorities. One firm provides trash collection service to nearly all governments in the region. Although it is entirely possible that the firm performs well, there is virtually no evidence used to understand performance systematically, despite the fact that cost-effectiveness and other outcomes of trash collection are relatively easy to measure. (35)

STATE CONTRACTS FOR ELDERLY CARE AND FOSTER CARE/ADOPTION

Contracting by state governments has a long history, especially for highway construction. Yet in recent decades, state contracts increasingly involve services that differ fundamentally from those in the local government sector--namely, social services. As states enjoy expanded discretion in such policy areas as welfare, Medicaid, and child protective services, they have been eager to pursue contracting as a way to innovate, capture expertise, and hopefully contain cost growth.

In the state arena, we examine contracting for two high-cost social services. In the area of foster care and adoption services (FCA), Kansas has been in the national forefront in privatizing case management services and in shifting financial risk to contractual service providers. (36) Medicaid Home and Community Based Services (HCBS), designed to minimize nursing home use, resembles those offered in many other states.

Medicaid Services for the Elderly (HCBS)

Contract management for Medicaid services presents unique problems, partly because of the intergovernmental features of the program. Although one designated state agency is accountable to the federal government for Medicaid compliance, that agency may delegate some administrative duties to other state departments or other nongovernmental organizations, thus creating yet another link in the extended chain of accountability. The Government Accountability Office (GAO) has put Medicaid on its 2003 list of high-risk programs. A number of specific problems have been emphasized, including inappropriate state leveraging of federal funds, state waiver programs that increase the liability of the federal government, and insufficient state and federal oversight to ensure that payments to health care providers are accurate. (37)

Structure. The Kansas Medicaid HCBS program for the frail elderly involves a contract for case management services. Our research suggests that neither the state nor the contracting organizations were prepared for the shift in responsibilities, in part because of problems with contract structure. The first two years of the HCBS implementation experience were characterized by organizational disruption, financial crises, policymaking on the fly, imprecise performance expectations, confusion over the allocation of state and contractor responsibilities, and problematic procedures for accountability. (38) The legislation precluded competition by designating specific regional nonprofit contractors (Area Agencies on Aging, or AAAs) as the contractors of choice. The HCBS case-management contract was designed to take advantage of the existing close working relationship between the AAAs and elderly Kansas residents and to shift to a more streamlined system entry process and integrated case management for clients.

The HCBS contractors bear moderate financial risk. In fact, case management reimbursement rates were re-negotiated during the first year of the contract, and contractors received an increase of nearly one-third the original rate. However, the AAA contractors had full responsibility for the costs associated with start-up activity.

Management. Severe strains were experienced by both the state agencies and the contracting organizations in the areas of management and organizational adaptation. The AAAs faced substantial implementation challenges as they made the transition from very small, advocacy-oriented activities to highly regulated Medicaid services and reporting requirements. They had to make significant investments in new information systems, and often had to overcome organizational cultural barriers in the process.

There was evidence of over-monitoring by the state, as state employees--who had previously provided direct client service--took on the role of contract monitors reviewing the performance of AAA case managers. (39) Oversight was further complicated by the fact that those actually providing health-related services to the clients (e.g., home health aides) contracted directly with the client and were not subject to oversight by the state or by the AAA case managers. Also, the state Medicaid agency shifted program responsibility to a different state department--one inexperienced with Medicaid regulations--that had to prepare very quickly to take over contract management.

The HCBS contracts with the AAAs are now firmly established and operating fairly smoothly. But several years into the new system, the state and AAAs continued to negotiate about state regulations that were not stipulated in the contracts. AAA case managers noted ongoing confusion about "shifting" performance standards imposed by state monitors.

Foster Care and Adoption Services (FCA)

As part of its overhaul of the FCA system, Kansas became the first state to contract out all case-management services. This reform represented what external reviewers called the "most comprehensive restructuring of a state [social service] system" they had seen. (40)

Structure. All Kansas FCA contracts were awarded to well-established and highly respected in-state nonprofit organizations that had supplied other child welfare services in the past, albeit on more moderate scales. The foster care contracts required contractors to shift their traditional core technology away from reliance on group homes to the use of family-centered foster-care arrangements.

The speed of implementation led to widespread difficulties in defining performance expectations for these contracts. Adjustments were frequent as the state and contractors modified benchmarks and other performance standards. The state specified numerous performance outcomes for the small number of primary nonprofit contractors, but these primary contractors then contracted with multiple subcontractors across the service spectrum, creating complicated provider networks. The networks covered a wide array of support services for FCA clients, including mental health services. Because of the complexity of the networks used for the state contracts and subcontracts, the roles and responsibilities of providers were not always clear.

Competition for the FCA contracts was comparatively strong. But from the beginning, the state recognized that there were few potential providers in many rural sections of the state. Relationships have been subject to high levels of instability as the state changed primary contractors after the first contracting cycle. (41)

The state used a capitated, pre-paid managed care model during the initial years of the reform, incorporating fiscal incentives structured to encourage family reunification or adoption. Payments were designed to flow as benchmarks were reached. This arrangement entailed significant costs for the nonprofit contractors. It quickly became clear that the contract's reimbursement rates were insufficient; hence, they were increased up to seventy percent, partly because the legislature was relatively hospitable to requests by the nonprofit contractors for increased compensation.

Some FCA contractors in Kansas faced the ultimate corporate fiscal accountability-bankruptcy-arguably because of the risk transferred from the state to the contractors. In one case, a nonprofit faith-based provider, unwilling to reduce service quality, depleted its endowment to offset what it saw as inadequate reimbursement by the state. In February 2000, the state moved to a per-child per-month payment that reduced financial risks for the contractors. (42) The most recent RFPs, issued in the spring of 2004, include a new payment method-one that again increases financial risk to the contractors and provides incentives for earlier permanent placements. Children with more intense needs (i.e., those harder to place) will pose substantial financial risks to contractors.

Management. Compared to Medicaid HCBS, management capacity for the FCA contracts was relatively strong. Because of the political and legal imperatives associated with the ACLU lawsuit that drove the FCA reform, resources were allocated to bring in consultants and re-train staff to oversee these contracts. (43)

Despite strict attention to contract design, benchmarks, and performance standards, unanticipated problems plagued these contracts. The state and its contractors failed to forecast staff needs accurately, resulting in compromised services during the transition phase. (44) Contractor costs consistently exceeded predictions, and because of fiscal strains on contractors, the state changed the pacing of reimbursements and other elements of the contract frequently in the first few years. Although the contract "partners" were involved in many of these decisions, the changes were nonetheless disruptive.

Many of the contractors and subcontractors experienced serious organizational and service delivery setbacks under the contracting regime. While the primary contractors are directly accountable to the state, the state has no direct control over the service delivery systems or the extensive network of ancillary providers and subcontractors involved in child treatment.

In the early years of the new system, the state contracted for external reviews, and the legislature also ordered program audits. Evaluations of the new system regularly noted progress toward performance benchmarks, but there were also continued significant performance shortfalls. (45) More recently, the state agency that administers FCA has discontinued the external evaluations and now performs in-house assessments. A recent evaluation conducted by the federal Health and Human Services Administration on Children and Families faulted the state's program in several areas. (46)

The complexity of social services requires well-trained contract staff. Yet while state agencies typically take on new monitoring and quality-assurance functions and responsibilities, the incentives required to build this capacity run counter to the motivation to reduce costs. (47) Investments are also required for the up-to-date and compatible management information systems that are key to successful implementation of contracting regimes. Many states have encountered difficulties in this area, and officials report that the development of MIS was often the most difficult implementation task program they faced. (48) Evaluation of contractor performance has often been difficult. (49) Monitoring challenges include relying on performance measures that can be highly subjective because of the nature of social services and the difficulty of establishing benchmarks and other outcome measures.

In addition, contracts often entail coordination among multiple service providers from such fields as education, health care, and mental health. This multi-faceted domain creates complex provider networks that require intense management. (50) The tasks associated with "massaging" and "maintaining" a service network (e.g., altering incentives and mending relationships) multiply as network size and diversity increase. In short, the transaction costs associated with managing social service contracts, especially those that rely on networks, are substantial. (51) State administrators admit that for these social services, especially those that are intergovernmental and therefore subject to the increased complications of accountability inherent in shared programs, monitoring and oversight remain top concerns.

FEDERAL GOVERNMENT CONTRACTING: NASA AND TSA

Spurred by the Government Performance and Results Act of 1993 (GPRA), and the National Performance Review, the scope of federal contracting has grown substantially. Between 1999 and 2002, the total number of federal contractor jobs rose from 4,441,000 to 5,168,000, an increase of 727,000. During the same period, federal civil service employment fell by almost 50,000. (52) Compared to civil servants, employees in contractor jobs are nearly invisible to the American public, are less amenable to government scrutiny, and are potentially less accountable to the American public. This growth in federal contracting has imposed significant strains on the federal contract-management infrastructure.

Yet ironically, federal workforce capacity has generated considerable concern since the mid-1980s, when workforce size and age issues began to attract attention. The GAO has"designated strategic human capital management as a government-wide high-risk area." (53) Despite the increasing need for contract management expertise, agencies have downsized. The GAO is especially critical of "the lack of a consistent strategic approach to marshalling, managing and maintaining the human capital needed to maximize our government performance and ensure its accountability." (54)

In addition, many federal contract structures are weak due to the absence of competition. For example, the Department of Energy (DOE) extends no-bid contracts even when contractors perform below expectations. The DOE is one of several federal agencies rated by the GAO as "high-risk" in terms of its contracting, and 90 percent of the DOE budget is allocated to contracts.

Risk shifting has been especially problematic for the federal government. For contractors developing new technologies, such as space shuttles and defense weapons, the federal government tends to write cost-plus contracts whereby the government absorbs nearly all of the risks and contractors are guaranteed payment of all costs plus an agreed-upon rate of return for their effort. This approach is currently under scrutiny, partly because of the highly visible nature of defense services provided under contract in Iraq. (55) NASA

The breadth of contracting at NASA is extraordinary. Roughly 90 percent of NASA's annual budget is spent on contracts. (56) Beginning in 1995, NASA began consolidating the many space shuttle contracts under a single prime contractor to reduce redundancy and improve efficiencies. During FY 2001 and FY 2002, NASA spent about $2.7 billion for professional, administrative, and management support contracts, and procured over $13.3 billion in goods and services.

Structure. The key challenges of contract structure-performance specifications, risk shifting, and competition-are interrelated for NASA. NASA's Office of Inspector General (OIG) found that the agency had failed to structure contracts to increase competition among potential contractors and/or subcontractors. Consequently, NASA has been unable to assure that the selected contractors offered fair and reasonable prices for services valued at about $1.3 million. The OIG also concluded that the agency has not maximized opportunities to use fixed-price contracting for routine administrative services. Instead, NASA has used cost-plus contracts that minimize the contractor's incentive to control costs and perform efficiently. In addition to the potential losses due to the incentives in these contracts, they can be more costly and burdensome for NASA to administer due to more stringent contract reporting and review requirements. (57)

A lack of absolute clarity in product specifications in NASA contracts may not be surprising, given the exploratory nature of the agency's programs. However, independent reviews found that NASA contracts extend beyond what one could reasonably expect, to "include an inadequate definition of requirements, changes in program content, and schedule delays." (58) NASA's history regarding the space shuttles and the space station is one of heavy reliance on "undefinitized" contract actions (UCAs) to modify work or initiate new work on existing contracts. Such changes are "unnegotiated and uncosted," leading to cost overruns because contractors perceive no financial risk and therefore have little incentive to restrain costs. (59) As of 31 March 2000, NASA spent more than $2 billion on about 186 UCAs. (60)

Management. Resource issues within the agency have had an important impact on the administration of contracts and accountability, including staffing, management systems, and oversight. Historically, NASA has managed its contracts by employing experts in-house to work alongside its contractors. In an effort to economize and privatize, NASA reduced its in-house staff and substantially increased the number of contractor employees. (61) During the 1990s, the overall NASA workforce was reduced by 25 percent through normal attrition, early retirements, buyouts, and hiring freezes. Civil service staff working on the Space Shuttle Program fell from 120 in 1993 to 12 in 2003. According to NASA's OIG, the agency also faces the loss of significant procurement expertise through the year 2007. (62)

While contract-monitoring requirements increased, government positions were staffed by less experienced engineers, thereby eroding NASA's in-house technical capabilities and increasing its reliance on United Space Alliance and its subcontractors to identify, track, and resolve problems. (63) Like government, contractors also experience management weaknesses, and these can prove very costly, especially if not detected. Following the 2003 Columbia Shuttle accident, a retired Boeing engineer made claims that the contract firm had compromised the quality of its analyses because of the loss of experienced staff. (64) Because of its own staffing weaknesses, NASA contract managers failed to detect this performance problem.

This pattern of extensive contracting has presented serious challenges for NASA, so much so that NASA is on the GAO's high-risk list for contract management. NASA's highly visible tragedies-the Challenger shuttle explosion in 1986 and the more recent Columbia Shuttle accident-remind us that human lives are also at stake. The GAO cites NASA's human capital shortcomings as impediments to effective contract management, and notes that NASA lacks effective systems and processes for overseeing contractor activities and does not emphasize controlling costs. Equally troublesome, NASA cannot provide detailed data to outside agencies such as the GAO. The NASA OIG has echoed these concerns. Analyses by the Columbia Accident Investigation Board found that transfer of responsibilities from NASA to its contractors "complicated an already complex program structure and created barriers to effective communication" regarding the space shuttle. (65) The GAO has concluded that many of these problems relate to NASA's management culture and that the success of NASA will depend upon its ability to solve financial and contract management problems. (66)

Transportation Security Administration (TSA)

While NASA is a long-standing organization with a well-developed and embedded culture, TSA faces challenges as a new and quickly formed federal agency. Anyone who has traveled by air in the United States knows that the airport-security field is in tremendous flux. Although the data are less comprehensive than we would like, this case allows us to examine contract regimes that are created with extremely short lead times. In such instances, we tend to see many of the performance expectations and risk factors being negotiated after the contracts take effect. (67)

In response to the 11 September 2001 attacks on the World Trade Center, and after much debate, Congress created the TSA within the Department of Homeland Security to increase airline security and minimize the chance of another terrorist takeover of an airline. Although the bulk of TSA workers are federal employees, the TSA has been experimenting with a pilot program to privatize airport screening at five airports in the United States. (68) At each of these pilot airports, TSA contracts with a single provider.

Structure. Successful implementation in this case requires that local and regional transportation, emergency management, and law enforcement agencies agree on relative responsibilities and performance-based standards that describe desired outcomes, testing procedures, and the sharing of intelligence information. (69) Yet the division of responsibilities between the TSA and its contractors has been hampered by organizational cultures that are reluctant to share sensitive information and by outdated and incompatible computer systems. (70)

Administrators at the privatized airports reported in interviews during the summer of 2003 and in testimony to Congress in 2004 that the TSA generally approached its contract management responsibilities as a regulatory responsibility that emphasized command and control rather than a partnership. (71) According to the airport managers, TSA does not willingly share information with them. When asked about performance expectations for the screening contracts, the local airport administrators reported an absence of performance-based standards by which to assess contractor performance or the success of the privatized pilot program itself. (72) Instead of setting performance goals and standards, and allowing contractors the flexibility and autonomy to implement those standards, the TSA has individuals on site monitoring contractor progress daily.

The Department of Homeland Security's inspector general concurred, noting in his congressional testimony that the TSA had not developed or implemented adequate guidance or standards to monitor, measure, and evaluate the results of the pilot program. (73) A GAO official testified that private screening contractors have had little opportunity to demonstrate innovations and achieve efficiencies as they lack authority to determine staffing levels, conduct hiring, and implement training. (74) Contractors feel that their autonomy is severely constrained under the contract, and they complain about restrictions on employing part-time screeners as a way to ease the complex burden of scheduling for peak and slack periods. Others complain of micro-management and the presence of too many TSA employees overseeing the contract. Because hiring and training of private airport screeners must be coordinated through the TSA, a process that can take many months, contractors cannot respond quickly to staffing shortages. (75)

The risk borne by TSA contracts is minimized because the federal government provides the necessary financial resources to ensure that the contractors comply with federal laws pertaining to airport screeners' wages, benefits, and training.

Management. Excessive monitoring and oversight requires adequate staffing, which the TSA appears to have allocated to the airport contracts, but there has been an absence of communication with contractors concerning expectations and performance standards. The implication is that federal managers monitor activity very closely, but may not have developed and shared expectations and standards with contractors. If federal monitors are aware of performance standards and expectations, it appears that they have frequently failed to convey these standards to the contractors providing the services.

The TSA case provides insights into the challenges of contracting in the very earliest stages of the process. It is perhaps understandable that participants in the pilot program perceive that things may not be working as smoothly or effectively as they could. The TSA has had little time to adopt appropriate contract management and accountability strategies or develop, promulgate, and implement performance standards and measures for contractors. The protocols for airport contract management, oversight, and evaluation are evolving, which creates challenges for all stakeholders at the same time that improvements are expected.

The TSA also faces considerable responsibility and pressure to guard and ensure the public safety and welfare. Such responsibility may contribute to a tendency to micro-manage its workforce and contractors. After all, the TSA will be held accountable for any security breaches; therefore, agency officials face the expectation that they should have control over and full awareness of the conduct and behavior of their contractors. The potentially tragic consequences that can arise from a failure in the security screening places the TSA in a situation that encourages close monitoring of contractors. Yet close monitoring of contractors undercuts the rationale for contracting in the first place, namely, that private contractors have greater flexibility and more incentives to seek out processes that are both efficient and effective at moving travelers through airports safely

As is true for state and local governments, federal contract management, especially with regard to oversight and accountability, is hardly clear-cut. The complexity and range of services subject to federal contracting generate considerable management difficulty. GAO reports consistently cite management capacity as a primary area of vulnerability in the federal contracting system. If contract management capacity is, contract design, risk allocation, contract implementation, and the achievement of contractor accountability will be, and have been, compromised.

Despite differences in contracting contexts and constraints across governments, our analysis indicates that the public management functions of contracting-constructing effective contracts and performing contract oversight and evaluation-are remarkably similar. For all governments, we observe that contract management, oversight, and evaluation are "weak links" in the contracting process. Effective contract structures, effective contract management, and ensuring accountability are elusive goals. Table 1 describes and summarizes our findings. (76)

DISCUSSION

The challenge for public agencies responsible for managing contracts is balancing the expectation that they remain accountable for service delivery with countervailing pressures to off-load as much responsibility to contractors as possible, thereby maximizing cost savings. Broadly speaking, success in contracting requires personnel and financial resources to develop contract management capabilities within the government agency and to ensure that contractors are accountable. These considerations are often overlooked in the enthusiasm for contracting.

Our findings do not support the hypothesis that for local governments, contract management and oversight are more effective, or more straightforward, compared to state and federal governments. In the cases we examined, monitoring by local government was nearly non-existent. For state government, the financial stakes and the nature of contracted programs led to more emphasis on contract design and oversight; yet contract management, monitoring, and accountability posed serious challenges to administrators. For the federal government, where our cases involve programs with serious safety issues, monitoring was also weak in terms both of its intensity and its effectiveness.

Our comparison of contract structure across governments suggests that some contract designs facilitate successful and accountable contractors, hut also that structure often creates misunderstanding and disagreement between the parties. Specified contracting outcomes and their associated performance targets are most effective when they are few in number, represent and identify the concepts to be measured in straightforward and simple terms, and are based on pre-privatization program data or on baseline data developed during the initial implementation stage of the privatization initiative. (77) Fiscal incentives are most effective when they are tied to a limited member of key program outcomes. The cases we analyzed tended to be inconsistent with these standards, and there is no evidence to suggest that any one level of government performs better than another in these areas.

Risk shifting, which requires nongovernmental contractors to assume part of the financial risk associated with providing a service, was a problematic feature in most of the contracts that we analyzed. In some cases, risk shifting created significant problems, including bankruptcy, for the contractors. In other cases, government was reluctant to make the investments necessary to structure appropriate risk designs, and turned instead to sole-source or cost-plus contracts, thereby undermining one of the strongest justifications for contracting.

Contrary to the expectations of privatization advocates, most of the contracts we examined did not lead to reduced costs or improved efficiencies. Locally, officials were hard-pressed to document cost or quality improvements or shortcomings. Since the State of Kansas began contracting out for foster care services in 1997, spending has doubled, and there is still much debate about whether the system is better managed and operated today than it was under direct state control. (78) Savings under the Medicaid HCBS program are also minimal to non-existent, and waiting lists have been created--a change from the early years of the program when nearly all eligible frail elderly were served. The NASA case-study shows that increased reliance on private contractors to manage and operate the space shuttle program has not constrained costs or enhanced safety and reliability. The Columbia Shuttle accident exposed the costs of blurred lines of accountability that are often unavoidable in a contracting situation, and NASA remained ultimately responsible regardless of the performance of its contractors. (79)

Similarly, the competition envisioned by supporters of privatization is rare in government contracting. (80) The cases we examined reveal significant limitations to the notion of competitive bidding. In the Kansas City metropolitan area, one company holds almost all contracts for waste collection, and monitoring of that firm's performance is almost non-existent. There has been little response from the nongovernmental sector to the city's request for ambulance service bids. There is concern that the Kansas foster care and adoption services contracts, currently up for bid, may attract fewer bidders than in past years as consolidation of service providers takes place. (81) Medicaid services for the elderly are now delivered by essentially monopolistic quasi-government organizations that enjoy "preferred" status. In the federal realm, several investigations are underway with regard to non-competitive, cost-plus contracts for NASA work and for rebuilding services in Iraq.

Inadequate investment in contract-management capacity is a common theme across the local, state, and federal cases. Resources are insufficient to sustain the required quantity and training of staff, or to properly fund monitoring and evaluation activities. This, in turn, has led to difficulties regarding contract management and contractor accountability. The infrastructure required for implementing, managing, and monitoring contracts is simply not a priority for policymakers motivated to contract out service delivery in less-than-ideal circumstances--for example, when competition is inadequate and the attendant market incentives for performance are lacking. We also observed challenges in achieving the optimal level of contract monitoring; monitoring activity is often either excessive or insufficient.

For all governments, and for most programs, timely and accurate data collection and integrated information systems are critical for determining costs and evaluating program outcomes. In states, the development of appropriate MIS systems was often the most difficult task program officials faced as they implemented privatized managed care initiatives. For federal agencies, we also found that NASA and other agencies had major difficulties in developing integrated financial management systems and reliable data and cost accounting. Most local, state, and federal systems were inadequate in this regard. Locally, contractor cost-effectiveness could not be evaluated because service costs were not well understood.

These federal, state, and local cases exhibit characteristics consistent with the theories that explain the constraints, limitations, and challenges of contracting. Privatization and contracting are hardly panaceas; in fact, they often intensify the pressures on government managers. Federalism poses particular challenges for contracting in shared federal-state programs. Both federal and state governments must provide the financial and human resources to adequately manage and monitor contracted programs. If the federal government does not provide adequate funding for itself, it will not have the capacity to ensure successful follow through by states and local governments. If the federal government fails to provide the necessary funding to the states to administer these programs, then the federal requirements amount to unfunded mandates. In the current economic climate, it is very difficult for all governments to allocate the necessary resources to build and maintain the management capacity necessary to properly implement, evaluate, and monitor contracts. Yet most research finds that without investment in management infrastructure, contract management is inadequate. As our cases demonstrate, the consequences of inadequacy can be costly and tragic.
Table 1
Contracting Dynamics in Selected Local, State, and Federal Government
Contracting Cases

                                         City
Contract                 Ambulance                  Trash
Structure:

Clarity an         Considerable clarity     Considerable
specificity of     of respective roles      clarity of
responsibilities   and goals.               respective roles
and goals                                   and of goals.
                   Precise performance
                   standards, but           Contractors not
                   confusion about          responsible for any
                   "efficiency"             specified
                   standards.               performance
                                            measures
                   Contractor not
                   required to report
                   operational costs.

Allocation of      Considerable transfer    Contractor bears
financial risk     of risk to private       little financial risk.
                   contractor, resulting
                   in only one bid and      Contractor
                   $5 million increase in   relatively free from
                   the bid price from       competition.
                   current contract.        Contracts typically
                                            awarded without
                   Audit found that         competitive
                   oversight agency did     bidding, reducing
                   not encourage            risk for contractor.
                   competition in its
                   procurement process.

                                         City

Contract                 Ambulance                  Trash
Management

Administrative     Inadequate               Low management
capacity for       management               capacity. Except
contract           capacity. Contractual    for the two central
management         oversight agency         cities, no personnel
                   (MAST) cited for         in metro area
                   faulty contract          specializing in
                   management, poor         contract
                   financial decisions      management and
                   and inability to         monitoring.
                   determine true cost of
                   private service.

                   City unprepared for
                   new oversight role as
                   MAST becomes
                   temporary direct
                   service provider.

Contract           MAST cited in city       Little contract
monitoring and     audit for faulty         management and
oversight          contract and financial   monitoring.
                   management and           Monitoring
                   oversight, and           restricted primarily
                   inability to determine   to responding to
                   true cost of private     citizen complaints.
                   service.                 Few cities
                                            systematically
                   Monitoring included      measure citizen
                   reports, external        satisfaction
                   audits, and citizen
                   satisfaction measures.   Only Kansas City,
                   But city not always      Missouri staff has
                   able to determine        compared relative
                   which party to hold      costs of private and
                   accountable for          public collection.
                   performance
                   problems.

                                             State
                            Home and                 Foster Care and
Contract                Community Based               Adoption (FCA)
Structure:              Services (HCBS)

Clarity an         Parties unprepared for       Roles and responsibili-
specificity of     new roles. Confusion         ties not always clear
responsibilities   over division of             due to extensive sub-
and goals          responsibilities. Low        contracting and
                   levels of role clarity and   complicated provider
                   role specificity during      networks.
                   first two years of
                   program.                     Difficulty in defining
                                                stable performance
                   "Extra" state agency         expectations. Adjust-
                   and additional direct        ments are still
                   service providers added      frequent, several
                   to complex                   years into contracts.
                   intergovernmental
                   structure.

Allocation of      Moderate contractor          Substantial financial
financial risk     financial risk, but many     risk borne by contrac-
                   contractors faced            tors during early
                   financial crises in early    years due to a
                   years. No start-up cost      modified "managed
                   reimbursement. Rates         care," prepaid case
                   renegotiated and             model; state
                   increased by 30% in          responded with up
                   first year. Heavy            to 70% reimbursement
                   contractor investments       rate increase.
                   in MIS.                      Highly visible
                                                bankruptcies by some
                   No competition--             contractors. Risk
                   contractor is                reduced in current
                   "preferred" provider in      contract cycle, but
                   reform legislation.          significant risk
                                                increase for
                                                contracts beginning
                                                next year.
                                                Relatively high
                                                levels of competition.

                                          State
                         Home and                 Foster Care and
Contract              Community Based              Adoption (FCA)
Management             Services HCBS

Administrative     Contractors unprepared       Comparatively strong
capacity for       for transition from          state contract
contract           advocacy role to             management capacity.
management         management                   Relatively high
                   requirements of              emphasis on training
                   contract.                    for contract management
                                                and monitoring.
                   State Medicaid
                   department shifted           Quick implementation
                   program administration       placed severe strains
                   to other state               on capacity building
                   department, which did        by contractors; staff
                   not have capacity in         shortages and turnover
                   place when contracts         plagued contractors in
                   began.                       early years of program.

Contract           Excessive contract           Extensive internal and
monitoring and     monitoring by                external evaluation and
oversight          caseworkers formerly         monitoring in early
                   responsible for client       years. Evaluation now
                   service.                     limited to in-house.

                   Continued contractor         Complex network of
                   confusion about              contractors and sub-
                   "shifting" performance       contractors complicated
                   standards imposed by         monitoring and contrac-
                   state monitors.              tor accountability.

                                        Federal
                             NASA                  Transportation
                                                  Security Agency
Contract                                               (TSA)
Structure:
                   Lack or clarity m           Lack of performance
Clarity an         product specifications      based standards,
specificity of     due to exploratory          goals, and measures
responsibilities   nature of agency            to evaluate contractor
and goals          programs. Inadequate        performance.
                   definition of contract
                   requirements.               "Command and
                                               control" relationship
                                               with contractors
                                               stifles innovation,
                                               flexibility and
                                               effectiveness.

Allocation of      Minimal contractor risk     Little transfer of
financial risk     due to use of cost-plus     financial risk to
                   contracts rather than       contractors. Federal
                   fixed-price contracts.      government provides
                   Reduced incentives for      the financial
                   cost-effectiveness.         resources necessary
                                               to ensure contractor
                   Failure to structure        compliance with
                   contracts to increase       federal laws
                   competition.                regarding screener
                   Heavy reliance on           wages, benefits, and
                   undefinitized contracts     training.
                   that reduce risk to
                   contractors and lead to
                   cost overruns. By
                   2002, less reliance on
                   this type of contract.

                                    Federal
                        NASA                      Transportation
Contract                                         Security Agency
Management                                           (TSA)

Administrative     Inadequate contract         Internal and external
capacity for       management capacity         reviews report that
contract           cited in several internal   TSA staff presence is
management         and external agency         excessive in terms of
                   reviews.                    quantity and intensity
                                               of oversight.
                   Reduction of in-house
                   staffing levels and
                   engineering and
                   technical expertise due
                   to extensive
                   contracting.

Contract           Downsizing has led to a     Excessive
monitoring and     lack of effective           monitoring, including
oversight          systems and processes       use of command and
                   for overseeing              control techniques.
                   contractor activities
                   (according to GAO           TSA does not share
                   reports).                   information or
                                               expectations with
                   Cost control not            local contractors.
                   emphasized in
                   monitoring.                 Contractor autonomy
                                               inadequate.
                   Agency unable to
                   provide oversight
                   organizations (such as
                   GAO) with required
                   data.


AUTHORS' NOTE: This research has been funded in part by the PricewaterhouseCoopers Endowment for the Business of Government; the Kellogg Foundation, Robert Wood Johnson Foundation, and Center for Health Care Strategies through the Rockefeller Institute of Government; and the University of Kansas.

(1) Lisa A. Dicke, and J. Steven Ott, "Public Agency Accountability in Human Services Contracting," Public Productivity and Management Review 22 (June 1999): 503.

(2) E.S. Savas, Privatization and Public-Private Partnerships (New York: Chatham House Publishers, 2000); E.S. Savas, Privatizing the Public Sector: How to Shrink Government (Chatham, NJ: Chatham House Publishers, 1982); E.S. Savas, Privatization: The Key to Better Government (Chatham, NJ: Chatham House Publishers, 1987 ; John E. Chubb and Terry Moe, Politics, Markets, and America's Schools (Washington, DC: The Brookings Institution, 1990); William Niskanen, Bureaucracy and Representative Government (Chicago, Aldine/Atherton, 1971); and Gordon Tullock, The Politics of Bureaucracy (Washington, DC: Public Affairs Press, 1965).

(3) Donald Kettl, Sharing Power: Public Governance and Private Markets (Washington DC: The Brookings Institution, 1993); John Donahue, The Privatization Decision (New York: Basic Books, 1989); Janet Rothenberg Pack, "Privatization of Public-Sector Services in Theory and Practice," Journal of Policy Analysis and Management 6 (Summer 1987): 523-540; Mark Schlesinger, Robert A. Dorwart, and Richard T. Pulice, "Competitive Bidding and States' Purchase of Services: The Case of Mental Health Care in Massachusetts," Journal of Policy Analysis and Management 5 (Winter 1986): 245-263.

(4) Robert M. Stein, "Alternative Means of Delivering Municipal Services: 1982-1988," Intergovernmental Perspective 19 (Winter 1993): 27; Robert Jay Dilger, Randolph R. Moffett, and Linda Struyk, "Privatization of Municipal Services in America's Largest Cities," Public Administration Review 57 (January/February 1997): 21-26.

(5) Trevor L. Brown and Matthew Potoski, "Managing Contract Performance: A Transaction Costs Approach," Journal of Policy Analysis and Management 22 (Spring 2003): 275-297; Jocelyn M. Johnston and Barbara S. Romzek, "Contracting and Accountability in State Medicaid Reform: Rhetoric, Theories, and Reality," Public Administration Review 59 (September/October 1999): 383-399.

(6) Robert M. Spann, "Public Versus Private Provision of Governmental Services," The Sources of Government Growth, ed. Thomas E. Borcherding (Durham, NC: Duke University Press, 1977).

(7) John Murawski, "Former United Way Chief Gets 7 Years in Jail: Sentence Praised by Charities," Chronicle of Philanthropy 12 (July 1995): 37-38; Steven Steklow, "New Era's Bennett Gets 12 Years in Prison for Defrauding Charities," Wall Street Journal, 23 September 1997, p. B13; Kurt Eichenwald, "Mining Medicare: How One Hospital Benefited On Questionable Operations," New York Times, 12 August 2003; Milt Freudenheim, "Troubled HealthSouth Faces Medicare Fraud Investigation," New York Times, 11 September 2003, p. C3.

(8) Kurt Eichenwald and Matt Richtel, "Enron Trader Pleads Guilty to Conspiracy," New York Times, 18 October 2002, pp. C1, C9.

(9) Douglas Jehl, "Evidence Is Cited of Overcharging in Iraq Contract," New York Times, 12 December 2003; Joel Brinkley, "Halliburton Likely To Be a Campaign Issue," New York Times, 14 February 2004, p. A16.

(10) Kettl, Sharing Power, H. George Frederickson, The Spirit of Public Administration (San Francisco: Jossey Bass, 1997).

(11) Rowan Miranda and Allan Lerner, "Bureaucracy, Organizational Redundancy, and the Privatization of Public Services," Public Administration Review 55 (March/April, 1995): 193-200.

(12) Schlesinger, Dorwart, and Pulice, "Competitive Bidding and States' Purchase of Services," 245-263.

(13) H. Brinton Milward, "Introduction," Journal of Public Administration: Research and Theory 6 (April 1996): 193-196.

(14) Trevor L. Brown and Matthew Potoski, "Contract-Management Capacity in Municipal and County Governments," Public Administration Review 63 (March-April 2003) 153-164; Brown and Potoski, "Managing Contract Performance: A Transaction Costs Approach," 275-297; Kettl, Shuring Power, Barbara S. Romzek and Jocelyn M. Johnston, "State Social Services Contracting: Exploring Determinants of Effective Contract Accountability," Public Administration Review (forthcoming).

(15) Donald E. Klingler, John Nalbandian, and Barbara S. Romzek, "Conflicting Expectations and Accountability," American Review of Public Administration 32 (June 2002): 117-144.

(16) Elliott D. Sclar, You Don't Always Get What You Pay For: The Economics of Privatization (Ithaca, NY: Cornell University Press, 2000).

(17) Kenneth J. Meier, Laurence J. O'Toole Jr., and Sean Nicholson-Crotty, "Multilevel Governance and Organizational Performance: Investigating the Political-bureaucratic Labyrinth," Journal of Policy Analysis and Management 23 (Winter 2004): 31-47; Louise K. Comfort, "Managing Intergovernmental Responses to Terrorism and Other Extreme Events," Publius: The Journal of Federalism 32 (Fall 2002): 29-49; Robert Agranoff and Michael McGuire, "A Jurisdiction-Based Model of Intergovernmental Management," Publius: The Journal of Federalism 28 (Fall 1998): 1-20; Paul Posner, "Accountability and Management Challenges Posed by Third Party Governance Tools," (paper presented at the annual conference of the American Political Science Association, Atlanta, Georgia, 2-5 September 1999).

(18) Dilger, Moffett, and Struyk, "Privatization of Municipal Services in America's Largest Cities," 21-26.

(19) Brown and Potoski, "Managing Contract Performance: A Transaction Costs Approach," 275-297; Robert D. Behn and Peter A. Kant, "Strategies For Avoiding the Pitfalls of Performance Contracting," Public Productivity and Management Review 22 (June 1999): 470-489; Barbara S. Romzek, "Where the Buck Stops: Accountability in Reformed Public Organizations," Transforming Government: Lessons from the Reinvention Laboratories, eds. Patricia W. Ingraham, James R. Thompson, and Ronald P. Sanders (San Francisco: Jossey-Bass, 1998).

(20) George A. Boyne, "Bureaucratic Theory Meets Reality: Public Choice and Service Contracting in U.S. Local Government," Public Administration Review 58 (November 1998): 474-484.

(21) We recognize that a full analysis of contract management would require attention to many issues (such as political and economic environments) which are beyond the scope of this study, but which nevertheless play a clear role in contracting. See, for example, Jocelyn M. Johnston, Contracting Case Studies in Medicaid Managed Care Series: Implementing Medicaid Managed Care in Kansas: Politics, Economics (Albany, NY: The Rockefeller Institute of Government, 2000).

(22) Amy K. Donahue, "The Influence of Management on the Cost of Fire Protection," Journal of Policy Analysis and Management 23 (Winter 2004): 71-92; Carolyn J. Hill and Laurence E. Lynn Jr., "Governance and Public Management, An Introduction," Journal of Policy Analysis and Management 23 (Winter 2004): 3-11; Jerrell D. Coggburn and Saundra K. Schneider, "The Quality of Management and Government Performance: An Empirical Analysis of the American States," Public Administration Review 63 (March/ April 2003): 206-213; James W. Fossett, Malcolm Goggin, John S. Hall, Jocelyn M. Johnston, Richard Roper, L. Christopher Plein and Carol Weissert, "Managing Medicaid Managed Care: Are States Becoming Prudent Purchasers?" Health Affairs 19 (July/August 2000): 39-49.

(23) Brown and Potoski," Contract-Management Capacity in Municipal and County Governments," 153-164; H. George Frederickson and Todd LaPorte, "Airport Security, High Reliability, and the Problem of Rationality," Public Administration Review 62 (September 2002): 33-43; Elizabeth Keating and Peter Frumkin, "Reengineering Nonprofit Financial Accountability: Toward a More Reliable Foundation for Regulation," Public Administration Review 63 (January/February 2003): 3-15.

(24) H. Brinton Milward and Keith G. Provan, "Governing the Hollow State," Journal of Public Administration Theory and Research 10 (April 2000): 359-380.

(25) U.S. General Accounting Office, Privatization: Lessons Learned by State and Local Governments (Washington, DC: Government Printing Office, 1997); Barbara S. Romzek and Jocelyn M. Johnston, "Reforming Medicaid through Contracting: The Nexus of Implementation and Organizational Culture," Journal of Public Administration Research and Theory 9 (January 1999): 107-139; Barbara S. Romzek and Jocelyn M. Johnston, "Reforming State Social Services through Contracting: Linking Implementation and Organizational Culture," Public Management: New Developments in Theory, Methods, and Practice, eds. Jeffrey Brudney, Laurence O'Toole, Jr., and Hal B. Rainey (Washington, DC: Georgetown University Press, 2000).

(26) Nancy McCarthy Snyder and Marcia Allen, "Managing the Uneasy Partnership Between Government and Nonprofits: Lessons from the Kansas Child Welfare Privatization Initiative," (presented at the 25th Annual Research Conference of the Association for Public Policy Analysis and Management, Washington DC, 6 November 2003).

(27) Since 1997, nearly 100 interviews have been conducted with administrators in local, state, and federal governments and contract agencies, front-line workers, advocacy groups, evaluators, elected officials, and others.

(28) Milward and Provan, "Governing the Hollow State," 359-380. See also Robert Yin, Case Study Research: Design and Methods (Newbury Park, CA: Sage, 1989).

(29) Dilger, Moffett, and Struyk, "Privatization of Municipal Services in America's Largest Cities," 21-26.

(30) Irene Rubin, "Municipal Contracts: Alike in All Unimportant Respects," (paper presented at the Annual Conference of the Association for Budgeting and Financial Management, Washington, DC, 18-20 September 2003); U.S. Government Accounting Office, Privatization: Lessons Learned by State and Local Governments. All governments recognize the need to involve employees in the privatization process and to provide a safety net for displaced employees. The use of managed competition, whereby public employees and public departments are allowed to submit a bid for service delivery along with private and nonprofit firms, achieves this objective. If the rationale for contracting rests on the potential advantages of competition, then government bids are legitimate additions to those received from the private and nonprofit sectors. Brown and Potoski observe that council-manager types of local government show a preference for contracting with other governmental units or using "joint contracting" to achieve some level of competition. See Brown and Potoski, "Contract-Management Capacity in Municipal and County Governments," 153-164.

(31) City of Kansas City, Missouri City Auditor's Office, Performance Audit: MAST Financial Viability (July 2003).

(32) Not coincidentally, EPI (the former contractor) had about 400 highly trained and skilled employees it no longer needed. The executive director of MAST reported that 360 of the 400 EPI employees were hired by MAST, including many managers. Kevin Hoffman, "End of Contract Raises Questions For MAST ambulance services," Kansas City Star, 1 July 2003.

(33) Fitch and Associates, LLC, Consultant Report: Kansas City Emergency Medical Services System Design (April 2004).

(34) Curtis Wood, "Metropolitan Governance in Urban America: A Study of the Kansas City Region" (Ph.D. diss., University of Kansas, 2004). Commercial trash collection in the Kansas City metro area is typically privatized, with no remaining government role.

(35) Administrative staff in KCMO--the largest jurisdiction in the metro area--reports that there are no centralized written procedures/policies for assessing the feasibility of contracting out or privatizing a service, for implementing contracts, or for evaluating contractor performance. Although performance measures and standards are typically specified for contracted services, contract performance is monitored and managed by the relevant line department, and not by the centralized management services department in the city manager's office. In 1996, the city auditor recommended a contracting process model that included managed competition and centralized contract monitoring, but the recommendation was not adopted by the city council or the city manager.

(36) Increasingly, state social service contracts are designed to shift some risk from the government agency to a contractor. Risk shifting adds more complexity to contracting. The most common form of risk shifting uses pre-established case reimbursement rates, which can create serious financial difficulties for contractors because the actual costs of service often turn out to be significantly higher than originally estimated by both the government and contractors. See Madelyn Freundlich and Sarah Gerstenzang, Privatization of Child Welfare Services: Challenges and Successes (Washington, DC: Children's Rights, Inc., 2003); Charlotte McCullough and Barbara Schmitt, 2000-2001 Management, Finance, and Contracting Survey Final Report (Washington DC: CWLA Press, 2002); Barbara S. Romzek and Jocelyn M. Johnston, "Contract Implementation and Management Effectiveness: A Preliminary Model," Journal of Public Management Research and Theory 12 (July 2002): 423-453; Jocelyn M. Johnston and Barbara S. Romzek, "Examining the Stability Hypothesis: Comparing Stable and Dynamic Systems in Social Service Contracts," (paper presented at the 6th National Public Management Research Conference, Bloomington, IN, October 2001).

(37) U.S. Government Accountability Office, Long-Term Care: Federal Oversight of Growing Medicaid Home and Community-Based Waivers Should Be Strengthened (Washington, DC: U.S. Government Printing Office, June 2003).

(38) Johnston and Romzek, "Contracting and Accountability in State Medicaid Reform," 383-399; Romzek and Johnston, "Reforming Medicaid through Contracting," 107-139.

(39) Johnston and Romzek, "Contracting and Accountability in State Medicaid Reform," 383-399; Jocelyn M. Johnston and Barbara S. Romzek, Implementing State Contracts for Social Services: An Assessment of the Kansas Experience (Washington, DC: The Pricewaterhouse Coopers Endowment for the Business of government, 2000); Romzek and Johnston, "Reforming Medicaid Through Contracting," 107-139. Initially, 100 percent of the HCBS contract cases were subject to review in a given year.

(40) James Bell Associates, External Evaluation of the Kansas Child Welfare System Year End Report: January-December 1998, p. 145.

(41) For example, the initial foster care contracts in FY 1997 went to three different providers covering five different regions of the state. In the second round of contracting, which began in FY 2001, contracts were awarded to five contractors, and two of the original contractors each lost one of their regional contracts. More specifically, contracts were awarded to different providers in service regions 1 and 4; as a result the contractor in phase 1 (for region 4) became a subcontractor in phase 2 (for region 4). There has also been a great deal of shifting among subcontractors.

(42) Freundlich and Gerstenzang, Privatization of Child Welfare Services. The initial capitation rate resembled the strategy used in managed health care plans, whereby the contractor is paid a fixed rate for each patient and must bear all costs associated with treatment.

(43) The cabinet secretary responsible for child welfare saw contracting as the only solution to the dual problems of legal challenges to the state's foster care and adoption system and the reluctance of the state legislature to provide adequate resources to fix the system from within the government.

(44) Mike Shields, "Loving the Children ... Hating the System," Lawrence Journal World, 26 April 1998, pp. 1A, 4A, 5A.

(45) James Bell Associates, External Evaluation of the Kansas Child Welfare System Year End Report: January-December 1998, 145; James Bell Associates, External Evaluation of the Kansas Child Welfare System Year End Report:January-December 1999; Kansas Legislative Division of Post Audit, Verifying Information Provided by the Department of Social and Rehabilitation Services On Its Compliance with the Terms of the Foster Care Lawsuit Settlement Agreement (August 2000).

(46) In FYs 2001 and 2002, the U.S. Department of Health and Human Services (HHS) conducted child and family service reviews in 32 states, including Kansas. Kansas failed five of the seven outcome measures, but was in substantial compliance with all but one systemic measure (the state lacked a comprehensive training program for workers). HHS concluded that Kansas was maintaining children safely in their homes, and that children in the state's FCA system receive appropriate education services. Kansas did not meet the minimum federal outcome standards regarding protection from abuse and neglect, placement permanency and stability, continuity of family relationships, ensuring that families have capacity to provide for their children's needs, and adequate physical and mental health services for children. Even so, Kansas fared no better or worse than the other 31 states evaluated by HHS.

(47) James W. Fossett, Carol Ebdon, and Norman Brier, "When Is Growth Not Growth? The Curious Case of Mental Budgeting in New York," Public Budgeting and Finance 16 (December 1996): 82-95; David M. Van Slyke, "The Mythology of Privatization in Contracting for Social Services," Public Administration Review 63 (May/June 2003): 296-315.

(48) Freundlich and Gerstenzang, Privatization of Child Welfare Services; U.S. General Accounting Office, Child Welfare: Early Experiences Implementing A Managed Care Approach (Washington DC: U.S. Government Printing Office, 1998); Richard P. Nathan and Thomas L. Gais, "Early Findings About the Newest New Federalism for Welfare," Publius: The Journal of Federalism 28 (Summer 1998): 95-104; Richard P. Nathan and Mark Ragan, Federalism and the Challenges of Improving Information Systems for Human Services (The Rockefeller Institute of Government, 2001) ; Romzek and Johnston, "State Social Services Contracting."

(49) U.S. General Accounting Office, Privatization: Lessons Learned by State and Local Governments.

(50) Milward, "Introduction."

(51) Lawrence J. O'Toole and Kenneth J. Meier, "Modeling the Impact of Public Management: Implications of Structural Context," Journal of Public Administration Research and Theory 9 (1999) : 505-596; Laurence E. Lynn, Carolyn J. Heinfich, and Carolyn J. Hill, "Studying Governance and Public Management: Challenges and Prospects," Journal of Public Administration Research and Theory 10 (9000): 933-969; Kenneth J. Meier and Lawrence J. O'Toole, "Managerial Strategies and Behavior in Networks: A Model with Evidence from U.S. Public Education,"Journal of Public Administration Research and Theory 11 (July 2001): 271-993; Agranoff and McGuire, "A Jurisdiction-Based Model of Intergovernmental Management," 1-20.

(52) Paul C. Light, "Fact Sheet on the New True Size of Government" (The Brookings Institution, September 9003).

(53) U.S. Government Accounting Office, Major Management Challenges and Program Risks: NASA (Washington, DC: U.S. Government Printing Office, 2003), pp. 4-5. The size of the federal workforce has been significantly reduced in the past decade but the need fro- contract management expertise has increased as the number of contracts let to nongovernmental agencies has exploded. For example, since 1999, 20,000 civil service positions in the Departments of Defense and Energy and NASA have been eliminated. But during the same time period, 560,000 contractor jobs have been created. Of this total, 153,000 additional contractor jobs have been added to the NASA workforce. See Paul C. Light, "Fact Sheet on the New True Size of Government."

(54) Ibid.

(55) Peter Singer, Corporate Warriors: The Rise of the Privatized Military. Industry (Ithaca, NY: Cornell University Press, 2003). A non-competitive, cost-plus contract with Halliburton for reconstruction and related services in post-war Iraq has been given significant attention by Department of Defense auditors and the media, and is under investigation by the GAO. See Center for Public Integrity, "Winning Contractors: U.S. Contractors Reap the Windfalls of Post-War Reconstruction," (30 October 2003).

(56) U.S. Government Accounting Office, Major Management Challenges and Program Risks: NASA.

(57) NASA's OIG has recommended that NASA contracting officers require contractors to develop company policies for documenting justifications for noncompetitive subcontract awards, document their approval of a contractor's request to subcontract, and allow for expanded use of fixed-price contracting (OIG, NASA, March 2003).

(58) U.S. Government Accounting Office, Major Management Challenges and Program Risks: NASA, p. 12.

(59) "An undefinitized contract action means a unilateral or bilateral contract modification or deliver/ task order in which the final price or estimated cost and fee have not been negotiated and mutually agreed to by NASA and the Contractor." See ibid., p. 3.

(60) NASA acknowledges that UCAs are a risky way of conducting business because contractors perform work before they have reached agreement with the government on what the work will cost, thereby increasing the risk of cost growth. By November 2002, NASA had reduced the number of UCAs to 19 with a total value of $61 million and had taken significant steps to improve contract management by reducing its use of unnegotiated contract changes. See National Aeronautics and Space Administration, Office of Inspector General, Semiannual Report. (Washington, DC: 31 March 2003), National Aeronautics and Space Administration Office of Inspector General, Audit Report." Procurement Workforce Planning (01-041) (Washington, DC: September 2001) and Government Accounting Office, Major Management Challenges and Program Risks: NASA.

(61) An external review report had suggested that, given the safety and maturity of the shuttle program, less NASA oversight was necessary (Kraft Report, 1995).

(62) National Aeronautics and Space Administration Office of Inspector General, Audit Report: Procurement Workforce Planning. See also Government Accounting Office, Major Management Challenges and Program Risks: NASA.

(63) Columbia Accident Investigation Board, Report of the Columbia Accident Investigation Board (26 August 2003), pp. 1-248.

(64) John Schwartz, "Computer Program That Analyzed Shuttle Damage Was Misused Engineer Says," New York Times, 25 August 2003, p. A9.

(65) Columbia Accident Investigation Board (CAIB), Report of the Columbia Accident Investigation Board, p. 118.

(66) Government Accounting Office, Major Management Challenges and Program Risks: NASA.

(67) Johnston and Romzek, "Contracting and Accountability in State Medicaid Reform," 383-399.

(68) The five airports are in Kansas City (MO),Jackson Hole (WY), San Francisco (CA), Tupelo (MS), and Greater Rochester (NY).

(69) Government Accounting Office, Transportation Security; Frederickson and LaPorte, "Airport Security, High Reliability, and the Problem of Rationality," 33-43.

(70) Government Accounting Office, Major Management Challenges and Program Risks: Department of Homeland Security (Washington, DC: U.S. Government Printing Office,January 2003) ; Government Accounting Office, Transportation Security: Post September 11th Initiatives and Long-Term Challenges, Statement of Gerald L. Dillingbam, Director, Physical Infrastructure Issues (2003).

(71) Testimony before the U.S House Transportation and Infrastructure Committee Aviation Subcommittee on the Privatization Pilot Program (PP5) on April 22, 2004.

(72) One exception to this lack of communication regarding performance standards is the Jackson Hole Airport. The airport manager told us in the summer of 2003 that the TSA supplied the Jackson Hole Airport Board with a set of standard operating procedures for screeners and a statement of work that listed items to be accomplished.

(73) Testimony of Clark Kent Irvin, inspector general of the U.S. Department of Homeland Security, before the U.S. House Transportation and Infrastructure Committee Aviation Subcommittee on the Privatization Pilot Program (PP5) on 22 April 2004.

(74) Testimony of Norman J. Rabkin, managing director, Homeland Security and Justice, before the U.S. House Transportation and Infrastructure Committee Aviation Subcommittee on the Privatization Pilot Program (PP5) on 22 April 2004.

(75) The TSA contracts with Lockheed to train all federalized and privatized airport screeners. While this means that training is centralized and made more uniform, there is also a reduction in local autonomy and flexibility to adjust to changing needs and problems. The TSA, as a result, has invited local airport authorities to make suggestions to improve the training. It seems that training quality is similar for both public and private screeners. In his 22 April 2004 testimony before the U.S. House Transportation and Infrastructure Committee Aviation Subcommittee on the Privatization Pilot Program (PP5), Clark Kent Irvin reported that federalized and privatized airport screeners performed at about the same level, which is to say equally poorly.

(76) Control of extraneous variables is virtually impossible in this admittedly exploratory multiple case analysis. The primary objective was not to fully explain similarities and differences across orders of government, but to assess whether they exist and to explore potential explanations for what was observed. See Yin, Case Study Research.

(77) Freundlich and Gerstenzang, Privatization of Child Welfare Services.

(78) Grace Hobson, "Kansas Still Navigating Private Child Welfare," Kansas City Star, 21 September 2003, p. A1.

(79) Barbara S. Romzek and Melvin J. Dubnick, "Accountability in the Public Sector: Lessons From the Challenger Tragedy," Public Administration Review 47 (May/June 1987): 227-238.

(80) Jonas Prager, "Contracting Out Government Services: Lessons From the Private Sector," Public Administration Review 54 (March/April 1994) : 176-184; Sclar, You Don't Always Get What You Pay For.

(81) McCarthy, Snyder and Allen, "Managing the Uneasy Partnership Between Government and Nonprofits."

Jocelyn M. Johnston

American University

University of Kansas

Barbara S. Romzek

University of Kansas

Curtis H. Wood

Northern Illinois University
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Author:Johnston, Jocelyn M.; Romzek, Barbara S.; Wood, Curtis H.
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Date:Jun 22, 2004
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