Is Working with Contractors a Boon or a Bust?

Posted on 10-20-2014 by
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Outsourcing your work force. More and more companies, and the government, take advantage of this option. But it is not a panacea. Outsourcing has many benefits, but it also comes with risks.

In July of this year, LexisNexis produced a nationwide Webinar during which panelists shared their expertise on this complex and strategic issue as it relates to government and private contracting.

Kevin Mullen of Jenner & Block outlined key benefits of outsourcing. Government agencies and private companies generally enjoy the same benefits. It allows the enterprise to focus on its core competencies while allowing non-core operations to be taken care of outside the organization by a contractor strongly suited to the task.

Since an enterprise cannot possibly have expertise in everything, outsourcing permits you to pull in the best people at the best prices, Mullen said. And because the contracting company is more efficient, you save money.

Because an enterprise can focus on its core competencies, growth becomes much more possible. Outsourcing also provides an enterprise with flexibility and nimbleness in hiring.

The U.S. government has moved increasingly in this direction over the last 20 years, Mullen said. It boosted outsourcing by 50 percent in the 2000s, spending more than $300 billion on such services.

When the Government Outsources

The first step in the government’s process is procurement planning. Mullen said the agency must identify what areas are suitable for outsourcing. Services that are not inherently governmental are ripe for consideration. Then comes market research and a determination of adequate competition.

“If there are only one or two companies doing something very specialized that you need, you could be left with very little competition, and that could affect both the availability of the services and the prices you pay,” Mullen said. “Do your market research; do your homework.”

Then the agency must determine how best to fulfill its needs—how much work is required, how many people and what skills will be needed to complete it. That needs to be accurately stated in the request for proposals so that you get the best competition in the submissions.

The agency must also decide whether contract performance metrics and incentives might apply to this particular project, Mullen said.

Finally, the solicitation must include information about how the proposals will be evaluated and the contract awarded, Mullen said. Will a “low price technically acceptable”—LPTA—approach be followed? Does this pass-fail on the technical evaluation apply, or will it be the best value approach? Certain services, such as high-end technical services, are better served with a best value approach, he said. On the other hand, there may be no reason to pay a premium for routine IT services.

“Within industry, there’s a view, and I share it, that the government has trended too far in this direction, and in many instances is using LPTA solicitation for inappropriate services,” Mullen said.

What About Government Contractors?

Changing perspectives, how is the contractor impacted by the LPTA? An incumbent contractor seeking a subsequent contract is at a disadvantage in an LPTA situation, he said. The technical advantage is watered down, and there is a price disadvantage. A contractor that has done an excellent job may have to cut costs in order to be the winner under LPTA.

“You can see through that dynamic that there could be a slow and steady erosion of quality over time to their outsourced services,” Mullen said.

One way a contractor might cut expenses is to outsource work overseas. In those instances, though, government contractors must be careful not to violate compliance obligations within the proposal or any statutory provisions governing business in foreign nations for false claims.

Cyber Security at the Forefront

One of the special risks of outsourcing is cyber security. Mark Davis, Assistant General Counsel for General Dynamics Information Technology, Inc., said government agencies must seek open and forthright communication with contractors early in the procurement cycle to make cyber security requirements clear. This can be accomplished through bidders’ conferences, requests for information, sources sought and draft RFPs.

Agencies should understand that cyber security requirements link closely to what is technically acceptable, and prepare solicitations accordingly.

“Remember, clear requirements serve to drive whether a solution is actually technically acceptable,” Davis said. “Agencies should understand that an LPTA procurement strategy really does not allow for the dynamic cyber security delivery required for many procurements.”

He advised agencies to avoid using LPTA for strategic government functions, given that cyber-security requirements change even faster than IT requirements.

Clear cyber-security requirements enable agencies to select the appropriate contract type, whether it’s fixed price, cost plus or a hybrid, for the work being solicited, while starting to increase competition and reduce contractor prices.

“Contractors will have more information and be able to submit better proposals at cheaper prices, and in this manner, it allows the government to obtain higher-quality service delivery,” Davis said.

Best practices for government contractors in the cyber-security realm include making sure they share information and best practices across the contractor community to maximize protection of government, commercial and individual information, Davis said. Likewise, contractors should strive for full understanding of applicable cyber-security laws and regulations.

Contractors should use the National Institute of Standards and Technology framework as a baseline from which to assess their organization’s current cyber-security posture, as well as their ability to innovate, gain and maintain customers in the cyber-security field. They should understand each individual agency’s cyber-security needs, and the risk tolerances.

They should also be aware of their contractual cyber-security requirements and obligations, including requirements for disclosure of a cyber-security breach, he said.

Due diligence on subcontractors and vendors is a must to understand their cyber-security capabilities and limitations.

Private-Sector Outsourcing

In the non-government sector, the question is often asked, “Why ever have an employee?” Michael Elkon of Fisher & Phillips made it clear—sometimes the rules just require it. If you do not follow the rules, you are subject to legal risk.

The chief reason to use a contractor is to save on labor costs. You do not have to pay taxes, workers’ compensation or withholding when you use an independent contractor. But since the government likes to collect taxes, it creates rules to make sure that it still can. The two agencies who exert the most influence over outsourced workers are the Department of Labor and the Internal Revenue Service. Often, they team up to ensure employees are properly classified.

Determining if a worker is an employee or a contractor depends on a number of variables.

“If you don’t want to get into the legal minutiae and you just want to have a basic rule that you can explain to anybody at your company about what an independent contractor does and an employee doesn’t, an independent contractor is not subject to control in terms of the way he or she does the work,” Elkon said. “An independent contractor generally is given a goal to accomplish, and the independent contractor determines the best way to accomplish that goal. An employee is told how to accomplish the goal.”

Beyond that, there are some additional guidelines. Companies should never pay an independent contractor’s expenses. They pay their own. The same applies to office equipment or other tools required to do the job, Elkon said.

Companies also cannot subject independent contractors to the same rules that apply to employees. Contractors cannot do the same jobs as employees. Companies cannot tell them how many hours to work or what schedule to keep.

Simply calling them an independent contractor and having them sign an agreement to that effect also does not make them an independent contractor, Elkon said.

“Essentially, the independent contractor test would cease to have any meaning, if simply having somebody sign an agreement called an independent contractor agreement were sufficient to establish independent contractor status,” he said.

Companies that deviate from an independent contractor contract also may be in violation, Elkon said, if the deviation exerts more control over the worker.

In a perfect world, Elkon said an outsourced worker should set up his own business. The contracting company should pay that business, which has its own licenses, cards and equipment. Payment should be by the job, not the week, and should be made on a 1099 basis, not time cards. The independent contractor should carry his own insurance. The company should pay no benefits or bonuses.

“Lastly,” Elkon said, “you should have a contract spelling this all out.”

The above article has been republished courtesy of the Corporate Counsel Advisory Newsletter.

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