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Annual Privatization Report

Annual Privatization Report 2005 – Contract Management and Performance

Contract Management and Performance


The 2005 Municipal Yearbook from the International City/County Management Association includes an analysis of “Why do some contractual relationships between local governments and private providers succeed while others fail? Why do some local governments get what they need from a private provider while others do not?”

Seeing that contracting for services has become firmly entrenched in the United States and that governments across the country will likely continue to contract out hundreds of billions of dollars in services and programs, the issue of performance becomes more urgent than ever. Researchers must begin to examine more closely and with greater rigor those factors that account for performance in the area of contracting for services.

The authors, Sergio Fernandez of Indiana University and Hal Rainey of the University of Georgia surveyed 439 specific contracts between local governments and private providers. Their analysis of the contracts, outcomes, and management systems is chock full of useful information and advice. Perhaps the most important general finding is that privatization is overwhelmingly successful.

Table 5 – Types of Service Contracts Surveyed (percent)
Public works/transportation 44
Public utilities 3
Public safety 6
Health and human services 13
Parks and recreation 7
Cultural and arts programs 1
Support functions 26

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Contract Characteristics

The survey compared characteristics of the contracts, such as:

  • Type of bidding procedure used: 42 percent by RFP, 35 percent by invitation-to-bid, 18 percent sole source, 5 percent multistage solicitation.
  • Previous contractor: 64 percent of the contracts went to a contractor that had been used by the local government in the past to provide the same service.
  • Contract incentives: 52 percent of contracts included offered an incentive of contract renewal based on good performance, 5 percent offered gain sharing, 2 percent included bonuses for reaching specific goals.

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Contract Monitoring

The authors wanted to learn how broad in scope are the contract monitoring practices of local governments and how many aspects of contracts are evaluated. One of the most interesting findings is that there is very little use of citizen surveys, even though that is considered in some sense the ultimate measure of performance. In general, though, their results are not surprising in that “those types of monitoring that are more expensive and difficult to implement, such as citizen surveys and performance measurement systems, tend to be adopted with lesser frequency.” [Note: For information on the importance of making contract management a part of local governments core capabilities, see Governing by Network and Reason’s How-to Guide for performance-based contracting.]

Table 6 – Use of Different Monitoring Tools and Procedures
Frequency of use
Never A few times a year About once a month About every 2 weeks About once a week Several times a week
Inspections of work in progress 12 20 15 7 21 26
Inspections of work completed 11 17 19 7 24 22
Complaints monitoring 12 18 16 8 18 28
Examination of contractor reports 21 20 35 6 11 7
Performance measurement system 46 18 20 3 6 6
Citizen surveys 74 22 3 1 1 1
Percentages not equal to 100% due to rounding

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Political Support and Contractor Performance

It is no surprise that management and elected officials tend to support privatization more than do frontline employees (Table 7). But it is surprising that 9 percent of frontline workers are at least somewhat supportive. The high degree of political support found in the survey isn’t entirely surprising given that these are cities that do contract out services. Past surveys show that local governments experience success with privatization. And the survey does not tell us to what extent political support led to privatization, and to what extent the success of privatization has increased political support, but the local governments rate the performance of privatization very highly (Table 8).

Table 7 – Political Support for Contracting Out (percent)
Not at all supportive Not very supportive Somewhat supportive Very supportive
Top management <0.5 1 19 80
Elected officials <0.5 1 30 69
Middle management <0.5 4 32 65
Frontline workers 1 9 40 50
Percentages not equal to 100% due to rounding
Table 8 – Dimensions of Contractor Performance (percent)
Poor Fair Very good Excellent
Actual cost in comparison to projected cost 1 12 61 26
Actual costs in comparison to in-house service delivery 3 14 55 29
Quality of work 1 15 55 29
Responsiveness to government requirements 1 15 53 31
Timeliness 2 17 57 24
Continuity of service (no disruptions) 2 16 50 32
Compliance with the law <0.5 7 55 38
Customer satisfaction 1 14 64 21
Percentages not equal to 100% due to rounding

Finally, the authors scoured through the survey responses to try to determine what contract elements seem to lead to successful contractual relationships. They conclude that success is most often seen when:

  • The parties work together to arrive at solutions to problems that arise during the life of the contract;
  • The parties trust each other;
  • Public managers and employees support (or do not oppose) the contracting initiative;
  • The contracting process is well funded;
  • The task performed by the contractor is relatively simple to accomplish;
  • Public managers rely on the occasional threat or sanction to enforce the agreement;
  • Public managers conduct a more thorough evaluation of the contractor’s capacity to meet the local government’s needs; and
  • The parties engage in frequent communication during the life of the contract.

Again the information summarized here is only a fraction of the good stuff in the article.

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