About 500 disasters occur every year, affecting more than 200 million people and killing around 75,000. Moreover, the number and severity of disasters are increasing. To cope with these challenges, governments spend vast amounts of money in acquiring products and services. For example, the US Federal government spent over $20 billion for supplies needed for Hurricane Katrina, and so far, it has committed over $245 billion in acquisitions related to the Covid-19 pandemic.
During disaster relief operations, procurement can be a complex and uncertain activity, and there is ample reporting of failures. A report by the US Senate Committee on Homeland Security and Governmental Affairs examined contracts awarded by Federal Emergency Management Agency (FEMA) during the response to the 2017 hurricane season. The report reveals major shortcomings, such as the failure to adequately use pre-positioned contracts, the award of contracts without adequate vetting, inadequacies of the bidding process, and failures of suppliers to deliver.
While disaster relief operations have similarities with commercial operations, there are notable differences concerning speed of response, uncertainty of supply and demand, and stakeholder’s goals. These differences call for unique capabilities in terms of logistics – to ensure timely delivery – and procurement – to ensure efficient and effective contracting. Despite the importance of both logistics and procurement in this context, research has tended to focus on logistical challenges. Much less attention has been placed on procurement, with some notable exceptions. A review of the disaster management literature shows that out of 268 papers, only nine dealt with procurement, emphasizing the paucity of research into procurement in disaster relief. In the public administration literature, researchers have also noted that emergency procurement has been neglected and that more research is needed. To frame our research, we take a multidisciplinary perspective drawing from the fields of operations management, disaster management, and public administration.
This research focuses on procurement during relief operations by investigating the use of contracts by US federal agencies during national emergencies. The research focuses on the choice of contract type, which is an established dilemma in procurement. Different contract types offer buyers and sellers a different balance of risks and rewards, and debate continues about their effectiveness under varying circumstances. Thus, it is important to investigate the factors that influence the choice by federal agencies between cost-reimbursement contracts and fixed-price contracts as disaster relief operations unfold.
Three key stages characterize disaster relief operations: preparation, response, and recovery. Each stage presents vastly different operational conditions. The response stage, in the immediate aftermath of a disaster, is particularly distinctive due to increased uncertainty, market disequilibrium, pronounced information asymmetries, and extreme time pressure; differences that increase the government’s risk exposure. For instance, the CARES Act, launched in response to the Covid-19 Pandemic, immediately attracted the attention of unscrupulous suppliers. Despite the differences across disaster stages, the dearth of research spanning across all stages has thus far prevented the evaluation of the factors influencing contracting practices. This study addresses this research gap by investigating how the type of acquisition and the amount of spend affect the choice of contract type. Furthermore, we examine how the disaster stage moderates these relationships, with a particular focus on the response stage, which presents the most extreme conditions.
Drawing from agency theory and the theory of regulatory capture, we investigate the choice of contract type in a setting that combines high uncertainty (which creates information asymmetries, adverse selection, moral hazard, and opportunism), and the need for speed and flexibility (which exacerbates problems of bounded rationality, supplier availability, and adverse selection). Agency theory brings an economic perspective to the choice of contract type dilemma, as it seeks to determine the most efficient contract, given conditions of goal conflict, opportunism, information asymmetry, bounded rationality, risk aversion, and self-interest. The theory of regulatory capture brings a public-private relationship perspective, arguing that private organizations can advance their interests by gaining influence over government agencies, often at the expense of the public interest. It has been noted that in the aftermath of disasters, it is not uncommon to find corrupt suppliers exploiting the situation.
The research relies on data made available by the US government, including all contracts deployed by federal agencies to support disaster-relief operations between 2005 and 2016, including 47,560 contracts across 14 disasters. We evaluate the role of two key factors underpinning the choice of contract type during disasters, namely the type of acquisition and the amount of spend.
Our results indicate a positive association between contract spend and the likelihood of choosing a cost-reimbursement contract, which has significant implications for policymakers and practitioners because it indicates a higher risk exposure for government agencies in larger contracts. Spend thresholds stipulated within FAR are intended to mitigate this type of risk, but since these thresholds are relaxed during disasters, government agencies become more exposed by accepting risk for the sake of expediency. However, federal agencies continue to have a fiduciary responsibility, which falls into the hands of contracting officers. Thus, both capacity (i.e., availability) and capability (i.e., knowledge and skills) of contracting officers are central to effective disaster response. This emphasizes the importance of human resource aspects of public procurement.
For contracting officers, the positive relationship between contract spend and cost-reimbursement contracts emphasizes the importance of contracting efforts in advance of a disaster, when they have more time to evaluate suppliers and negotiate contracts. Pre-arrangements could thus help mitigate opportunistic behavior. Policy guidelines under FAR make pre-established arrangements available to government officials, and researchers have reported on their effectiveness. For example, in 2019, the Army Corp of Engineers established a $999 million advance joint venture agreement with six contractors to provide time-sensitive disaster support to repair critical infrastructure such as roads, bridges, electric distribution systems.
Our finding that cost-reimbursement arrangements are more prevalent in services contracting, particularly during the response stage, appears to be generally beneficial to suppliers, as they assume less risk and can concentrate on delivering the expected outputs from the contract without particular concern for costs. For the government, this represents an increased risk, and contracting offices must remain vigilant and act when suppliers fail to fulfill their duties. Potential suppliers should be mindful that cost-reimbursement contracts can involve additional monitoring costs. For federal agencies, this stresses the importance of having quick and easy onboarding as well as monitoring processes for suppliers of services in disaster situations. Furthermore, it is important that contracting officers maintain open communications channels with suppliers and use supplier forums to allow suppliers to provide feedback on the suitability of contract types and other aspects of relief operations.
The negative moderation of response stage as spend increases means that there is a preference for fixed-price contracts involving large monetary value during the response stage when compared to other stages. This appears to be positive news for the government, as it allows prioritizing speed over the fear of opportunism when dealing with large contracts. However, this result does not imply that contracting officers can let down their guard against opportunistic suppliers. While fixed-price contracts might help mitigate some risks for government agencies, it is still possible for opportunistic suppliers to take advantage of disaster situations. Therefore, government agencies should continue to maintain transparency and fairness of the procurement process before, during, and after the award. Moreover, drawbacks associated with fixed-price contracts, such as limited flexibility, potentially poor quality, and the possibility of supplier opportunism, should be taken into consideration. For example, in 2009, FEMA reached a $4 million settlement with a supplier who failed to deliver on a contract to build and operate a base camp for first responders during Hurricane Katrina. It is also important to consider efforts during the preparation stage to maintain the supply base for categories involving large acquisitions to preserve competition among prospective suppliers.
Source: Mena, C., Nair, A. U.S. Federal Government Contracting for Disaster Management. Working paper.