Hidden Costs of ‘Everything Bagel’ Procurement
Layering requirements on government contractors to achieve unrelated policy goals has serious drawbacks.
There’s barely a week that goes by that I don’t see an organization promote an innovative policy proposal: “We can leverage the money that governments are already spending to achieve our policy goals at little or no additional cost!”
If this seems too good to be true, it’s because it is too good to be true.
The latest example came when I recently saw a press release from the Sierra Club titled “Leading Environmental and Allied Organizations Champion Emissions Reporting Rules for Federal Purchases”:
The Federal Supplier Climate Risks and Resilience Rule represents a major step towards the development and implementation of sensible public purchasing policies to tackle climate risk. Under the rule, federal contractors with more than $50 million in annual contracts would be required to disclose their Scope 1, 2, and 3 greenhouse gas emissions, their climate risk assessments, and their science-based emissions reduction targets. Contractors with annual contracts between $7.5 million and $50 million would be required to disclose their Scope 1 and 2 greenhouse gas inventories. By focusing on these large federal contractors, the rule places the onus for compliance on merely 1.2 percent of registered government contractors that, according to the FAR Council, are responsible for 86 percent of federal supply chain emissions.
The rule is clearly well-intended, and I think climate action is important, but layering new requirements on government contractors can have serious unintended consequences.
We often look at these rules in isolation: “How much harm could this one rule cause?” That’s wrong. What matters is the collective impact; we layer on rule after rule after rule—so potential government contractors have to comply with hundreds or even thousands of rules to bid on contracts.
These kinds of rules add costs in numerous ways, such as:
Operational cost: when rules require contractors to do something differently in their operations
Cost of proving compliance: data collection, legal analysis, and paperwork
Costs of reduced competition: when vendors decide that the rules aren’t worth it, declining to bid altogether and leaving a smaller pool of bidders
I want to discuss the second and third points in more detail.
Death by data
In her book Recoding America, Jennifer Pahlka writes:
MACRA [the Medicare Access and CHIP Reauthorization Act of 2015] was designed to pay doctors more for high-quality care, so the law directed [the Centers for Medicare & Medicaid Services] to change some of the ways that it would calculate payments to doctors. …
[A] table estimated that 87 percent of solo practitioners would … make less under the proposed new rules than under the old ones. Just 13 percent of solo practitioners would make more. For the practices with a hundred or more clinicians, the effect was reversed: 18 percent of these large practices would make less under the new rules, and 81 percent would make more. It was right there in black and white, in the Federal Register. If the draft rule went into effect, it was going to make more money for large health care systems. And it was going to hurt small medical practices.
There is no correlation between the size of the medical practice and the quality of care. You are just as likely to get great care from a doctor in a one- or two-person private practice as from a Kaiser or HCA Healthcare facility. Programs designed to pay more for better quality care, therefore, should reward independent doctors on average just as well as they reward large health systems. They don’t. As a member of the policy team on MACRA told me, large health systems consistently benefit more from value-based medicine programs. It’s not because they are delivering better quality care but because they are better at understanding program rules, choosing the right options, and reporting the right data. “We were not really measuring the quality of care doctors provide,” he admitted. “We were measuring them on how well they do administrative tasks.” (p. 162–163)
This is what I worry will happen with programs that seek mandatory reporting on government vendors’ greenhouse-gas emissions or other climate-related data. It will just end up advantaging firms that specialize in compliance paperwork.
This example here wasn’t actually about procurement, but its lesson still applies. As Jen then notes:
Procurement regulations are meant to make the process as fair as possible, but the very existence of those intricate, voluminous rules means that large government contractors—who have the resources to master them—have an advantage over smaller firms, as well as over firms that don't specialize in government clients. (p. 164)
She sums up the lesson as: paperwork favors the powerful.
Even though the climate rule that I mentioned only applies to firms with over a certain volume of contracts—thankfully excluding smaller ones—it still disadvantages medium-sized firms who exceed the reporting threshold but don’t have the scale resources of much larger firms. It also hurts firms that are considering competing on government contracts but don’t already specialize in it.
Competition is good
Instead of putting up with the hassle and costs of compliance, many companies choose an easier route: avoid bothering with government contracts at all.
You might say “too bad for them” but the reality is more like “too bad for all of us”: it’s not just that a business lost out on a potential business opportunity, it’s that we the citizens lost out of a bidder who might have offered lower prices or higher quality.
When you have fewer companies competing on a contract, you are left with less competition on price and quality, meaning that we get less for our money.
If we want a more diverse contracting ecosystem—and the benefits of more competition—we need to claw back some of these rules, or at least stop adding more of them.
Beware the ‘everything bagel’ approach
In his essay “The Problem With Everything-Bagel Liberalism” in the New York Times, Ezra Klein writes:
You might assume that when faced with a problem of overriding public importance, government would use its awesome might to sweep away the obstacles that stand in its way. But too often, it does the opposite. It adds goals—many of them laudable—and in doing so, adds obstacles, expenses and delays. If it can get it all done, then it has done much more. But sometimes it tries to accomplish so much within a single project or policy that it ends up failing to accomplish anything at all.
I’ve come to think of this as the problem of everything-bagel liberalism. Everything bagels are, of course, the best bagels. But that is because they add just enough to the bagel and no more. Add too much—as memorably imagined in the Oscar-winning “Everything Everywhere All at Once”—and it becomes a black hole from which nothing, least of all government’s ability to solve hard problems, can escape. And one problem liberals are facing at every level where they govern is that they often add too much. They do so with good intentions and then lament their poor results.
He continues:
[T]here is a cost to accumulation. How many goals and standards are too many? And why is subtraction so rare? It is impossible to read these bills and guidelines and not notice that the additions are rarely matched by deletions. Process is enthusiastically added but seldom lifted.
The result is that public projects—from affordable housing to semiconductor fabs—aren’t cost competitive, and that makes them vulnerable when a bad economy hits or a new administration takes over and the government cuts its spending.
Finding a balance
Procurement will generally be more complicated in government than eslewhere for accountability reasons. We want to make sure that public officials are not handing out contracts to their friends and family, and that money is being spent well. This often means extra processes and paperwork.
As I discussed in a post about what I call the “paradox of government accountability,” this alone can have significant consequences in reducing the efficiency and effectiveness of government:
So I think we need to be extremely careful when tacking on additional requirements for unrelated policy goals. For those policy goals, there are usually many other avenues for achieving desired government action, but for procurement there’s only one avenue: the procurement process itself.
Personally, I favor really trying to limit additional complications to ones that we think will help the larger contracting ecosystem, such as programs that help small businesses have a better shot a contracts as a way of (hopefully) maintaining a diverse vendor pool—ultimately increasing competition and reducing the risk associated with being dependent on a single vendor or small group of vendors.
Beyond that, my default position is to be skeptical of other proposed requirements and complexities.
By the way: I’m organizing and will be speaking on a panel for Nava next Tuesday, May 21, that continues the conversation from my previous posts on public-policy education! Joining me will be Emily Tavoulareas (who wrote this follow-up) and Nick Sinai (whose course I highlighted). We’ll discuss how universities can help address the disconnect between policy and public service delivery. You can attend online or in person (with lunch provided) in DC.
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Let me know in the comments: What do you think about rules like the proposed one on reporting greenhouse gas emissions? Are there any kinds of rules whose benefits you think outweigh their costs in procurement compliance and potential reduced competition?
This times a million! Yes yes yes