Vendors Gain Congressional Support on IT Pricing

Selling information technology to the U.S. government is never easy, and it’s even harder when a vendor cannot highlight the qualitative differences it believes separates its competencies from other providers competing for the same work.

Yet a major contracting tool federal agencies use in seeking IT products and services tends to smother those differences in skills and competencies — much to the chagrin of IT providers.

Now, Congress is taking steps to reduce the vendors’ anxiety.

The House Armed Services Committee addressed the problem in a provision of the National Defense Authorization Act, which gained committee approval last month. In addition, several members of Congress — including Sen. Mark Warner, D-Va., and Rep. Don Beyer, D-Va. — recently introduced legislation in response to the complaints of the IT industry.

Low-Price Selection Troubles Vendors

The problem for IT vendors is federal agencies’ use of the Lowest Price Technically Acceptable method for selecting government contractors.

The issue came to the forefront earlier this year when the U.S. Defense Department said it would use LPTA to acquire IT products and services from as many as 40 vendors under the Encore III contract with a potential value of US$17.5 billion. Industry groups fired off a letter of complaint to the DoD, while two major IT companies separately lodged a legal protest of the contract proposals with the Government Accountability Office.

Under the LPTA method, the government requires all potential contractors for a given project to demonstrate that they meet a uniform “technically acceptable” standard in terms of competency. All companies that meet the minimum standard qualify for the work, and the contract is then awarded to the company with the lowest-price bid.

Some vendors may be better than others for certain tasks, but those qualitative differences do not enter into contract selection as long as each contractor meets the minimum competency requirement.

Most federal IT projects involve challenging and often complex objectives that do not lend themselves to a one-size-fits-all standard of competency, vendors contend. By ignoring the inherent qualitative issues of projects, as well as different competencies among providers, the government runs the risk of obtaining less-than-optimum outcomes — which can result in costly deficiencies in IT performance that far outweigh any savings from low-cost bids.

“While LPTA can be a tool for economizing, it may actually introduce additional costs down the road if the quality of the work is subpar,” Deniece Peterson, director of federal industry analysis atDeltek, told the E-Commerce Times.

Between 2009 and 2014, an average of 20 percent of federal LPTA procurements were for IT-related products and services, according to a major report on federal LPTA contracting Deltek released in 2015.

LPTA has some benefits, such as forcing contractors to focus on lower-cost bids and simplifying procurement to better enable small businesses to bid, the report found. The method also makes it simpler for federal agencies to administer procurements — a benefit for hard-pressed agencies that may be short on funds and personnel. In theory, the use of LPTA can reduce contractor protests.

However, the use of the method for a large swath of IT procurements with far-from-simple objectives troubles the provider community. The consequences are significant when vendors introduce shortcuts on quality to keep expenses under control, according to Katell Thielemann, a research director at Gartner.

Those include setting up a junior varsity to keep labor overhead costs low and “getting to bare-bones back-office support and providing agencies with a junior program manager or doing a bait and switch on key personnel,” she noted.

Other problems include vendors setting prices for very narrow elements and then imposing change-order fees for any deviation and offering services from attractive subcontractors only to later take over the sub work themselves. Also, contractors may trim management layers, which can increase risks in contract governance and security practices.

“Meanwhile, commercial or digital native vendors who are most likely to bring innovation into the federal environment stay on the sidelines, scratching their heads wondering why in the world they should bother doing business with federal agencies,” Thielemann told the E-Commerce Times.

Congress Reacts to IT Industry

The legislation introduced by Sen. Warner last month would significantly restrict the DoD’s use of LPTA.

“The current LPTA focus on price makes sense when the Pentagon is purchasing belts, bolts and ballpoint pens, yet it provides no incentive for DoD to seek out the most innovative IT and engineering solutions, especially important as we are working to encourage more innovation in cybersecurity. In many ways, LPTA discourages participation by companies investing in cutting-edge capabilities,” he said.

In seeking to maintain a competitive edge for the U.S., “Pentagon procurement officers require the flexibility to use updated criteria when evaluating cutting-edge technology and IT services in ways that protect our military men and women and the taxpayers,” Warner said.

The House Armed Services panel stopped short of issuing specific limitations for the use of the contracting method. However, the NDAA bill the committee approved does require DoD to review its formal and informal policy guidance on LPTA and to submit a report by early 2017 on that guidance and on the knowledge of contracting officers about LPTA. The report must include a compilation of the frequency and type of goods and services DoD acquired via the LPTA method in 2015 and 2016.

The bill cited an internal memo issued in 2015 by DoD Undersecretary Frank Kendall on the appropriate use of LPTA. “The committee is concerned that LTPA processes and contracts are being used in many circumstances far beyond the depiction of ‘appropriate’ in the Under Secretary’s memorandum, resulting in the negative consequences described in the memorandum,” a section of the bill noted.

IT providers efforts’ to restrain the use of LPTA contracts appears to be paying off. While some vendors might not miss the LPTA standard if were completely eliminated — at least for IT acquisitions — that situation is highly unlikely at this point.

“It’s my sense that DoD will try to retain the LPTA contract vehicle. I don’t foresee that DoD or the civilian agencies will scrap the use of LPTA altogether for major IT projects,” said Jonathan Etherton, president ofEtherton & Associates and a former staff member of the Senate Armed Services Committee.

“Especially with DoD, I think we are seeing the department make continuous efforts to use LPTA appropriately by trying to more precisely define technically acceptable,” he told the E-Commerce Times. “Recent directives within DoD indicate an effort to refine the appropriate use of LPTA,which necessarily involves a better understanding of the nature of the mission projects are intended to support.”