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INFRASTRUCTURE OUTSOURCING

2. Issues with Cost Comparison Literature and Practices

One disconcerting feature that emerges from studies of cost savings from outsourcing road and bridge projects (the only real body of infrastructure outsourcing cost literature) is the range of findings they exhibit. Most are conducted by the state DOTs, and they tend to find themselves to be cheaper than consultants. But the findings range from consultant costs that are “cheaper” than in-house design in one study to 240 percent more expensive in another: mixed results at best, and the picture only gets murkier if you bore down into the details.

Underlying these discrepancies is the exclusion of important cost factors and employment of widely varying measurements. Office of Management and Budget (OMB) Circular A-76 sets the standards for cost comparisons by federal agencies, standards that many states have adopted and courts have used to assess the “reasonableness” of cost comparison policies. A-76 mandates:

The Federal Government shall rely on commercially available sources to provide commercial products and services. In accordance with the provisions of this Circular and its Supplement, the Government shall not start or carry on any activity to provide a commercial product or service if the product or service can be procured more economically from a commercial source.141

The vague language of the phrase “more economically” has fostered an environment in which different studies have employed different methodologies and considered varying types of data and cost factors. These discrepancies contribute to the different findings. The Council of State Governments reports that

. . . unfair and unrealistic cost comparison procedures can contribute to slow implementation or even failure of privatization. Agencies have been criticized for using techniques to increase contract costs or decrease in-house cost estimates to deny privatization opportunities. Such techniques include requiring performance standards that could not be applied to government performance; including the full costs of social security, retirement, and unemployment in the contracts; and

requiring higher qualifications for private workers than for government employees.142

Some studies do take a well-thought-out, full-cost approach. The Louisiana DOT commissioned a cost comparison study that made a concerted effort to include all relevant cost factors in the analysis.143 In addition, attention was given to ensure that cost items were comparable. For example, office rental and utility costs, often excluded from in-house costs, were included in the study. And insurance, which is usually inflated to cover tort liability for public institutions, was modified to reflect the same sort of professional indemnity covered in consultant insurance plans. The study found that outsourced costs were similar to in-house costs but that outsourcing required additional expenditures to monitor contractors.

However, computation of overhead costs in other state studies calls into question their results. Texas and New York are good examples of the “dueling studies” phenomenon that arises from politicized studies and poor techniques.

141

Office of Management and Budget, Performance of Commercial Activities, OMB Circular No. A-76 (Washington, D.C., August 4, 1983, revised 1999), section 5(c). A-76 cost comparison standards are themselves heavily criticized, in particular for a cavalier treatment of overhead cost differences and for allowing distortions and conflicts of interest in cost comparisons. See, for example, criticisms by the Professional Services Council at www.pscouncil.org/westand/ westand.htm.

142

143

Chi and Jasper, 1997, p. 17. Schneider et al., Louisiana Department of Transportation.

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