"Lowest price technically acceptable" contracts drive down prices but sacrifice long-term value to meet short-term government savings goals, says study.
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Shrinking budgets and tight fiscal restraints are pushing federal agencies to use "lowest price technically available" (LPTA) contracts more frequently, a move that may be sacrificing long-term value in the quest for short-term savings.
According to new research released Oct. 24, the LPTA approach has its share of potential pitfalls: contracts may be going to less qualified companies, standards of performance may be lowered and the approach may not be optimum for services or product development.
The federal government's rationale for using LPTA is that the criteria is simple to follow, it can help control spiraling costs and reduces likelihood of a protest. LPTAs also tend to simplify the proposal process, shorten the procurement cycle and make contract requirements easier to fulfill.
One thing that doesn't seem up for debate: LPTA use is expected to rise in the next three years, according to the research.
The shift to LPTA is occurring at a time when government contractors already are feeling squeezed by across-the-board agency budget cuts, not to mention the recent government shutdown. The research also suggests that contractors are suffering significant collateral damage in the areas of staffing, competition and overhead.
Specifically, contractors are forced to offer lower price solutions that might not be in the best interests of government. They're also having difficulty budgeting for and retaining senior staff with the proper expertise and finding that the margins given do not cover overhead and other expenses.
"With the total impact on procurement policies and agency budgets being unknown, many contractors believe that LPTA contracts are stifling innovation, driving down prices and at times being used for the wrong types of federal procurements," said Lisa Dezzutti, president and CEO at Market Connections, which produced the report with Centurion Research Solutions. The study was based on a survey of 375 government contractors involved with business development for their companies and 360 federal government decision makers involved in selecting contractors for various federal projects.
The study found that LPTA sacrifices long-term value: 65% of contractors and 43% of government employees believe that LPTA procurements sacrifice long-term value for short-term cost savings. It also found that less-qualified contractors win LPTA contracts.
Both audiences (71% contractors and 59% government) see the same two main drawbacks of LPTA for the federal government: the potential for contracts to be awarded to less-qualified companies and sacrificing long-term value for short-term cost savings.
"LPTA is a fine procurement methodology when buying a commodity, where quality is fairly standard and price is really the only meaningful discriminator. But when acquiring services of any degree of complexity, it makes no sense at all," said Stan Soloway, president of the Professional Services Council, which represents contractors.
"Its use drives all bidders to the bottom of the barrel since they only need to be minimally qualified. In those circumstances innovation goes out the window, continuous improvement is impossible and companies simply cannot bring the best talent or capability to bear," Soloway told InformationWeek.
The Defense Department and military services, however, already rely heavily on LPTA. These contracts total $27.7 billion annually, while best value contracts total $744.5 billion annually, the research notes.
LPTA opportunities range from $40,000 to $6 billion, with the average opportunity estimated at $70 million. In contrast, so-called "best value" opportunities range from $20,000 to $50 billion, with the average opportunity estimated at $223.6 million. The average contract length is 3.6 years and 4.1 years for LPTA and best value contracts, respectively.
As a result of the rise in LPTA acquisitions, contractors are being forced to make decisions based on price regardless of the potential quality of work, compelled to offer a lower price solution that might not be in the best interest of the government, and afforded no room to deliver value-added solutions, the research states.
Contractors may decide it is in their best interests to respond to LPTA solicitations for several reasons, the study concluded. One reason is the shrinking number of opportunities available to them in the current fiscal environment. Another is the depth of knowledge many have in knowing customer requirements from previous work. LPTAs also offer the opportunity to maintain existing relationships or win an initial contract with a new customer.
At the same time, the findings suggest that contractors might consider refraining from responding to an LPTA proposal request when there's no real opportunity to furnish value-added approaches, when they cannot be competitive on price, and when they lack real knowledge of the agency needs or of the competitive landscape, the study said.
In an LPTA contracting environment, the study states that contractors should be aware of and take the following steps:
-- Accept that the lowest price may be the best value for the government customer.
-- Pursue new and lower cost business models.
-- Know their customers and their competitors on LPTA bids.
-- Diversify into adjacent markets, such as energy, international, and state and local.
What is undeniable is that the LPTA approach is on the rise. The study concludes, "Federal customers have and will continue to have a higher degree of tolerance for or contentment with more limited solutions."