Competition Brings Savings

Competitive contracting a powerful tool to lower costs, help governments better serve taxpayers

Former Gov. Mario Cuomo once said, “It is not government’s obligation to provide services, but to see they’re provided.” He’s right: government workers don’t need to be the ones providing many services.

Public sector managers already understand this. For decades, they’ve increasingly relied on contracting out for the delivery of a wide range of services, including waste collection, vehicle fleet operations, road maintenance, child welfare services and many more. A recent National League of Cities and American University survey of over 300 local government managers found 93 percent support contracting.

This should come as no surprise. Contracting works by introducing competition into an otherwise monopolistic system of public service delivery. Governments operate free from competitive forces and without a bottom line. Agency and program budgets are too rarely tied to results, so poor performance in government is often perversely rewarded with budget increases.

Contracting usually generates cost savings for taxpayers between 5 and 20 percent on average, though the benefits of competition extend far beyond cost control. For example, service quality improvements, improved risk management, innovation, and access to outside expertise are other benefits often cited by satisfied government customers.

Contracting out is simply a policy tool, and like any tool, it can be used well or poorly. There are two critical ingredients to successful government contracting. First, public managers should think carefully about the service quality standards they want to achieve, and then develop strong, performance-based contracts that hold contractors accountable for meeting them. Measurable performance standards should be built into contracts, along with incentives for exceeding standards and penalties for underperformance.

Second, once a performance-based contract is in place, government managers must monitor and enforce the terms of the contract to ensure that contractors perform.

Government contracting needs to be seen as part of a larger fiscal management toolkit that includes performance assessment, priority-based budgeting, sunset reviews, and many other approaches to reform. But make no mistake – when done with proper care and diligence, competitive contracting is a powerful and widely-used tool to drive down costs, improve performance and, in the end, help governments more effectively serve taxpayers.

Leonard Gilroy is the director of government reform at Reason Foundation. This column was originally published as a New York Times‘ “Room for Debate” feature on April 4, 2011.