OPINION:
As the federal government undertakes a major rewrite of procurement rules, Congress and the Trump administration have a unique opportunity to fix an excessively regulated system. Given that procurement reform is already underway, I urge administration reformers to consider a proven approach: dynamic pricing for commercial products.
As a former Office of Management and Budget management deputy responsible for procurement, I saw the limitations of the fixed-price model, especially for commercially available items. Standard fixed-price contracts are costly and slow to administer, especially when market competition drives frequent price adjustments. In categories such as information technology, this leads to higher costs and unnecessary red tape.
During the COVID-19 pandemic emergency, the cumbersome system made it difficult to buy needed technology, health equipment and personal protective gear quickly.
In the “fixed-price world,” contractors balance a desire to create a competitive bid with the need to avoid overexposure to supply chain price fluctuations. Without mechanisms for rapid pricing adjustments, the government often pays premium prices because vendors may overestimate market uncertainty to offset downside risk in fixed price bids.
Particularly for smaller businesses, protecting against downside risk while staying competitively priced affects success in government contracting. Everyone, including taxpayers, deserves better.
Recent guidance from the Department of Defense offers a perspective on rethinking fixed-price contracts. Economic price adjustment clauses, price ceilings and market-tested metrics are simple, implementable steps. Pricing offices and financial managers can work with these new tools to review prices and save the government money.
As part of federal procurement reform, I urge the government to use a simple, nonpartisan fix: Amend the Federal Acquisition Regulation to allow contracting officers to use competitive pricing models.
Competitive pricing allows sellers and contractors to adjust prices in response to market forces while competing for government business. This expands choice for comparable products, based on price, value, delivery capability or ratings. For common, readily available commercial products such as laptops, tires or safety goggles, allowing prices to respond to market conditions is simple and cost-effective, and it offers valuable market intelligence.
This model enables agencies to assess market prices for services and products as needed, establishing continuous competition throughout the procurement process as a market research tool and a competitive counterweight to fixed-price contracts.
Although competitive pricing is standard in private sector procurement, the government has yet to adopt this powerful tool. The recent executive order Ensuring Commercial, Cost-Effective Solutions in Federal Contracts requires agencies to maximize the use of the competitive marketplace. Dynamic pricing aligns well with that proposal.
The irony is that the federal government already recognizes the value of competitive pricing in specific contexts. For example, utility contracts automatically adjust prices based on regulatory changes and market conditions. Agencies benefit from supply-and-demand-driven pricing for cloud computing and storage. Making this change for commercially available purchases would enhance the contracting ecosystem, allowing government contractors and commercial vendors to show value continuously.
Contractors would compete in a codified way against commercial options, while commercial vendors would need to prove they can meet federal procurement requirements competitively. Implementation would be straightforward. Federal Acquisition Regulation changes could enable competition through competitive pricing models, using tools and metrics to prove price reasonableness.
In states, legislators and chief acquisition officers can work to make similar policy changes. States use the GSA Advantage! system but often have limited ability to lower prices and enhance competition through competitive pricing.
Although competitive pricing doesn’t always lead to lower prices, it’s a quick, cost-effective way to keep government purchasing fair and flexible in a dynamic market. When pre-negotiated contracts are more cost-effective, they should prevail, but when commercial markets offer better value, agencies should have the flexibility to pursue those options.
As with many good reform ideas, this is not a partisan issue but rather a matter of making obvious modernization actions a priority. The last major procurement system overhaul occurred during the Clinton administration in the 1990s. Since then, dynamic pricing models have become commonplace in the public and private sectors.
Today’s challenge is to modernize outdated practices and use contemporary innovations to maximize taxpayer value. Government can spend smarter for taxpayers, enhance its contracting base and create more competition, all while reducing costs to maintain and purchase in a dynamic procurement environment.
• Margaret Weichert, CEO of The MorganWeichert Group, has more than 30 years of experience working at the intersection of business and government, including responsibility for federal procurement as the former deputy director for management at the Office of Management and Budget.
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