contract.101 And in the arena of water and wastewater utility outsourcing, the advent of long-term management contracts has “placed the issue of capital risk at center stage.”102 Long-time water utility outsourcing consultant Eric Petersen argues that especially for turnkey projects, outsourcing can shift much of the risk to the contractor, increasing accountability and efficiency.103
H. Outsourcing to Cut Costs
Research shows that cost saving is not always the motivation for outsourcing, that it is becoming less central
as governments become more adept at outsourcing,104
and that best value is increasingly the goal of
outsourcing. Still, the issue of cost saving often dominates the debate.
The growth of outsourcing has provoked controversy in the public-works industry. Some state agencies and state-employee unions have been loudly critical of the use of consultants, while senior management of many state agencies desire the flexibility to use the private sector as needed to deliver projects on schedule and within budget. Institutional bias has clouded study of outsourcing, with much of the in-depth research on the efficacy of private-sector involvement in infrastructure delivery undertaken by its most fervent critics, the state agencies that find themselves challenged to compete. And the largest and most comprehensive studies have looked mainly at one narrow area—the impact of outsourcing in highway planning and construction.
Comparing in-house projects to consultant projects is like comparing apples to oranges: the two use different methods of service delivery and cost accounting, among other things.
These studies have employed widely varying methodologies and produced a murky picture of cost savings from outsourcing, with an implausible range of modest cost savings to 240 percent higher costs from
Not only is this literature focused on highways alone out of all infrastructure projects, but the
same analytical problems keep turning up, making it difficult to rely on the data.
First, it is virtually impossible to properly calculate overhead costs for in-house projects, evidenced by the widely varying overhead rates used by states in their studies. Second, comparing in-house projects to consultant projects is like comparing apples to oranges: the two use different methods of service delivery and cost accounting, among other things. Third, rarely do comparisons go beyond the grossest level of project comparison—for example, comparing a bridge project to another bridge project. They neglect the possibility that there may be huge differences between two bridge projects in the level of innovation, risk shifting, personnel expertise, or any of the other benefits of outsourcing we have discussed so far.
A. V. Bailey, “Virginia’s Interstate Maintenance Contract,” presentation to AASHTO Contract Maintenance Workshop, Nashville, Tennessee, September 1999.
Eric Petersen, “Allocating Capital Risk in Water System Management Contracts,” Public Works Financing (April 2000), p. 24.
Ibid., p. 25. Chi and Jasper, Private Practices, pp. 4–5.
Based on an analysis of 19 government and academic studies comparing in-house and consultant costs for highway projects. A list of studies can be obtained from the authors.