outsourcing highway or street maintenance dramatically cut costs. In other examples, competition has spurred improvement and innovation in in-house operations, cutting costs without outsourcing.
The cost-saving potential of street and highway maintenance outsourcing is confirmed by other sources. Virginia’s highway maintenance contracts cut costs by more than 15 percent the first year, saving the state $22 million and leaving the state government very pleased with the outcome and with the potential for further savings.123 British Columbia saved money by contracting for all of its highway maintenance in 1989.124 The province was divided into separate districts, and contractors competed for three-year, lump-sum contracts with standards that stressed results rather than process. However, once the total privatization was complete, the province laid off its entire maintenance staff and required private contractors to hire most of them back at the same wage rates. The mandated employment policy locked in the original high cost of maintenance delivery, dramatically reducing the cost savings that might have been achieved.125
Roads and Bridges. Aggregate studies of outsourcing road and bridge projects support the idea that outsourcing can reduce costs. One study, using Federal Highway Administration data, found that design costs were lowest in states that used a mix of private- and public-sector work and that states that used contracting
had a slower growth of design costs than did states that did not use contracting.126
Specifically, the study
reports that “states with the lowest preliminary and construction engineering costs are states that contract out 50 to 70 percent of engineering work.”127 Other work by the same researcher in the Professional Services Management Journal showed that the cost of engineering services as a proportion of construction cost progressively diminished as the proportion of work conducted by consultants increased.128
Studies with a more narrow focus demonstrate that outsourcing often is not aimed primarily at cutting costs. The 1990 Wisconsin Legislative Audit Bureau study concluded that contracting costs were not significantly different from in-house costs.129 But it further noted that consultants were used primarily to provide expertise unavailable to in-house staff and to meet short-term, or “peak,” demand levels, not to cut costs.130
A 1999 study prepared for the Texas DOT by PricewaterhouseCoopers found that outsourcing cut costs only about 40 percent of the time. But again, cost saving was usually not the reason for outsourcing—instead, reasons given were lack of in-house expertise; insufficient in-house staff; ability on the part of contractors to deliver a level of quality and innovation; and faster contractor response time.131
Presentation by Robert Bourdon, VMS, at the AASHTO workshop “Contract Maintenance: Closing the Gap,” Nashville, Tennessee, September 20–22, 1999; and Shirley Ybarra, Virginia secretary of transportation, letter to Keith Summers, January 12, 2000.
Presentation by John Newhouse, manager of maintenance programs, British Columbia Ministry of Transportation and Highways, at the AASHTO workshop “Contract Maintenance: Closing the Gap,” Nashville, Tennessee, September 20– 22, 1999.
Dennis Lisk, Highway Maintenance: Putting the Market to Work, Policy Brief 98-07 (Seattle: Washington Institute Foundation, September 1998), pp. 1–2.
William Fanning, The Effect of Contracting Out on Engineering Costs, June 1991, as cited in Hamm et al., Analysis of the PECG Initiative, p. 36.
Kaye and Kreutzen, Meeting California’s Infrastructure Challenge, p. 6.
William Fanning, “Contracting Out Engineering Services Is Cost Effective: US Government Data Shows Contracting Out Saves Money,” Professional Services Management Journal (March 1992), as quoted in Schneider et al., Louisiana Department of Transportation p. 13.
Wisconsin Legislative Audit Bureau, Evaluation of Use of Engineering Consultants, p. 1.
Ibid., p. 10.
PricewaterhouseCoopers, Highway Design Cost Comparison, p. 55.