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The Importance of Contract Design

Authors

  • Yong Woon Kim,

    1. The Ohio State University
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    • Yong Woon Kim earned his doctorate from the John Glenn School of Public Affairs at The Ohio State University. A common theme underlying his research is the exploration of systematic links between management and organizational performance in government. His research examines a variety of organization and public management issues, including organizational change and innovation, performance management, contracting out, and privatization policy.E-mail: yongwoonk@gmail.com

  • Trevor L. Brown

    1. The Ohio State University
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    • Trevor L. Brown is associate professor in the John Glenn School of Public Affairs at The Ohio State University. He teaches courses on public management, public sector strategy, and organizational theory. His research examines why governments elect to make some goods and services internally, while contracting for others. When governments elect to contract, his research examines the investments governments make in contract management capacity to deliver desired outcomes.E-mail: brown.2296@osu.edu


Abstract

This article examines the contract design decisions of three federal agencies—the Departments of Health and Human Services, Defense, and Homeland Security—using five years of data from the Federal Procurement Data System. Three basic contract design elements are charted—type (fixed price versus cost reimbursement), length, and value—across simple to complex products. All three agencies use short-term, fixed-price contracts for the majority of the purchases that they make. This basic contract design allows agencies to tap the benefits of competition: innovation and cost-efficiency. However, the Departments of Defense and Homeland Security often dramatically increase the length and value of contracts through modifications to initial agreements. This approach forgoes the benefits of competition and may expose the agency to the risk of cost overruns, delivery delays, and diminished product quality.

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