Association for Public Policy Analysis & Management

The outsourcing of public services through contracts is a well-established government practice, premised in part on the public management movement and reliance on markets to enhance the quality of those services while reducing costs.  However, the extent of contract cost savings is unclear (Boyne 1998) and most cost-effectiveness studies do not account for the administrative costs of contracting.  Such costs include government resources devoted to contract design, implementation, and oversight – the transaction costs of the exchange between the government purchaser and the contractor (Whittington 2010; Williamson 1981).  There is good evidence that these costs increase when contractor markets are noncompetitive (Sclar 2000) and that agency performance decreases (Smirnova and Leland 2013). 

Our preliminary research suggests that when contracting officials judge the number of potential contractors as inadequate, they spend time and other resources in an effort to strengthen competition.  They do this before contracts are put out to bid, and during the life of the contract in order to ensure competition for the next contract cycle.  One implication is that management resources used to strengthen contractor supply markets could diminish the resources available for other contract management components such as oversight designed to ensure contractor performance and accountability and enhance returns to citizens. Furthermore, when the supply of potential contractors is low, stricter oversight may be needed to compensate for the absence of the performance incentives that exist when alternative contractors are plentiful. 

This paper examines the relationships between government efforts to strengthen contractor competition when it is weak, and resources dedicated to contract oversight. Does chasing competition reduce contract oversight?  If so, is contract service quality affected?   To answer these questions, we adopt a multi-method approach using primary data from an original national survey of local government managers, as well as interviews with officials responsible for contract management in local governments, states, and the federal government.

We will test the proposition that when local officials dedicate time and other administrative resources to strengthening competition, they have less to spend on other elements of contract management – especially oversight.  This research is motivated by evidence that despite the theorized gains from tapping into competitive markets to improve government services while reducing costs, pursuit of competition for contracts is not only a common phenomenon in local public service contracting, but also that it can detract from other contract management activities.  The dynamics occur in part because of the inconsistency between the theory of contracting gains from improved performance induced by competition, and the reality that competition for government contracts is often weak.